New Judgement: Crown Prosecution Service (Appellant) v Aquila Advisory Ltd (Respondent) [2021] UKSC 49

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)

LIBOR no more: Effects on lender and borrower arrangements

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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Limber up for rate reform

At the same time, LIBOR (or using its full title, the London Interbank Offered Rate) will also see last orders called by supporting Banks in 2021. Beyond that, the future of LIBOR is entirely uncertain.

Why?

Largely as a result of the financial crisis in 2007, and the subsequent market abuse identified with LIBOR rates, the world of reference rate calculation is set to change.  Broadly, the three key concerns identified with LIBOR in particular were:

the potential for rate manipulation – further investigation of which has resulted in criminal convictions for various individuals as a result of misconduct in this area
the accuracy of the rates – the reference rates are calculated based on submissions of estimated borrowing costs and not actual transactions, which may differ from those estimates; and
the decline of unsecured interbank lending – as banks have started to use a more diverse range of funding options, unsecured interbank lending has seen a fall in popularity and consequently inter-bank offer rates may not reflect the true costs of funding, making it difficult to determine a benchmark on that basis.

As a result of the above, something known as the Benchmarks Regulation was published in order to tighten up the controls concerning reference rates, and create requirements around how and who will set reference rates.

What’s the impact?

What this means in practice is that with effect from 31 December 2019, FHBR will cease to exist and will no longer be published by the Finance & Leasing Association (FLA).  Similarly, the future of LIBOR is not certain and whilst it will continue to be published for a period, it is by no means certain for how long it will continue to exist. 

For those used to relying on FHBR, all is not lost.  With effect from 1 January 2020, the FLA proposes to calculate an adjustment to 3-month Sterling LIBOR and publish this on a monthly basis for those who want to reference LIBOR with this adjustment in their contracts but do not wish to calculate the adjustment themselves.  The FLA can do this without falling into the territory of creating a reference rate for the purposes of the Benchmarks Regulation, but if LIBOR’s future is uncertain, this may not prove to be the magic wand that many may be hoping for.

So, what’s the deal with LIBOR?  Well, to date, the Financial Conduct Authority (FCA) has confirmed that the LIBOR panel banks have agreed to continue submitting data to support the calculation of LIBOR until the end of 2021.  The FCA was keen to do this in order to avoid a sudden withdrawal of the rate which could have a detrimental impact on the financial sector, which is reassuring save that after the end of 2021 there will be no ability for the FCA to compel banks to submit data to support the calculation of LIBOR and so it is not guaranteed that LIBOR will exist post 31 December 2021.  In fact, the FCA has gone as far as to say that firms should assume that LIBOR will be discontinued and prepare for this accordingly. 

What to do next?

1. Back book:

Contracts:

Firms need to review their contracts and identify if any of them reference FHBR and/or LIBOR;
Determine whether those contracts provide for the right to use a substitute rate or calculation, or a fall-back rate in the absence of FHBR or LIBOR;
If not, consider amending those contracts to replace the definition of the interest rate with a wider definition, bearing in mind any limitations on the right to vary such as the circumstances in which variation is permitted, notice periods etc;

Tariffs of charges:

Identify if these refer to FHBR and/or LIBOR;
Consider whether updates to these documents can be made on notice to the other party or if any change has to be handled as a variation of the related document;

Security:

Review existing security documents to determine whether they refer to FHBR and/or LIBOR;
If they do, consider whether to seek amendments to that security to deal with updating those references, noting that this could result in updated filings with various registries, and amendments to any related intercreditor deeds;

2. Forward looking:

Update template contracts, tariff of charges and any security templates;
Review funding agreements to determine whether a firm’s own cost of funds may be impacted by a withdrawal of FHBR and / or LIBOR;
Review and update pricing models to ensure that they reflect the firm’s position on reference rates;
Review and update collections and arrears policies, identify any references to FHBR and/or LIBOR and update these to align with the above.

Ultimately, given the potential need for amendments to existing contracts, firms need to start looking at this now if they are to avoid any nasty surprises six months from now.  If they don’t, and they face a challenge on the interest charges under their agreement, they may find themselves in unchartered territory as regards what interest can be recovered under their contracts.

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Shoosmiths sector experts comment on Green Finance Strategy

The government recognises that to meet the 2050 target it will require ‘unprecedented levels of investment in green and low carbon technologies, services and infrastructure’. It is therefore focussing attention on green financing as it believes the financial service sector has a significant role to play in shaping the UK’s greener future.

The Green Finance Strategy has two key objectives:

to align private sector financial flows with clean, environmentally sustainable and resilient growth, supported by government action; and
to strengthen the competitiveness of the UK financial sector.

There are three strategic pillars to the strategy to support these objectives:

Greening finance – which centres on ensuring climate and environmental factors are integrated into mainstream financial decision making;
Financing green – where the focus is on accelerating finance for clean and resilient growth and improving access to finance for green investment; and
Capturing the opportunity – which aims to cement the UK’s position as a global leader for green finance and ensure the UK is at the forefront of green financial innovation, data and analytics.

Of particular interest to publicly listed companies is the strategy’s expectation that they will disclose climate risk and impact data by 2022, and that such reporting may become mandatory.

Shoosmiths’ sector experts offer up their thoughts on the main themes outlined in the strategy:

Stephen Dawson, financial services sector head:

This strategy truly shows that everyone has their part to play to address climate change and that while funding green projects is an important building block, the financial services sector has a much bigger role in helping the private and public sectors deliver on the 2050 targets.

“We’re already seeing financial institutions recognise climate change as a key financial risk factor in their decision-making processes, perhaps as more of a reaction to significant increases in insured losses resulting from weather disasters over the past decade rather than pre-empting the issue, but there are the beginnings of a more proactive approach by lenders and the regulators alike.

“We’ve seen HSBC make a longer-term commitment to sustainable funding through the launch of its green finance range for businesses and now we’re seeing the regulators speak up about their desire to embed climate change initiatives within the regulatory frameworks through concepts such as mandated climate related disclosures. No doubt this is just the beginning, with more rules and guidance to come from the Prudential Regulation Authority and Financial Conduct Authority to drive better behaviours to support the strategy, which is all very encouraging. However, businesses and financial institutions need to be ready and willing to adapt quickly as the scale of the issue can only mean that any changes will need to be implemented very quickly if 2050 is to be achievable.

James Wood-Robertson and Nick Iliff, joint sector heads, infrastructure and energy:

This strategy shows that the UK government recognises the importance of putting climate and environmental considerations at the heart of financial decision-making, and the need to encourage and accelerate private investment in clean energy.

“The government has introduced some positive initiatives such as the £5m Green Home Finance Fund established to help scale green finance mechanisms, including home energy efficiency grants, green mortgages, the Green Finance Education Charter, and the expectation for publicly-listed companies and asset owners to disclose climate risk and impact data by 2022. These initiatives deserve support and some praise. There is an overriding concern in the market, echoed by the shadow chancellor in his response to the strategy, that may be “too little, too late” and it is not going to bring the scale of investment required to deliver the UK’s commitment to net zero emissions by 2050.

“The government needs to follow up this strategy with the right policy framework, including binding targets to push through change, and support mechanisms and reliefs to encourage and underpin investment. In turn, the financial services and energy sectors need to embrace and implement the strategy if the UK and the City of London are to meet their potential to be the global hub for green investment.

Bhavesh Amlani, living sector head:

In its report issued at the start of the year, ‘UK Housing: fit for the future?’ the Climate Change Committee warned that the UK would fail to meet its binding climate change targets if it does not almost completely eliminate greenhouse gas emissions from UK buildings.

“We know that the technology and know-how exists to create sustainable and high quality low-carbon homes but these targets will not be achieved without policy and building standards driving change. In recent years, retrofitting initiatives such as the Green Deal suffered from low up-take and concerns about standards and consumer protection with the government subsequently pulling funding for the scheme, and key policies for new-build residential such as the Zero Carbon Homes scheme have also been withdrawn.

“This strategy supports one of the recommendations of the Green Finance Taskforce in its Accelerating Green Finance report issued last year by committing a £5m Green Home Finance Innovation Fund to help the financial sector develop green home finance products such as “green mortgages” to finance the home retrofit measures.

“The Green Deal is likely to cast a long shadow, however, and more ambitious policy is required to drive change at the pace and scale required to meet our climate change commitments.

James Klein, technology sector head:

It is great to see the government setting out its ambition to position the UK at the forefront of green financial innovation and data and analytics. While the number of investors looking for sustainable investment opportunities is increasing, it is often acknowledged that such investments carry assessment and pricing risks, generally down to a lack of analytical capability and information asymmetry. Maturity misalignment is another barrier for sustainable investments with long term rewards.

“The advancement of digital technologies such as, big data, AI, mobile platforms, blockchain and the internet of things, means we now have the ability to address these barriers and thereby mobilise both public and private financing to accelerate green finance investment and support sustainable development. Those involved in the FinTech industry and likely to welcome the government’s recognition of this and I have no doubt we will see significant FinTech innovations reshaping the financial system to ensure it has the ability to meet sustainable development goals.

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Response to FCAs consultation on motor finance commission

“This consultation doesn’t come as any surprise to the industry – we have been expecting action from the FCA since we sat down with them in recent weeks. Clearly the principal impact will be for both brokers and motor finance providers creating something of a level commission playing field, with the ultimate aim of benefitting consumers.

“I am delighted that firstly that there are no proposed changes on the rules for creditworthiness assessments. In the context of commission however, and a ban on discretionary commission models, the challenge in this market is not necessarily commission itself, but more so the discretion afforded to brokers in setting the rates that directly affect the cost of motor finance for consumers. The discretion element, creating an obvious conflict of interests, is where we see the real impact of this consultation. And I certainly welcome anything that builds trust, maintains competition and allows innovation in the market. The one risk being that flat fee models and reduced commissions in one part of the customer transaction could push up costs in other parts (the vehicle cost itself for example) or encourage more pushy sales of additional products, making the transaction more complex.

“The other principal aim is to enhance the disclosure requirements around the existence and nature of commission models, as part of the brokering process. In my view, this may result in more information for consumers (which can be very helpful) but we do also risk overload if the explanations are complex and involve additional paperwork. This would be an own goal.

“If we do have rules in place for the end of Q2 2020 then the industry will need to respond quickly to the consultation and continue with the evolution that is already under way.”

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Quashing Quincecare: Easier said than done

The Supreme Court has handed down its eagerly awaited judgment in the case of Singularis Ltd v Daiwa Capital Markets Europe Ltd. The decision, made on October 31, is the first reported case of a bank having been found to have breached a so-called Quincecare duty, but is also significant because of the appellant bank’s unsuccessful attempt to attribute the fraudulent conduct of its customer’s director to his company.

Our expert view

Singularis merits reflection from a risk perspective, because the case is about banks’ potential civil liability for processing fraudulent instructions, but the question of potential criminal and regulatory penalties should not be overlooked.

David Farnell, partner in the firm’s litigation services team (specialising in banking and finance disputes), said the Supreme Court had made a “common sense decision”.

“This will provideclarity for banks and their advisers about the extent to which they might defend Quincecare claims.  Really the message is that if a bank has been negligent, then it would appear that in the absence of very exceptional circumstances, the court is unlikely to deny its customer a remedy on the ground of illegality,” he added

“All banks must of course be wary of fraud and put robust procedures in place to protect their customers from fraudulent instructions.  From the detailed judgment, I can see that in this particular case, the court seems to have drawn a distinction between Daiwa, which is a relatively small investment bank, and large retail banks who receive many thousands of customers’ payment instructions daily.  That distinction might be significant in determining whether a particular bank is, in specific circumstances, ‘on inquiry’, but that is all. It would be foolhardy for larger banks to assume that their duty of care is somehow less exacting in light of this decision.

“The preferred practice of many banks is to place distressed corporate connections under specialised relationship management, which might well have avoided the kind of mistakes that Daiwa made in this particular case.”

Dan Stowers, partner in our regulation, business crime and compliance team, said

“This is a welcome decision on the duties owed by financial institutions to their corporate customers in circumstances of fraud and an area where we expect to see further development in coming years, but two points arise:

“First, the Supreme Court’s decision against the attribution of fraudulent conduct to the company, appears sensible, but, in a criminal law context, difficult to rationalise when you bear in mind that Al Sanea was the only director who exercised any influence over the company and the only mandated signatory for the company’s bank accounts. The other seven must have had fiduciary duties, after all.  It looks a pragmatic decision, in the sense that the Supreme Court appears to have stood back and looked in broad terms at whether it would be fair to attribute blame to the company where only an eighth of the directorship had been behaving fraudulently. From a criminal law perspective, the Serious Fraud Office or other law enforcement body, were they investigating this matter, might not be so sympathetic. Nor does the identification principle require them to be – the actions of a controlling mind would be sufficient.

“Second, the civil courts have recognised that it would be a rare situation, for a bank in its day to day business, to be put on inquiry [of fraudulent conduct] given the high threshold. It is, however, clear that once there are ‘reasonable grounds to believe’ that such conduct is taking place, the bank is under a positive duty to investigate the fraud. It is only after taking those steps that a ‘reasonable banker’ would be expected to do in these circumstances that the bank should go on to progress the transaction. However, once this stage of inquiry is reached, the bank should have already considered, or be in the process of considering, all of its duties. This includes not only contractual duties, but also those under anti-money laundering and tax evasion legislation, in order to identify potential criminal and regulatory liabilities that flow from its actions, or its failure to take action, in circumstances where it could be said that the bank is facilitating or involved in the transacting of criminal property.”

Background

The Quincecare duty derives from the case of Barclays Bank v Quincecare (1988), which held that it is an implied term of a contract between a bank and its customer that the bank must not execute instructions if it is put on notice, or has reasonable grounds to believe, that the instructions are an attempt to misappropriate funds.

The court recognised the need to ensure that the law did not impose too burdensome an obligation on banks, hampering the effective transacting of bank business. On the other side of the coin, the court was keen to ensure that the law should guard against the facilitation of fraud and impose a reasonable standard of care, so as to protect customers and third parties.

To balance these competing interests, the court settled a “sensible compromise”. The bank’s duty is therefore as follows:

“a banker must refrain from executing an order if and for as long as the banker is ‘put on inquiry’ in the sense that he has reasonable grounds (although not necessarily proof) for believing that an order is an attempt to misappropriate the fund of the [customer]”.

In Singularis, the claimant was a Cayman Islands-registered company set up to manage its sole shareholder Mr Maan Al Sanea’s assets.  He was head of the Saad Group and one of Singularis’s seven directors, but the others exercised no real influence over the company and Mr Al Sanea was the only mandated signatory for the company’s bank accounts.

Daiwa, an investment bank (and not a deposit taker), lent Singularis funds with which to acquire a portfolio of shares, over which the bank took security. In 2009 the Saad Group collapsed, and Daiwa learned that creditors had moved to freeze Mr Al Sanea’s assets. Daiwa enforced its security and discharged the loan, leaving a surplus in Singularis’s account of USD$204 million.

On receipt of instructions from Mr Al Sanea, Daiwa effected various payments to third parties, who subsequently passed the money to Mr Al Sanea. The surplus was dissipated, Singularis was unable to pay its creditors and subsequently became the subject of a winding-up order. Its liquidators commenced proceedings against Daiwa, claiming (among other things) that it should restore the surplus to the account, because it had breached its Quincecare duty.

The High Court found that Daiwa had been negligent, because it should have been obvious to its officers that Mr Sanea’s instructions were to effect payments for his personal benefit, rather than the company’s. Daiwa’s head of compliance had warned staff only a few days before the relevant transactions that “any payment requests [from Singularis] must be properly authorised and be appropriate”, emphasising the “need for care and caution”, but to no avail. Daiwa’s employees processed the instructions without conducting enquiries to confirm that they were legitimate.  These failings were symptomatic of “a dysfunctional structure” according to Rose J.

Daiwa had breached its Quincecare duty and was ordered to restore the surplus (subject to a 25% reduction to allow for Singularis’s contributory negligence). Daiwa’s appeal was subsequently dismissed by the Court of Appeal.

Issues in the Supreme Court

Daiwa appealed again to the Supreme Court. The main issue was whether Mr Al Sanea’s fraudulent conduct was attributable to the company, so that Singularis should be denied a remedy because of the ex turpi causa principle.

The principle is that it would be contrary to the public interest for the civil courts to enforce a claim which had arisen from illegality. Daiwa cited the House of Lords case of Stone & Rolls Ltd v Moore Stephens (2009), where the Supreme Court’s predecessor had held that the principle applied to companies and that the fraud of a company’s dominant director and shareholder could be attributed to the company itself. The Supreme Court had reviewed that decision in Bilta (UK) Ltd v Nazir (No 2) (2015) and stated that a defence of illegality could be run in certain circumstances, where there were no innocent directors or shareholders.

In Singularis, Daiwa argued that its customer had been a “one-man company” and Mr Al Sanea’s fraudulent conduct should therefore be attributed to his company.

Decision

The Supreme Court decided unanimously that the facts of Singularis differed from those of Bilta and that there was no evidence to show that Mr Al Sanea’s fellow directors had been aware of his fraudulent conduct, nor any reason why they should have been complicit in his misappropriation of the company’s funds.  Consequently, the fraud could not be attributed to the company.

Helpfully, the court determined the apparent conflict between the Quincecare and Bilta decisions. It said that to answer the question of whether to attribute a fraudulent director’s knowledge to his company, it was necessary to consider the context and the purpose for which attribution is relevant.  The court also reiterated the purpose of the Quincecare duty: it is meant to protect a company against the misappropriation of its funds, but if the fraud of its trusted agent is attributed to the company itself, that attribution will effectively remove the practical value of the duty.

Throughout this case, the courts saw no reason to treat Daiwa as anything other than a bank and therefore subject to the Quincecare duty, even though Daiwa was not a deposit taker.Daiwa satisfied the broad common law definition of a bank, even though it would not have fallen within the more exacting FCA and PRA definitions, which require a bank’s activities to include deposit taking. 

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New Judgment: Ho v Adelekun [2021] UKSC 43

On appeal from: [2020] EWCA Civ 517

This appeal concerns the operation of a scheme known as Qualified One Way Cost Shifting (“QOCS”), located in Part 44 of the Civil Procedure Rules. QOCS applies to most personal injury claims and ordinarily has the effect of limiting the amount of legal costs payable by a claimant to a defendant where a claimant loses on part or all of their claim.

Facts

The Appellant was injured following a road traffic accident with the Respondent on 26 June 2012. Some years later, the Respondent offered to pay the Appellant £30,000 to settle her claim. She also offered to pay the Appellant’s legal costs up to that point. The offer was accepted and a settlement agreement was concluded.

There was, however, a dispute regarding the extent of the pre-settlement costs owed by the Respondent. The Court of Appeal upheld the Respondent’s contention that she was only liable for £16,700 of the pre-settlement costs. Reflecting the fact that she had succeeded on this point, the Court of Appeal made a costs order that the Appellant should pay the Respondent’s legal costs of about £48,600 for the hearings dealing with that dispute.

The Respondent accepted that because she had agreed to pay the Appellant the £30,000 by way of a settlement agreement rather than being ordered to pay that amount by a court, this meant that there were there were no orders for damages and interest for the purposes of CPR 44. There was nothing, therefore, against which she could enforce the Court of Appeal costs order under the QOCS regime.

The issue was whether the Respondent could nonetheless avoid paying the £16,700 that she owed the Appellant for the pre-settlement costs, because it was cancelled out by the £48,600 that the Appellant owed her under the Court of Appeal costs order. The Court of Appeal concluded that she could, leading the Appellant to appeal to the Supreme Court.

Judgment

HELD – The Supreme Court unanimously allowed the appeal.

It was agreed by both parties that the question was one of construction of the language of the QOCS provisions in CPR rule 44.14.

The Court held that the effect of rule 44.14(1) is to create a monetary cap on the amount that a defendant can recover in costs from the claimant, set at the level of the aggregate amount in money terms of all court orders for damages and interest in a claimant’s favour. The defendant must keep a running account of all costs recoveries which it makes against the claimant, and cease enforcement once that monetary cap is reached.

The Respondent nonetheless argued that she could set off the opposing costs orders against each other because the monetary cap created by rule 44.14(1) only applied to the net costs liability of a claimant after all opposing costs orders had been netted off. Therefore, despite the aggregate amount of court orders for damages and interest in the Appellant’s favour being zero, the Respondent argued that the £16,700 owed by her for the pre-settlement costs could still be netted off against £16,700 of the Court of Appeal costs order.

The Court rejected this argument. The setting off of costs against costs is a form of enforcement covered by the QOCS provisions just as the setting off of costs against damages is. A calculation of a claimant’s net costs liability was therefore an incorrect approach, as the bar to enforcement in the QOCS provisions applied to the gross amount of a defendant’s costs orders against a claimant rather than the net amount.

The effect of this is that the Respondent must pay the Appellant the full pre-settlement costs of £16,700 on top of the £30,000 agreed to in the settlement agreement, but cannot enforce the Court of Appeal costs order at all.

Lord Briggs and Lady Rose recognise that this conclusion may lead to results which at first look counterintuitive and unfair. But the conclusion follows from the wording of the QOCS provisions in CPR Part 44, and any apparent unfairness in an individual case is part and parcel of the overall balance struck by the QOCS regime.

 

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

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

If you would like to watch the hearing, please see below:

29 June 2021
Morning session
Afternoon session

30 June 2021
Morning session

New Judgment: Anwar v The Advocate General for Scotland (representing the Secretary of State for Business, Energy and Industrial Strategy) (Scotland) [2021] UKSC 44

On appeal from: [2019] CSIH 43

The Supreme Court unanimously dismissed this appeal concerning the petition for judicial review against the Department for Business, Energy and Industrial Strategy for failure to provide effective interim protection for successful workplace discrimination and harassment claims, in breach of EU law.

Background to the Appeal

The appellant brought proceedings in the employment tribunal against her former employer and former line manager for workplace and work-related harassment on the grounds of her sex, race and religion, contrary to section 26 of the Equality Act 2010. She succeeded and was awarded £74,647.96. The appellant has been unable to enforce the award in her favour because, she alleges, her former employer deliberately dissipated its assets to avoid paying her compensation. The appellant maintains that she should have been able to obtain the interim remedy of an arrestment of funds on the dependence of her employment tribunal claim, which could have prevented the alleged dissipation of assets by freezing her former employer’s bank account.

The appellant issued a petition for judicial review against the Department for Business, Energy and Industrial Strategy. She argues that the UK Government has failed properly to implement two EU Directives, Council Directives 2000/43/EC and 2000/78/EC (together “the Equality Directives”) by its failure to provide effective interim protection for successful workplace discrimination and harassment claims, in breach of EU law. She claims compensation for that failure.

 

Held – appeal dismissed

Under EU law, member states are obliged to provide effective remedies for the implementation of EU law-based rights. Those remedies must be equivalent to the remedies available for comparable claims that do not involve EU law (the “principle of equivalence”), and they must not render the exercise of EU law-based rights practically impossible or excessively difficult (the “principle of effectiveness”). It was not disputed that the principle of effectiveness requires there to be an interim remedy available to claimants that safeguards their rights derived from the Equality Directives. The employment tribunal in Scotland does not have the power to grant diligence on the dependence.  There were three main issues before the Court:

(i) Does the Court of Session or the sheriff court have power to grant a warrant for diligence on the dependence of an application to the employment tribunal by a worker who alleges unlawful work and workplace-related discrimination or harassment on the grounds of sex, race, religion or belief?

(ii) If the answer to issue (i) is yes, does the requirement for an applicant in an employment tribunal claim to raise such court proceedings constitute a breach of EU law principles of effectiveness or effective remedy?

(iii) If the answer to issue (i) is no, does this constitute a breach of EU law?

 

On issue (i), the Court holds that the Court of Session and the sheriff court have the power at common law to grant diligence on the dependence in support of a claim being pursued in another tribunal, such as arbitral proceedings. That power does not depend on the court having jurisdiction to determine the merits of the dispute. Nor has it been removed by Part 1A of the Debtors (Scotland) Act 1987. Accordingly, if the criteria in Part 1A of the 1987 Act are met, the Court of Session or sheriff court may grant a warrant for diligence on the dependence of an ancillary action brought before the employment tribunal. Issue (iii) therefore does not arise.

On issue (ii), the Court rejected the contention that EU law requires claimants vindicating EU rights to be provided with a “one stop shop”, by which the tribunal determining the merits of the claim is also authorised to grant interim measures. The Court also rejected the argument that the courts’ jurisdiction to grant interim measures in support of employment tribunal proceedings must be expressly stated in legislation, and not case law, to be sufficiently clear and accessible to comply with the principle of effectiveness. The Court then assessed the additional hurdles involved in making a separate application to court to obtain a warrant for diligence on the dependence, namely court fees, the preparation of additional documentation, and the potential exposure to adverse costs. The Court acknowledged the benefits of the employment tribunal regime, especially to vulnerable employees who may recently have lost their jobs. However, the Court concluded that the additional hurdles to raise proceedings in the sheriff court are a modest departure from the employment tribunal regime, and are proportionate given the potential of diligence on the dependence to disrupt and even destroy the employer’s business by freezing its assets. As such, the exercise of the appellant’s EU law-based rights was not rendered practically impossible or excessively difficult.

The appellant also asserted a breach of the principle of equivalence. The Court holds that the correct comparator in this case is between an employment claim based on EU law-based rights and an employment claim based on domestic law rights, such as unfair dismissal. As an employment tribunal cannot grant a warrant for diligence on the dependence for either claim, there is no breach of the principle of equivalence.

For the judgment, please see:

Judgment (PDF)

For the Press Summary, please see:

Press summary (HTML version)

For a non-PDF version of the judgment, please see:

Judgment on BAILII (HTML version)

To watch the hearing:

25 Feb 2021        Morning session               Afternoon session

This Week in the Supreme Court – w/c 18th October 2021

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

On Monday 18th October, the Supreme Court will hear the appeal of Her Majesty’s Attorney General v Crosland, in Courtroom 1 at 11am.

This is an appeal of the decision in [2021] UKSC 15, and the Court will consider whether it was wrongly decided that Mr Crosland’s disclosure of the result of the Heathrow appeal, in breach of an embargo on the Court’s judgment, constituted a contempt of court. They will go on to consider whether the Court then wrongly imposed a fine of £5,000 on Mr Crosland, and wrongly ordered him to pay the Attorney General’s costs in the sum of £15,000.

On Tuesday 19th October, the Supreme Court will hear the appeal of Secretary of State for the Home Department v SC (Jamaica) at 10:30am in Courtroom 2. The decision appealed is [2017] EWCA Civ 2112.

The Court will consider how the Immigration Rules relating to deportation apply in the context of an individual’s criminal conduct whilst in the UK.

On Wednesday 20th October, the Supreme Court will hand down judgment in two cases:

FS Cairo (Nile Plaza) LLC v Brownlie (as Dependant and Executrix of Professor Sir Ian Brownlie CBE QC) – heard 13th and 14th January 2021. The Court was asked to consider whether Lady Brownlie can serve her claim out of the jurisdiction on FS Cairo, an Egyptian company, with a view to the trial of her claim in the courts in England and Wales (with each claim governed by Egyptian law). The citation will be [2021] UKSC 45.
R (on the application of Majera (formerly SM (Rwanda)) (AP) v Secretary of State for the Home Department – heard 10th May 2021. The Court was asked whether the Appellant’s purported grant of immigration bail by the First-tier Tribunal invalidated from the outset by defects in the Tribunal’s order, and if not what are the consequences. The citation will be [2021] UKSC 46.

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

The following Supreme Court judgments remain outstanding: (As of 15/10/2021)

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
FS Cairo (Nile Plaza) LLC v Brownlie (as dependant and executrix of Professor Sir Ian Brownlie, CBE, QC), heard 13 and 14 January 2021
Crown Prosecution Service v Aquila Advisory Ltd, heard 27 April 2021
Lloyd v Google LLC, heard 28 and 29 April 2021
BTI 2014 LLC v Sequana SA and Ors, heard 4 May 2021.
R (on the application of SM (Rwanda) (AP)) v Secretary of State for the Home Department, heard 10 May 2021
Kostal UK v Dunkley and Ors, heard 18 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
Alize 1954 and Anor v Allianz Elementar Versicherungs AG and Ors, heard 7 and 8 July 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.
Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait), heard 30th June – 1st July 2021
Basfar v Wong, heard 13th-14th October

New Judgment: FS Cairo (Nile Plaza) LLC (Appellant) v Brownlie (Respondent) [2021] UKSC 45

On appeal from: [2020] EWCA Civ 996

The Supreme Court dismissed the appeal.

In January 2010 the respondent and their husband were on holiday in Egypt. They stayed at the Four Seasons Hotel Cairo at Nile Plaza. On 3 January 2010, they went on a guided driving tour booked through the hotel. The vehicle they were travelling in during the tour crashed, killing the respondent’s husband and seriously injuring the respondent.

The respondent issued a claim in England seeking damages in contract and tort. The case reached the Supreme Court which found that the company sued by the respondent was not the operator of the hotel and remitted the matter to the High Court. The respondent successfully sought permission to substitute the present defendant and to serve the proceedings on them out of the jurisdiction. The defendant appealed on the question of whether permission should have been given to serve the proceedings out of the jurisdiction. The Court of Appeal dismissed the appeal.

The defendant raised two issues before the Supreme Court. The first (the “tort gateway issue”) is whether the appellant’s claims in tort satisfy the requirements of the relevant jurisdictional ‘gateway’ in the Civil Procedure Rules (the “CPR”). The second (the “foreign law issue”) is whether, in order to show that her claims in both contract and tort have a reasonable prospect of success, the appellant must provide evidence of Egyptian law.

Held – appeal dismissed

The Supreme Court dismisses the appellant’s appeal on both issues. In relation to the tort gateway issue, Lord Lloyd-Jones (with whom Lord Reed, Lord Briggs, and Lord Burrows agree) gave the lead judgment. Lord Leggatt dissents and would have allowed the appeal on that issue. As to the foreign law issue, Lord Leggatt gave the unanimous judgment.

 

The tort gateway issue:

Before permission may be given for service of a claim form outside the jurisdiction, the claimant must establish that: (1) the claim falls within one of the gateways set out in paragraph 3.1 of Practice Direction (“PD”) 6B to the CPR; (2) the claim has a reasonable prospect of success; and (3) England and Wales is the appropriate forum in which to bring the claim. Those conditions are the domestic rules regarding service out of the jurisdiction; they may be contrasted with the EU system.

The respondent submits that their tortious claims meet the criterion for the gateway in paragraph 3.1(9)(a) of PD 6B, namely that “damage was sustained… within the jurisdiction”. The appellant submits that paragraph 3.1(9)(a) only founds jurisdiction where the initial or direct damage was sustained in England and Wales. The respondent instead maintains that the requirements of the gateway are satisfied if significant damage is sustained in the jurisdiction.

The Supreme Court considers that the word “damage” in paragraph 3.1(9)(a) refers to actionable harm, direct or indirect, caused by the wrongful act alleged. Its meaning should not be limited to the damage necessary to complete a cause of action in tort because such an approach is unduly restrictive. The notion that paragraph 3.1(9)(a) should be interpreted in light of the distinction between direct and indirect damage which has developed in EU law is also misplaced. It is an over generalisation to state that the gateway was drafted in order to assimilate the domestic rules with the EU system. In any event, there are fundamental differences between the two systems. The additional requirement that England is the appropriate forum in which to bring a claim prevents the acceptance of jurisdiction in situations where there is no substantial connection between the wrongdoing and England. The respondent’s tortious claims relate to actionable harm which was sustained in England; they therefore pass through the relevant gateway.

Lord Leggatt dissented on this issue. He favours a narrower interpretation of paragraph 3.1(9)(a). He considers that the respondent’s tortious claims do not pass through the relevant gateway because Egypt is the place where all of the damage in this claim was sustained.

 

The foreign law issue:

It is common ground that the respondent’s claims are governed by Egyptian law. One of the requirements for obtaining permission for service out of the jurisdiction is that the claim as pleaded has a reasonable prospect of success. The appellant argues that the respondent has failed to show that certain of her claims have a reasonable prospect of success because she has not adduced sufficient evidence of Egyptian law. The respondent submits that it is sufficient to rely on the rule that in the absence of satisfactory evidence of foreign law the court will apply English law.

The Supreme Court distinguishes between two conceptually distinct rules: the ‘default rule’ on the one hand and the ‘presumption of similarity’ on the other. The default rule is not concerned with establishing the content of foreign law but treats English law as applicable in its own right when foreign law is not pleaded. The justification underlying the default rule is that, if a party decides not to rely on a particular rule of law, it is not for the court to apply it of its own motion. However, if a party pleads that foreign law is applicable they must then show that they have a good claim or defence under that law. The presumption of similarity is a rule of evidence concerned with what the content of foreign law should be taken to be. It is engaged only where it is reasonable to expect that the applicable foreign law is likely to be materially similar to English law on the matter in issue. The presumption of similarity is thus only ever a basis for drawing inferences about the probable content of foreign law in the absence of better evidence. Because the application of the presumption of similarity is fact-specific, it is impossible to state any hard and fast rules as to when it may properly be employed (although some general observations may nonetheless be made).

The respondent’s claims are pleaded under Egyptian law. There is thus no scope for applying English law by default. However, the judge was entitled to rely on the presumption that Egyptian law is materially similar to English law in concluding that the respondent’s claims are reasonably arguable for the purposes of establishing jurisdiction.

 

For judgment, please download: Judgment (PDF)

For Court’s press summary, please download: Court’s Press Summary

For a non-PDF version of the judgment, please visit: BAILII

 

Watch hearing:

13 Jan 2021Morning session Afternoon session

14 Jan 2021 Morning session Afternoon session

 

 

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