MWB Business Exchange Centres (“MWB”) operated managed office space in central London. Rock Advertising Limited (“Rock”) provided marketing services. For some seven or eight years prior to the events giving rise to the proceedings, Rock occupied as licensee premises managed by MWB. Initially the premises consisted of a relatively small suite of offices which Rock could afford. In August 2011 it decided to expand its business, and entered into an agreement in writing for larger premises at an increased fee for a term of 12 months commencing on 1 November 2011. The licence fee to which it agreed was £3,500 per month (excluding VAT) for the first three months and then, from February 2012, £4,433.34 per month (again excluding VAT).
Clause 7.6 of the Agreement provided:
“This Licence sets out all of the terms as agreed between MWB and Licensee. No other representations or terms shall apply or form part of this Licence. All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.”
Rock was unable to meet this financial commitment because its business did not develop as it had hoped, and by late February 2012, it had incurred arrears of licence fees and other charges of over £12,000. The company’s sole director proposed a revised schedule of payments to a credit controller employed by MWB. It was found by the County Court Judge at trial that on 27th February 2012, an oral agreement was made between MWB, acting by its credit controller, Ms Evans, who had ostensible authority, and Rock, acting by its sole director, Mr Idehen, to reschedule the licence fee payments due under the agreement over the period from February to October 2012, so that for the first few months Rock would pay less than the amount originally agreed but thereafter it would pay more with the result that, by the end of the year, the arrears would have been cleared. On the same day Rock paid £3,500 to MWB, this being the first instalment due in accordance with the revised payment schedule.
On 29th February 2012 Ms Evans sent an email sent an e-mail to Mr Idehen reporting that her finance director required payment terms giving less time for payment by Rock:
“Morning Christian, I had a debt review with my finance director last night. We have to have a minimum payment of £5,320 [this being the licence fee plus VAT] on account each month to cover the cost of the licence fee. He is not happy to allow you to accumulate anymore debt on the account and said £4,000 is not acceptable as you are not covering your contractual expectations. Please confirm that you will make payments for no less than £5,320·01 each calendar month. It is £1,320 more in March as per your schedule and £320 more for April and May as per your proposed payment schedules. Please confirm by return as I have to update the finance director at 4 pm today.”
On 30th March 2012 MWB purportedly exercised its right under the licence agreement to lock Rock out of the premises, and shortly afterwards, it gave notice purporting to terminate that agreement with effect from 4th May 2012. MWB then sued for the arrears. Rock counterclaimed damages for wrongful exclusion from the premises. The case turned on whether the variation agreement found by the County Court Judge was effective in law.
The County Court judge held (i) that the oral variation agreement was supported by consideration, because it brought practical advantages to MWB, in that the prospect of being paid eventually was enhanced; but (ii) that the variation was legally ineffective because it was not recorded in writing signed on behalf of both parties, as required by clause 7.6. of the Agreement; MWB were therefore entitled to claim the arrears without regard to it.
The Court of Appeal held, allowing the appeal, that: (1) The oral contract was effective notwithstanding clause 7.6; (2) There was consideration notwithstanding the decision of the House of Lords in Foakes v Beer (1884) 9 App Cas 605; and (3) If the variation had been ineffective because of clause 7.6 there was no estoppel precluding MWB from taking the point, based on that agreement made on 27th February, because MWB had made their position clear by email on 29 February 2012. It would not have been inequitable for MWB to assert and enforce its legal rights as it did.
The Court of Appeal referred to a well known passage in Beatty v Guggenheim Exploration Co (1919) 225 NY 380 with which Hiscock Ch J, Chase, Collin and Crane JJ concurred (Cuddeback and Hogan JJ dissenting), in which Cardozo J said, at pp. 387–388:
“Those who make a contract, may unmake it. The clause which forbids a change, may be changed like any other. The prohibition of oral waiver, may itself be waived … What is excluded by one act, is restored by another. You may put it out by the door, it is back through the window. Whenever two men contract, no limitation self-imposed can destroy their power to contract again …”
The Court of Appeal in Globe Motors Inc v TRW LucasVarity Electric Steering Ltd (2016) 168 Con LR 59 had agreed with it. So did the Court of Appeal in the present case.
The Supreme Court through Lord Sumption, disagreed:
“A contract in writing which contains a provision requiring any modification or termination by agreement to be in writing may not be otherwise modified or terminated by agreement. However, a party may be precluded by his conduct from asserting such a provision to the extent that the other party has relied on that conduct.”
Article 1.2 of the UNIDROIT Principles of International Commercial Contracts, 4th ed (2016), provides that “nothing in these Principles requires a contract, statement or any other act to be made in or evidenced by a particular form.” Yet article 2.1.18 provides that:
“A contract in writing which contains a clause requiring any modification or termination by agreement to be in a particular form may not be otherwise modified or terminated. However, a party may be precluded by its conduct from asserting such a clause to the extent that the other party has reasonably acted in reliance on that conduct.”
7. The Supreme Court pointed out that entire agreement clauses were effective to preclude reliance on any agreement outside the written agreement containing the clause. The judges said that a NOM clause similarly was intended to prevent oral variations which could give rise to disputes and uncertainty.
8. “The natural inference from the parties’ failure to observe the formal requirements of a No Oral Modification clause is not that they intended to dispense with it but that they overlooked it. If, on the other hand, they had it in mind, then they were courting invalidity with their eyes open.”
9. The enforcement of NOM clauses carries with it the risk that a party may act on the contract as varied, for example by performing it, and then find itself unable to enforce it. Both the Vienna Convention and the UNIDROIT model code qualify the principle that effect is given to No Oral Modification clauses, by stating that a party may be precluded by his conduct from relying on such a provision to the extent that the other party has relied (or reasonably relied) on that conduct. In England, the safeguard against injustice lies in the various doctrines of estoppel.
Subject to the doctrine of estoppel, these clauses denuding a subsequent agreement of legal effect unless there is compliance with the required formalities are valid and effective under English law.
The Supreme Court held that courts below had held correctly that “the minimal steps taken by Rock Advertising” were not enough to support any estoppel defence. Lord Sumption speaking for the judges except Lord Briggs, considered that the scope of estoppel could not be so broad as to destroy the whole advantage of certainty for which the parties stipulated when they agreed the NOM clause. At the very least, (i) there would have to be some words or conduct unequivocally representing that the variation was valid notwithstanding its informality; and (ii) something more would be required for this purpose than the informal promise itself: see Actionstrength Ltd v International Glass Engineering In Gl En SpA [2003] 2 AC 541, at [9] (per Lord Bingham), and [51] (per Lord Walker).
Lord Briggs said that in his view a NOM clause, continues to bind until the parties have expressly (or by strictly necessary implication) agreed to do away with it. He said that his view would probably leave only those cases where the subject matter of the variation was to be, and was, immediately implemented, where estoppel and release of the NOM clause by necessary implication are likely to go hand in hand; “While it might in theory also leave open the case where it is alleged that the parties did have the NOM clause in mind, and then agreed to do away with it orally, that seems to me to be so unlikely a story that a judge would usually have little difficulty in treating it as incredible (if denied), and therefore as presenting no obstacle to summary judgment on the contract in its unvaried form.”
His reasoning founded on the position in Subject to Contract negotiations and what was required to enable them to give rise to a binding and enforceable contract. “Subject to Contract” is a well known expression often used in correspondence negotiating a contract relating to land. Those using it will know of it because there has to be an express use of it in those negotiations. Solicitors, surveyors, property developers, and others who continue to negotiate subject to it can be expected to know the consequences of its use in those negotiations.
A variation can be agreed in circumstances which factually have little or nothing to do with the circumstances in which “Subject to Contract” is commonly used. A NOM clause may be in boiler plate clauses in a lengthy main agreement or incorporated by reference in it to standard terms. That agreement may have been made some time ago. In the negotiations for the variation there may be no reference at all to the existence of the NOM clause or its terms. The negotiations may be between individuals who were not involved in the original contract, and thought anything agreed would be binding and made that apparent to each other. The doctrine of estoppel should be kept flexible, ready for use in different circumstances to prevent injustice.
Sir Edward Coke (1552-1634) was the great man of the common law; lawyer, advocate, Solicitor–General, Attorney–General, Serjeant at Law, Chief Justice of the Court of Common Pleas and then of the Court of King’s Bench , author of 13 volumes of the Reports, and of his treatises contained in the four volumes of the Institutes of England . In Foakes v Beer the House of Lords held as being part of the common law what Sir Edward Coke had said was a rule laid down by the whole of the Court of Common Pleas in Pinnel’s Case (1602) 5 Co Rep 117a that “payment of a lesser sum on the day in satisfaction of a greater, cannot be any satisfaction for the whole”. In that case the plea was of payment and acceptance before the date in the conditional bond of a lesser amount than provided in the condition. The rule did not apply on the facts, and the case was decided on a pleading point. It may be that the rule was no more than a dictum as stated by Lord Blackburn. Coke’s writings do include certain factual errors and misinterpretations of legal precedent. However that may be, the rule was sufficiently established by judicial statements, and its acceptance in Smith’s “Leading Cases”, to become the subject of binding precedent of the House of Lords over 130 years ago, which decided that it was a common law rule dating from 1602.
On 11 August 1875, Mrs Beer obtained a judgment in the High Court against Dr Foakes in the sum of £2,090 19s. Dr Foakes asked for time to pay. On 21 December 1876, a memorandum of agreement was signed by the parties. Dr Foakes made an immediate payment of £500 on signature as agreed, and promised to make payments of £150 thereafter every six months until the whole of the judgment debt “shall have been fully paid and satisfied”. The memorandum provided that on payment of all the instalments “…the said Julia Beer hereby undertakes and agrees that she, her executors, administrators or assigns, will not take any proceedings whatever on the said judgment.”
Some six years later, and after Dr Foakes had paid the whole sum of £2,090 19s in instalments, as he had agreed, Mrs Beer demanded and subsequently brought a claim for interest upon her judgment. No mention was made of “interest” in the memorandum. The Earl of Selborne L.C. and Lord Watson questioned whether the agreement was any more than an agreement to defer payment of the judgment debt, without giving up any claim to interest.
The Earl of Selborne L.C. said at p.611:
“The question, therefore, is nakedly raised by this appeal, whether your Lordships are now prepared, not only to overrule, as contrary to law, the doctrine stated by Sir Edward Coke to have been laid down by all the judges of the Common Pleas in Pinnel’s Case in 1602, and repeated in his note to Littleton, sect. 344, but to treat a prospective agreement, not under seal, for satisfaction of a debt, by a series of payments on account to a total amount less than the whole debt, as binding in law, provided those payments are regularly made; the case not being one of a composition with a common debtor, agreed to, inter se, by several creditors. …. The doctrine itself, as laid down by Sir Edward Coke, may have been criticised, as questionable in principle, by some persons whose opinions are entitled to respect, but it has never been judicially overruled; on the contrary I think it has always, since the sixteenth century, been accepted as law. If so, I cannot think that your Lordships would do right, if you were now to reverse, as erroneous, a judgment of the Court of Appeal, proceeding upon a doctrine which has been accepted as part of the law of England for 280 years.”
Lord Blackburn, considered that Coke had made a mistake in treating what was only a dictum of the Court of Common Pleas as a decision on the point. He said at pp 622–623:
“What principally weighs with me in thinking that Lord Coke made a mistake of fact is my conviction that all men of business, whether merchants or tradesmen, do every day recognise and act on the ground that prompt payment of a part of their demand may be more beneficial to them than it would be to insist on their rights and enforce payment of the whole. Even where the debtor is perfectly solvent, and sure to pay at last, this often is so. Where the credit of the debtor is doubtful it must be more so. I had persuaded myself that there was no such long-continued action on this dictum as to render it improper in this House to reconsider the question. I had written my reasons for so thinking; but as they were not satisfactory to the other noble and learned Lords who heard the case, I do not now repeat them nor persist in them.”
The House of Lords unanimously upheld the decision of the Court of Appeal that Mrs Beer was entitled to judgment for the interest and her costs, on the ground that Dr Foakes was under an antecedent obligation to pay the whole judgment debt, and payment of that due debt through the immediate payment of £500 and agreement to pay the remainder on the agreed dates did not amount to consideration for the undertaking which was therefore not contractually binding. This was because as a matter of law, payment of part of a sum which is owed, even though the debtor might otherwise not pay it or possibly become insolvent, cannot, of itself, amount to good consideration. The debtor did not incur any additional detriment by promising to pay what he had already a legal obligation to pay, nor did the creditor obtain any benefit in addition to what he was already entitled under the debt. There was no agreement by other creditors to forebear or acceptance of something other than money.
In 1937, the Law Revision Committee (chaired by Lord Wright MR) expressed the opinion that Lord Blackburn’s view remained as valid as it was some 50 years earlier and recommended that legislation should be passed to give effect to it. That recommendation was not implemented. Foakes v Beer (1884) 9 App Cas 605 has been followed including in three decisions of the Court of Appeal in Vanbergen v St Edmunds Properties Ltd [1933] 2 KB 223, D & C Builders Ltd v Rees [1966] 2 QB 617 and In re Selectmove Ltd [1995] 1 WLR 474. An estoppel defence was not argued in Foakes v Beer. Since then the law on estoppel has not stood still. In Central London Property Trust Limited v High Trees House Limited [1947] K.B. 130, Denning J considered that notwithstanding the absence of consideration, there may be cases where the creditor is precluded from enforcing his strict legal rights because of a promissory estoppel.
In Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 Q.B. 1 there was a promise by building contractors to make bonus payments to Williams, a carpenter, to provide carpentry work which he had already agreed to do, when it became apparent that the financial difficulties of Williams would make it unlikely that the work would be completed in time and therefore the Respondent building contractors would be penalised under the main contract. It was held that the promise to pay the bonus was enforceable by Williams because the building contractors had obtained a benefit or avoided a liability under the building contract with the Shepherds Bush Housing Association Ltd to refurbish the block of flats. The decision is controversial because it is inconsistent with a rule that performing or promising to perform an existing obligation does not provide good consideration for a promised variation. The case concerned an agreement to pay extra for continued services which were covered by an existing contract, “increasing pacts”. The rule in Pinnel’s case concerned paying less in satisfaction of a debt. So did Foakes v Beer (1884) 9 App Cas 605. Neither were cited.
In Re Selectmove [1995] 1 W.L.R. 474 at 481, Peter Gibson L.J. said:
“Foakes v Beer was not even referred to in Williams v Roffey and it is in my judgement impossible, consistent with the doctrine of precedent, for this court to extend the principle of Williams’s case to any circumstance governed by the principle in Foakes v Beer. If that extension is to be granted, it must be by the House of Lords or, perhaps even more appropriately, by Parliament after consideration by the Law Commission.” In contrast with this, Williams v Roffey Bros & Nicholls (Contractors) Ltd was followed by the Court of Appeal in the present case, one of satisfaction of a debt, and Foakes v Beer distinguished on the ground that MWB obtained practical benefits from the variation agreement because it enhanced the prospects of being paid the arrears.
The Supreme Court did not have to, and did not, go on to consider the point on consideration. Departure from Foakes v Beer would require consideration by an enlarged panel. It was pointed out by Lord Sumption that practical benefits obtained by a creditor from agreeing to deferred payments were specifically mentioned by Lord Blackburn in Foakes v Beer; this point was before the House of Lords in that case.
If it is to be departed from it is because the rule gives rise to results which are unfair because parties can make an agreement to defer payment and find out subsequently it is unenforceable, and because it fails to reflect the reality that a creditor who agrees deferment has a better prospect of being paid and this is a benefit.
It is open to doubt whether the Supreme Court in an expanded bench would be willing to depart from Sir Edward Coke’s statement of the rule in Pinnel’s case and Foakes v Beer which the House of Lords had unanimously decided in 1884. Williams v Roffey Bros & Nicholls (Contractors) Ltd, was a case of paying more than had been agreed for services when the carpenter had quoted too low and had not supervised the work properly. It is not logical that agreements to give more for services already contracted for, are subject to a different rule.
The law on consideration only requires some consideration, however small. Sir Edward Coke stated in Coke, Littleton 212 b “the gift of a horse, hawk or robe, etc in satisfaction is good. For it shall be intended that a horse, hawk, or robe, etc might be more beneficial to the plaintiff than the money”. In Foakes v Beer, Dr Foakes had given none. The requirement for some consideration can be satisfied by adding something of little value, an extra £1 on the debt or a postage stamp, or a voucher from a third party retailer.
(i)“All variations ….must be ….signed on behalf of both parties”
Clause 7.6 required “All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect”. What would comply and what would not is a matter of interpretation of the particular contract. Does it require signatures of both parties on the same, single document? If so an exchange of documents agreeing a specific variation and setting it out, even with a signature of one party on each would not be sufficient. The parties would either have to meet or sign sequentially with the single document passing between them, for example by post or courier. What is required by the word “signed”? Is what is required is an original signature in manuscript? Would a rubber stamped signature suffice, or an electronic image of a signature, or a name typed at the end of a document? Could one individual sign for each party as agent?
(ii) Consumers
The Supreme Court did not mention consumers. They are often made to telephone and agree what is to be done on the telephone because the commercial entity does not correspond by email. A consumer might well not have in mind standard terms in a consumer contract. These can be very lengthy, not readily available without searching through records or obtaining another copy, and are not invariably read, or even expected to be read prior to a consumer dispute arising.
(iii) Avoiding application of Foakes v Beer
In future it would be well for those dealing with credit controllers or customer services to bear this case in mind, lest they end up like Rock with an oral agreement but no binding contract to reschedule. Foakes v Beer is a default rule which applies in the absence of contrary agreement. There is a risk of unfairness if parties intended and agreed a binding variation, only for the expectation to be defeated because of the rule. An offer email might in the future usefully include specific words providing consideration to the creditor in the form of a new item of some small value such as £1 or an Amazon voucher.
(iv) Avoiding the NOM rule
There is the risk of unfairness when there are facts when it is to be expected that a party may not know of or remember the clause, for example because it was tucked away in boiler plate standards terms incorporated by reference into the original contract, or the original contract was made some considerable time previously, or by a different agent then acting for the principal.
Entire agreement clauses govern the consequences from the time of conclusion of a contract of what has happened between the parties in or during those particular negotiations. In contrast a NOM is in the past, governing future negotiations and the effect of conclusion of a new agreement.
The NOM rule allows freedom of contract in the original contract, but creates a barrier before any variation can be effective. A NOM clause can be expected to be drafted so as to apply to variations of it. Clause 7.6 applied to “All variations to this Licence …” . Clause 7.6 appears to have contemplated that there would need to be a single document signed in manuscript on behalf of each party by its authorised agent, expressed to be a binding contract, overriding and paramount to the previous terms. What formalities are required, and how in the circumstances these can be met, depends upon its particular wording. If it requires a face to face meeting between named individuals or certain officers of companies, or a board resolution, that will have to be arranged. There is no single, certain cure without first locating the clause and considering its wording. What may look reasonable without looking at the wording may not be sufficient, and then a party arguing a variation is effective, is thrown back on the uncertainties of litigation about the facts and estoppel.
This case lays down a rule of wide application. It does not cater on a case by case basis. One size fits all. The decision requires commercial men and the public to be vigilant, diligent in finding the NOM, and meticulous in designing, agreeing and implementing a solution which complies with its wording, if their legitimate expectations are to be achieved.
According to the government website, the UK is the best prepared country for the implementation of artificial intelligence (AI), and attracts the most venture capital investment in Europe. It will come as no surprise that the enthusiasm for AI and machine learning has percolated to public authorities, of which HMRC leads the way.
For years HMRC has been particularly receptive to automation – and for entirely practical reasons. From introducing digital tax accounts to creating a Digital Strategy, the goal is to help customers get their tax calculations right and make tax easier. Automation is intended to make both compliance and enforcement more time and cost-efficient. To this end, HMRC has created a new so-called Collaboration Zone, to explore how AI and machine learning can improve its decision-making processes, as well as customer experience. In HMRC’s own words, AI is about ‘automating repetitive tasks and freeing up our people for more satisfying work helping our customers – this is people and machines working powerfully together’. Since opening its Automation Delivery Centre in 2016, HMRC has set itself the ambitious goal of automating 10 million processes by the end of 2018. It is no surprise that AI is considered to be the logical next step to help meet this goal.
How will AI be used? Robotics tools currently in use range from the simplest, namely social media engagement and the use of a virtual assistant called Rita, to harnessing the power of machine learning to assist with compliance and complex tax investigations. It is the latter end of the spectrum that provides more food for thought. KPMG’s 2017 report, ‘Technology in Tax’, reveals that, according to surveys by the World Economic Forum, a significant number of experts believe that by 2021, 30% of corporate audits will be performed by AI, and tax will be collected for the first time by a government via a blockchain.
For the sceptics, an interesting instance of machine fail appears to have occurred in a fairly run-of-the-mill tax case, Richter v HMRC [2017] UKFTT 0339 (TC), an appeal against penalties for late filing of an income tax return. Speaking obiter, the judge remarked that ‘not even the most sophisticated computers can (yet) form beliefs, and certainly not those operated by HMRC’. In the Richter case, a human being needed to form a belief about the appropriate level of penalty to be charged. Specifically, the legislation provided for a penalty for late filing (beyond 6 or 12 months) which was the higher of 5% of the tax liability on the return and £300. This wording called for a determination ‘to the best of HMRC’s information and belief’ as to whether the taxpayer’s past history of returns and payments justified a penalty higher than £300. Instead, however, the practice was that the HMRC self-assessment computer would trawl its database for cases where a return had been issued but not received before the 6 month point, and that computer was programmed to issue, in all cases, a £300 penalty. The computer was not programmed to interrogate any data it held about past liabilities. Consequently, the judge cancelled the automatic assessment of the payable penalty. The real-life scenario of the Richter case underlines some potentially serious challenges and glitches that lie ahead in the use of AI in the tax context.
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’.
