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In this post, Richard Bamforth, Jessica Foley, and Julia Czaplinska-Pakowska of CMS comment on the UK Supreme Court’s decision in Kabab-Ji Sal (Lebanon) v Kout Food Group (Kuwait) [2021] UKSC 48, which delivered further guidance to commercial parties and arbitration practitioners on the issue of the governing law of arbitration agreements.

On 27 October 2021, the UK Supreme Court upheld the decision of the Court of Appeal in Kabab-Ji Sal (Lebanon) v Kout Food Group (Kuwait) [2021] UKSC 48, finding that a general choice of law clause in a written contract containing an arbitration agreement will normally be a sufficient indication of the law governing that arbitration agreement. Applying English law, the court further held that the contract subject to the dispute had not been novated such as to make a third party subject to the arbitration agreement, in the light of the No Oral Modification clause in the contract. Lastly, the Supreme Court considered that the Court of Appeal was correct in refusing the recognition and enforcement of the arbitral award by way of summary judgment, and that the first instance judge had been wrong to adjourn the enforcement decision pending the outcome of an annulment application in the French courts concerning the same award.

Whilst the decision may initially appear to have more deeply ingrained the conflicting approaches of the English and French courts to the issue of governing law of arbitration agreements, the court’s reasoning is based on a methodical analysis of the relevant choice of law rules. It also provides helpful confirmation of the English law approach to identifying the governing law of an arbitration agreement, following an earlier landmark decision by the Supreme Court on the same issue in Enka v Chubb [2020] UKSC 38.

Factual background and the tribunal’s decision

The underlying dispute arose out of a franchise agreement between Kabab-Ji SAL (Kabab-Ji), a Lebanese company, and Al-Homaizi Foodstuff Co WWL (AHFC), its Kuwaiti licensee. Following a corporate reorganisation, AHFC became a subsidiary of Kout Food Group (KFG), the respondent to the proceedings. The franchise agreement contained (i) an express choice of English law as the law of the main contract, (ii) an arbitration agreement providing for arbitration in Paris and (iii) a No Oral Modification clause.

Kabab-Ji referred its dispute with KFG to arbitration in Paris under the ICC Arbitration Rules. A majority of the tribunal decided that the question whether KFG was bound by the arbitration agreement was governed by French law, but that English law governed the question whether KFG had acquired substantive rights and obligations under the franchise agreement by a novation of the agreement from AHFC to KFG. The Tribunal then found that KFG was in breach of the franchise agreement and awarded Kabab-Ji damages.

KFG filed an annulment application with the French court (as the competent authority of the country in which the award was made). In the meantime, Kabab-Ji applied to the English court for the award to be recognised and enforced.

The English High Court judgment

The judge at first instance decided that the choice of English law in the franchise agreement constituted an express choice of law for the entire agreement, including the arbitration agreement. The judge also reached the provisional conclusion that, applying English law, the No Oral Modification Clause meant that there was no novation of the franchise agreement from AHFC to KFG, and Kabab-Ji had not satisfied the conditions for estoppel that would have precluded AHFC by its conduct from relying on the No Oral Modification Clause. However, the judge thought it was possible that further evidence might emerge in the course of the French proceedings that might alter this conclusion, and he therefore declined to make a final ruling on the point. He adjourned any further hearing until after the Paris Court of Appeal had decided KFG’s application to annul the award. Both parties appealed.

The Court of Appeal judgment

The Court of Appeal agreed with the lower court that the parties’ express choice of English law to govern the main contract was also an express choice of the same law to govern the arbitration agreement. Where there was no indication that the arbitration agreement was to be construed separately from the rest of the contract, the contract should be construed as a whole and the express choice of law applied to all its clauses. The express choice of Paris as the seat of the arbitration did not impliedly override this choice, since an implied provision cannot displace an express one.

The court also agreed with the judge at first instance that the contract had not been novated. However, it held that he had been wrong to refuse to make a final order. There was no real prospect that new evidence would come to light that would allow Kabab-Ji to satisfy the conditions for an estoppel. The recognition and enforcement of the award was refused. Kabab-ji appealed to the Supreme Court.

The French court judgment

In the meantime, in a conflicting judgment, the Paris Court of Appeal rejected KFG’s application to annul the award. KFG had argued that the arbitral tribunal did not have jurisdiction because KFG was not a party to the franchise agreement. In refusing to annul the award, the court found that French law, not English law, was the governing law of the arbitration agreement.

Indeed, the French courts have consistently held that the existence and validity of an arbitration agreement must be considered solely in the light of the requirements of international public policy, irrespective of any national law, even a law governing the form or substance of the main contract. The French courts instead apply substantive rules of international arbitration, including the “separability principle”. In this case, the court held that as the parties had not expressly agreed that English law would govern the arbitration agreement specifically, the tribunal was instead bound to apply the substantive law of the place of the seat of arbitration (French law). Under French law, KFG was bound by the arbitration agreement.

The Supreme Court  judgment

In the face of these diverging decisions, the Supreme Court was asked to decide on three issues, namely:

What law governs the validity of the arbitration agreement?
If English law governs, is there any real prospect that a court might find at a further hearing that KFG had become a party to the arbitration agreement contained in the franchise agreement?
As a matter of procedure, was the Court of Appeal justified in giving summary judgment refusing recognition and enforcement of the award?

The choice of law issue

The appeal was heard in June – July 2021, a few months after the Supreme Court handed down judgment in another significant case concerning the governing law of arbitration agreements  in Enka v Chubb [2020] UKSC 38. In that case, the Supreme Court set out a series of English law principles to be methodically applied whenever the question arises as to what law governs an arbitration agreement.

However, in the present case, the Supreme Court noted that, in its previous case, the question of governing law arose before any arbitration had taken place, and therefore the English common law rules for resolving conflicts of laws applied. However, in Kabab-ji, an arbitral award had been made, so the rules to be applied were those set out in the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention), as transposed into English law by the Arbitration Act 1996. The relevant provision of the New York Convention – article V(1)(a) – can be found in section 103(2)(b) of the Arbitration Act, and states that “the recognition or enforcement of the award may be refused if the person against whom it is invoked proves (…) that the arbitration agreement was not valid under the law to which the parties subjected it or, failing any indication thereon, under the law of the country where the award was made.”

The Supreme Court noted that it would be desirable, given the international status of the New York Convention, if the rules for determining whether there is a valid arbitration agreement were not only given a uniform meaning but were applied by the courts of the contracting states in a uniform way – a nod, perhaps, to the existence of conflicting decisions such as those in the history of this case. The court was not troubled by this for long, noting that “[i]t is apparent, however, that there is nothing approaching a consensus” on the question whether or when a choice of law for the contract as a whole constitutes a sufficient indication of the parties’ choice of law for the arbitration agreement, in particular where it differs from the law of the seat. The court considered that, therefore, “the English courts must form their own view”.

The court had regard to commentary provided at the conference at which the New York Convention was adopted, which indicated that an express agreement as to the law that is to govern the arbitration agreement is not required and that any form of agreement will suffice. On that basis, the court found it “difficult to resist” the conclusion that a general choice of law clause in a written contract containing an arbitration clause will normally be a sufficient indication of the law to which the parties subjected the arbitration agreement.

The court also recalled the principles that it set out in its previous case, noting that it would be “illogical” if the law governing the validity of the arbitration agreement were to differ depending on whether the question was raised before or after an award had been made.

The Supreme Court concluded that the effect of the clauses in the franchise agreement was “absolutely clear”. The agreement contained a typical governing law clause, providing that “this Agreement” shall be governed by the laws of England. Even without any express definition, the court considered that that phrase is ordinarily and reasonably understood to denote all the clauses incorporated in the contract, including the arbitration agreement. The Supreme Court found there was no good reason to infer that the parties intended to except the arbitration agreement from their choice of English law to govern all the terms of their contract. Therefore, the law applicable to the arbitration agreement was English law.

Addressing two arguments against this conclusion raised by Kabab-ji, the court noted that a reference in the franchise agreement to the arbitrator applying “principles of law generally recognised in international transactions” (i.e. UNIDROIT Principles of International Commercial Contracts) was a reference to the rules of law to be applied to the merits of the dispute, not the validity of the arbitration agreement. The court also rejected Kabab-ji’s contention that, as the parties should be presumed to intend that the arbitration agreement will be valid and effective, one should infer that the choice of English law does not extend to it if applying English law would invalidate it. This is the “validation principle”, which is a principle of contractual interpretation which presupposes that an agreement has been made. The court appeared to restrict the validation principle slightly, noting that it does not apply to questions of validity in the expanded sense in which that concept is used in article V(1)(a) of the New York Convention and section 103(2)(b) of the Arbitration Act to include an issue about whether any contract was ever made between the parties to the dispute.

The “party” issue

Having established that English law applied, the court then considered whether KFG had become a party to the arbitration agreement. The Supreme Court referred to the decision in MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2018] UKSC 24; [2019] AC 119, where the Supreme Court held that No Oral Modification clauses are legally effective. The court considered the various provisions and held that the clauses applied to termination of the franchise agreement (which was contemplated by Kabab-ji as part of the novation) as they did to amendments and modifications to the agreement. Yet such termination could only be effected in writing and if signed by or on behalf both of the parties, which had not been done.

The court also found that the requirements for estoppel from relying on No Oral Modification clauses as laid out in Rock Advertising had not been satisfied, and even if there was evidence supporting an estoppel against AHFC, that would not necessarily extend to KFG.

Accordingly, the court agreed with the Court of Appeal that as a matter of English law, there was no real prospect that a court might find at a further hearing that KFG had become a party to the arbitration agreement in the franchise agreement.

The procedural issue

Finally, the Supreme Court turned to the question whether the Court of Appeal was justified in giving summary judgment refusing recognition and enforcement of the award. The New York Convention provides that the recognition and enforcement of an award may only be refused if the party against whom it is invoked proves one or more grounds set out in article V(1)(a) to (e). The Supreme Court found that there is nothing in the New York Convention or the Arbitration Act which prescribes how the party is to prove the ground is satisfied, and it is for the English courts to decide how the ordinary judicial determination should be made in accordance with its own procedural rules, including the overriding objective under the Civil Procedure Rules. In some cases, this may involve a full evidential hearing and in others, where appropriate, a summary determination.

In fact, the Supreme Court suggested that summary determinations may be an entirely preferable way of achieving a speedy resolution, since in many cases the nature and extent of the relevant evidence will already be clear from the hearing before the arbitral tribunal. Using this procedure would be entirely consistent with the pro-enforcement policy of the New York Convention and its equivalent provisions in the Arbitration Act. Whether or not it is suitable will depend on the specific facts of the case.

As to whether the judge at first instance was correct to adjourn the decision on enforcement pending the decision of the French Court of Appeal, the Supreme Court evaluated situations in which it would be reasonable and favourable to adjourn a decision pending that of a court in another jurisdiction, and found that since the French Court of Appeal was deciding the matter on the basis of a different body of law (French law) and therefore its decision would have no bearing on that of the English courts (which would be applying English law), there was no valid reason to adjourn pending the decision of the French court.

Accordingly, the Supreme Court held that the Court of Appeal was justified in overturning the first instance decision to grant an adjournment and in giving summary judgment refusing recognition and enforcement of the award. The appeal was dismissed.

Comment

The decision in Kabab-Ji provides further reassuring clarity on how the governing law of the arbitration agreement is to be determined under English law where the governing law is not expressly stated in the arbitration agreement itself. The Supreme Court’s reasoning is consistent with its earlier decision on the same issue, albeit in the context of enforcement pursuant to the New York Convention, rather than considering the arbitration agreement before an award is rendered. These two cases reflect the commercial reality that in practice, when negotiating a contract, parties rarely distinguish between the arbitration agreement and the contract as a whole when deciding which governing law to choose for their agreements.

Commercial parties and arbitration practitioners should nonetheless bear in mind the diverging approach of the French courts (and indeed of other jurisdictions) and err on the side of caution by expressly stating the governing law of the arbitration agreement, specifically, in their contracts.

The Supreme Court also confirmed how the English courts will construe the scope of No Oral Modification clauses following Rock Advertising. Its refusal to recognise a novation by conduct, where the contract so clearly called for all amendments, modifications and any termination to be agreed in writing, provides a useful reminder to parties of the importance of adhering to the express provisions of their contract when seeking to amend its terms.

The indication of the Supreme Court as to the usefulness of the summary judgment procedure for deciding the recognition and enforcement of an arbitral award also helpfully recognises the fact that arbitration users often want a speedy enforcement process, and that a summary judgment is most likely to achieve that.

The Supreme Court’s decision on the procedural issue of adjournment is also noteworthy as a potential test to the doctrine of comity. However, the implications of this aspect of the decision should not be overstated. If the court had been required to consider Article V(1)(e) of the New York Convention (which provides a defence to enforcement where an award has been set aside by the courts of the seat of the arbitration) whilst such a set-aside application was pending before the French courts, the court would have been likely to grant an adjournment pending the decision of the French courts. However, the Supreme Court was presented only with an Article V(1)(a) defence, regarding the validity of the arbitration agreement, and was required only to apply English law.

As KFG has appealed the rejection of its set-aside application in the French Court of Appeal to the Court of Cassation, it will be interesting to see whether and the extent to which France’s highest court now seeks to bridge the gap.

Hearings in the Supreme Court are now shown live on the Court’s website.

On Thursday 18th November, the Supreme Court will hear the combined appeals of PWR (AP) v Director of Public Prosecutions and Akdogan and another (AP) v Director of Public Prosecutions. These will be heard at 10:30 in Courtroom One. The Court will decide whether section 13(1) of the Terrorism Act 2000 creates a strict liability offence, and if so, whether it is compatible with Article 10 of the ECHR. The decision being appealed is [2020] EWHC 798.

A full list of the cases scheduled for the Michaelmas Term can be found here.

The following Supreme Court judgments remain outstanding: (As of 15/11/2021)

The Law Debenture Trust Corporation plc v Ukraine (Represented by the Minister of Finance of Ukraine acting upon the instructions of the Cabinet of Ministers of Ukraine) Nos. 2 and 3, heard 9-12 December 2019
BTI 2014 LLC v Sequana SA and Ors, heard 4 May 2021.
Bott & Co Solicitors v Ryanair DAC, heard 20 May 2021
In the matter of an application by Margaret McQuillan for Judicial Review (Northern Ireland), In the matter of an application by Mary McKenna for Judicial Review (Northern Ireland), and In the matter of an application by Francis McGuigan for Judicial Review (Northern Ireland), heard 14-16 June 2021
East of England Ambulance Service NHS Trust v Flowers and Ors, heard 22 June 2021
R (on the application of O (a minor, by her litigation friend AO)) v Secretary of State for the Home Department and R (on the application of The Project for the Registration of Children as British Citizens) v Secretary of State for the Home Department) (Expedited), heard 23 and 24 June 2021
R (on the application of Elan-Cane)  v Secretary of State for the Home Department, heard 12 and 13 July 2021
A Local Authority v JB (by his Litigation Friend, the Official Solicitor) (AP), heard 15 July 2021
Maduro Board of the Central Bank of Venezuela v Guaidó Board of the Central Bank of Venezuela, heard 19 to 22 July 2021.
Basfar v Wong, heard 13th-14th October
Her Majesty’s Attorney General v Crosland, heard 18th October
Secretary of State for the Home Department v SC (Jamaica), heard 19th October
Commissioners for Her Majesty’s Revenue and Customs v Coal Staff Superannuation Scheme Trustees Ltd, heard 26th October
Harpur Trust v Brazel, heard 9th November 2021
FirstPort Property Services Ltd v Settlers Court RTM Company and others heard 10th November 2021

 

In this article Joanna Clark, a Professional Support Lawyer at CMS, comments on the recent UK Supreme Court’s decision on the Scottish Parliament’s attempt to incorporate (1) the United Nations Convention on the Rights of the Child and (2) the European Charter of Local Self-Government into Scots law, and whether such actions are within the Scottish Parliament’s devolved competencies,  

Introduction

On 6 October 2021, the Supreme Court gave its decision on two references by the Attorney General and the Advocate General for Scotland (the “UK Law Officers”) in relation to two Bills that had been passed by the Scottish Parliament: (1) The United Nations Convention on the Rights of the Child (Incorporation) (Scotland) Bill (“UNCRC Bill”) and (2) the European Charter of Local Self-Government (Incorporation) (Scotland) Bill (“ECLSG Bill”). Both Bills seek to incorporate international treaties into domestic Scots law that have been ratified by the UK, but not incorporated into domestic UK law.

The references, made under s 33(1) of the Scotland Act 1998, required the court to determine whether certain provisions in each of the Bills (namely ss 6, 19(2)(a)(ii), 20(10)(a)(ii) and 21(5)(b)(ii) of the UNCRC Bill and ss 4(1A) and 5(1) of the ECLSG Bill) were within the legislative competence of the Scottish Parliament.

It was not suggested by the UK Law Officers that the Scottish Parliament could not seek to incorporate these treaties into domestic law in some form, rather it was said that the Bills as drafted would place obligations on UK Government ministers and affect the UK Parliament’s power to make laws for Scotland in reserved areas which would be contrary to the devolution settlement. Accordingly, these should be sent back to the Scottish Parliament for appropriate amendments to be made.

The Bills

The UNCRC Bill

The Scottish Government has indicated its intention to take a number of steps to strengthen and develop the legal framework for human rights in Scotland and the UNCRC Bill represents one of the first of these steps.

The substantive rights in the UNCRC are wide-ranging. They include health, education and economic rights, equality and non-discrimination rights, freedom of expression, thought, religion and assembly rights, protection from exploitation and abuse, privacy rights, the right to play, and the right to participate in cultural and artistic life. The explanatory notes to the UNCRC Bill explain that the Bill takes a “maximalist approach” to the UNCRC, fully incorporating its terms subject only to limited amendments designed to address the issues of devolved competence.

The Scottish Government has stated its intention to incorporate other international human rights treaties into domestic Scots law. A government-led taskforce, the National Taskforce for Human Rights Leadership, published a report in March 2021, recommending, amongst other measures, the incorporation of four other international human rights treaties. These are the International Covenant on Economic, Social and Cultural Rights (ICESCR), the Convention on the Elimination of All Forms of Discrimination against Women (CEDAW), the Convention on the Elimination of All Forms of Racial Discrimination (CERD), and the Convention on the Rights of Persons with Disabilities (CRPD).

The ECLSG Bill

The ECLSG Bill is a private members Bill introduced by Andy Wightman MSP (then of the Scottish Green Party) with the stated aim of strengthening the status and standing of local government. This sought to incorporate Articles 2-11 of the ECLSG into Scots law.

The issues before the court

The court focused on two issues:

Whether the Bills, in bestowing certain powers on the Scottish courts to scrutinise and interpret UK legislation, modify the terms of s 28(7) of the Scotland Act 1998 and are therefore outside the legislative competence of the Scottish Parliament; and

Whether certain provisions of the Bills required to be “read down” in order to come within legislative competence. In that regard, guidance was sought on s 101(2) of the Scotland Act 1998 which states that if a provision of an Act of the Scottish Parliament could be read as being outside legislative competence, that provision is to be “read as narrowly as is required for it to be within competence, if such a reading is possible, and is to have effect accordingly.”

The Decision

The court agreed with the UK Law Officers that the provisions which had been identified were outside the legislative competence of the Scottish Parliament.

These included:

Provisions stating that Acts of the UK Parliament were to be read and given effect in a way which was compatible with the UNCRC or ECLSG. The court was of the view that, as drafted, these provisions would require the courts to interpret UK statutory provisions in a way that would conflict with the meaning intended by the UK Parliament;

Provisions enabling the courts to make declarators of incompatibility or strike down provisions of Acts of the UK Parliament which were incompatible with the UNCRC or ECLSG. The court was of the view that, as drafted, these provisions would affect the power of the UK Parliament to make laws for Scotland; and

In the case of the UNCRC Bill, a provision making it unlawful for any public authority to act incompatibly with the UNCRC. It was accepted by the Lord Advocate that this particular provision was, on the face of it, plainly outside legislative competence. The Lord Advocate argued that it would be capable of being “read down” in terms of s 101(2) of the Scotland Act 1998, however, the court rejected this.

Quoting Lord Bingham (The Rule of Law (2010)), Lord Reed noted that “the law must be accessible and so far as possible intelligible, clear and predictable”. He also referred to various passages from case law including Lord Diplock’s observations in Fothergill v Monarch Airlines Ltd [1981] AC 251, 279:

“Elementary justice or, to use the concept often cited by the European Court [of Justice], the need for legal certainty demands that the rules by which the citizen is to be bound should be ascertainable by him (or, more realistically, by a competent lawyer advising him) by reference to identifiable sources that are publicly accessible.”

Lord Reed stated that s 101(2) could not have been intended to enable the courts to rewrite provisions which were, on their face, unambiguously outside legislative competence. The limitations of a Bill should be clear upfront and should not require to be confirmed through corrective limitations imposed by the courts on a case-by-case basis.

Lord Reed also referred to the various safeguards within the Scotland Act 1998 which were designed to ensure the legislative competence of Bills. For example, s 31(1) requires the person in charge of the Bill to make a statement as to its legislative competence, s 31(2) requires the Presiding Officer of the Scottish Parliament to separately consider and determine the issue of legislative competence, and the Scottish Ministerial Code requires Bills to be cleared by the Scottish law officers. The approach suggested by the Lord Advocate to s 101(2) would circumvent those safeguards.

The court concluded that the two Bills would require to return to the Scottish Parliament for reconsideration and amendment.

Following the publication of the court’s decision, the Scottish Government has confirmed, in relation to the UNCRC Bill, that it will be proceeding with that Bill and, in relation to the ECLSG Bill, that it will liaise with the new designated MSP in charge of it on the best way forward.

Comment

One point that was not contested in these references was whether it was within the legislative competence of the Scottish Parliament to incorporate international human rights law into domestic Scots law. It will therefore be open to the Scottish Government to proceed with incorporation of the UNCRC and other treaties, subject to making it clear that the relevant legislation will apply only to devolved matters.

Questions have been raised as to whether the decision has implications for other future legislation, in particular, any Bill seeking to allow another independence referendum without the consent of the UK Government.

The devolution settlement reserves to the UK Parliament various aspects of the constitution, including “the Union of the Kingdoms of Scotland and England” (Scotland Act 1998, Sch 5, para 1(b)). The meaning of that provision is yet to be considered by the courts (Note: the Court of Session declined to opine on the matter in Keatings v Advocate General [2021] CSOH 16 on the basis that it was a hypothetical question in that case). Some argue that it means that any Bill seeking to hold an independence referendum without consent would be outside the legislative competence of the Scottish Parliament. Others argue that it would be within competence, since any referendum would not itself legally determine the question of independence but would simply invite the public’s views on the question. In this regard it may be worth noting these observations of Lord Reed in this decision on the proper approach to interpreting the Scotland Act 1998:

“The Scotland Act must be interpreted in the same way as any other statute. The courts have regard to its aim to achieve a constitutional settlement and therefore recognise the importance of giving the Scotland Act a consistent and predictable interpretation, so that the Scottish Parliament has a coherent, stable and workable system within which to exercise its legislative power. That is achieved by interpreting the rules as to competence in the Scotland Act according to the ordinary meaning of the words used.”

On appeal from: [2019] EWCA Civ 1599

The question raised by this appeal is whether the Respondent can bring a claim against the Appellant in a representative capacity seeking compensation under section 13 of the Data Protection Act 1998 for damage allegedly suffered by a class of Apple iPhone users as a result of unlawful processing of their personal data. The claim is based on the factual allegation that, for several months in late 2011 and early 2012, the Appellant secretly tracked the internet activity of some 4 million of Apple iPhone users in England and Wales and used the data collected without the users’ knowledge or consent for commercial purposes (by enabling advertisers to target advertisements at users based on their browsing history). The DPA 1998 was in force at the time of the alleged breaches and applied to this claim.

The Respondent sought to rely on rule 19.6 of the Civil Procedure Rules, which allows a claim to be brought by (or against) one or more persons as representatives of others who have the “same interest” in the claim. The Respondent argued that the “same interest” requirement is satisfied in the present case and that this representative procedure can be used to recover a uniform sum of damages for each person whose data protection rights have been infringed, without having to investigate their individual circumstances. A sum of £750 per person was suggested which would produce an award of damages of the order of £3 billion.

Because the Appellant is a Delaware corporation, the claimant needs the court’s permission to serve the claim form outside the jurisdiction. The Appellant opposed the application on the grounds that: (1) damages cannot be awarded without proof that a breach of the requirements of the Act caused an individual to suffer financial damage or distress; and (2) the claim in any event is not suitable to proceed as a representative action. In the High Court Warby J decided both issues in the Appellant’s favour and therefore refused permission to serve the proceedings. The Court of Appeal reversed that decision. The Appellant then appealed to the Supreme Court.

 

HELD – The Supreme Court unanimously allowed the appeal and restored the order made by the judge.

 

The Court considered the scope of the representative procedure and endorsed the view that it is a “flexible tool of convenience in the administration of justice”. It is even more appropriate now in modern conditions including the development of digital technologies which have greatly increased the potential for mass harm for which legal redress may be sought.

The attempt to recover damages without proving either what, if any, unlawful processing of personal data occurred in the case of any individual or that the individual suffered material damage or mental distress as a result of such unlawful processing was unsustainable. The Court held that, in these circumstances, the claim could not succeed and permission to serve the proceedings outside the jurisdiction was rightly refused by the judge.

 

For a PDF of the judgment: Judgment (PDF)

For the Press Summary: Press summary (HTML version)

For a non-PDF version of the Judgment: Judgment on BAILII (HTML version)

 

To watch the hearing, see below:

28 Apr 2021
Morning session
Afternoon Session

29 Apr 2021
Morning session
Afternoon Session

On appeal from [2020] EWCA Civ 293

This appeal concerned the scope of a shipowner’s obligation to exercise due diligence to make a vessel seaworthy, and in particular whether negligent passage planning may render a vessel unseaworthy or whether it is excepted as involving negligent navigation.

The Appellants are the owners of a container ship which grounded on a shoal outside of the buoyed fairway shortly after leaving port. The Admiralty judge found that the vessel’s defective passage plan was causative of the grounding and that this involved a breach of the carrier’s seaworthiness obligation under article III rule 1 of the Hague Rules. The decision was upheld by the Court of Appeal. The Appellants contend that the decisions of the courts below were wrong, that the vessel was not unseaworthy and/or due diligence was exercised, and that any negligence in passage planning was a navigational fault which is exempted under article IV rule 2(a) of the Hague Rules.

HELD – The Supreme Court unanimously dismissed the appeal.

Issue 1: Did the defective passage plan render the vessel unseaworthy for the purposes of article III rule 1 of the Hague Rules?

The Court rejected the Appellants’ argument that there is a category-based distinction within the Hague Rules between the seaworthiness and the navigation or management of the ship. They are not mutually exclusive. If the vessel is unseaworthy then it can make no difference whether negligent navigation or management is the cause of the unseaworthiness or is itself the unseaworthiness. Seaworthiness is not limited to physical defects in the vessel and her equipment; it extends, for example, to documentary matters, to the knowledge and skill of the crew, to the vessel’s systems and sometimes to the vessel’s cargo or trading history.

The Court confirmed that the well–established prudent owner test, namely whether a prudent owner would have required the relevant defect to be made good before sending the vessel to sea had he known of it, is an appropriate test of seaworthiness. It further confirmed that the fact that a defect is remediable may mean that a vessel is not unseaworthy.

The Court held that on the proper interpretation of the Hague Rules, the article IV rule 2 ‘nautical fault’ exception cannot be relied upon in relation to a causative breach of the carrier’s obligation to exercise due diligence to make the vessel seaworthy. The fact that the defective passage plan involves “neglect or default” in “the navigation of the ship” within the article IV rule 2(a) exception is no defence to a claim for loss or damage caused by unseaworthiness.

Issue 2: Did the failure of the Master and second officer to exercise reasonable skill and care when preparing the passage plan constitute want of due diligence on the part of the carrier for the purposes of article III rule 2 of the Hague Rules?

The Appellants’ alternative case was that, so long as the carrier has equipped the vessel with all that was necessary for her to be safely navigated including a competent crew, the crew’s failure to safely navigate the ship is not a lack of due diligence by the carrier. It is outside of the carrier’s orbit of responsibility.

The Court held that the obligation on the carrier to exercise due diligence to make the vessel seaworthy requires that due diligence be exercised in the work of making the vessel seaworthy, regardless of who is engaged to carry out that task.

The carrier is liable for a failure to exercise due diligence by the master and deck officers of his vessel in the preparation of a passage plan for the vessel’s voyage. The carrier’s seaworthiness obligation in relation to passage planning is not limited to providing a proper system for such planning.

 

Judgment (PDF)

Press summary (HTML version)

Judgment on BAILII (HTML version)

 

To watch the hearing, please click the links below:

In this post, Mitchell Abbott, an Associate in the Disputes team at CMS, comments on the Supreme Court’s decision in Anwar v The Advocate General (representing the Secretary of State for Business Energy and Industrial Strategy) [2021] UKSC 44, which concerns the availability of interim protective remedies for employment tribunal claimants in Scots law and whether the Scottish regime meets EU requirements.

On 13 October 2021, the Supreme Court handed down its decision in Anwar v The Advocate General (representing the Secretary of State for Business Energy and Industrial Strategy) [2021] UKSC 44. The Supreme Court adhered to the lower court’s finding (previewed here) that Ms. Anwar could have sought interim protective measures from the Scottish courts in support of her employment tribunal claim with the aim of preventing her previous employer from (allegedly) dissipating funds so as to frustrate her financial award. In doing so, the Supreme Court also held that the EU principles of effectiveness and equivalence had not been breached by the Scottish system.

The factual background

Ms. Anwar brought employment tribunal proceedings against her former employer and line manager alleging harassment on the basis of her race, sex, and religion. Ms. Anwar was successful in those proceedings, obtaining an award of £74,647.96.

However, Ms. Anwar has been unable to fulfil her award due to her previous employer’s lack of funds. From the judgment, it appears that Ms. Anwar has only been able to recover £2,967.32. Ms. Anwar alleges that she received information that her former employer was to be shut down and a new entity was to be started in its place so as to frustrate her award.

Ms. Anwar’s difficulties in enforcing her employment tribunal award are not uncommon. The Equality and Human Rights Commission (who were interveners in the case) highlighted statistics to the Court on the difficulties claimants face. For example, a 2013 survey found that 34% of English claimants received no payment and 16% received only a partial payment of their award. In Scotland, the figures stand at 46% and 13% respectively. The Court also noted that this is a problem acknowledged by the UK Government.

In Scots law, claimants can obtain interim protection of their future award in certain situations through “diligence on the dependence”, which takes the form of either an arrestment (i.e. a freeze) of movable property in the hands of a third party (often, money in a bank account) or an inhibition (which prevents the dealing of land and buildings).

Ms. Anwar argued that the Scottish regime does not permit claimants before employment tribunals to obtain diligence on the dependence, and argued that this alleged failure breached the EU principals of effectiveness and equivalence. Ms. Anwar’s alternative argument was that even if such remedies are available, the procedure for obtaining them breached the principles of effectiveness and equivalence

Issue 1 – Diligence on the dependence in support of employment tribunals

The Equality Act 2010 gives employment tribunals exclusive jurisdiction to hear workplace discrimination and harassment claims such as Ms. Anwar’s. Ms. Anwar argued that as a result it is not competent to seek diligence on the dependence from the courts and, as employment tribunals cannot grant diligence, diligence on the dependence was unavailable to claimants in employment tribunals.

The Court rejected Ms. Anwar’s argument, holding that claimants in employment tribunals can apply to the courts for diligence on the dependence in support of their employment tribunal claim. The Court noted that the Scottish courts have historically granted diligence on the dependence in support of foreign proceedings and in support of arbitration. Notably, in such cases, the Scottish courts will have no jurisdiction over the merits of the action or their jurisdiction will have expressly been excluded. The Court found that the same principles applied to employment tribunal claims.

The Court also rejected an argument that the 2007 reforms to the law of diligence (Part 1A of the Debtors (Scotland) Act 1987) comprehensively prescribe the courts’ powers of diligence. They noted that many issues relating to diligence still fall to be determined by the common law and in any event obtaining diligence on the dependence in support of a claim which the Scottish courts have no jurisdiction over is consistent with the statutory scheme.

As such, having rejected Ms. Anwar’s first argument the Court turned to consider whether the Scottish system breached the EU principles of equivalence and effectiveness.

Issue 2 – Has there been a breach of the EU law principle of effectiveness?

The principle of effectiveness requires that the enforcement of EU law rights is not rendered “practically impossible or excessively difficult” (Impact v Minister for Agriculture and Food [2008] 2 CMLR 47).

It was not disputed by either party that EU law requires interim remedies to be available to protect EU law rights. However, Ms. Anwar argued that the procedure for obtaining diligence on the dependence rendered the enforcement of her EU law rights  “practically impossible or excessively difficult” so as to breach the principle of effectiveness. She also argued that the availability of diligence on the dependence was so unclear as to breach the principle of effectiveness.

Case Law

In reliance upon case law, Ms. Anwar advanced several arguments as to what standards the principle of effectiveness required national legal systems to meet and why the Scottish regime breached the principle. Each of these were rejected by the Court.

The Court’s reasoning can be summarised as follows:

while case law showed that national bodies must have the power to disapply laws inconsistent with EU law, that is different from requiring national bodies to have the power to directly order interim remedies;
while in some cases the Court of Justice of the European Union (“the CJEU”) had found that rulings in civil law jurisdictions on interpretation of statute did not provide sufficient clarity for EU law, that context is distinguishable from the common law context which has a strong tradition of judge-made law;
while the CJEU had in the past found that certain UK judicial remedies did not properly protect EU law, that decision was fact-specific instead of establishing a general principle that legal rules laid down in case law cannot meet the level of legal certainty required;
while the CJEU had found that it was necessary for a national body to be able to provide interim relief in some contexts (such as the suspension of national law and environmental challenges), that context is distinguishable from the context of interim orders to secure financial claims; and
absent any requirement in the directives, the Court found that there was no reason why interim measures could not instead be available from the general law of domestic legal systems.

In the circumstances, the Court concluded that the existence of diligence on the dependence to support employment tribunal claims was not too uncertain.

Impossibility and difficulty

The Court then considered the procedure for employment tribunal claimants obtaining diligence on the dependence and held that the requirement to obtain it in ancillary proceedings before a court did not render the remedy practically impossible or excessively difficult.

The Court first noted that were diligence on the dependence to be available directly from an employment tribunal, it would likely require many of the same procedural steps as an application to the courts. For example, both would require written pleadings, evidence of insolvency, and potentially a hearing. Similarly, claimants can appear in both forums without legal representation should they choose. The Court also noted that it was likely that the employment tribunal would charge a fee for such applications.

In the circumstances and on the evidence before it, the Court noted that obtaining diligence on the dependence from a sheriff court was likely to be at most £414.15 more expensive than if it were available direct from an employment tribunal.

The Court concluded that that the additional procedure and expense of having to make an application to the court did not make the exercise of EU law rights “impossible in practice or excessively difficult”. As such, the principle of effectiveness had not been breached.

The Court also rejected an argument that the Scottish procedure breached Article 52 of the Charter of the Fundamental Rights of the European Union (2012/C 326/02), and that the principal of effectiveness had been expanded by recent case law.

Issue 3 – Has there been a breach of the EU law principle of equivalence?

The principle of equivalence requires that rights deriving from EU law are not to be treated less favourably than similar domestic law rights.

In a brief couple of paragraphs, the Court rejected Ms. Anwar’s argument that the principle had been breached. The Court held that the lower courts were correct to identify the appropriate comparator as claims before employment tribunals which are based on domestic law. As diligence on the dependence is also not available directly from an employment tribunal in those cases, there had been no breach of the principle of equivalence.

Case Comment

This is potentially a significant judgment. First, as noted by the lower court, there have previously been few, if any, applications to the courts for diligence on the dependence in support of employment tribunal claims. This series of judgments opens up new tactical choices for claimants before employment tribunals and as such will be of interest to employment law practitioners.

However, the Court is clear that diligence on the dependence will not in itself cure the difficulties claimants face in enforcing employment tribunal awards – the Court noted that Ms. Anwar’s ex-employer’s insolvency appeared to be for reasons other than to frustrate the enforcement of Ms. Anwar’s award.

The reasoning in the judgment is applicable not just to employment tribunals but claims before other tribunals as well. The Scottish courts may issue further judgments clarifying the availability of diligence on the dependence in support of other tribunals and proceedings in the coming years.

Finally, the Court’s re-confirmation that diligence on the dependence is available in support of arbitration will be welcome news to arbitration practitioners.

 

Hearings in the Supreme Court are now shown live on the Court’s website.

 

On Tuesday 9th November, the Court will hear the case of Harpur Trust v Brazel. The case will consider whether a worker’s right to paid annual leave is accumulated according to the working pattern of the worker and/or is pro-rated. The judgment being appealed is [2019] EWCA Civ 1402, and will take place in Courtroom One at 10:30am.

 

On Wednesday 10th November, the Court will hear the case of FirstPort Property Services Ltd v Settlers Court RTM Company and others, on appeal from [2019] UKUT 243. This case will consider the provisions of the Commonhold and Leasehold Reform Act 2002 and the extent to which a company has acquired certain rights. This will be heard in Courtroom One at 10:30am.

The Court will also hand down the following two judgments on Wednesday:

Lloyd v Google LLC – here, the Court was asked to consider whether the respondent should have been refused permission to serve his representative claim against the appellant out of the jurisdiction (i) because members of the class had not suffered ‘damage’ within the meaning of section 13 of the Data Protection Act 1998 (‘DPA’); and/or (ii) the respondent was not entitled to bring a representative claim because other members of the class did not have the ‘same interest’ in the claim and were not identifiable; and/or (iii) because the court should exercise its discretion to direct that the respondent should not act as a representative. The judgment being appealed is [2019] EWCA Civ 1599 and the Supreme Court first heard the case on the 28th and 29th of April 2021.
Alize 1954 and another v Allianz Elementar Versicherungs AG and others – this judgment will decide whether seaworthiness for the purposes of Article III Rule 1 of the Hague-Visby Rules includes navigational decisions taken by the crew taken prior to commencement of a voyage. This case was heard on the 7th and 8th of July 2021 and the judgment being appealed can be found at [2020] EWCA Civ 293.

 

On Thursday 11th November, the Court will hear the cases of The Law Debenture Trust Corporation plc v Ukraine (Represented by the Minister of Finance of Ukraine acting upon the instructions of the Cabinet of Ministers of Ukraine) No. 2 and No. 3. This is a joined appeal, wherein the Court is asked to consider:

In The Law Debenture Trust’s appeal: (i) whether there is any “domestic foothold” for the allegations of duress made by Ukraine or whether the foreign act of state doctrine is relevant to or engaged by the allegations such that they are non-justiciable before the English Court; and (ii) whether the claim (or any of its aspects) ought to be stayed.

In Ukraine’s Appeal: (i) whether Ukraine’s defence of lack of contractual capacity has a real prospect of success (including whether Ukraine as a sovereign has unlimited capacity to contract); (ii) whether Ukraine has an arguable case that Ukraine’s Minister of Finance did not have ostensible authority and/or usual authority to enter into the Notes and that it has not ratified the Notes;

(iii) whether Ukraine’s defence that it was entitled not to repay sums otherwise due as a countermeasure has a real prospect of success; and (iv) whether there is a “compelling reason” within the meaning of CPR r24.2(b) for any of Ukraine’s defences to be determined at a trial irrespective of whether any of those defences satisfy CPR r24.2(a).

The judgment appelaed is [2018] EWCA Civ 2026 and will be heard at 10:30am in Courtroom Two by Lord Reed, Lord Hodge, Lord Lloyd-Jones, Lord Kitchin, and Lord Carnwath.

 

A full list of the cases scheduled for the Michaelmas Term can be found here.

The following Supreme Court judgments remain outstanding: (As of 01/11/2021)

The Law Debenture Trust Corporation plc v Ukraine (Represented by the Minister of Finance of Ukraine acting upon the instructions of the Cabinet of Ministers of Ukraine) Nos. 2 and 3, heard 9-12 December 2019
BTI 2014 LLC v Sequana SA and Ors, heard 4 May 2021.
Bott & Co Solicitors v Ryanair DAC, heard 20 May 2021
In the matter of an application by Margaret McQuillan for Judicial Review (Northern Ireland), In the matter of an application by Mary McKenna for Judicial Review (Northern Ireland), and In the matter of an application by Francis McGuigan for Judicial Review (Northern Ireland), heard 14-16 June 2021
East of England Ambulance Service NHS Trust v Flowers and Ors, heard 22 June 2021
R (on the application of O (a minor, by her litigation friend AO)) v Secretary of State for the Home Department and R (on the application of The Project for the Registration of Children as British Citizens) v Secretary of State for the Home Department) (Expedited), heard 23 and 24 June 2021
R (on the application of Elan-Cane)  v Secretary of State for the Home Department, heard 12 and 13 July 2021
A Local Authority v JB (by his Litigation Friend, the Official Solicitor) (AP), heard 15 July 2021
Maduro Board of the Central Bank of Venezuela v Guaidó Board of the Central Bank of Venezuela, heard 19 to 22 July 2021.
Basfar v Wong, heard 13th-14th October
Her Majesty’s Attorney General v Crosland, heard 18th October
Secretary of State for the Home Department v SC (Jamaica), heard 19th October
Commissioners for Her Majesty’s Revenue and Customs v Coal Staff Superannuation Scheme Trustees Ltd, heard 26th October
Harpur Trust v Brazel, heard 9th November 2021
FirstPort Property Services Ltd v Settlers Court RTM Company and others heard 10th November 2021

On appeal from: [2019] EWCA Civ 588

The directors of Vantis Tax Ltd (“VTL”) exploited their position in breach of their fiduciary duty to make a secret profit of £4.55m. The amount of £4.55m was also the benefit obtained by the directors from their crime of cheating the public revenue by dishonestly facilitating and inducing others to submit false claims for tax relief. VTL went into administration. The respondent was assigned VTL’s proprietary rights.

Following the directors’ criminal convictions, the appellant sought confiscation orders under the Proceeds of Crime Act 2002 (“POCA”) against them, and they were ordered to pay ordered to pay £809,692 and £648,000 to the appellant. The respondent argued that the directors should be treated as having acquired the benefit of the secret profit on behalf of VTL. The respondent argued that, as a result, the £4.55m was beneficially owned by VTL under a constructive trust, and now the beneficial interest in that trust had been assigned to the respondent.

Thus, the respondent argued that because it had a proprietary claim to the secret profit of £4.55m, its claim takes priority over the confiscation orders, which do not give the appellant any form of proprietary interest. If this is correct, the respondent would be entitled to all of the directors’ assets, leaving nothing to satisfy the confiscation orders. At first instance, the trial judge granted a declaration that an amount of £4.55m was held on constructive trust in favour of VTL, whose rights had since been assigned to the respondent. Further, and in accordance with an agreement between the parties, the trial judge declared that the appellant was obliged to give instructions for the transfer of the net proceeds realised from all the assets listed in the confiscation orders to Aquila.

On appeal to the Court of Appeal the appellant argued that the directors’ actions should have been attributed to VTL, and thus VTL should have been barred from recovering any proceeds of crime because of the principle of illegality. The Court of Appeal dismissed the appeal.

 

Held – appeal dismissed

Lord Stephens considered the appellants three grounds of appeal in turn.

Ground 1:

The appellant argued that the Court of Appeal was wrong to conclude that in the case of a proprietary claim by a company against its directors to recover proceeds of crime received in breach of fiduciary duty, the illegality of the directors is not attributed to the company, notwithstanding that the company itself suffered no loss and stood to profit from the illegal acts.

The Court dismissed this argument and found that the reasoning in Bilta (UK) Ltd v Nazir [2015] UKSC 23 applies to this case, in that the unlawful acts or dishonest state of mind of a director cannot be attributed to the company to establish an illegality defence defeating the company’s claim under a constructive trust.

Ground 2:

The appellant argued that the decision of the Court of Appeal is inconsistent with the regime established by POCA. It argued that POCA was intended to permit innocent third-party purchasers who have paid market value for criminal property to keep it, and for innocent third-party victims who have suffered loss as a result of criminal behaviour to be compensated, in each case in priority to the State, but not to permit third parties to otherwise benefit from criminal activity.

The Court found that the overall scheme of POCA is not to interfere with property rights. Furthermore, although there are specific provisions of POCA which allow the State to override property rights, these provisions were not engaged by the CPS in this case. As a result, the Court found the decision of the Court of Appeal was not inconsistent with POCA.

Ground 3:

The appellant argued that even if the unlawful conduct of the former directors cannot be attributed to VTL then the trial judge in the proper exercise of his discretion, ought not to have granted Aquila any declaratory relief.

The Court found that in this context, the constructive trust (and thus VTL’s beneficial ownership of the secret profits) arose automatically when the directors breached their fiduciary duties. At no stage did the directors own the secret profits in equity. The Court found that the trial judge’s order recognised this reality, and was a proper exercise of his discretion.

 

Watch hearing: 

27 April 2021   Morning session          Afternoon session

For a PDF version of the judgment, see:  Judgment (PDF)

For the Press Summary, see:  Press summary (HTML version)

For a non-PDF version of the Judgment, see:  Judgment on BAILII (HTML version)

The normal rate on which corporate lending and leasing (and some other facilities’) interest is currently based is LIBOR, which provides forward-looking rates that are applied to calculate the rate of interest, for various borrowing periods, in advance. LIBOR is used internationally, and is quoted in a wide number of currencies.

However, LIBOR will no longer be available from the end of 2021, and there is not yet an agreed replacement rate. Latest developments mean that different countries will most probably use their own local reference rates (and these possibly will apply to UK loans drawn in other currencies): SONIA in UK, SOFRA in USA, ESTER/€STR in Eurozone.

What does this mean in practical terms?

Each of these screen rates currently are available, but only provide backward looking rates – so you know what the interest rate is only once it has been applied, which makes projections and budgeting more difficult. In addition, these rates were designed as overnight rates and so will change daily rather than setting a rate that you know will not change for three months, six months or whatever. And they don’t take into account lenders’ credit risk, so an additional element will need to be added to the replacement screen rate to calculate the actual rate that will be charged.

As a result, the rate that applies under existing loan agreements will change once the applicable replacement rate has been adopted. Where your loan agreement already provides for changing the basis for interest to apply, and most will, it might be worthwhile checking before LIBOR ceases, to see what that will mean to those loans, what costs are likely to be incurred, and who has the right to decide on the applicable replacement rate.

Where you have hedging arrangements, then you may already see reference to SONIA (Sterling Overnight Index Average) or other replacement reference rates in the documentation. For traditional lending transactions however, SONIA does not yet provide an answer – although there is a lot of work going on to make it work before LIBOR disappears. At the moment, it is tricky to include SONIA or any other alternative rate for debt finance, since the definitions cannot be pinned down, the actual replacement rates are not agreed yet and we don’t know yet exactly how they will be calculated.

The Bank of England Working Group on Sterling Risk Free Reference Rates issued a discussion paper on possible conventions for referencing SONIA in loan documentation and has now issued a statement on progress towards adoption of a Term SONIA Reference Rate (TSRR) in Sterling markets. There is a general assumption that the market will move towards use of a TSRR, with work focussing on development of a forward-looking TSRR that would give the borrower some advance notice of the interest payment which would apply. It is also generally expected that transition from LIBOR, to the greatest extent possible, will progress independently of the development of a TSRR.

We will continue to update you as the position evolves, and in the meantime discuss with your legal team if your existing loan agreement refers to LIBOR. Although we have until the end of 2021 before LIBOR will stop being widely used, we expect that new agreements will start to refer to the replacement rate in readiness as soon as that rate is agreed.

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