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In this post, Sarah Coates-Madden, Senior Associate at CMS, and Fiona Dalling, Associate at CMS, preview the decision awaited from the Supreme Court in Davies v Bridgend County Borough Council.

Introduction

9 August 1850 saw the arrival at Kew Gardens of a set of 40 new plants from Leiden, Germany. Among them, a discovery from a recent trip to Japan. Named Polygonum sieboldii (the discoverer, Herr Siebold, apparently not shy of self-promotion), this is the first record available of the appearance of Japanese knotweed in Britain.

A commercial success, knotweed was exalted by vendors for its good looks and strength. It wasn’t then, as it is now, a shrub, the mere suggestion of which conjures images of green shoots bursting through ceilings and property values plummeting through floors.

A RICS paper, published in 2012, is generally associated with a peak in knotweed hysteria. Although the institution has since diluted its original findings, reassuring the public that knotweed is not the “bogey plant” it was once thought to be, it is nonetheless an organism of formidable resilience and propagational power (even a lava flow would not successfully exterminate its rhizomes!).

Without narrating the history and management regime required for knotweed (for which, do see this excellent longread: The war on Japanese knotweed | Invasive species | The Guardian) the issue of knotweed, and its absolute resistance to conventional methods of weed-management, is a serious problem for affected property owners.

The case

Mr Marc Davies is the respondent to the Supreme Court appeal. Bridgend County Borough Council (the “Council”) is the appellant in the Supreme Court.  Mr Davies originally brought a claim against the Council  in nuisance, as knotweed on the Council’s land had encroached on his land.

First Instance and First Appeal

The timeline is important for the appeal currently before the Supreme Court. Mr Davies bought his property in 2004. Sometime prior to that, the knotweed had encroached from the Council’s land.  Underground rhizomes were present on Mr Davies’ land before 2004.

It was not until 2017 that he became aware that the knotweed might be a problem. A letter of claim was not sent until 2019.

At first instance, District Judge Fouracre decided that the date of the Council’s knowledge of the foreseeable risk of harm was 2012.  The date of knowledge was linked to the 2012 RICS information paper mentioned above.   DJ Fouracre decided that from 2013 the Council should have treated the knotweed, and that therefore the Council’s breach of duty was from 2013 to 2018, at which point they started to treat the knotweed effectively.

The Council contended that as the knotweed was already present on Mr Davies’ land (from at least 2004), any damage arose before the breach of duty, and therefore the fact the property is affected by knotweed is not due to any breach by the Council, and the claim must be fatally flawed on causation. The District Judge rejected this argument and decided it was answered by the fact that there was a continuing nuisance and breach of duty as a result of persisting encroachment. While the initial encroachment was historic, any loss suffered by Mr Davies in principle continues and will accrue by the continuation of the breach in the Council’s failing to treat the knotweed.

District Judge Fouracre went on to consider the damages arising from the breach of duty.  The judge dismissed Mr Davies’ claim for general damages for distress and inconvenience. His evidence that he was immensely distressed by the presence of the knotweed on his land was not accepted. Mr Davies had delayed in finding out who owned the neighbouring land and contacting the Council after it came to his attention that the knotweed might be problematic. 

Most elements of his claim for diminution in the value of his property also failed. The cost of treatment was not recoverable.  The Council successfully argued that this cost would always have been necessary, even before their delay in treating the knotweed, because it had spread before the Council’s breach. Mr Davies dropped his claim for disturbance and inconvenience arising from the knotweed treatment because by the time the joint expert inspected his land there was no knotweed to see, and for the same reason that the treatment would have been required regardless of the Council’s breach. Claims for the cost of neighbour cooperation and temporary loss of land were also irrecoverable.

The only element of loss remaining was what was referred to as residual diminution in value.  That is, an enduring stigma or ‘blight’ affecting the land due to its association with Japanese knotweed. The reduction in value can be around 3-7% of the value of the land, for several years after the knotweed has been treated. 

District Judge Fouracre had to consider a key principle of damages in the tort of nuisance, namely that pure economic loss is not recoverable.  The purpose of nuisance is to protect the owner or occupier of the land in their use or enjoyment of that land. The judge found that the residual diminution was pure economic loss, so was irrecoverable.

HHJ Beard upheld that decision at the first appeal.  This meant that there was no remedy for landowners whose property valuation was affected by encroaching knotweed. This modest value case has attracted considerable attention because of the implications for both landowners and local authorities.

Mr Davies pursued a second appeal to the Court of Appeal on this pure economic loss point.

Court of Appeal

The Court of Appeal was tasked with considering the point of recoverability of diminution of value, as well as two discrete points of appeal by the Council, to which we will return below.

The Council contended that Diminution of Value amounted to Pure Economic Loss, which is irrecoverable under the tort of nuisance. Their position had, as its foundation, the case of Williams v Network Rail [2018] EWCA Civ 1514, [2019] QB 601. In his lead judgment, Birss LJ spent considerable time examining this judgment – the correctness of which was not called into question – and determining its correct construction.

While the Council had proposed that economic loss was not recoverable on the basis that “the purpose of the tort of nuisance is not to protect the value of property as an investment or financial asset”, the Court of Appeal disagreed that Williams was authority for such a position.

It was not the case that the diminution of value in Mr Davies’ case was Pure Economic Loss, unrelated to actual damage and therefore too removed from the tort of nuisance to be considered recoverable. The diminution of value attributable to the encouragement of knotweed – which no party contended to be trivial or de minimis – was economic loss stemming from actual damage. As such, it was a recoverable damage and the appeal was allowed.

The Council’s two additional points were as follows: (i) The causation point which had been raised by the Council but lost in previous hearings; and (ii) a submission as to the quality of Mr Davies’ evidence of diminution of value.

The Court of Appeal dismissed each of these grounds. The Council is taking the first point on causation, to the Supreme Court.

Supreme Court

The question for the Supreme Court is: were the lower courts correct to decide that loss suffered by Mr Davies, in the form of diminution in value of his property as a result of the encroachment of Japanese knotweed from the Council’s land, was caused by the Council’s breach of duty in failing to treat the knotweed, in circumstances where the encroachment first arose before the Council’s breach?

The Court of Appeal judge noted the “attractive simplicity” of the Council’s argument (that the diminution of value cannot be attributed to a breach by the Council as the relevant encroachment occurred prior to Mr Davies’ ownership of the property). However, finding Delaware Mansions [2001] UKHL 55 to be instructive, he held that “the fact the encroachment was historic was no answer when there was a continuing breach of duty as a result of persistent encroachment”. We shall see if the Supreme Court concurs.

In this post, Holly Ranfield, Associate at CMS, preview the decision awaited from the Supreme Court in RTI Ltd v MUR Shipping BV.

Factual Background

MUR Shipping BV (“MUR”), the shipowners, and RTI Ltd (“RTI”), the charterers, entered into a contract of affreightment in June 2016. Under the contract, RTI agreed to ship and MUR agreed to carry bauxite from Guinea to Ukraine.  It was a term of the contract that RTI would pay freight in the sum of US $12 per metric ton.

The contract provided that “neither Owners nor Charterers shall be liable to the other for loss, damage, delay or failure in performance caused by a Force Majeure Event…while such force Majeure Event is in operation the obligation of each Party to perform this Charter Party … shall be suspended”. A Force Majeure Event was defined as an event (i) outside the immediate control of the party giving notice, (ii) which prevented or delayed the loading or discharge of the cargo, (iii) was caused by one or more of a number of specified reasons, and (iv) which could not be overcome by the reasonable endeavours of the affected party.

On 6 April 2018, the US Department of the Treasury’s Office of Foreign Assets Control imposed sanctions on RTI’s parent company such that the parent company was added to the Specially Designated Nationals and Blocked Persons List (the “Sanctions”). As a consequence, on 10 April 2016 MUR sent a Force Majeure Notice to RTI, stating that the continuance of the contract would be a breach of Sanctions and that Sanctions would prevent the payments in US dollars, which was required under the contract. The notice further stated that RTI itself should be treated as included on the Specially Designated Nationals and Blocked Persons List.

RTI rejected the Force Majeure Notice stating that Sanctions would not affect the performance of the contract and that RTI, being a Dutch company, was not a US person caught by the Sanctions. It proposed settling the freight payment in Euros instead and undertook to bear any currency exchange loss resulting from the different currency. MUR did not accept RTI’s proposal, stating that the contract required payment in US dollars, that there had been a force majeure event and consequently suspended vessel nomination under the contract on the basis of the force majeure clause. RTI obtained alternative tonnage and brought a claim by way of arbitration against MUR seeking the additional costs incurred.

The Arbitral Tribunal held that the exercise of reasonable endeavours required MUR to accept RTI’s proposal to make payment in Euros and that adopting this alternative would have resulted in no detriment for MUR. In the circumstances, MUR was not entitled to rely on the force majeure clause as the force majeure event could have been overcome by the exercise of reasonable endeavours.

MUR brought an appeal under the Arbitration Act 1996, s 69 as to whether reasonable endeavours extended to accepting payment in a non-contractual currency instead of the currency stipulated in the contract.

High Court

The High Court found that the exercise of reasonable endeavours under the force majeure clause did not require MUR to sacrifice its contractual right to payment in US Dollars under the contract.

The court remarked that the exercise of reasonable endeavours required endeavours towards the performance of the parties’ bargain and did not extend to requiring the affected party to accept non-contractual performance (being the payment of freight in a different currency) which did not form part of their agreement.

Court of Appeal

The Court of Appeal reversed the High Court’s judgment by a 2:1 majority. The court considered that the question was whether, in order to overcome the state of affairs caused by the Sanctions, it was essential for the contract to be performed in strict accordance with its terms.

The judgment provided that terms such as “overcome” and “state of affairs” were broad and non-technical, and that the force majeure clause should be applied in a common sense way to achieve the purpose underlying the parties’ obligations.

The court held that RTI’s proposal to pay in Euros and to cover the conversion costs would have achieved the parties’ obligations without detriment to either party.

The judgment set out that that it was apparent from the arbitral award that the reason MUR had refused to accept payment in Euros was that the contract had become disadvantageous to it.

However, the judge stressed that the case was not concerned with reasonable endeavours or force majeure clauses in general and that each clause should be considered on its own terms.

MUR appealed the decision and a hearing took place before the Supreme Court on 6 and 7 March 2024 for which the judgment is awaited.

Comments

Standard form force majeure and reasonable endeavours clauses are frequently included in contracts. Whilst a party may hope not to need to rely on such provisions, sanctions and the changing geopolitical landscape have resulted in these clauses being of increased interest.

Against that background, and given the differing approach taken by the High Court and Court of Appeal, the Supreme Court’s decision is keenly awaited.  Whilst it is unlikely that the Supreme Court’s decision will provide universal guidance to interpreting these clauses (given the emphasis from the Court of Appeal that each clause should be considered on its own terms), the decision will hopefully provide useful guidance as to how parties can ensure clarity in drafting reasonable endeavours clauses. In the meantime, parties drafting these clauses will want to ensure they are as specific as possible as to what equates to reasonable endeavours in order to reduce ambiguity.

In this post, Pippa Borton, Associate at CMS, previews the decision awaited from the Supreme Court in Hirachand v Hirachand and Anor.

Factual Background and First Instance Decision

This case concerns an appeal to the Supreme Court against an award granted pursuant to the Inheritance (Provision for Family Dependents) Act 1975 (“the 1975 Act”). Mr Navinchandra Hirachand (“the Deceased”) died in 2016, leaving his entire estate to his wife, Mrs Nalini Hirachand (“the Appellant”). Mrs Hirachand’s estranged daughter (“the Respondent”), who suffers from severe mental illness and does not work, made a claim against Mr Hirachand’s estate for reasonable financial provision for her maintenance.

Despite obtaining legal advice, the Appellant did not cooperate with the proceedings and failed to file an acknowledge of service or defence to her daughter’s claim, including following the granting of relief from sanctions in her favour. Accordingly, the Appellant was permitted to attend the hearings but was not allowed to take part in them or rely on written evidence.

The Judge concluded that the Deceased’s will did not make reasonable financial provision for the Respondent. Accordingly, a total of £138,918 was awarded to the Respondent. The award included £16,750 in respect of the fees payable under a conditional fee agreement (“CFA”) that the Respondent had entered into in order to fund the claim (“the CFA Success Fee”). The award did not cover the full CFA success fee, which was 72% and would have amounted to £48,175. The inclusion of this sum in the award formed part of the appeal.

Decision of the Court of Appeal

The Court of Appeal dismissed the Appellant’s application to set aside the CFA Success Fee.

The Court of Appeal acknowledged that, in accordance with s 58A(6) of the Courts and Legal Services Act 1990 (“the 1990 Act”), a costs order “may not include provision requiring the payment by one party of all or part of a success fee payable by another party under a conditional fee agreement”. Therefore, it was not possible for the Respondent to recover the success fee as part of an order for costs.

The question before the Court of Appeal was therefore whether the CFA Success Fee could be held to come within the Respondent’s financial needs under s 3(1)(a) of the 1975 Act by virtue of the fact it was a debt incurred since the passing of the Deceased.

The case law on the 1975 Act has been cautious not to define “maintenance” too narrowly or prescriptively. In the case of Ilott v Blue Cross and Others (No 2) [2018] AC 545, the Supreme Court held that debt may form part of maintenance if it is a financial need of the claimant. However, a financial need does not extend to everything the claimant wants, so for example, in re Jennings Deceased [1994] Ch 286 the claimant adult son of the deceased was denied provision to pay his mortgage because he lived a comfortable life with a good income.

Another important consideration in deciding to award the CFA Success Fee was that the Respondent would not have been able to afford litigation without the CFA. Moreover, the Court of Appeal agreed with the judge at first instance that not allowing the Respondent to recover the CFA Success Fee from the Deceased’s estate would mean that a substantial part of the sum awarded would go to paying the Respondent’s solicitors fees and her financial needs would, therefore, not be met by the award.

Appeal to the Supreme Court

The Appellant appealed the Court of Appeal’s decision to the Supreme Court. The appeal was heard on 18 January 2024 and the judgment is awaited.

Comment

This is an important decision for claimants and defendants alike who are facing claims under the 1975 Act. If the Supreme Court upholds the Court of Appeal’s judgment, this would put claimants under the 1975 Act in an advantaged position when compared to other litigants since they would have recourse to recover success fees under a CFA, which is specifically prohibited under the 1990 Act. Conversely, defendants in such cases, in the knowledge that an award in the claimant’s favour could include the uplift under a conditional fee arrangement, would be put at a significant strategic disadvantage because any damages awarded could be bolstered by a success fee.

Allowing claimants to recover a success fee as part of a reasonable provision for maintenance could also cause procedural difficulties. The amount of the success fee would have to be disclosed to the court in advance of any judgment, which could be problematic because (1) the full extent of the legal fees would not be known until the conclusion of the proceedings and (2) there would have been no assessment as to the reasonableness of the level of costs having been incurred. Questions also arise over treatment of the Part 36 regime (regarding offers to settle): if the claimant had failed to obtain a judgment more advantageous than a defendant’s Part 36 offer, this would not be known until after judgment was handed down. The Court of Appeal judge in the Hirachand case felt that this was likely to be less of a risk than might first appear, since most CFAs oblige claimants to accept reasonable settlement offers.

As a final consideration, if the judgment in this case is upheld, there is a question of whether future claimants should be subjected to costs management measures, something that is not currently a requirement for claims under the 1975 Act.

In this post, Adam Ferris (Senior Associate) in the Finance Disputes Team at CMS and Henry Powell (Associate) in the Real Estate Disputes Team at CMS comment on the judgment of the Supreme Court in Byers and Ors v Saudi National Bank [2023] UKSC 51, which was handed down on 20 December 2023.

Summary

The Supreme Court has clarified the principles applicable to a claim for knowing receipt.

Knowing receipt is an equitable personal claim which can be brought against a person who has received property transferred to them in breach of trust. The principal elements of such a claim are that:

A trustee transfers trust property beneficially owned by the claimant to the defendant in breach of trust; and

The defendant had knowledge of the breach of trust at the time of the transfer or obtained such knowledge prior to disposing of the property.

The successful claimant in knowing receipt has against its defendant remedies requiring the defendant to account as a trustee of the property. Accounting to the claimant is a powerful remedy; the defendant must restore the trust fund to the position it would have been had the breach not occurred.

It has long been established that knowing receipt liability will not arise where the claimant’s equitable proprietary interest in trust property is overridden by a transfer to “equity’s darling”, i.e. a bona fide purchaser for value without notice of the breach of trust. The primary issue before the Supreme Court – Lord Hodge, Lord Briggs, Lord Leggatt, Lord Burrows and Lord Stephens – was whether it is the case more generally that for a claim in knowing receipt to succeed the claimant must have a continuing equitable proprietary interest in the trust property, that has not been overreached or overridden, at the point it is received by the defendant. In particular, can knowing receipt liability arise when the defendant receives clean title to property transferred to it in breach of trust as a result of the claimant’s beneficial interest being extinguished by the foreign law governing the transfer of the property? 

The Supreme Court held, dismissing the appeal from the Court of Appeal, with whom it agreed, that a claimant in knowing receipt must be able to establish a continuing equitable interest, which has not been extinguished by overriding or overreaching, at the point the defendant receives the property. The opposite conclusion would have resulted in a “deep-rooted contradiction” between the recipient holding clean title to property yet being under an obligation to restore it to another. Accordingly, where the claimant’s beneficial interest is overridden upon the transfer to the defendant by the operation of foreign law – as it had been in this case – no liability in knowing receipt can arise.

Therefore, despite Saudi National Bank having knowingly received company shares in breach of trust, it could not be held liable for a claim in knowing receipt in the High Court, the Court of Appeal or, finally, the Supreme Court because the Appellant’s beneficial interest in the shares had been extinguished by the transfer, which was governed by Saudi Arabian law.

Policy arguments that the conclusion reached by the Supreme Court would amount to a “money launderers’ charter” were rejected on the basis that both criminal law and the availability of claims in dishonest assistance (not pleaded in this case) provide a sufficient deterrent to fraudsters who might seek to make use of foreign law transfers to avoid knowing receipt liability.

While this case provides helpful clarification on the law of knowing receipt, the Supreme Court acknowledged that a number of areas of uncertainty remain, including:

Whether the level of knowledge required is a fixed standard of knowledge or one based on unconscionability that may vary on a case by case basis;

Whether a category of knowledge known as “constructive knowledge” can satisfy such requirement;

What is the relevance of unjust enrichment to knowing receipt; and

Whether knowing receipt is properly categorised as ancillary to a proprietary claim (as Lord Briggs found) or an “equitable proprietary wrong” (as Lord Burrows found).

These issues will need to be determined on another occasion.  

Background

A Cayman Islands company, Saad Investments Company limited (“SICL”), was the beneficiary of Cayman Island trusts. The owner of SICL, Mr Maan Al-Sanea, declared himself a trustee of shares SICL held in five Saudi Arabian banks (the “Disputed Securities”) and, on 16 September 2009 (the “September Transfer”), transferred the shares to Samba Financial Group to discharge part of the personal debts he owed the bank. Latterly, in April 2021 the assets and liabilities of Samba Financial Group would be transferred to Saudi National Bank and so for the purposes of this article we refer to both as (the “Bank”). On the day of the September Transfer the Bank duly credited Mr Al-Sanea’s account with the market value of the Disputed Securities in the sum of around 801 million Saudi riyals and the shares were registered in the Bank’s name.

SICL collapsed into insolvency in 2009 and joint official liquidators were appointed (the “Claimants”).  In 2013 the Claimants sought a declaration from the High Court under section 127 of the Insolvency Act 1986 that the September Transfer was a void disposition of property belonging to SICL. The High Court imposed a stay on jurisdictional grounds. The Claimants were successful on appeal to the Court of Appeal and, thereafter, the Bank appealed to the Supreme Court in February 2017 (Akers and others  v Samba Financial Group [2017] UKSC 6).

Allowing the Bank’s appeal, the Supreme Court – comprising Lord Neuberger, Lord Mance, Lord Sumption, Lord Toulson and Lord Collins – held that, at common law, the nature of the interest intended to be created by a trust depends on the law governing the trust.

Saudi Arabian law does not recognise a distinction between legal and beneficial (i.e., equitable proprietary) ownership in the way the English common law does. Rather, in the Saudi jurisdiction, the disposition of shares to a third party ‘extinguishes’ any interest of a beneficiary in the shares. As a matter of Saudi Arabian law, the effect of the September Transfer and registering of the Disputed Securities in the Bank’s name meant that SICL had no continuing proprietary interest in the Disputed Securities following the transfer.

It followed that the transfer of the Disputed Securities to the Bank did not ‘dispose’ of any rights belonging to SICL within the meaning of section 127, which applied only to assets legally owned by the company that it sells itself, rather than the transfer of legal rights held by a third party as in the case of Mr Al-Sanea’s transfer of SICL’s shares to the Bank. The appeal was dismissed.

The Claimants applied to amend the particulars of claim to plead a claim in knowing receipt and, as an insurance policy if permission to amend were refused on limitation grounds, issued a new claim in knowing receipt.

Permission to amend was refused on appeal and so the new claim in knowing receipt reached trial in the High Court in October 2020.

Decisions of the lower courts

In the High Court, three substantive issues came before Fancourt J: as to liability, the “Saudi Arabian Law” issue and the “Law of Knowing Receipt” issue and, on quantum, the “Valuation” issue.

Fancourt J gave judgment on 15 January 2021 and held in relation to the first two issues that:

Saudi Arabian Law – the effect of the September Transfer under Saudi Arabian law was such that it extinguished SICL’s proprietary interest in the Disputed Securities. As a matter of evidence as to the law and practice in Saudi Arabian capital markets, registration is prima facie evidence and, until displaced, is conclusive as to ownership of shares.

Law of Knowing Receipt – the cause of action depends on a defendant’s knowledge that the property it received is trust property which ought to have been dealt with in accordance with the trust. Following the decision of the House of Lords, in Macmillan Inc v. Bishopsgate Investment Trust plc (No.3) [1995] 1 WLR 978, Fancourt J held that a claim in knowing receipt is a personal claim for equitable compensation based on a proprietary interest, but where the Bank acquired clean title – here, by virtue of the foreign law governing the transfer of property, but also in other scenarios such as where clean title is conferred by virtue of statute (e.g. the Law of Property Act 1925, s 2) or by a transfer to equity’s darling – then the claim must fail.

In view of the two hurdles to liability there was no need to decide the third issue on quantum but Fancourt J gave his view that when valuing trust property the proper valuation method for the court would ordinarily be on the basis of market valuation but, on the facts of this case, given the size of the shareholding relative to the average daily traded volumes, it was appropriate to apply a ‘block discount’ from the quoted price.

On all three fronts the Claimants appealed to the Court of Appeal, which handed down judgment on 27 January 2022. Newey LJ, Asplin LJ and Popplewell LJ, dismissed the appeal for these reasons:

Saudi Arabian Law is an Islamic system with concepts and principles far removed from those in English law and on the particular facts of the case the practice and culture of Saudi Arabian capital markets was relevant in determining the law. Fancourt J, as trial judge, had heard extensive expert evidence to determine these foreign law issues. The Claimants had failed to satisfy the criteria for the Court of Appeal to interfere with the trial judge’s findings, per Fage UK Ltd v Chobani UK Ltd [2014] EWCA Civ 5, [2014] E.T.M.R. 26, [2014] 1 WLUK 663.

Law of Knowing Receipt – the Claimants could not establish a continuing proprietary interest capable of making the Bank a knowing recipient as this was entirely inconsistent the unencumbered title it received.

The Court indicated that were the findings on liability not fatal to the appeal it would have allowed the appeal on the Valuation issue. The preferred valuation method was by reference to the cost of the asset had it been purchased by the trustee rather than what it would have achieved on a sale, which would involve no block discount.

Jettisoning the Saudi Arabian Law issue, the Claimants appealed the Court’s decision on Knowing Receipt alone.

Knowing Receipt: the central issue on appeal to the Supreme Court

On the Bank’s case, an action in knowing receipt requires the claimant to have a continuing equitable proprietary interest in the relevant property at the point it is received by the defendant. The September Transfer of the Disputed Securities to the Bank caused the Bank to receive title freed forever from the Claimants’ equitable interest and as such the knowing receipt claim must fail.

On the Claimants’ case, a continuing equitable proprietary interest is not required. Rather, having acquired the Disputed Securities with clean title, the Bank’s knowledge that a breach of trust was involved made it unconscionable for the Bank to continue to treat that property as its own and so liability in knowing receipt arose.

Approving the decision of the Court of Appeal and dismissing the Claimants’ appeal, Lord Briggs and Lord Burrows gave judgment – with whom Lord Hodge, Lord Leggatt and Lord Stephens agreed – setting out the requirements for a claim in Knowing Receipt.

Both Lord Briggs and Lord Burrows agreed that the question with which they were asked to grapple had been addressed head on in the case law to date. As such, they were required to derive their answer from an analysis of principle.

Pertinent to the court’s analysis was its observation of the well-established rules pertaining to a transfer of trust property to equity’s darling, in particular that:

a transfer of trust property to equity’s darling overrides the proprietary interest of the beneficiary (even if the transfer is made in breach of trust); and

the effect of this overriding is permanent and is not resuscitated when the recipient later becomes aware of the breach of trust or where the recipient subsequently transfers the property to another party that is aware of the breach of trust.   

The Supreme Court found that knowing receipt is not an accessory liability: it requires interference with the claimant’s equitable rights rather than being merely responsible for another’s wrongdoing. Liability in knowing receipt depends on the claimant having a continuing equitable proprietary interest when the property is received. If the claimant’s interest is extinguished, as it is as a result of a transfer to a bona fide purchaser for value without notice, as a result of the operation of statute, or, as in this case, as a result of the operation of foreign law, there can be no proprietary or knowing receipt claims. The effect of Saudi law in this case was to confer clean title to the shares on the Bank, overriding the Claimants’ equitable interest.

If the opposite were true this would imply a suspensory effect on the claimant’s proprietary interest as a result of a transfer to equity’s darling which would offend the basic equitable principles referred to above. The purpose of the doctrine of equity’s darling is to confer full beneficial ownership of property. Equity stops short of ‘interposing equitable interests’ in derogation of that outcome because it regards equity’s darling as having the better right to ownership than the beneficiary. The earlier equitable interest is overridden, once and for all, and cannot be revived against a successor in title to equity’s darling even with knowledge, per Harrison v Forth (1695) Prec. Ch. 51; 24 ER 26.

To say otherwise would seriously detract from the full beneficial ownership equity treats the recipient as acquiring. A legal interest or estate is good against all the world, whereas an equitable interest is (save for statutory intervention or foreign law) good against all the world except equity’s darling.

Further, the Court held that there was no reason why a claim in knowing receipt should survive overriding or overreaching but powerful reasons which tended in the opposite direction. In resolving the “deep-rooted” contradiction between having clean title and being obliged to restore the same property to another, how could equity’s darling say “the property is mine” but also be required to ‘look after [the property] in the meantime’, and to account to the beneficiary for any use of the property falling short of those duties? It could not.

Policy arguments made by the Claimants that this principle would incentivise fraudsters to route assets to third parties via jurisdictions where the law extinguishes equitable proprietary interests could not assist the Claimants either. The criminal law acts as a better disincentive to that fraudulent conduct than the civil law (and in any event a civil law claim in dishonest assistance is likely to be available against a dishonest recipient), and a policy concern of that kind could not possibly undermine the force of the Court’s principled view on continuing equitable interest.

Lord Briggs’ diagnosis for the confusion regarding this issue in previous case law was a looseness in the language of previous authorities, in referring to equitable doctrines and constructive trusts, knowledge and notice, as in Macmillan Inc v Bishopsgate Investment Trust plc (No 3) [1995] 1 WLR 978 which had obscured the conditions for a claim in knowing receipt. Accordingly, the court emphasised the priority of the conflicting equitable principles.

Lord Briggs disapproved of the Claimants’ argument that knowing receipt was equity’s response to the apparent unconscionability of the defendant treating the property as his own after learning of the breach of trust rather than the best available vindication of the claimant’s continuing equitable proprietary interest in the property where it has been dissipated by the defendant. The test proposed by the Claimants wrongly elevated unconscionability from an equitable objective to an unruly and unpredictable test for liability which would have unacceptable adverse consequences for certainty in resolving issues as to priority of title to property.

The appeal was dismissed.

Comment

The Supreme Court was tasked with clearing a fog which had hung over this litigation and the doctrine of knowing receipt. It had been allowed to creep in through imprecisions of language and a tendency for other courts to offer views on matters which were not properly before them.

In the light of the Court’s judgment, which marks a return to basic principles of equity and an unwillingness to defer to an exercise in weighing ‘all the circumstances’ in the face of apparent competing equitable claims, a recipient of property who has received clean title can say “this is mine”. The force of the Supreme Court’s statement on the unimpeachability of such a title has already assisted lower courts, as in Asturion Foundation v Alibrahim [2023] EWHC 3305 (Ch), which had been experiencing difficulties in ‘classifying’ and ‘characterising’ claims in knowing receipt.

These filings were made without the knowledge of the companies concerned or the lenders who held the charges. As a result, Companies House incorrectly marked the charges as satisfied on the public register when in fact they remained outstanding – causing widespread concern amongst banks and other lenders. 

The filings all seem to have been made in February by an individual giving an address in Enniskillen in Northern Ireland. There does not appear to be any discernible pattern, with the issue affecting various companies and lenders. The filings have been made maliciously, although the motivation remains obscure.

This article explores the action taken by Companies House in response to the attack and steps which a lender may want to take in the light of it.

What action has Companies House taken to rectify this?

At the time of writing, Companies House has not made any formal announcement regarding the issue or the action that it has taken to rectify it, although it has communicated directly with affected parties. Companies House believes that it has identified all the affected companies and blocked the account from which the incorrect filings were made.

It is also understood that Companies House has rectified the register for the affected companies using new powers under the Economic Crime and Corporate Transparency Act 2023 (ECCTA). In each case, the charge previously erroneously shown as satisfied is now stated to be outstanding. The filing history for the company has also been annotated with a note that it has been rectified and that material formerly considered to form part of the register is no longer considered by the Registrar to do so.

Enhanced role of Companies House under ECCTA

This incident and the action taken by Companies House highlights a recent fundamental change in the role of Companies House. Under ECCTA, which received royal assent in October 2023, this is changing from an essentially administrative function to that of a more proactive gatekeeper in relation to company formation, with new objectives, including that of ensuring the accuracy and integrity of information on the register of companies.

ECCTA enshrines these new objectives in statute and provides Companies House with additional powers to fulfil this role, including stronger powers to remove information from the register, require additional information to be provided and reject documents where there are inconsistencies. Many of these additional powers came into force on 4 March 2024 and Companies House appears to have moved quickly to utilise them to deal with the erroneous filings. Previously, it would have been necessary for an affected party to obtain a court order authorising the rectification of the register in each case – which would have been time consuming and involved a cost to the company.

New guidance on Companies House website states that its approach to the removal of information from the register is changing. It will remove information where it is satisfied that information is false, has been sent without the company’s knowledge or where a document records a transaction that never occurred.

ECCTA will also introduce identity verification requirements for directors, persons with significant control and persons filing information on behalf of companies. These measures are not yet in force but had they been, the person who made the fraudulent filings would have had to comply and provide evidence of their identity.  Their introduction is seen by Companies House as a longer-term project as they require a significant upgrade to Companies House’s existing systems. However, the fact that one individual could cause this amount of disruption demonstrates the need for these measures.

Acceptance of statements of satisfaction in the future

The incident also highlights a well-known flaw in the system for noting charges on the register as having been satisfied.  It has always been viewed as anomalous that Companies House must accept a completed statement purporting to be from or made on behalf of the company and mark a charge as satisfied on the register, without reference to the charge holder and without any evidence that the charge has actually been satisfied or released. Whilst there have been instances in the past of companies mistakenly filing statements of satisfaction, it may not previously have been anticipated that a third party might maliciously file a statement of satisfaction, falsely claiming that they were doing so on behalf of the company. 

As one of Companies House’s new objectives is to ensure the accuracy of information on the register, it may look to take a more rigorous approach to its acceptance of such statements in future. While we wait for the identity verification measures to be brought into force, it will be interesting to see if Companies House takes the view that it can use its new powers under ECCTA to take a more stringent approach, consistent with its new objectives.

What action should lenders take?

Affected lenders should check that the relevant company did not enter into any transactions which might prejudice any charges whilst they were incorrectly shown as satisfied on the register. 

Subject to this, the action taken by Companies House should resolve the current issue. However, it is possible that Companies House has not identified all affected companies and there could be further deliberate misfilings made from another account. 

We anticipate that lenders will therefore want to take a cautious approach on new and existing matters and require their advisers to check recent filings of statements that charges have been satisfied to see if they look suspicious. In relation to any transactions where reliance is continuing to be placed on existing security (for example, on an amendment to an existing loan facility), it will be prudent to check that it has not been incorrectly marked as satisfied on the register.

Conclusion

This incident has brought into focus some of the very concerns which prompted ECCTA in the first place and provided Companies House with an early opportunity to step into its new role. For further detail on Companies House and its new reforms, please see the following series of articles created by Shoosmiths. 

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The rules are designed to address concerns over “concentration risk” (in effect, too many FS firms  / institutions having their critical service and IT eggs in too few supplier baskets) and the impact an outage with a CTP could have on  operational resilience across the financial system. In an era where “cloud first” is the mantra of most FS IT departments, the threat of something going seriously wrong at one of the large vendors or hyperscalers is seen as potentially existential. 

The rules represent a bold stretching of the BoE / PRA’s regulatory perimeter. For the first time, non-FS businesses who supply important (enough) services to the industry will come under the direct supervision of the regulators. Obviously there are limits to what is being proposed, and the rules relate mainly to the provision of information by CTPs to the regulator to show that they are resilient and secure. It is a punchy move nonetheless. 

So far, regulated FS businesses have been tasked with making sure that their own operations (including when they are outsourced) are sufficiently resilient. But the buck stops with them – which means that, when dealing with relevant suppliers, they are possibly only as good as the due diligence information, audit rights, and contractual assurances etc which the supplier is willing to give. Cue years of debates in contract negotiations about what is “market” vs what is a “regulatory requirement”!

The new rules at least might provide an overlay to that where, before they can supply to the industry, CTPs at least have to show the regulator that they are stable enough. 

I’m sure that the consultation responses, when they are shared, will show an obvious spectrum of opinion ranging from resistance on the part of suppliers, to support from institutions. For example, exactly how CTPs are identified is a tricky subject  – the proposal being that HM Treasury decides after recommendations.  However, it may be that some vendors can see it as an opportunity to gain approval / endorsement and use the fact that they are compliant as a differentiator.

Based on feedback so far, I would expect to see some interesting questions and themes coming out of the consultation responses including:

Whether the industry / customers should have a say in which suppliers are designated as CTPs and how often the list should be reviewed – especially given how fast developments in AI and FinTech are moving
What enforcement action would be taken if a designated CTP did not comply with the requirements? Would the regulators be able to force a supplier out of the UK market, and what about the impact on their existing customers?
Should individual officers of CTPs have similar responsibilities as senior managers of FS regulated  businesses?
Whether CTPs should be required to share with their FS customers the supporting evidence of their operational resilience which they have provided to the regulators and to otherwise deal openly with them (subject possibly to redactions).
Should contract terms be mandated for use between CTPs and firms – possibly in a similar way to the “model clauses” used to aid protection of personal data when it is transferred overseas. 
How costs will be managed. Whilst compliance may be welcomed, firms may be wary of the potential impact on suppliers’ prices for their relevant services.

We will have to wait and see how those and any other relevant points are addressed by the regulators in response to the consultation.

 

CP26/23 – Operational resilience: Critical third parties to the UK financial sector

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Background

In this post, Mark Whiteside, Partner at CMS, and Johanna Dodgson, Associate at CMS, comment on the Supreme Court’s judgment in Target Group Ltd v Commissions for His Majesty’s Revenue and Customs [2023] UKSC 35.

Shawbrook Bank Limited (“Shawbrook”) is a provider of mortgages and loans. The appellant Target Group Ltd (“Target”) administers loans made by Shawbrook, including by operating individual loan accounts and instigating and processing payments due from borrowers.

The principal issue was whether the services provided by Target qualified for exemption under the Value Added Tax Act 1994, Group 5, items 1, 2, 2A and 8 of Schedule 9. It was not in dispute that the UK legislation reflects the exemption provided for in the Principle VAT Directive, Article 135(1)(d), for transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection.

Target argued that its services were exempt from VAT under the Principal VAT Directive, article 135(1)(d) (the payments exemption). Target relied on the fact that it procured payments from borrowers’ bank accounts to Shawbrook’s bank accounts by giving instructions for payment which were then automatically and inevitably carried out through the BACS system. Target also relied on the fact that it inputted entries into the borrowers’ loan accounts with Shawbrook, which it claimed amounted to transactions concerning debts.

Through the courts

The First-tier Tax Tribunal (“FTT”) found that Target’s supply included transactions concerning payments or transfers within the financial services exemption but that the predominant nature of the supply was debt collection, therefore excluded from the exemption and taxable.

The FTT decision was handed down before the CJEU decision  in Commissioners for Her Majesty’s Revenue and Customs v DPAS Limited (Case C-5/17) [2018] STC 1615 (“DPAS”) and when the case was appealed to the Upper Tribunal (“UT”), the UT held that the subsequent CJEU decision made it clear that the supplies by Target did not fall within the scope of the exemption for payments and transfers. The UT also held that Target’s inputting of accounting entries in the loan account did not fall within the exemption as it did not change any party’s legal and financial position.

Target appealed to the Court of Appeal. The Court of Appeal, unanimously, dismissed the appeal. In particular, DPAS made it clear that:

“actual execution is necessary to qualify as a transaction concerning transfer or payment, and the mere giving of an instruction is not sufficient in itself, even if the instruction is or order is indispensable to the transaction taking effect, and even if the instruction triggers an entirely automatic process leading to payment.”

In agreement with the lower tribunals, the Court of Appeal also rejected the alternative argument that the supplies were exempt as transactions concerning current accounts. In agreement with the FTT and the UT, the Court of Appeal considered that a fundamental characteristic of a current account was that a customer is able to deposit and withdraw funds in varying amounts and, in the case of a current account, the account holder can pay amounts to third parties. The loan accounts operated by Target were not “current accounts“.

Target appealed to the Supreme Court.

The Supreme Court’s judgment

The Supreme Court considered whether the instructions Target provided to BACS, which automatically and inevitably resulted in the transfer of funds from the bank account of a borrower to the bank account of the lender, meant that the services supplied by Target were within the scope of the exemption.

The Supreme Court considered the Court of Justice decision in Sparekassernes Datacenter v Skatteministeriet (Case C-2/95) [1997] (“SDC”). This was the first case to consider the exemption in the Principal VAT Directive, Article 135(1)(d). The Supreme Court derived the following principle from SDC: to be exempt the services provided by a data-handling centre, viewed broadly and ‘as a distinct whole’, must (i) have the effect of transferring funds; and (ii) change the legal and financial situation.

HMRC and Target disagreed about whether the reasoning in SDC required Target’s services to have this effect and make that change (‘the narrow interpretation’) or whether it was sufficient for them to have that causal effect (‘the wider interpretation’). HMRC argued for the narrow interpretation and Target for the wider.

Surveying the subsequent case law, the Supreme Court held that ‘later CJEU case law, and in particular Bookit Ltd v Revenue and Customs Comrs (Case C-607/14) [2016], National Exhibition Centre Ltd v Revenue and Customs Comrs (Case C-130/15) [2016] STC 2132  and especially DPAS, have made it absolutely clear that the narrow interpretation is the correct one.’

The narrow interpretation meant that in order to fall within the exemption:

the services must in themselves have the effect of transferring funds and changing the legal and financial situation;

it is not enough to give instructions to do so thereby triggering a transfer or payment;

it is not enough to perform a service which is essential to the carrying out of the transfer or payment, nor one which automatically and inevitably leads to transfer or payment; and

it is necessary to be involved in the carrying out or execution of the transfer or payment—its ‘materialisation’. This requires functional participation and performance. Causation is insufficient, however inevitable the consequences.

Based on the narrow interpretation, it was clear that Target’s services of providing instructions which automatically and inevitably resulted in payment from the borrowers’ bank accounts to the lender via BACS were insufficient to fall within the exemption.

Concluding thoughts

The Supreme Court’s judgment confirms that the VAT exemption for payments and transfers is to be interpreted strictly, and that it only applies to services that perform the specific and essential functions of a payment or transfer, not to services that are preparatory, ancillary or administrative in nature.

Overview

On 17 January 2024, the Supreme Court handed down  judgment in Herculito Maritime Ltd & Ors v Gunvor International BV & Ors unanimously dismissing the appeal. In this post David McKie, Partner at CMS, comments on that judgment.

The case concerned whether cargo owners who were receivers under bills of lading had to make to the shipowner carrier a contribution in General Average to a ransom payment paid to Somali pirates for the release of the ship.  Cargo owners had resisted contribution on the basis that  the terms of war risks clauses in a voyage charterparty, by which the charterer was responsible for paying additional war risks premium for a Gulf of Aden transit, were incorporated into the contracts of carriage for the cargo evidenced by bills of lading and constituted an “insurance code”, by which the parties had agreed that the shipowner would look only to insurers in the event of a loss.  

The cargo owners’ argument had succeeded before an arbitration tribunal, but was subsequently rejected by the Commercial Court, and by the Court of Appeal. The Supreme Court held that the war risks clauses did not meet the stringent requirements necessary to create an insurance code, so that the appeal fell at the first hurdle.

The case has significant implications for shipowners, charterers and bill of lading holders, and for insurers, as to the effect of insurance and premium payment clauses in contracts of carriage on subsequent rights of recourse in the event of an insured peril arising.  It reminds parties of the stringent requirements which will need to be satisfied before an insurance code arises by way of implication from contract terms, so if that is what parties to contracts wish to agree they should do so expressly.

Background

MT POLAR (“the Vessel”) was voyage chartered for the carriage of a cargo of 69,493.28 mts of fuel oil from St Petersburg to Singapore, a voyage which envisaged transit through the Gulf of Aden. The voyage charter was on an amended BPVOY 4 form. It included terms that any additional insurance premium payable in respect of war risks, including piracy, incurred by reason of the vessel trading to excluded areas not covered by the shipowner’s basic war risk insurance (such as the Gulf of Aden) were to be for charterer’s account subject to a US$40,000 limit.  The shipowners issued bills of lading which were stated to incorporate the terms of the voyage charterparty.  The shippers of the cargo, who were also the voyage charterers, paid the shipowners the additional premium for Kidnap & Ransom and War Risks insurance effected by the shipowners for the Gulf of Aden transit. 

The Vessel was seized by pirates in the Gulf of Aden on 30 October 2010 and released on 26 August 2011 after payment of a ransom of USD 7.7 million on behalf of the Vessel’s owners and/or their Kidnap & Ransom/War Risks insurers. The Vessel’s owners declared General Average (thereby allowing under maritime law and by contract the parties to apportion extraordinary expenses incurred for the preservation of ship and cargo).  Prior to discharge of the cargo a General Average Guarantee and Bond (both of which contained a London arbitration clause) were provided by cargo insurers and by the cargo receivers who were the lawful holders of the bills of lading (“cargo interests”).  A General Average adjustment was drawn up which determined that US$4,829,393.22 was due from the cargo interests to the Vessel’s owners.  

The cargo interests rejected the claim for a contribution on the ground that the Vessel’s owners’ only remedy was to recover under the terms of the insurance policies, the premium for which had been paid by the voyage charterer.  

The cargo interests argued that those provisions formed a complete insurance code or “insurance-based solution” which precluded the shipowners from recovering from cargo interests in General Average in the event of loss caused by a covered risk, based on the principles in  Gard Marine and Energy Ltd v China National Chartering Co Ltd (The Ocean Victory) [2017] UKSC 35  and Kodros Shipping Corp of Monrovia v Empresa Cubana de Fletes (The Evia (No 2)) [1983] 1 AC 736 [HL].

An arbitration tribunal determined two preliminary issues in favour of the cargo interests: (1) that the terms of the voyage charterparty were incorporated into the contracts of carriage evidenced by the bills of lading and (2) that further to The Evia (No 2) and The Ocean Victory the effect of the term as to payment of war risks insurance premium by the charterers was that the shipowners had implicitly agreed to look solely to their insurance cover and not to cargo interests in the event that they suffered a loss covered by that insurance. 

On an appeal to the Commercial Court under the Arbitration Act 1996, s 69, Sir Nigel Teare agreed with the arbitration tribunal on the first issue but disagreed on the second.  In light of the decisions of the House of Lords in The Evia (No 2) as explained by Longmore LJ in the Court of Appeal decision in The Ocean Victory, the charterparty provisions operated as a complete code by which the shipowners and the voyage charterers had agreed that the shipowners would look only to the insurance cover; this principle applied not just to cases of breach of charterparty but also to contributions in General Average.  However, the charterparty clause requiring the additional war risks premiums to be paid by the charterers could not be manipulated so as to place the obligation of payment on the holders of the bill of lading and so they could not take advantage of the insurance code incorporated into the bills of lading. The cargo interests’ defence therefore failed and they were liable to make the contribution which had been assessed.

The Court of Appeal unanimously dismissed the cargo interests’ appeal, upholding the reasoning of the Judge (although they questioned whether the position in The Evia (No 2) and The Ocean Victory was as wide or clear-cut as the Judge had accepted).

Lord Justice Males pertinently and pithily observed as follows: “In reality this is a case where both parties were insured against the risk of piracy and where allowing the shipowner to claim will mean that each set of insurers will bear its proper share of the risk which it has agreed to cover. In contrast, the effect of construing the bills of lading to exclude a claim by the shipowner will mean that the loss is borne entirely by the shipowner’s insurers and that the cargo owners’ insurers escape liability for a risk which they agreed to cover. Standing back, therefore, in my judgment the judge’s conclusion accords with both legal principle and commercial sense”.

Permission to appeal to the Supreme Court was granted in the autumn of 2022, and the case was heard over 2 days in October 2023.

Decision

Lord Hamblen delivered the only judgment, with which all the other Lord Justices agreed.   Four issues arose for decision, of which the finding on the first was determinative of the appeal. 

Issue 1

The first issue was whether on the proper interpretation of the voyage charter and/or by implication the shipowner was precluded from claiming against the charterer in respect of losses arising out of risks for which additional insurance had been obtained.

The Court reviewed the relevant authorities on the implication of an insurance code. The issue was one of construction. The following general considerations were of relevance. 

(1)       For the shipowner to have given up a valuable right of a contribution in General Average in relation to well-known kidnap and ransom risks requires a clear agreement to that effect – Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689, 717.

(2)       In order to establish that the parties have agreed an insurance code or fund it has to be shown that this is a necessary consequence of what has been agreed.  This is a high threshold.

(3)       Where parties have contracted that there should be insurance in joint names, this normally implies a waiver of subrogation (although it was not a decisive factor in The Ocean Victory). This was not a case of joint names insurance.

(4)       There is no principle exempting charterers from liability for their breaches of contract or having to contribute in general average merely on the ground that they have directly or indirectly provided the funds whereby the owners insured themselves against the relevant loss or damage.

The Evia (No 2) was a decision on its own facts, could be distinguished, and did not establish any general principle (albeit the considerations applied in that case remained relevant to an assessment of whether or not there was an insurance code). 

The Supreme Court held that in view of the carefully agreed contractual regime in the voyage charter for the known piracy risks of transiting the Gulf of Aden it would not have been open to the shipowner to contend that such risks were “war risks” for the purposes of clause 39 of BPVOY4 (as amended).  Consequently, this was not a case in which the charterer would otherwise obtain no benefit from the payment of the additional premium, or was undertaking a significant additional burden.  There was therefore no insurance code or fund agreed in the voyage charter, so the appeal failed. 

The further three issues which arose were therefore addressed obiter on the assumption that there was such a code in the voyage charter.  They concern whether such a code was incorporated into contracts of carriage evidenced by the bills of lading, by virtue of incorporation clauses on the reverse of the bills. 

Issue 2

The second issue was whether all material parts of the war risks clauses in the voyage charter were incorporated into the contracts of carriage evidenced by the bills of lading. 

The Vessel owners argued that they were not incorporated because the obligation to pay insurance premium was not directly relevant to the loading, carriage, and discharge of the cargo, or the payment of freight. The Court disagreed.  The clauses related to the voyage route.  They were therefore directly relevant to carriage. The liberties given to the shipowner were also relevant to carriage.  Consequently, all material parts of the war risks clauses in the charter were incorporated into the bills of lading.

Issue 3

The third issue was whether on the proper interpretation of those war risks clauses in the bill of lading and/or by implication the shipowner was precluded from claiming for its losses against the cargo interests as bill of lading holders. 

Cargo interests argued that the voyage charterer should be regarded as paying the additional insurance premium on behalf of cargo interests, because it was the cargo interests rather than the charterer who would be most directly concerned in the event of a piratical seizure and would bear the principal liability to contribute in general average.

The Court disagreed. The obligation to pay was that of the voyage charterer.  It had its own interest in ensuring proper performance of the charter.  The bargain made is that the parties will not look to each other to make good an insured loss. That is a bilateral agreement.  No insurance code case extended any understanding to that effect beyond the parties to the relevant contract.

Issue 4

The final issue was whether the wording of the war risks clauses in the voyage charter allocating responsibility for the payment of the additional insurance premium could or should be manipulated so as to substitute the words “the Charterers” with “the holders of the bill of lading”. 

Manipulation of charterparty clauses incorporated by general words of incorporation may be permissible if it is necessary to do so to make the wording fit the bill of lading. There was no such need in this case. Allocation of responsibility for paying additional premium made sense in the context of the bills of lading as a record of the terms upon which the shipowner has agreed to transit the Gulf of Aden. As held at first instance and by the Court of Appeal, there were positive reasons why there should be no manipulation in this case. These included the uncertainty of how any premium should be apportioned between bill of lading holders and the implausibility of bill of lading holders accepting potential liability to pay unknown and unpredictable amounts.

Comment

There has been a growing trend of parties to contracts seeking to escape liability for breach of contract (or in this case a contribution) who have increasingly resorted to arguing for an implied waiver of subrogation – often with some success (as the finding of the arbitral tribunal in this case shows).  This decision is therefore a welcome one which accords both with legal principle and commercial sense and is likely to restrict the situations in which an insurance code is found to exist as a matter of implication. 

Contractual parties may agree that specified loss or damage is to be covered by insurance and that in the event of such loss or damage occurring the parties will seek recourse only against insurers rather than their contractual counterparty creating an ‘insurance fund’ or ‘insurance code’ as the sole mechanism for recoupment of loss. 

They can do so expressly.  Such an intention can also be implied.  Previously, such a code has been held to exist (by way of implication) under a demise charter (as in The Ocean Victory) and under a time charter (as in The Evia (No 2)), both of which involved alleged breach of contract causing a loss which was covered by insurance in the name of the shipowner but paid for by the charterer.   

This was said to be the first case to consider judicially whether there is an insurance code or fund in a voyage charter and, if so, whether that code is applicable to contracts of carriage evidenced by bills of lading which incorporate the terms of the voyage charter. Unsurprisingly, it is now clear that in principle it is possible  for parties to  create (by implication) a code within a voyage charter.  It is however unlikely that such a code will be incorporated by reference into contracts of carriage evidenced by bills of lading. As always whether either of these things happens is dependent on the proper interpretation of the contracts on the facts of the case.

The judgment of Longmore LJ in the Court of Appeal in The Ocean Victory offers some general statements as to when there may be held to be an insurance code or fund even in the absence of joint names insurance, including “…the prima facie position where a contract requires a party to that contract to insure should be that the parties have agreed to look to the insurers for indemnification rather than to each other”.

Contrary to the cargo interests’ submissions, this was not endorsed by the Supreme Court in The Ocean Victory.  Even in a joint names insurance case the court both looked for and relied upon other contractual indicia to support the conclusion that there was an insurance fund arrangement. There is no prima facie position. It always depends upon the construction of the contract terms as a whole and the necessary consequences of what has been agreed in relation to insurance.

The Supreme Court emphasised that tribunals should be cautious before following the reasoning of The Evia (No 2) because the search for an insurance code introduces uncertainty.  If parties wish subrogation rights to be waived they should clearly state this in their contract. The mere existence of a requirement to insure or a contractual obligation to pay for the other party’s insurance cover should now be insufficient without more to imply an intention to create an insurance code or a waiver of subrogation.

Although the context was claims under a contract of carriage, it is pleasing to see that the Supreme Court actually considered this issue from insurers’ perspective, even if only in passing.  Lord Hamblen said this:

“The practical difficulties which may arise are illustrated by a consideration of the position of insurers. Whether or not they are to have rights of subrogation is likely to be material to their rating of the risk as it increases the risk of loss borne by them. Disclosure may, however, give rise to difficult issues. For example, it may be very unclear whether the subrogation position is known to the insured in circumstances where it all depends upon implications to be drawn from the terms of the charter. Similarly, if disclosure is sought to be met by providing a copy of the charter, whether that is full and fair disclosure must be questionable in circumstances where it says nothing expressly about subrogation rights. If no effective insurance cover were provided then issues would arise as to whether in such a case there is any code, and difficult questions might also arise if the insurance did not fully cover the losses suffered by the shipowner”.

The existence of loss of subrogation rights is usually fundamental to a calculation of premium (it is unlikely to increase the risk of a loss, but it will increase the amount of the loss the insurer has to bear) and the loss of subrogation rights may make the risk uneconomic to insure. 

Ordinarily all parties to a marine adventure would expect to contribute their proper share in general average, and they insure against that risk.  Commercially, it is perfectly reasonable for shipowners to require charterers to reimburse additional war risks premium for transiting high risk areas, the benefit for charterers being that the cargo can be carried on a more direct route for less freight.  In the context of a charterparty this is probably primarily intended to be an accounting exercise, and allocates a specific part of the additional cost of performing the voyage to the charterers, not included within freight, for obvious reasons. Voyage charterers, if they are sellers or buyers of cargo, will in that capacity insure the cargo against war risks (including piracy) both for physical loss of or damage to cargo and cargo’s proportion of General Average. The argument run by cargo interests, if correct, would have provided a windfall and forced parts of the hull and P&I insurance market to bear an expense which has not been priced in to their cover, but which cargo insurers have already priced into theirs.  

The subsidiary issues involved the application of established principles to the incorporation of terms from charterparties into bills of lading of interest in the shipping law context. The Supreme Court took the opportunity to reiterate several of the relevant principles, and to reject cargo interests’ argument that these approaches (and the language used) were outdated.   It is now clear that war risks clauses which relate to a voyage route or provide liberties to the shipowner as to how carriage is to be performed will in principle be capable of incorporation into contracts of carriage evidenced by the bills of lading on the basis that these can be considered as germane (or, in more modern language, directly relevant).

In this case, Madison Ingram, a Trainee Solicitor in the technology & media team at CMS, comments on the Supreme Court decision in Potanina v Potanin [2024] UKSC 3, which was handed down on 31 January 2024.

The Supreme Court decided, by a 3-2 majority, to overturn the decision of the Court of Appeal, and allow the appeal sought. In doing so, the court made rather impactful comments of which essentially alter the practice which has been followed in the process of setting aside leave under section 13 of Part III of the Matrimonial and Family Proceedings Act 1984 (“the 1984 Act”).

Background

Natalia Potanina (“Wife”) and Vladimir Potanin (“Husband”) are two Russian nationals who were married from 1983 to 2014. They spent their entire marriage living in Russia.

Husband claims that the couple began to live separate lives from 2007, whereas Wife claims they did not separate until 2013 when Husband told her that he wanted a divorce.

Throughout their marriage, Husband accrued substantial wealth, becoming a multi billionaire. In 2007, Husband transferred assets to Wife of approximately USD$76 million. This is acknowledged as being a small portion of Husband’s wealth – of which is mostly located in shares in companies or other business entities which were not registered in his name, but instead were held in trusts or corporate vehicles.

Upon the granting of their divorce in early 2014, Wife commenced a wave of litigation in Russia, the USA and Cyprus to obtain further financial relief from Husband’s assets. She was unsuccessful in all claims. She then decided to bring a claim for financial relief under English law on the basis that she had purchased a property in England in 2014 and, since 2017, had been living in England permanently. This was done by way of a without notice application for leave under rule 8.25 of the Family Procedure Rules 2010 (“the 2010 Rules”).

Lower Courts

On 25 January 2019, Wife was granted leave to apply for financial relief pursuant to Part III of the 1984 Act at an ex parte hearing.

Husband then applied under rule 18.11 of the 2010 Rules to set aside Wife’s application for financial relief on the basis that the judge had been misled as to the facts of the case, the issues of Russian law and the applicable principles of English law. His application was heard in the High Court in October 2019.

The High Court granted Husband’s application to set aside Wife’s application for financial relief on the basis that she did not meet the requirements under the 1984 Act. Cohen J (who was also the judge at the first hearing) made an order on 8 November 2019 to set aside the leave on the grounds that he had been misled at the ex parte hearing, on the basis that he had not been presented with such extensive material at the original hearing.

Court of Appeal

Wife then appealed to the Court of Appeal which set aside the High Court’s decision and allowed Wife’s appeal in January 2021.

The Court of Appeal referred to Traversa v Freddi [2011] EWCA Civ 81, the case in which it was established that a court ought to defer an application to set aside to be heard alongside the substantive application, unless the respondent can produce a “knock-out blow” (as originally commented obiter in Agbaje v Agbaje [2010] UKSC 13). The Court of Appeal explained that where a court has been misled and the leave should be set aside, that is often a sign that the issue should be considered at trial as there is not an obvious “knock-out blow”. The Court of Appeal criticised the High Court’s diversion from this approach.

The Court of Appeal was therefore of the opinion that a hearing with oral evidence should have instead been conducted, and that the judge had indeed not been misled and that the issues which he identified were in fact not material enough to justify setting aside the application for leave.

Husband appealed the decision to the Supreme Court.

Decision of the Supreme Court

The Supreme Court allowed Husband’s appeal by a 3-2 majority. Lord Leggatt, Lord Lloyd-Jones and Lady Rose made the majority decision.

The Supreme Court stated that, where a respondent is served with an order of which leave has been granted on an application made without notice under rule 8.25 of the 2010 Rules; rule 18.11 of the 2010 Rules provides the respondent with a complete unrestricted right to apply to have the order set aside purely on the ground that the test for leave is not met. There is no mention of the requirement for a ‘compelling reason’ or a ‘knock-out blow’ to be demonstrated.

The Supreme Court noted that, in the High Court Agbaje proceedings, Justice Munby made reference to Jordan v Jordan [1999] EWHC Admin 666 in which Lord Justice Thorpe criticised rule 3.17 of the Family Proceedings Rules 1991 (the relevant legislation prior to the 2010 Rules) which provided for an exparte application where leave is sought under Part III of the 1984 Act. Lord Justice Thorpe believed that conducting an inter partes rather than an ex partes hearing would be a more productive approach.

Justice Munby, in agreement with Lord Justice Thorpe’s comments, stated that the rule has a “baleful effect” and that “something should be done to amend rule 3.17 with a view to implementing Lord Justice Thorpe’s wise proposals”.

The Supreme Court noted that it was evident, from both Lord Justice Thorpe and Justice Munby’s comments, that they were referring to the replacement of an ex parte hearing with an inter partes hearing and were clearly not challenging or conveying any worries about the right to apply to set aside leave granted ex parte. In their view, by conducting an inter partes hearing initially instead (where both parties are represented), this would reduce costs, rather than carrying out an ex partes hearing (where only the claimant is represented), followed then by an application by the respondent to have the leave set aside. In any event, however, they were not criticising the right to apply to set aside leave granted ex parte.

Despite the High Court’s comments, both the Court of Appeal and the Supreme Court in Agbaje interpreted these in a different light.

Lord Justice Ward (in the Court of Appeal) believed that Justice Munby was suggesting proceeding directly to a substantive hearing of the application for financial relief after granting leave ex parte.

Following suit, the Supreme Court then also misunderstood the High Court’s reasoning, and in doing so, quoted the following proposition:

“…the approach for setting aside leave should be the same as the approach to setting aside permission to appeal in the Civil Procedure Rules, where (by contrast with the Family Proceedings Rules) there is an express power to set aside, but which may only be exercised where there is a compelling reason to do so: CPR r 52.9(2). In practice in the Court of Appeal the power is only exercised where some decisive authority has been overlooked so that the appeal is bound to fail, or where the court has been misled…in an application under section 13, unless it is clear that the respondent can deliver a knockout blow, the court should use its case management powers to adjourn an application to set aside to be heard with the substantive application”.

This rule was then adopted in Traversa v Freddi, of which provides some key context to Agbaje and how the test ought to be applied. It has been cited consistently ever since.

The Supreme Court did recognise the arguments presented by those in favour of retaining the position in Agbaje.

The first of these is that the ‘knock-out blow’ test saves time and costs in that it only allows those who can meet the test to apply to set aside leave, therefore greatly reducing the number of applicants. The Supreme Court did not doubt that this was the case but were keen to acknowledge that “the fundamental point is that fairness is not a value which can properly be sacrificed in the interests of efficiency”. In their view, the Agbaje approach does not uphold such principles of fairness and equality in placing such restrictions on applications to set aside leave.

Second, it was claimed that since an application to grant leave does not actually deal with any substantive issues to a claim, if a respondent is not allowed the chance to object, this is not actually unfair, and the respondent is put in the same position as the majority of respondents to other claims (since leave is not often required in alternate proceedings). However, the court contested this, stating that, just because this is an uncustomary rule, this does not signify that it is extraneous. It is a central aspect of the Part III regime under the 1984 Act and is of particular relevance to foreign respondents, as they may then be subject to high legal costs to defend such proceedings, whereby the only element linking the applicant to the jurisdiction is that they have been habitually resident in England and Wales for a year prior to making the application. Moreover, the fact that this does not deal with any substantive issues is immaterial – it is a fundamental part of the justice system and is crucial to the principle of fairness.

Third, it was highlighted that the Supreme Court is not best placed to deal with procedural matters. Although recognising that this is the established position, the Supreme Court did not consider it to be relevant in this case. The Court of Appeal made comments on this area of the law which were regarded as binding following the decision of Traversa v Freddi. Therefore, it would be inappropriate for the Supreme Court to be unable to address the issue where the Court of Appeal believes that only the Supreme Court can indeed do so. Further, the 2010 Rules are coherent and do not require amendment by the Rules Committee. Rather, they must indeed be applied and not discounted. Moreover, there has been an error of law in this case since the practice to set aside leave that has been adopted is unlawful. Therefore, this is in conflict with the applicable rules of court and to a foundational principle of procedural justice, and so the Supreme Court ought to step in to resolve this issue where it is not being followed in other courts.

As a further argument, the Supreme Court also noted that the wording of section 13 of the 1984 Act clarifies that leave under Part III of the 1984 Act can only be permitted where there is substantial ground for introducing a claim for financial relief. Accordingly, this is at odds with the fact that a substantive hearing can only be allowed where the respondent can produce a ‘knock-out blow’ to show that there is no substantial ground to introduce such a claim.

In addition, rule 8.25 of the 2010 Rules was amended in 2017 to change the default position from an application for leave usually being made on notice (and the court can permit it to be made without notice) to such application being made without notice (and the court can permit it to be heard on notice). This amendment concorded with the interpretation of the position as stated in Traversa v Freddi.

The effect of the amendment now means that the decision of whether to hear an application for leave without notice, or proceed directly to an inter partes hearing, is for the court rather than the applicant (as was formerly the case). The Supreme Court did see the reasoning behind this, such as where providing notice would be an adverse cost to the respondent in a baseless claim, or where it is troublesome or inappropriate to give notice to the respondent. However, in the circumstances of the case in question, they found that it would be “quite wrong and unfair” to take away the basic right of the respondent to oppose reasons to the court why such leave should not be granted. There is no mention of the ability to do so in the 2010 Rules, and the court noted that express and unambiguous statutory wording would be required in order to do so.

The Wife also challenged the Court of Appeal’s second order, which refused leave,  on two further and alternative grounds (known as grounds 12 and 13):

Notwithstanding if permitted to do so, Cohen J should not have set aside the leave granted without notice, because the test for section 13 of the 1984 Act was met after hearing reasoning from each side; and

Wife’s application should not have been discharged in any event to the extent that the court has jurisdiction in respect of it by way of the Maintenance Regulation (Council Regulation (EC) No 4/2009 of 18 December 2008).

The Supreme Court stated that a supplementary hearing will need to be conducted before these questions can be determined.

In light of the reasoning summarised above, the Supreme Court allowed the appeal, but remitted grounds 12 and 13 to the Court of Appeal.

Dissenting Opinion

Lord Briggs and Lord Stephens, in dissent, disagreed with the majority approach of the Supreme Court, for several reasons.

First, the unanimous obiter comments by the Supreme Court in Agbaje (implementing the ‘knock-out blow’ test) have been “treated as the last word” in Traversa v Freddi in what was a unanimous decision.

Second, the Agbaje test has been routinely implemented since its initiation, without challenge or condemnation until the case at hand.

Third, the 2010 Rules have been amended on the basis that Agbaje was the correct legal approach.

Fourth, the Supreme Court’s proposition would presumably result in the ‘ex parte on notice’ custom coming back into play, of which has been openly criticised by eminent family judges and was the basis on which the 2010 Rules were amended.

Fifth, the discretion of the court in deciding whether the proposed respondent’s facilitation should be required in determining whether to grant permission to the applicant would be diminished to “near meaninglessness”.

Sixth, the function of the Supreme Court, in their view, is not to make decisions on matters of procedure – this is best achieved by the Court of Appeal, the specialist courts and the Rules Committee of which have the correct resources to make such decisions.

Seventh, the case is so extraordinary that it is an “unreliable platform” to enable such drastic amendments to the legal process to applications for leave under Part III of the 1984 Act.

Lord Briggs and Lord Stephens therefore would have dismissed the appeal and, should the Family Procedure Rule Committee have been requested to do so, direct the issue to them of whether Part III of the 1984 Act requires reform.

Comment

This is an extremely interesting case, and one which has also garnered attention in the media. The decision of the Supreme Court has been particularly remarkable, considering that it has been decided on a 3-2 majority, highlighting the complicated nature of this area of the law.

Some may say that the law has simply now been clarified and restored back to what it should always have been – that being that the 2010 Rules contain no mention of the requirement for a ‘compelling reason’ or ‘knock-out blow’ to be shown. However, as advocated by those in dissent, this latter practice has been consistently applied for more than a decade and endorsed in the decisions of several high-profile judges, including in its initial roots of obiter dicta comments made in a decision of the Supreme Court itself.

It seems, however, that the majority of the Supreme Court are strong in their views, in finding that the fundamental principles of justice and fairness had been disregarded in the operation of granting applications for leave by restricting the right of the respondent to oppose said application. They believed that such a practice had to be brought to an end, and that it was their duty to do so.

In this post, Emma Pinkerton, a Partner in the Real Estate Disputes team at CMS, comments on the Supreme Court’s decision in Wolverhampton City Council and others v London Gypsies and Travellers and others [2023] UKSC 47, which was handed down on 29 November 2023.

In our Case Preview we discussed the background to this case in more detail but in summary the primary focus of the Supreme Court was in relation to the apparent distinction between interim and final injunctions and the impact of the grant of either on “newcomers”. 

“Newcomers” are considered to be people who haven’t yet done, or threatened to do anything in breach of the terms of the injunction and so cannot be identified, or participate in the proceedings, at the time when the injunction is made.

Whilst this case related specifically to injunctions obtained by various Councils in relation to traveller encampments the decision is more far reaching.  This is as a result of the rise of the use of similar injunctions against so called “newcomers” in relation to areas as diverse as environmental protests, breaches of intellectual property rights and unlawful activities on social media.

Court of Appeal Decision

The Court of Appeal decided that any newcomer aware of the injunction could become a defendant by breaching its terms. 

This decision was appealed by London Gypsies and Travellers and two other organisations who were granted standing and who had the benefit of a protective costs order granted by the Supreme Court itself.

Appeal dismissed

The Supreme Court has upheld the decision of the Court of Appeal although for different reasons. 

In a very detailed review of the basis upon which newcomer injunctions can be granted, the Supreme Court has decided that this is a newly evolved form of injunction which is essentially one against the whole world. 

The decision was made on the basis that:

Injunctions continue to be an equitable remedy – equity looks at substance instead of form rather than being constrained by any rule or principle.

The relevant right should be remedial.

The Supreme Court explained that they looked at the way equity has propelled development of injunctions and has broken through every limiting rule.  However, they equally made clear that these newcomer injunctions will only be granted if there is:

A compelling need to do so in order to ensure compliance with planning and public law and then only when there is no other available remedy possible to ensure such compliance; and

a real and imminent threat of tortious action and high probability that such action will cause harm.

The Supreme Court considered that these newcomer injunctions are essentially always without notice and acting in breach of their terms can result in contempt of court even where proceedings haven’t been served on that person.

The judgment also makes it clear that newcomers are not party to the proceedings and do not become a party simply by breaching the terms of the order.  The preferred analysis is that a newcomer can still be in contempt of court by acting in breach of the order with knowledge of that order on the basis that is an interference with the administration of justice. 

The restrictions placed on persons unknown, including newcomers, should be balanced by ensuring that the order provides for liberty to apply and set aside the injunction in the widest terms.

In addition, there must be protections afforded by the actions of the claimants throughout the proceedings. Whilst this is not a change per se it is now beyond any doubt that anyone applying for an injunction against persons unknown and potential newcomers should make full disclosure to the court (after due research of facts and matters) that may go against the injunction they are seeking and that this is a continuing duty.

Finally, a number of principles were affirmed by the Supreme Court including:

That there needs to be a very precise definition of newcomers – particularly by reference to conduct expressed in clear, understandable terms.

The terms of the order need to be clear and precise – these should, so far as possible, relate to the threatened or actual unlawful activity.

The order must provide specific geographical restrictions – clear maps should be used where possible.

The order should be limited temporally – in a departure from previous decisions, the Supreme Court indicated that, at least in relation to traveller cases, this should be limited to a year.

Conclusion

This decision provides guidance to those making applications for injunctions which may include newcomers and clarified that this equitable jurisdiction should be prepared to flex to keep pace with the changing legal landscape.  What hasn’t changed is the need for careful consideration of the facts and evidence in support of any application and the need to be very precise in the way in which they are then formulated.