There is an important difference between obtaining a judgment and successful enforcement of that judgment. JSC BTA Bank v Mukhtar Ablyazov, Madiyar Ablyazov [2018] EWCA Civ 1176 illustrates this, a case of embezzlement with a judgment for US$5 billion and only a relatively small amount recovered. In England a claimant can expect to have to pay the costs of third parties in obtaining their assistance in providing disclosure, or implementing court orders. A client aims to avoid being left with losses, an unsatisfied judgment, and legal costs. It is important to have in mind from the beginning of a case how any eventual judgment is going to be enforced, and to prepare for it. This requires planning.
Possible routes may involve insolvency proceedings. There may be a need to set aside transfers of assets. Planning includes considering where assets are likely to be and finding out where assets are through court orders, identifying what proceedings may have to be taken and where, time limits, what has to be proved, and collecting evidence. Many cases involve cross-border aspects. In other jurisdictions consideration has to be given to the local laws and remedies.
JSC BTA Bank v Mukhtar Ablyazov concerned a transfer by the father of an amount which was trivial in comparison with what he had embezzled, to his schoolboy son, who needed a visa to remain in the country to complete his education. There was no evidence on why the amount transferred would be safer from the claimant Bank in a London Bank account in the name of the son, rather than in an offshore account in the name of a less than transparent BVI company, from which the transfer had originated. The judge, upheld by the Court of Appeal, decided that the Bank had not proved the necessary intent required by section 423 of the Insolvency Act 1986 for setting aside transfers made to defraud creditors. The case was exceptional. The test to be applied means it will often not be difficult to prove in other cases the intention required. The decision is also an application of principle on when there can and cannot be a successful appeal against factual findings by the trial judge. It shows that many cases against transferees, including cases under section 423, will be in time for Limitation Act purposes, even though company money or trust assets were looted, many years previously.
Assets can be hidden in corporate or trust structures abroad by a determined defendant. It may be open to attack such structures using section 423. The section is not limited to assets located, or transfers which have taken place, within the territorial jurisdiction of the court. Where jurisdiction over proceedings with substantive claims against a defendant is in England, the court will do what it reasonably can to avoid its judgment being left unsatisfied.
A Freezing Injunction will have an ancillary order for disclosure of assets. The purpose is to make the injunction effective. If assets have been transferred prior to the granting of the order, there may be a question whether they are subject to the order. This may be because of beneficial ownership of them by the defendant or because the defendant has control over them. The width of disclosure to make the injunction effective and enable it to be policed is a matter of discretion. That disclosure can include disclosure of bank accounts which record transfers. It may involve disclosure of documents, evidence by witness statement made by the defendant, and cross examination of the defendant about what are or may be his assets, what transfers have been made and how assets are held. A defendant may be subjected to extensive pre-trial investigation of his assets. In proceedings based on proprietary claims the court may grant disclosure orders, including against third parties, requiring information including documents showing what has become of the assets claimed and what proceeds there may be. An injunction may be granted to safeguard those assets or their proceeds.
Section 423 is the replacement of section 172 of the Law of Property Act 1925 which had been based on the Statute of Elizabeth I (13 Eliz I c 5) of 1571 on Fraudulent Conveyances. This had made void transfers of assets to defraud creditors. Fraudulent transfers were commonly done, were inconsistent with due performance of bargains or other binding transactions, and enforcement of them through the courts. The Statute made void transactions which “…are devised and contrived of malice, fraud, covin [deception or fraud which is hidden], collusion or guile to the end, purpose and intent to delay, hinder or defraud creditors and others”. For gifts the principle applied by the case law was that persons must be just before they are generous, and that debts must be paid before gifts could be made.
The Statute was the forerunner of Fraudulent Conveyances legislation in the United States. In about 150 to 125 BCE, Paulus, a praetor (a Roman Magistrate), created a procedure which enabled a creditor to revoke acts carried out fraudulently and to his detriment by a debtor. Centuries later Justinian’s Digest (Justinian, Book IV, Title VI, para 679, no. 6) stated “… If a person has alienated his property in fraud of creditors …they are allowed to bring an action cancelling the alienation, that is alleging that the property has not been alienated and therefore remains an item in the debtor’s estate.”. Jurisdictions whether civil law, common law, or otherwise, can be expected to have rules for setting aside transfers which have removed assets which would otherwise be available for creditors. There are jurisdictions which have a “Pauline action” (actio Paulina) allowing creditors to set aside such transfers. These include the Netherlands, its former colonies, Jersey and Guernsey.
The Bank was, until early 2009, controlled by Mukhtar Ablyazov (“MA”), who had embezzled more than US $6 billion. In 2008 the bank got into financial difficulties. On 30th January 2009 the bank informed its regulator in Kazakhstan that it could not meet its liabilities. On 2nd February 2009, MA was removed as chairman of its board of directors, and he fled to London. On 26th February 2009 there was transferred from a Swiss Bank account in the names of MA and his son, £1.1 million to a London bank account solely in the name of the son, who was 17 years old at school in England on a student visa. In August 2009 the bank commenced proceedings against MA in England, obtained a worldwide freezing order and in 2012 obtained judgments against him for more than US$5 billion. The balance on the account amounted to over £1 million. The solicitors for the Bank said there was a “serious likelihood” that the balance was subject to the injunction. It had been paid into court pending determination of the proceedings, which had been commenced by the son.
No claims were made against the son which would have required the Bank to prove that the funds transferred from the Swiss Bank account to London originated from the funds embezzled from the Bank by MA.
There was no tracing claim advanced by the Bank, asserting that the transferred money belonged to it. This would have been a claim that the transfer came out of assets which were proceeds of the money embezzled by MA in breach of his duties owed to the Bank as Chairman. This would have had to be proved on a balance of probabilities. “A man’s money is property which is protected by law. It may exist in various forms, such as coins, treasury notes, cash at bank, or cheques, or bills of exchange of which he is ‘the holder,’ but, whatever its form, it is protected according to one uniform principle. If it is taken from the rightful owner, or, indeed, from the beneficial owner, without his authority, he can recover the amount from any person into whose hands it can be traced, unless and until it reaches one who receives it in good faith and for value and without notice of the want of authority.” In this case the transfer had originated from an account in the name of a BVI company controlled by MA. If the money transferred was proceeds derived from embezzled money, then it would have been the Bank’s money held by the defaulting fiduciary (MA), who had been a director of the Bank. His son would not have been a bona fide purchaser for value without notice, because he had received a gift. The fact that the transfers went through Switzerland, which does not recognise beneficial ownership, would not have prevented tracing and a proprietary remedy. The son would have been liable to pay it over to the Bank.
Where a transferee has given value, the burden of proof would be on him to prove he was a bona fide purchaser for value without notice. This includes constructive notice. It depends on what a reasonable person should have realized.
Nor was there any claim that the son was liable as a constructive trustee either on the grounds of knowing receipt of misapplied assets belonging to the Bank, or for dishonest assistance of MA to act in breach of his fiduciary duties owed to the Bank as its Chairman by embezzlement, and dealing with the proceeds.
(i)The Trust Claim – that the funds transferred belonged to MA
The Bank claimed that the £1.1 million belonged beneficially to MA, and the judgment could be executed on it as an asset of the judgment debtor. The Bank contended that there was no gift and the fund was held on resulting trust for the father. The son said that it was a gift to him, and was his, made to enable him to make investments to get a Tier 1 investment visa. Whether money transferred by a father to a son were a gift commonly arises in the context of a claim by a father to the proceeds of transferred assets. A gift requires there to have been an intention by the father to make a gift to his son. It will not be a gift if that intention is missing, for example if money is lent to the son, or transferred so that the son can invest it for the father, for example by buying a holiday home for the father. Under English law transfers from father to son are subject to a “presumption of advancement”. It is presumed that there is a gift unless the contrary is proved. This gave rise to an issue of fact – had the Bank on the evidence disproved the intention to make a gift? The Bank accepted that MA may well have wanted to obtain an investment visa for the son. The Bank argued that MA and the son had lied about the subsequent use of part of the transferred money, contending that it had been used 5 years after the transfer to pay a Swiss Lawyer retained by the father for proceedings in 2013-2014 in France to extradite him to states which had formed part of the former Soviet Union, including Russia. This had culminated in the Cour de Cassation quashing an extradition order. The judge rejected the factual contention, and observed that even had it been correct it would have been possible for the son to have helped out his father in these difficult circumstances from money that had been a gift. In criminal cases where a defendant has or may have lied, for example in a police interview, the judge may need to give a “Lucas” direction warning the jury that lies may be told to bolster a good defence, or for reasons which are consistent with an absence of guilt. The same is so in a civil case. The judge found that the transfer was an outright gift to the son, and this was not challenged on appeal.
(ii)The Claim under section 423
The Bank sought relief under section 423 setting aside any gift made, and enabling the Bank to enforce its judgment against that money. This would restore the position to what it was prior to the transfer. Section 423 applies to gifts and transfers at an undervalue, when there is the purpose stated in the statute.
Prior to the enactment of section 423, the jurisdiction was in section 172 of the Law of Property Act 1925, which subject to exceptions, including transfer to a bona fide purchaser for value without notice of the intent to defraud creditors, applied to “…every conveyance of property, made whether before or after the commencement of this Act, with intent to defraud creditors..” This had replaced the 1571 statute, in simpler words. These might have been taken to require dishonesty. Its judicial interpretation had not always been consistent. The position was criticised by the Cork Report, the Insolvency Law and Practice-Report of the Review Committee (Cmnd 8558, 1982). This recommended that the necessary intent should be an intent on the part of the debtor to defeat, hinder, delay or defraud creditors, or to put assets belonging to the debtor beyond their reach (Cork Report, para. 1215(b)). It also recommended that such intent should be capable of being inferred whenever it was the natural and probable consequence of the debtor’s actions in the light of the financial circumstances of the debtor at the time, as known, or taken to have been known, to him. Bowen LJ said in Edgington v Fitzmaurice (1885) 29 Ch.D 459at p. 483, that “…the state of a man’s mind is as much a fact as the state of his digestion.” Medical science at the time did not have MRI. Diagnosis could require the skills of a detective. One could not be sure of what was happening inside a man. Intent is a factual conclusion derived from the evidence. It is usually a matter of inference. The natural and probable consequences of a transfer may have been obvious to and known by the transferor. This can be relevant to what is to be inferred was his motive. When James Bond points a machine gun at a villain next to him and pulls the trigger, it may not be that difficult to infer that he intended to kill.
It was not an objective of the 1571 statute to interfere with the giving of a few coins to the church collection plate. It is not an objective of section 423 to interfere with transfers, including gifts, from the assets of a debtor of a trivial amount. The requirement of proof of intention within the statutory purpose takes such cases outside of section 423.
Section 423 (3) provides:
“(3) In the case of a person entering into such a transaction, an order shall only be made if the court is satisfied that it was entered into by him for the purpose –
(a) of putting assets beyond the reach of a person who is making, or may at some time make, a claim against him, or
(b) of otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make.”
Had the Bank proved that the transfer by MA was made for the statutory purpose defined in section 423(3)? In Inland Revenue Commissioners v Hashmi [2002] EWCA Civ 981; [2002] 2 BCLC 489, a transfer of premises where the father carried on a restaurant business, was found to have been made with the statutory purpose, and the decision upheld on appeal. The defendant had for a number of years been deliberately and dishonestly under-declaring the profits of the business to the Inland Revenue, and the defendant must have known that, should his dishonesty ever be uncovered, he would become liable to pay very substantial sums in tax, interest and penalties. The judge accepted evidence that the defendant was a caring father who wanted to secure his son’s future and that this was “a” purpose of transferring the ownership of the property to him. The judge found that the defendant transferred the property when he did, “because he could not be sure, given the inherently risky way in which his taxation affairs were conducted, that he would be able to make the provision at a later date”.
The judge held that the transaction was also entered into for the prohibited purpose. The judgments in the Court of Appeal upheld this decision, holding that it is sufficient to come within section 423 (3) if the purpose can properly be described as “a” purpose, and not merely as a consequence. The motive had to be something which was positively intended. It did not have to be the dominant purpose. It had to be a “substantial” purpose of the transfer, meaning something more than trivial.
That a transfer is a gift is not sufficient to trigger application of the section. The fact that consequences within section 423 (3) were foreseen by the transferor does not satisfy the test, nor does the fact that the transfer in fact had these consequences. Purpose is different from consequences, even when these are foreseeable, or even obvious or inevitable. There is no constructive intent, which will trigger the section. It is a matter of actual objective and aim, one of motive, intention in fact present in the transferor’s mind at the time of transfer.
In JSC BTA Bank v Mukhtar Ablyazov, after pointing out that it was “at least an outcome” of the transfer of funds made by MA to the son that the funds were put beyond the reach of the Bank as a person who was making or might make a claim against MA, the judge had said:
“What I therefore have to determine is whether this was also a purpose of [MA] in making the Transfer. That depends … on whether [MA] positively intended that outcome.”
In the Court of Appeal, Leggatt LJ with whose judgment the other judges agreed, upholding this, said:
“… [A] commander may order a missile strike on a military target knowing that it will almost certainly cause some civilian casualties. But this does not mean that the missile strike is being carried out for the purpose of causing such casualties.”
In Inland Revenue Commissioners v Hashmi, Simon Brown LJ said:
“There may be cases in which, even absent the statutory purpose, the transaction would or might have been entered into anyway. That would not necessarily negate the section’s application; but the fact-finding judge on an application made to him under section 423 must be alert to see that he is satisfied that the statutory purpose has in truth substantially motivated the donor if he is to find that the section bites.”
The first sentence and the beginning of the second ask what would, or was likely to, have happened if there had been no purpose within the statute. Whether the purpose or motivation present was causative of the transfer, is not the test. The question is what purpose or motive was actually present. The last words echo the requirement of more than a trivial purpose.
Simon Brown LJ continued:
“I would, however, add this. If in fact the judge were to find in any given case that the transaction is one which the debtor might well have entered into in any event, he should not then too readily infer that the debtor also had the substantial purpose of escaping his liabilities.”
This is a comment on what findings of fact may be appropriate. A judgement may explain why a judge has found absence of a required intent, referring to another particular fact or factor in the case. The statement contains no rule of law, and does not lay down any presumption of absence of purpose on particular facts.
Section 423 (3) contains no requirement of dishonesty or fraud or deception. Leggatt LJ said:
“It is sufficient simply to ask whether the transaction was entered into by the debtor for the prohibited purpose. If it was, then the transaction falls within section 423(3) , even if it was also entered into for one or more other purposes. The test is no more complicated than that.”
It had been judicial glosses and interpretations that had made section 172 uncertain in its ambit, led to the recommendations of the Cork Report, and resulted in its repeal and the enactment of section 423. This is an unequivocal affirmation by the Court of Appeal of the words of the statute, neither more nor less, with no judicial change and no gloss.
The judge held that the Bank had failed to prove that the gift was made by MA for the purpose in section 423. The Bank appealed on section 423, and lost again.
By the time of the transfer the father had already been removed as chairman, it was known that large sums had gone missing from the Bank and MA had fled from Kazakhstan to London. The judge found that:
(1) At the time of the transfer MA knew that he would be facing claims against himself and his assets in this jurisdiction.
(2) MA is a person who “time and again has shown that he will do all he can to prevent [the Bank] from being able to preserve and enforce against his assets”.
(3) There were advantages of an investor visa compared to a student visa as it allowed the son to remain in the UK without any of the restrictions imposed on those with only a student visa such as the need for a student sponsor and the need to find a job on graduation with an employer willing to sponsor a general visa.
(4) MA had initiated the process which led to the son applying for an investor visa, when he instructed a firm of immigration solicitors in January 2008, before any fraud was uncovered, albeit that “even at that early time MA is very likely to have appreciated that he had been involved in serious wrongdoing against [the Bank] for which he might get sued” .
(5) The investor visa application continued from when it was initiated in January 2008, until it was obtained.
(6) It was likely that MA would have made the transfer to enable the son to pursue the investor visa application even if he had not been at risk of a claim being made against him by the Bank.
(7) The £1.1 million transfer was sourced from a company incorporated in the British Virgin Islands controlled by MA, and the interests behind that company had been not transparent.
There was no evidence on why it would have been thought to be more effective to hinder the Bank, to transfer the amount to the son’s bank account in London through the Swiss Bank account in their joint names, from “…the relative obscurity…” of an account in the name of the BVI company.
(8) Vast sums had already been put away from the Bank in overseas bank accounts. The transfer was of a drop in the ocean compared with the massive sums MA had embezzled. It was not shown that at that time there was a course of conduct on the part of MA of making gifts. The judge said that the amount would have been almost de minimis.
These taken together indicated that the motive of MA was to benefit the son, and supported the factual conclusion, reached by the judge and upheld by the Court of Appeal, that it was not proved by the Bank that the transfer was made by MA with the intention of delaying the Bank or putting assets beyond its reach.
Whether or not an appellate court will entertain an appeal on the facts is a question of great practical importance. The principles and their application are shaped by considerations of practicality, the doing of justice and public policy.
(i) The judge sees the witnesses and hears their evidence: “…..as the evidence proceeds through examination, cross-examination and re-examination, the judge is gradually imbibing almost instinctively, but in fact as a result of close attention and of long experience, an impression of the personality of the witness and of his trustworthiness and of the accuracy of his observation and memory or the reverse….” The appellate court does not have the same facilities and means of forming a judgment as were possessed by the judge. The trial judge has sat through the entire case and his ultimate judgment reflects this total familiarity with the evidence. The insight gained by the trial judge who has lived with the case for several days, weeks or even months may be far deeper than that of the Court of Appeal whose view of the case is much more limited and narrow.
In Thomas v Thomas [1947] AC 484, Lord Thankerton said at pp 487–488:
“(1) Where a question of fact has been tried by a judge without a jury, and there is no question of misdirection of himself by the judge, an appellate court which is disposed to come to a different conclusion on the printed evidence, should not do so unless it is satisfied that any advantage enjoyed by the trial judge by reason of having seen and heard the witnesses, could not be sufficient to explain or justify the trial judge’s conclusion.
(2) The appellate court may take the view that, without having seen or heard the witnesses, it is not in a position to come to any satisfactory conclusion on the printed evidence.”
(ii) Factual issues should be decided at the trial which is not simply a dress rehearsal for hearings on appeal.
(iii) An appeal should target particular matters and be a focussed exercise in finding errors. It is “telescopic” looking from a distance at particular features of a trial, and subjecting particular issues to close examination.
(iv) Duplication of the trial judge’s efforts on appeal would very likely contribute only negligibly to the accuracy of fact determination at a huge cost in diversion of judicial resources.
(v) Judges when they give their reasons for factual findings may well not describe in full everything which has influenced their factual findings, and its weight. This does not entail that the reasons are erroneously incomplete. There is room for a penumbra of uncertainty and debate if there is a retrial of the facts on appeal using the reasons in the judgment as a starting point for the arguments. “[The judge’s] expressed findings are always surrounded by a penumbra of imprecision as to emphasis, relative weight, minor qualifications and nuance…of which time and language do not permit exact expression, but which may play an important part in the judge’s overall evaluation.”
Nevertheless, there are circumstances, where an appellate court should and will make its own findings of fact:
(vi)In Thomas v Thomas [1947] AC 484, Lord Thankerton qualified his statement of principle :
“(3) The appellate court, either because the reasons given by the trial judge are not satisfactory, or because it unmistakably so appears from the evidence, may be satisfied that he has not taken proper advantage of his having seen and heard the witnesses, and the matter will then become at large for the appellate court.”
(vii) Where an issue has been determined applying the wrong legal test, and the facts found are for application of that wrong test. An example is findings on causation where the hypothetical facts of the counterfactual are wrong in law. For example looking at a counterfactual where the defendant would still be in breach of duty.
(viii) Where the findings of fact are “plainly wrong” or “…cannot reasonably be explained or justified” or “..the conclusion reached by the judge lies outside the bounds within which reasonable disagreement is possible and is thus one that no reasonable judge could have reached.”.
(ix) Where there is infection of the factual findings by “a material error”; for example overlooking relevant evidence, or misunderstanding the evidence.
The Bank was refused permission to appeal against a number of factual findings which would have opened up a wide ranging investigation and reweighing of evidence at the trial. A proposed appeal based on the “weight” attached to evidence by the judge may well offend against the principles. On questions of fact an appellate court is a court of error, and not a court for retrying the case.
The judge held that the claim by the Bank under section 423 was an action by the Bank for a sum recoverable by statute subject to a six year limitation period. The Bank’s action against the son was begun in December 2015, more than six years after the transfer was made on 26th February 2009, and the claim may have been time-barred. The bank relied on section 32 of the Limitation Act , which provides for the postponement of the limitation period in certain cases. These include under s32 (1) (a) when the action is based upon the fraud of the defendant; or under s32 (1)(b) any fact relevant to the claimant’s right of action has been deliberately concealed from him by the defendant. The “defendant” includes the defendant’s agent and “any person through whom the defendant claims and his agent”. This is further elucidated in section 38 “(5) … a person shall be treated as claiming through another person if he became entitled by, through, under, or by the act of that other person to the right claimed…”. In this case the son became entitled to the fund by the act of the father in making the transfer.
Time does not run until the claimant has discovered the fraud or concealment, or could with reasonable diligence have done so. The Court of Appeal, agreeing with the judge, expressed the opinion that for the purpose of applying section 32(1)(a) and (b) of the Limitation Act 1980, the court would have had to consider whether there was fraud or concealment by MA because he was a “…person through whom the defendant claims”. Since it had not been shown that MA had had the necessary purpose under section 423 (3), this question did not arise.
Section 32(1)(b) applies to concealment irrespective of the particular cause of action. Its wording, earlier case law, and this decision will assist claimants resisting a Limitation Act defence advanced by a transferee, when the claimant has only found out about an asset transfer within the last 6 years, but many years after its assets have been taken. That there has been a transfer is a “fact relevant to [claimant’s] right of action” against the transferee. Where there has been concealment of the transfer within section 32(1)(b), the sub-section will apply whether the transferee is sued using section 423, or there is a proprietary or personal claim against him.
An important feature of the case is that no claim was advanced based on the transfer being funded from embezzled money or its proceeds. This case shows (i) what purpose has to be proved to bring a transfer within section 423; (ii) why on the facts and evidence the necessary purpose was not proved for this particular gift; (iii) the limits to appeals on issues of fact being entertained by an appellate court, and (iv) that claims against transferees, including under section 423, may well have a delayed commencement date for the running of Limitation by reason of section 32 of the Limitation Act 1980.
A working group has recently reviewed the rules by which parties to civil litigation must plan for and provide disclosure. In promoting a new, draft Practice Direction, it has concluded that the regime needs re-structuring. It is expected that the Business and Property Courts in England and Wales will soon commence a two-year pilot of the reforms. The pilot will commence alongside signs that the judiciary is now also placing even greater emphasis on the cost-benefits of deploying automated software in the disclosure process. In this update, we briefly consider some of the headline changes, and the questions that they pose vis-à-vis electronic document review.
Moving away from standard disclosure
Under the extant disclosure rules in multi-track cases, the court can make various orders. These range from dispensing with disclosure, to an order for disclosure on specific issues, to ‘standard disclosure’. In advance of the court’s order, the parties are encouraged to agree a proposal which facilitates the just and proportionate disposal of the claim(s).
In recent times, concerns have developed as to the suitability of this regime. There is a perception that the judiciary has not gone far enough in deploying the breadth of available orders, and a concern that many practitioners are simply treating ‘standard disclosure’ as the default preference. An attempted shift away from this ‘default preference’ perhaps serves as the defining feature of the proposed changes and the pilot.
Standard disclosure requires a party to disclose the documents: (i) on which it relies; (ii) that adversely affect its own case or another party’s case; and (iii) that support another party’s case. ‘Documents’ are defined broadly: any paper or electronic source “in which information of any description is recorded.” A reasonable search for (ii) and (iii) must be carried out.
The question as to what constitutes a reasonable search can be complex vis-à-vis electronic documents. As explained by the then Senior Master of the Queen’s Bench Division, Master Whitaker, in Goodale v Ministry of Justice [2009] EWHC B41:
“… an enormous volume of information is now created… and stored electronically. … The problem is how the parties and (if disputed) the court determines what the scope of that search [for electronic information] should be, [and] how it is going to be made proportionate….”
The proposed changes seek to curtail the occurrence of broad searches that frequently occur under standard disclosure. Under the pilot, parties will need to provide: (i) known adverse documents; and (ii) ‘basic disclosure’. Basic disclosure constitutes the key documents upon which a party relies and which are necessary for the other parties to understand the case to meet.
Notably, the duty to provide known adverse documents does not require an extensive search: it requires a party to consider whether it is aware of the existence of such material. Similarly, basic disclosure can be dispensed with by agreement or by court order. If basic disclosure would result in a party providing more than 500 pages, it falls away.
If a party wants disclosure additional to, or in place of, basic disclosure, it can request ‘extended disclosure’. It can only do so on an issue-by-issue basis, and it must persuade the court that such disclosure is required. In response to a request, the court can make one of five orders: (i) no disclosure; (ii) basic disclosure (to the extent not already provided); (iii) disclosure, pursuant to a specific search-request, for “particular documents or narrow classes of documents”; (iv) disclosure, pursuant to a reasonable and proportionate search, of the documents likely to support or undermine the party’s case or that of another party; and (v) in exceptional cases, disclosure, pursuant to a reasonable and proportionate search, of documents likely to be supportive or adverse, or which “may lead to a train of inquiry which may then result in the identification of other documents for disclosure” (in essence the old “Peruvian Guano” test for disclosure).
The proposed Practice Direction also includes a duty upon the parties, and their representatives, to co-operate in relation to disclosure. This duty has significant requirements relevant to electronic documents. Where the sought-after disclosure requires searches, the parties must discuss and seek to agree refinements by reference, amongst other things, to the use of technology assisted review (“TAR”) software. The express inclusion of this tool in the core procedural rules signifies its growing importance in the litigation process.
The results of the co-operation are to be recorded by the parties in a ‘Disclosure Review Document’ (the “DRD”). Section 2(12) of the draft DRD provides that where the parties decide against TAR, they should set out their reasons. Significantly, paragraph 10.2 of the draft Practice Direction adds: “If a party fails to cooperate and constructively to engage in [the process of agreeing the DRD] the court may make appropriate orders at the case management conference, including the dismissal of any application for Extended Disclosure and/or the adjournment of the case management conference with an adverse order for costs.”
This raises the question of when a party’s approach to the use of TAR might be criticised.
Technology Assisted Review
TAR, or ‘predictive coding’, refers to computer programmes that categorise potentially disclosable documents. When deployed, it involves: (i) determining the pool of documents for ‘review’ by the software; (ii) human categorisation of a sample from the pool. This phase is intended to ‘educate’ the software; (iii) an initial categorisation, by the software, of all documents in the pool; (iv) manual review and, if necessary, re-categorisation of a sample of the documents analysed by the software. This phase is intended to ‘re-educate’ the programme; (v) application, by the software, of the ‘re-educated’ programme to the document pool; and (vi) repetition of steps (iv) and (v) until re-categorisations fall within a tolerance level.
Recent caselaw provides some guidance on when a court may order the use of TAR, and how it should be used.
Pyrrho Investments Limited & Anr -v- MWB Property Limited & Ors [2016] EWHC 256 (Ch)
In this High Court case which approved TAR, the key features included: (i) an agreement, between the parties, as to its role; (ii) in excess of three million electronic documents; (iii) a cost of several million pounds to manually review the document pool; (iv) a claim value in the tens of millions; (v) upper cost estimates for deploying TAR of c. GBP 470,000; (vi) a window before trial affording “plenty of time to consider other disclosure methods if for any reason the predictive software route turned out to be unsatisfactory”; and (vii) the absence of “factors of any weight pointing in the opposite direction.” The Court also noted that TAR had been sanctioned in other jurisdictions, including the Irish case of Irish Bank Resolution Corporation Limited v Quinn [2015] IEHC 175 where, unlike in the instant case, one party had objected to its involvement.
Triumph Controls UK Limited & Anr -v- Primus International Holding Co. & Ors [2018] EWHC 176 (TCC)
In this more recent High Court case regarding the review of c. 220,000 electronic documents, the Court held that the claimants’ unilateral application of TAR to a sample of the disclosable documents was unsatisfactory. Finding that the work-product of that process should, effectively, be disregarded, it ordered the claimants to undertake a further, sample-review of the document pool. In doing so, the Court made several key points, including:
These two cases indicate the breadth of factors relevant to: (i) the merits of any position, agreed or otherwise, on the use of TAR; and (ii) whether a party has been sufficiently co-operative and constructive when engaging on the question.
Summary
By redefining the regime in terms of known-adverse, basic and extended disclosure, hopes abound for a wholesale cultural change epitomised by greater intervention on the part of the judiciary, and a reduction in the instances of disproportionate (in terms of time and cost) disclosure.
This change coincides with increased judicial emphasis on the cost savings that TAR can produce. In document-heavy cases under the pilot, judges are likely to apply greater scrutiny to the parties’ analysis of, and discussions on: (i) the size of the potentially disclosable electronic-document pool, and how it should be refined; (ii) the costs of TAR; (iii) the mechanics of the TAR process, including suitable tolerance levels for sample reviews; (iv) how the use of TAR would align with the trial timetable; and (v) safeguards, including human review, in the event that the process yields anomalous results. Parties will be doing so against the backdrop of an enhanced duty to engage co-operatively and constructively on issues of disclosure and, ultimately, against the real threat of potentially serious costs consequences for being found by the Court to have taken an unsuitable position.
The Court of Justice of the European Union (CJEU) has warned that the German Evangelical Church might be breaching anti-discrimination laws by requiring its employees to belong to a Christian denomination (C-414/16 Egenberger).
While we might expect the local vicar to be a Christian in name at least, it is not clear why an applicant for a post to research the UN Convention on the Elimination of Racial Discrimination needs to be. Ms Egenberger, of no particular denomination, did not even make it to interview, as the job specification required that candidates should belong to a Protestant or other Christian church. Ms Egenberger consequently sued for discrimination, and the German Federal Labour Court referred the case to the CJEU, asking for an interpretation of the Anti-Discrimination Directive (Council Directive 2000/78/EC).
According to the CJEU, it is for the national court to decide on a case-by-case basis whether religion is a ‘genuine, legitimate and justified occupational requirement’. Such judicial review would assess the balance struck between churches’ autonomy and workers’ anti-discrimination rights. Specifically, national courts must ascertain whether the said requirement is necessary and objectively dictated, having regard to the ethos of the organisation concerned, by the nature of the occupational activity in question or the circumstances in which it is carried out. In addition, the requirement must comply with the principle of proportionality, and thus it must be appropriate and not go beyond what is necessary for attaining the objective pursued.
Interestingly, the CJEU was not tempted to grant the Church a total exemption from anti-discrimination laws as regards employment (as is the case in the US, for example). Instead, the CJEU asserted that the EU law principle of proportionality governs how churches (and other religious institutions) may discriminate against employees on the basis of religion, and the proportionality or otherwise of such discrimination is for national courts to police.
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.
