The European Commission has proposed a new law to strengthen whistleblower protection across the EU as a means to unveil unlawful activities and help enforce EU law. According to the Commission, the catalyst for the new rules has been provided by recent scandals such as Luxleaks, the Panama Papers and Cambridge Analytica. The legislative proposal intends to guarantee a high level of protection for whistleblowers who report breaches of EU law by setting new, EU-wide standards.
The reforms are long due, as whistleblower protection to date has been patchy both at Member State and EU levels. According to a Commission factsheet, only ten EU countries (France, Hungary, Ireland, Italy, Lithuania, Malta, Netherlands, Slovakia, Sweden and the UK) offer comprehensive legal protection to whistleblowers. In the remaining EU countries, the protection granted is partial, in that it covers only public servants or only specific sectors (for instance financial services) or only specific types of wrongdoings (such as corruption). At EU level, it is only in a limited number of sectors that measures have been put in place to protect whistleblowers, principally in financial services.
The draft measures define a whistleblower as a person (that can include an employee, a self-employed person, a freelancer, a supplier, a volunteer, an unpaid trainee or a job applicant) who reports or discloses information on violations of EU law which they observe in their work-related activities. Whistleblowers can also qualify for protection if they had reasonable grounds to believe that the information reported was true at the time of reporting, or if they have serious suspicions that they observed an illegal activity.
According to a Commission FAQ list, under the new Directive a whistleblower is granted protection when reporting on breaches of EU rules in the areas of: public procurement; financial services, anti-money laundering and counter terrorist financing; product safety; transport safety; environmental protection; nuclear safety; public health; food and feed safety, animal health and welfare; consumer protection; and protection of privacy and personal data, and security of network and information systems. The Directive further applies to breaches relating to EU competition rules, breaches harming the EU’s financial interests, and breaches of corporate tax rules or arrangements whose purpose is to obtain a tax advantage that defeats the object or purpose of the applicable corporate tax law.
Furthermore, all companies of a certain size (or of any size if operating in financial services or vulnerable to anti-money laundering or counter terrorist financing), all state and regional administrations, and local municipalities of more than 10,000 inhabitants must create internal reporting channels whilst ensuring the confidentiality of the whistleblower’s identity. They also need to designate a person or a department responsible for receiving and following up on the reports. Member States must identify the authorities charged with receiving and following up on reports about breaches under the new law. These authorities should put in place specific, user-friendly channels, separate from their normal public complaints systems, to allow for reporting, and dedicated staff to handle and follow up on reports.
To deal with any retaliation that whistleblowers may suffer, the new law also provides protection mechanisms which include free legal advice, remedial measures, freedom from liability for infringing any contractual ‘gagging’ clauses and reliance on the new EU law as a defence in judicial proceedings.
The recent decision of the UK Supreme Court in JSC BTA Bank v Ablyazov and another (No 14) [2018] 2 WLR 1125 has held that where there is a defendant who agrees with a third party to break a freezing injunction by dissipating assets covered by that injunction, and agrees to engage in conduct concealing what has happened to those assets, a cause of action is available in English law for the tort of conspiracy. A claim can be brought for damage caused to the claimant by the conspiratorial agreement and its implementation.
The Supreme Court did not have to decide, and did not decide, whether there could be a cause of action for damages caused by contempt of court. Contempt has numerous different forms. One form is where there is breach of an injunction. There have been various judicial statements supporting the proposition that breach of an injunction does not, in itself, give rise to cause of action in damages. The Supreme Court decision applies where there is a conspiracy to break an injunction causing damage.
Conspiracy as a tort consists of two forms: (1) damage caused regardless of the use of unlawful means, when there is a conspiracy to injure and where that is the predominant purpose of the agreement and its implementation, and (2) conspiracy when unlawful means are used and the conduct is directed against the claimant, and the defendants should have known in the circumstances that injury to the claimant is likely and injury results. ‘Unlawful means’ conspiracy is not restricted to where the unlawful means themselves would be actionable by the claimant with a remedy in damages.
Where a defendant has dissipated assets in breach of a freezing order, the claimant may suffer loss because this impedes or prevents enforcement of a money judgment. As against the defendant, the claimant has the money judgment which he can enforce if he finds assets. The entitlement to claim damages could include extra costs incurred in identifying assets and seeking to enforce. It might also include loss caused through delay in enforcement caused by the conspiracy.
In relation to the third party, the damages claim provides a remedy which could involve the third party paying damages for preventing enforcement. In these circumstances, there will be issues of causation and quantum which will involve looking at what the position would have been absent the conspiracy. The defendant might have hidden assets anyway. Enforcement of a money judgment against the defendant might have faced substantial practical difficulties. In assessing causation and quantum as against the third party, it may be that the court would look at the loss of the chance of successful enforcement against the defendant and value the loss by reference to that chance. In the case before the Supreme Court, the defendant, Mr Ablyazov, has had a formidable record of disobeying court orders, resisting enforcement and has become a fugitive from justice with an unknown location. Had the third party not assisted him, it might well have been the case that a judgment against Mr Ablyazov, proved difficult or impossible to enforce. If this is the case, the damages to be awarded against the third party would need to take this into account. It might be that there would be an argument by the third party that if he had not successfully conspired with the defendant to defeat enforcement, someone else would have done so. Such an argument would encounter the difficulty that had someone else conspired they would have been liable to the claimant in damages, and the law of causation should not permit the third party to escape on this ground.
The obvious shortcoming of a claim in the tort of conspiracy is that that it requires someone who conspires with the defendant.
There can be circumstances where a claimant has suffered loss as a result of a breach of a court order by the defendant, for which he would like to recover damages against the defendant but cannot do so under the tort of conspiracy. One example is where a claimant has obtained an anti-suit injunction against a defendant restraining the defendant from unconscionable conduct in bringing proceedings abroad. If the defendant breaks the injunction he may cause costs abroad to the claimant. Another example is a claimant with a freezing injunction which has been disregarded, may find himself with extra costs which do not form part of the costs of the proceedings. These could be costs of enquiries about assets abroad or costs incurred in foreign courts seeking to identify assets which could be used to satisfy a judgment. There may be proceedings abroad which have been fruitless. In these circumstances, the claimant should have a claim for damages under section 50 of the Senior Courts Act 1981 in addition to the injunction. The freezing injunction is an injunction within the meaning of section 50. Section 50 provides:
“50. Power to award damages as well as, or in substitution for, injunction or specific performance.
Where the Court of Appeal or the High Court has jurisdiction to entertain an application for an injunction or specific performance, it may award damages in addition to, or in substitution for, an injunction or specific performance.”
The application of section 50 is best understood against its historical background. The previous jurisdiction under section 2 of the Chancery Amendment Act 1858 (Lord Cairns’ Act) was:
“In all cases in which the Court of Chancery has jurisdiction to entertain an application for an injunction against a breach of any covenant, contract, or agreement, or against the commission or continuance of any wrongful act, or for the specific performance of any covenant, contract, or agreement, it shall be lawful for the same court, if it shall think fit, to award damages to the party injured, either in addition to or in substitution for such injunction or specific performance, and such damages may be assessed in such manner as the court shall direct.”
This was thought to be ‘procedural’, conferring a jurisdiction on the Court of Chancery which avoided the need for the plaintiff to sue for the damages in a common law court based on a cause of action in contract or for the ‘wrongful act’.[i] After the Judicature Acts 1873-1877, the common law courts and the Court of Chancery were replaced with a single High Court and there was no need any longer for a provision conferring this damages jurisdiction on the Court of Chancery. The Act was repealed in 1883, although the jurisdiction to award damages by reference to its principles survived; Leeds Industrial Co-operative Society v Slack [1924] AC 851. In his judgment Lord Finlay said: “Though the Act is gone, the law which it laid down still exists…”. In that case, the House of Lords held by a majority that damages could be awarded for loss not yet sustained so that instead of an injunction restraining building interfering with rights of light, compensation could be awarded which took into account loss of light for the future.
Under Lord Cairns’ Act it is sufficient that there would have been jurisdiction to entertain the application for an injunction in the particular proceedings even though, on the facts, there was no prospect of a judge exercising discretion to grant the injunction. The distinction was between absence of jurisdiction to grant the injunction in the suit, and not doing so as a matter of discretion. Freezing injunctions did not exist in 1858 or at any time prior to the repeal of Lord Cairns’ Act. They were recognised as legitimate by enactment of section 37 of the Senior Courts Act 1981, at the same time and in the same enactment as section 50. The first Mareva case was in 1975. Mareva Injunctions belong to an era commencing nearly a century after the repeal of Lord Cairns’ Act. Section 50 is not limited to cases of breach of contract or tort or for other ‘wrongful act’. In principle, it applies to any injunction which can be granted under section 37 of the same Act.
The words ‘in addition to’ in section 50, contemplate that there can be granting of an injunction and an award of damages under the section. Under Lord Cairns’ Act, which included the same expression, the plaintiff could not obtain both specific performance or the injunction, and damages for non-performance of the contract because the plaintiff cannot have both performance of the contract and damages for its non-performance where this would be to give to the plaintiff inconsistent remedies. If there was delay in complying with an order of specific performance, damages could be granted for the loss caused by the delay because this was consistent with the defendant also carrying out the contract after the relevant delay. This might be an award of damages for losses sustained prior to the injunction being granted or for losses sustained because the injunction granted is in more restricted terms than the underlying substantive rights. An example would be where an injunction is granted against part of a building to be constructed in infringement of rights of light but where there will still be an infringement of those rights because the injunction does not afford complete protection.
In the case of extra costs which are not costs of the proceedings, but which are caused by breach of a freezing order, the injunction has been granted but has proved to be an ineffective remedy through contempt of court. In principle the wording of section 50 can cover such a situation. The damages are awarded in addition to the injunction because the injunction has not fulfilled the purpose for which it was granted. They are also awarded in substitution for the injunction because that injunction has proved to be ineffective and the damages compensate for losses which have been sustained but which would not have been sustained had there been compliance with the injunction.
Where this has happened, it is appropriate that the court has a discretion to award damages for the loss caused, the words cover such a case, and protests that section 50 somehow is limited by reference to Lord Cairns’ Act are answered by section 50 not having the procedural purpose of that Act, and not being limited to breach of contract or other wrongful act.
In Morris-Garner v One Step [2018] UKSC 20 Lord Reed with whom three other justices agreed, referred to Lord Cairns’ Act and there was mention of section 50. In that case, it was recognised that damages could be awarded on the basis of what would be a reasonable licence fee negotiated in advance for release of a contractual restriction, previously called ‘Wrotham Park Damages’ now to be called ‘Negotiating Damages’. This measure of damages is available in certain other situations where there has been wrongful interference with, or appropriation of, the claimants ‘asset’. It is a measure of damages provided for in trade secret cases by the draft Trade Secrets (Enforcement, etc.) Regulations 2018, based upon the European Directive (EU) 2016/943 on trade secrets.
Where a third party knowingly aids and abets a breach of an injunction, an injunction can be granted against the third party from continuing that conduct. If notwithstanding the granting of such an injunction the third party assists the dissipation of assets in breach of a freezing injunction, then in principle damages should be available against the third party under section 50. There are circumstances where the court will grant an injunction against a third party (a non-party) based upon the cause of action against the defendant. This injunction may be ancillary to a freezing injunction granted against the defendant, restraining the non-party from dealing with certain assets which may, in due course, through one route or another, be taken to satisfy a judgment against the defendant. In these circumstances, if an injunction is granted against the third party and is disregarded by the third party, in principle damages are available in addition to that injunction under section 50.
Although its wording of section 50 to some extent echoes Lord Cairns’ Act, the context in which it was enacted, namely a hundred years after enactment of the Judicature Acts, and the difference in wording show that its effects are not limited to the constraints of Lord Cairns’ Act. The courts have yet to consider what may be the boundaries of the jurisdiction under section 50. When they do so, they will need to bear in mind that its provisions can apply to circumstances vastly different from those that could have been envisaged by Lord Cairns in 1858.
[i] There was a jurisdiction which the Court of Chancery exercised before 1858 to award damages in certain restricted categories of case; see Phelps v Prothero (1855) 7 De G.M. & G. 722 at page 744 and other cases cited in Spry on Equitable Remedies, 2001, at pp. 623-625.
In Botleigh Grange Hotel Ltd v Revenue & Customs Commissioners [2018] EWCA Civ 1032 (9 May 2018), a tax case, the Court of Appeal was required to consider the interpretation of the language used in consent orders. In so doing, the court prioritised the formal nature of such an order over a contract-based construction.
The issue arose in the context of a winding up petition brought by HMRC against the appellant company, on the basis of tax debts owed by the latter, and in respect of which the parties agreed a consent order which dismissed the petition. HMRC issued a subsequent demand to the appellant company for payment of further debts owed. In resisting the presentation of another winding up petition, the appellant argued that the consent order, despite having dismissed the first petition, preserved the dispute as to whether the first petition debt was due in its entirety. Relevantly, the appellant believed it had a cross-claim on that first petition debt which exceeded the second demand for payment issued by HMRC.
The Court of Appeal held that while a consent order embodied an agreement between the parties, at the same time it was a formal court document of public significance. Consequently, a consent order had to be interpreted not just as a contract (a bilateral arrangement), but also in the light of that public significance. The fact that a consent order was a court order, ‘the most formal of documents’, meant that on its face it contained no drafting errors or ambiguities. For that reason, the Court of Appeal warned against departing from the natural meaning of the words used, considering the language actually used as more important than inferences based on commercial common sense and/or surrounding circumstances. Accordingly, in the case before it, the Court of Appeal held that the consent order dismissed the first petition without any reservation or condition. If the order had been intended to preserve the dispute, the recitals would have indicated this, and they did not – as the Court of Appeal stated, they ‘make no reference of any kind to the preservation of the dispute as to whether the entirety of the petition debt was due’. The appeal was dismissed.
This case reinforces the care that should be taken in the drafting of an order, not only of a consent order but of any order, to ensure that its wording is both clear and precise in covering all that it is intended to cover and, equally, makes plain that any attempt to seek to look outside the wording of a formal court document is likely to make little, if any, headway.
Advocate General (AG) Kokott has opined in C‑249/17 Ryanair Ltd v The Revenue Commissioners that input VAT incurred by Ryanair on costs in a failed takeover of Aer Lingus is deductible.
Ryanair made a bid to purchase a 100% shareholding of Aer Lingus in 2006. When the takeover failed, Ryanair tried to claim a deduction of input VAT paid on professional advisory fees incurred for the attempted takeover. The Irish revenue authority argued that Ryanair was not engaged in an economic activity in acquiring those professional services and refused Ryanair’s claim. The Irish Supreme Court asked the Court of Justice of the European Union (CJEU) whether VAT on Ryanair’s costs could be deducted.
It is the AG’s opinion that input VAT should be fully deductible in the context of a strategic takeover by an operating undertaking. The AG held that failure to proceed with the acquisition did not impact the VAT recovery position. Applying a functional analysis, the AG concluded that the ‘acquisition of a company’s entire share capital with the intention of bringing about a direct, permanent and necessary extension of the taxable activity of the acquiring company constitutes an economic activity’.
The AG took the view that VAT recovery should be allowed even if the costs were sustained by a pure holding company, without an operating business, if such a holding company had the intention to provide (management) services to the target company after the takeover. In this respect, the AG argued that the only decisive factor was the ‘intention to commence an economic activity for VAT purposes, supported by objective evidence’.
Advocate General (AG) Szpunar has concluded in C-153/17 HMRC v VolkswagenFinancial Services (UK) Ltd that the UK’s treatment of hire purchase contracts for the purposes of VAT is not consistent with EU legislation.
Under UK law, hire purchase contracts are treated as two distinct transactions for VAT purposes: the taxable supply of a vehicle and the tax-exempt supply of credit. The UK Supreme Court asked the Court of Justice of the European Union (CJEU) whether the lessor could deduct input VAT on its overhead costs incurred for the purposes of the hire purchase transaction. The uncertainty arose because those costs were used for the purposes of the taxable supply of goods, but were in fact covered by the revenue from the VAT-exempt credit supply. HMRC’s method of calculating VAT in such a scenario – whereby the price of the vehicle (i.e. the taxable supply of goods) was excluded from the calculation of the value of the hire purchase transaction – meant input VAT could not be deducted.
For the AG, the situation brought into conflict the principle that any transaction subject to VAT should be taxed unless expressly exempt, and the principle that VAT must be neutral for all operators other than the consumer. The AG was of the view that the UK practice of splitting hire purchase transactions into a taxable part and an exempt part was an incorrect transposition into UK law of Directive 2006/112 on the common system of VAT. The AG concluded that neither obtaining credit nor hiring or purchasing a vehicle were an end in itself for a lessee entering a hire purchase agreement; the purpose was to use the vehicle under conditions specific to such an agreement.
Consequently, the AG viewed the provision of credit and the provision of the vehicle as a single transaction for VAT purposes, specifically a single taxable supply of services. As such, the AG felt that hire purchase agreements should be taxed in their entirety, and the supplier should be allowed to deduct all the input VAT on the goods and services used for the purpose of those supplies.
The Financial Conduct Authority (FCA) has recently confirmed that firms that deal in cryptocurrency derivatives need to be duly authorised and regulated. This statement precedes a review of the cryptocurrency market due later this year, which was announced in the FCA’s Business Plan for 2018/2019. The review is a joint effort between the FCA, the Bank of England and the Treasury.
A cryptocurrency is defined as ‘a digital currency produced by a public network, rather than any government, that uses cryptography [codes which keep information safe in computer networks] to make sure payments are sent and received safely’. The first cryptocurrency was Bitcoin, and it is still the biggest, though other, ever more obscure-sounding ones have sprung up – such as Litecoin and Dogecoin.
Cryptocurrencies have grown in importance for both markets and regulators in recent years. The anxiety is justified, as the trading of cryptocurrencies constitutes a new and relatively unregulated market. The (now former) New York Attorney General, Eric Schneiderman, announced that his office has launched the Virtual Markets Integrity Initiative, a fact-finding inquiry into the policies and practices of platforms used by consumers to trade cryptocurrencies. The inquiry springs from concerns about the transparency and accountability of such trading – these are serious issues, given that the Bitcoin market reached $118bn at the start of April.
In the UK, neither the Bank of England nor the FCA regulates the trade in cryptocurrencies as such. However, in 2017 the FCA issued consumer warnings on cryptocurrency Contracts for Difference (CFDs) and the risks of Initial Coin Offerings(ICOs), where the issuer accepts a cryptocurrency in exchange for a proprietary ‘coin’ or ‘token’ related to a specific firm or project. The FCA warned that the value of cryptocurrency CFDs is extremely volatile and suffers from a lack of transparency, while ICOs are not FCA regulated and provide no investor protection in the UK. Moreover, the FCA held that trading in financial instruments with cryptocurrencies as the underlying assets – for example cryptocurrency futures, CFDs and options – is likely to require regulatory authorisation.
For anyone old enough to remember the mountains of paper that clogged up offices in the 90s, the idea of a paperless working environment may seem revolutionary. Keeping paper files has been the rule for so long, particularly for law firms, that there are vast quantities of records that need to be dealt with.
What does a ‘paperless office’ actually look like, beyond IBM’s early marketing slogan? It would probably be unrealistic to assume that we can eliminate all paper – though progress is being made. And why is a move to a paperless office actually important? The easy answer is that it saves on physical space, important in big cities such as London, where commercial property prices are significant.
Less paper can also mean fewer resources being expended on document management – less processing, organising and destroying of paper, which typically requires a lot of (relatively expensive) human input. The environmental benefit of using less paper is also considerable, and would greatly assist with firms’ corporate responsibility and carbon footprint. And finally, failing to maintain and update paper files can be a breach of anti-money laundering (AML) rules; it is reported that as many as 37% of UK law firms rely on paper-based records to fulfil their AML reporting obligations. This is worrying, and mandates drastic improvement of record-keeping processes.
A move towards keeping less paper seems like a no-brainer. Even the largest academic institutions have jumped on the bandwagon. The London School of Economics is leading the way in digitising its archives and improving accessibility to material which is of public interest. For law firms, however, eliminating paper may prove more difficult. This is in part to do with an engrained pro-paper mentality in the legal profession, but also with issues around data security and client confidentiality. Lawyers need to learn to trust digital repository systems, and understand how to use them. In particular, cloud storage (whereby data is effectively stored online) is routinely used by companies in other industries, and comes with built-in data security features, which is all the more vital given the EU General Data Protection Regulation (GDPR).
Law firms can and should consider using digital storage platforms, and should do so responsibly, by monitoring access and visibility to the uploaded content, as the Law Society itself advises. Moreover, such platforms support flexibility in working practices by enabling robust mobile and remote working. In the words of Scott McNealy, former CEO of Sun Microsystems, ‘We believe we’re moving out of the Ice Age, the Iron Age, the Industrial Age, the Information Age, to the participation age. You get on the Net and you do stuff’. Given you are most likely reading this on your desktop or device, it’s hard to argue with that.
In the book, legal aid cuts and overworked, poorly paid lawyers make for a toxic combination, which falls considerably short of the ‘world-class justice system’ that the Ministry of Justice is seeking to deliver.
The Secret Barrister’s experience certainly resonates, and we need to ask what can be done to make things better. Tellingly, Victim Support, a leading independent charity, states that ‘[t]he legal system in England and Wales has been around for a long time and is widely respected. But it’s also complicated — particularly if you’ve never come into contact with it before’.
What precisely is so complicated about the justice system? Two key aspects emerge – transparency and access – and it seems both require significant improvement. According to the Centre for Criminal Appeals (CCA), a lack of transparency negatively impacts the accountability of the system and necessitates further reforms. Strikingly, the CCA observes that violations of disclosure rules by the police are occurring in 40.7% of cases, and trial transcripts are prohibitively expensive, which means that defendants cannot afford to appeal. On access, Liberty’s recent evidence to the parliamentary Joint Committee on Human Rights quotes Lord Thomas of Cwmgiedd, the then Lord Chief Justice, who wrote in his 2015 annual report to Parliament that ‘our justice system has become unaffordable to most’. Liberty’s evidence further notes that ‘only 39% of the general public believe the justice system works well for citizens and only 17% believe it’s easy for people on low incomes to access justice. The [legal aid] cuts have been criticised by leading human rights organisations, the Trades Union Congress, the National Audit Office, senior judges and parliamentary select committees’.
(A) The issue
The defendant sold her 50% shareholding in the claimant company, One Step. The sale, to which the company was a contracting party, included covenants undertaking not to solicit business from certain third parties, protecting confidential information of the company, and restricting competition with the company. The defendant was in breach of all the covenants, and the company claimed damages. How should the damages be assessed for the breaches of contract?
(B) The decisions in the Commercial Court and the Court of Appeal under appeal
The commercial judge ordered an assessment ‘on the basis of the amount which would notionally have been agreed between the parties, acting reasonably, as the price for releasing the defendants from the restrictions’. The judge thought that the claimant company had ‘a right to elect how its damages should be assessed’. The company could choose between damages assessed for the business lost by it, or on the basis set out in his order. Prior to the decision of the Supreme Court, this basis might have been referred to as ‘Wrotham Park Damages’, a label derived from Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798, where this formula was used to award damages for breach of a restrictive covenant concerning land. It is now called ‘Negotiating Damages’ (a term coined by Neuberger LJ in Lunn Poly Ltd v Liverpool & Lancashire Properties Ltd [2006] 2 EGLR 29).
The Court of Appeal decided that it was within the discretion of the commercial judge to decide the basis on which damages were to be awarded, taking into account that the breaches had been deliberate. It was said that there would be difficulty in establishing precisely the loss to the claimant’s business and that the discretion was to be exercised on ‘a broad brush basis’. This can be contrasted with the principle that damages are to compensate for the loss caused by the breach.
(C) The decision and reasons in the Supreme Court
The judgment agreed to by four of the five judges was given by Lord Reed. The ratio of that judgment is binding precedent. It decides that the sole measure of damages was the loss caused to the claimant’s business, including its loss of profits. The order made by the judge, which had been upheld by the Court of Appeal, was set aside. The judge assessing damages might or might not have regard to evidence as to what a reasonable release fee would have been but the hypothetical release fee would not itself be awarded as a measure of the loss.
Lord Sumption reached the same conclusion, stating that he took ‘broadly the same view as Lord Reed, although for reasons which I would express more simply’, and considered that ‘… the notional price of a release may … be relevant, not as an alternative measure of damages but as an evidential technique of what the claimant can reasonable be supposed to have lost’. Lord Carnwath agreed with the reasons given by Lord Reed, and added some observations about compensation to be awarded under certain statutory provisions. He considered that there were ‘significant differences’ between Lord Reed and Lord Sumption. Lord Carnwath described Lord Reed’s analysis as ‘an entirely orthodox approach’, declined to accept Lord Sumption’s ‘reformulation as a helpful guide in the general run of cases’, and was ‘unpersuaded that it is necessary or helpful to redefine, or break down the barriers between, the established categories; [or] that to do so [would offer] any improvement in the coherence of the law.’
Lord Reed decided that ‘Negotiating Damages’ can be awarded for breach of contract in certain cases concerning ‘assets’. Thus damages for breach of a restrictive covenant on land are given for invasion of a property right (the restrictive covenant) which qualifies as an ‘asset’. Breach of the covenant damages the asset. A price or reasonable hypothetical release fee compensates for the damage to the asset. ‘Negotiating Damages’ are available at common law in cases where there is to be compensation for the damage to an ‘asset’. These include infringement of patent rights, misuse of tangible property (e.g. taking someone else’s horse or car without permission), use of someone else’s land without permission, trespass on land, and use of intangible property without permission (e.g. a trademark). Damages for passing off or misuse of confidential information may be awarded on this basis, by analogy. In contrast, there are many negative covenants breach of which only attracts compensation for the loss caused by the wrong, and where ‘Negotiating Damages’ have no part to play. An example might be a contractual promise not to order a ship to an unsafe port. The damages would not be assessed on the basis of what would have been the price for a licence to do so. Lord Reed decided that One Step was not an ‘asset’ case, and so, ‘Negotiating Damages’ were not available. Breach of a restrictive covenant protecting land and breach of a restrictive covenant protecting the value of shares which have been sold do not attract the same measure of damages because whilst the former involves invasion of a right of property, the latter does not. Goodwill can be regarded as a capital asset in company accounts. Lord Reed considered that damage caused by the breaches of contract to the goodwill of the claimant’s business did not suffice to bring the case within the damage to an ‘asset’ category. This is because the damage to the goodwill did not constitute taking or misusing the company’s ‘asset’, or infringing its property rights in that ‘asset’. Likewise the covenant protecting the ship from damage at an unsafe port is a covenant given to protect an asset, but the contractual promise does not qualify as an ‘asset’ for this purpose.
(D) Damages under Lord Cairns’ Act and Section 50 Senior Courts Act 1981
The judgments touch upon the damages jurisdiction under Lord Cairns’ Act, section 2 of the Chancery Amendment Act 1858, and discuss some of the case law. That jurisdiction, which survived repeal of the section many years ago, is the subject of extensive case law. Section 50 of the Senior Courts Act 1981 which now continues the jurisdiction, provides:
‘50. Power to award damages as well as, or in substitution for, injunction or specific performance.
Where the Court of Appeal or the High Court has jurisdiction to entertain an application for an injunction or specific performance, it may award damages in addition to, or in substitution for, an injunction or specific performance.’
This includes the jurisdiction originally conferred by section 2 of the 1858 Act, which was confined to where the court ‘has jurisdiction to entertain an application for an injunction against a breach of any covenant, contract, or agreement, or against the commission or continuance of any wrongful act, or for the specific performance of any covenant, contract, or agreement’. Section 50 is not limited to these categories of case. The boundaries of section 50 are considered in Gee on Commercial Injunctions (6thedition) at paragraphs 2-047 to 2-048, and 14-049 to 14-052.
The 1858 Act empowered the old High Court of Chancery to award damages in cases within section 2, thus avoiding the need for damages to be dealt with in the courts of common law. It also had substantive consequences. It enabled compensation to be awarded for loss not yet sustained, and also allowed a measure of damages to be awarded which could include ‘Negotiating Damages’. The damages to be awarded were in substitution for, or in addition to, a decree of specific performance or the granting of an injunction. If an injunction were granted, the defendant caught in the grip of the order could purchase his release by negotiating with the plaintiff and arriving at a monetary solution. If an injunction were refused, and damages were to be awarded, then the plaintiff should be in the same position, and so permitted to obtain a reasonable fee for releasing his rights.
Claimants often do not commence proceedings until long after the breaches of contract have occurred and the losses have been sustained. In One Step, the covenants lasted for three years from December 2006. The breaches and the losses were sustained long before commencement of the court proceedings in July 2012. The claim appears to have been advanced without seeking damages under section 50. In contrast, in Pell Frischmann Ltd v Bow Valley Iran Ltd [2011] 1 WLR 2370, it was common ground before the Privy Council that damages could be awarded under Lord Cairns’ Act (‘presumably by analogy’) in proceedings in Jersey, when those proceedings were commenced long after the breaches and the losses had taken place.
Lord Reed, at [95] subparagraph (3), stated that ‘Damages can be awarded under Lord Cairns’ Act in substitution for specific performance or an injunction, where the court had jurisdiction to entertain an application for such relief at the time when the proceedings were commenced. Such damages are a monetary substitute for what is lost by the withholding of such relief’. Proceedings seeking an injunction are often issued after breaches of contract have taken place, losses have been sustained, and there is a threat of further breaches and further losses. The wording of section 50 is not confined to awarding damages for loss sustained after action brought. Provided that the proceedings commenced are within the section, there is a discretion to award the statutory damages. That these can include past losses sustained prior to action brought, is supported by Mance LJ in Experience Hendrix LLC v PPX Enterprises Inc[2003] 1 All ER (Comm) 830 at [34] to [35]. The example was of a pop concert which started when a person entitled to enforce a restrictive covenant, was away on holiday and brought proceedings to stop the concert when he returned home. The claimant could get damages under the Act, including the loss caused while he was abroad, unable to commence the proceedings. These are “in addition to” the granting of the injunction.
What principles apply and what measures of damages are available is governed by the section. This depends upon its interpretation. The words of section 50 allow damages ‘in addition to’, as well as ‘in substitution for’, the injunction. Where there is a continuing course of conduct both prior to and continuing after commencement of the proceedings in respect of which there is jurisdiction to grant an injunction, one would expect all the losses to be covered by section 50. This view avoids different methods of assessment of damages for the period prior to commencement of proceedings and that afterwards. It avoids different measures of damages being available for the period before, and the period after. It is to be expected that Parliament intended that there could be a single award of damages under section 50 in respect of the entire course of conduct. This is because this avoids complexity, provides a just remedy, and is supported by its wording.
Lord Reed says ‘such damages are a monetary substitute for what is lost by the withholding of such relief.’ If this were the limit of the jurisdiction, the damages would only be available in substitution for the granting of the injunction. The words ‘in addition to’ in section 50, go further. They are not limited to a substitute for the injunction. Nor are the words limited to covering the case where an injunction is granted, but still, losses will be sustained because of the limited wording of the injunction or because the injunction is not granted immediately. Where an injunction is sought ‘quia timet’ (literally ‘since he fears’ [the commission of a wrong]), no loss would have been suffered prior to the commencement of the proceedings and damages would be confined to compensating for the refusal of the injunction. In that situation, the words of Lord Reed apply because the damages would be a substitute for the injunction. However, there can be cases where losses start before the commencement of the proceedings, and part of the overall losses would not be avoided even were an injunction to be granted which prevented any further wrong. The wording of section 50 appears to be sufficiently wide to allow an award of damages under the section in respect of the entire loss caused by the wrongful course of conduct. Lord Reed was not asked to consider such a case. As a result, there may well be cases which remain well outside of the zone of impact of the decision in One Step.
(E) What does the future hold?
The First-tier Tribunal (‘FTT’) has held in Patel v HMRC [2018] UKFTT 185 (5 April 2018) that a voluntarily submitted self-assessment return does not qualify as a return under section 8(1) of the Taxes Management Act 1970 (‘TMA’). Consequently, HMRC cannot open an enquiry into a voluntary return.
The appellants had completed paper tax returns as they had been unsuccessful in registering for online self-assessment. The returns were voluntary, meaning HMRC had not given the appellants notice under section 8(1) TMA requiring the delivery of such returns. Following amendments made by the appellants to the tax return so as to reduce tax liabilities, HMRC sent them notices of enquiry under section 9A TMA.
The FTT held that, on the wording of section 8 TMA, ‘a return under section 8’ plainly meant a return which the taxpayer had been ‘required by a notice given to him by an officer of the Board to make and deliver to the officer’. The words ‘may be required by a notice given to him’ confers a discretion on HMRC whether or not to issue a notice; for example, tax liabilities can be collected without such notice under the PAYE system. However, the fact that HMRC did not issue a notice did not mean a voluntary return became one under section 8 TMA. This conclusion could not be changed by applying the doctrine of purposive construction, as the words used by Parliament as well as its expressed intention were ‘entirely clear’. However, it was open to HMRC, on receipt of a voluntary return and within prescribed time limits, to issue a notice under section 8 TMA requiring the taxpayer to make a return (and effectively resubmit the voluntary return).
This article appears in the JHA April 2018 Tax Newsletter, which also features:
