On Tuesday 29 May (12:45 to 1:45 UK time) John Ogilvie, Matthew Bonye and Alex Oddy will present a live audio webinar on pre-action strategy. The session will explore strategic considerations before proceedings are commenced, including:

• Immediate points to consider when a dispute arises;
• Pre-action protocols;
• Pre-action disclosure;
• Negotiation and ADR.  

This is part of our series of “Soundbite” webinars, which are designed to update Herbert Smith LLP clients and contacts on the latest developments without having to leave their desks. The webinars, both live and archived events, also qualify for one CPD point.   

The webinar can be accessed “live”, with a facility to send in questions by e-mail, or can be downloaded as a podcast after the event. If you would like to register for a webinar, or to obtain a link to the archived version, please contact Jane Webber.  A list of past webinars on dispute resolution topics, which can be downloaded as podcasts, is available here.

• A decision tree: intended as a quick reference to help determine which documents can legitimately be withheld on grounds of privilege; and
• Practical tips for maintaining privilege: aimed at minimising the risks of unhelpful, non-privileged material being produced.

The guide is available both as an interactive PDF, with links to more detailed information and articles, and as a hard copy guide for clients. Click here (or on “privilege guide” on the top menu) to access the “Handy client guide to privilege” home page, or contact Christina Southgate if you would like a hard copy.

The procedures will not, however, apply to the Commercial Court (unless the court orders that they should apply in a particular case). This is consistent with Lord Justice Jackson’s view, as stated in his final report following his costs review, that no case had yet been made out for introducing costs management in the Commercial Court. 

Background

Lord Justice Jackson’s final report recommended that judges should have a discretion to adopt “costs management” procedures where these would be beneficial for a particular case. (Click here for our e-bulletin of 14 January 2010 summarising his recommendations affecting major commercial litigation.)

Following a pilot of these procedures in the Birmingham Mercantile Court and Technology and Construction Court (TCC), the pilot was extended to all Mercantile Courts and the TCC through a new Practice Direction from 1 October 2011 (see post). A separate pilot has also been conducted in defamation cases. An interim report on the Mercantile Court and TCC pilot was published in February. This reported that there had been a low level of response to the questionnaires used to monitor the pilot, and it was too early to draw any firm conclusions.

The rules

Under the new rules, within 28 days after the defence is filed, all parties (except litigants in person) will have to file and exchange budgets setting out their estimated costs for each stage in the proceedings. Any party which fails to file a budget when required to do so will be treated as having filed a budget comprising only the applicable court fees.

The court may at any time make a “costs management order”, in which it will record the extent to which the budgets are agreed between the parties, or (to the extent not agreed) record the court’s approval of a budget, if necessary after making appropriate revisions. 

When assessing costs, the court will have regard to a party’s last approved or agreed budget and will not depart from it unless satisfied that there is good reason to do so. 

Comment

In his note to the Rule Committee, Lord Justice Jackson described the essential benefits of costs management as (a) bringing certainty to the parties about their financial commitment; and (b) bringing litigation costs down to a proportionate level. The procedures for costs management effectively shift the focus of costs control from retrospective, as it currently is, to prospective, with the court focusing upfront on how much should be spent (or at least recovered) in the litigation. Lord Justice Jackson’s view is that controlling costs before they are spent is a more effective process than “assessment” after the event.

It remains to be seen whether that will be the case, particularly since the costs management procedures appear to give similar status to budgets agreed between the parties and those approved by the court. If costs are to be examined at the outset, when neither party knows whether it will be on the paying or receiving end of a costs award, it may be said that there is less incentive for the parties themselves to minimise recoverable costs than if the exercise is conducted when it is clear where the liability lies.

The other key question is the likely cost of costs management. Lord Justice Jackson recognises that the main drawback of costs management is that the process itself is expensive. In his view, however, despite the additional expense, the overall effect will be to bring down the total costs of the litigation. Again, this remains to be seen, but in this context it is worth noting that the draft rules limit recoverable costs of the budgeting and costs mangement process to 2% of the approved budget.

• removing the restrictions on contingency fees or “damages-based agreements” (DBAs) for civil litigation;
• abolishing the recoverability of conditional fee agreement (CFA) success fees and after the event (ATE) insurance premiums; and
• introducing additional sanctions for defendants who fail to accept a claimant’s reasonable Part 36 offer to settle.

These provisions are expected to come into force in April 2013.

The decision illustrates that a refusal to mediate may, in some circumstances, be justified. It is however a high-risk strategy, as an unreasonable refusal to mediate can carry significant costs penalties. Parties should not take such a decision lightly.

	Alexander Oddy Partner +44 20 7466 2407
	Anita Phillips Professional support lawyer +44 20 7466 2871

Background

The defendant solicitors successfully defended a professional negligence claim against them. However, the trial judge (Arnold J) awarded the defendant only 50% of their costs, in light of:

• the fact that there were issues on which the defendant had been unsuccessful (despite being overall the successful party); and
• the parties’ conduct, in particular their approach to alternative dispute resolution (ADR).

With regard to ADR, the claimants had suggested mediation twice and the judge had encouraged the parties to consider mediation. At all stages the defendant declined to participate, maintaining that the claim was entirely without merit. 

The judge referred to the Court of Appeal decision in Halsey v Milton Keynes General NHS Trust  [2004] EWCA Civ 576 where, in deciding whether a party had acted unreasonably in refusing ADR, the Court of Appeal identified relevant factors, including:

• the nature of the dispute;
• the merits of the case;
• the extent to which other settlement methods had been attempted;
• whether the costs of ADR would have been unreasonably high;
• whether delay would have been prejudicial;
• whether ADR would have had a reasonable prospect of success.

In the present case, the judge found that “the defendant’s attitude in simply refusing even to contemplate the possibility of mediation on the grounds that the claim was utterly hopeless was an unreasonable position to take”.

Court of Appeal decision

The Court of Appeal (Davis and Richards LJJ and Lord Neuberger MR) disagreed that the defendant had been unreasonable in refusing to mediate, finding that where a party reasonably believed it had a watertight case, that might well be a sufficient justification for a refusal to mediate, and that remained the case even if on some issues the defence did not succeed. The Court of Appeal noted that it was a relatively rare case where a party was successful on all issues.

The Court of Appeal also had concerns at the judge’s assessment that the possibility of a mediated settlement was “not unrealistic”. In the Court of Appeal’s view, “at all stages the parties in reality were a hundred miles apart”. The claimants had sought £750,000 and costs by a Part 36 offer served shortly before the first trial. The defendant’s best offer had never been more than a “drop hands” approach. As such, it was difficult to see how a mediation could have had reasonable prospects of success.

Exceptionally, the Court of Appeal exercised the court’s discretion on costs afresh. The trial judge had not indicated the relative strength of the various considerations he had taken into account in arriving at the 50% figure, but neither party had suggested remitting the matter to him for further consideration. Using a “broad brush”, and taking into account the apparent importance of the mediation point as well as the judge’s conclusions on the other issues (which the Court of Appeal should respect) the court ordered that the defendant should be paid 60% of its costs of the proceedings.

Comment

This case demonstrates that a refusal to mediate, even in light of judicial encouragement to engage, may in some circumstances be reasonable. It will of course depend on the strength of the case and the approach the respective parties take to ADR. In this case, the defendant’s stance was vindicated by the trial judge’s finding on the merits, but that will not always lead to the conclusion that a party was justified in refusing mediation.

Any decision not to mediate should be carefully considered and justified, in light of the previous case law following Halsey (see here for example) and the government’s stated aim to increase the use of ADR within UK civil litigation (see here).

Under an opt-out regime claims can be brought on behalf of a defined group, without the need to identify individual group members; all those who fall within the group will be bound by the result unless they actively opt out of the case. This is a significant departure from existing procedures for multi-party litigation in England and Wales, which generally require potential claimants to make a positive decision to opt in to the proceedings. (The one exception, for representative actions under Civil Procedure Rule (CPR) 19.6, is not widely used due to the strict test that applies, as confirmed by the Court of Appeal in the Emerald Supplies case - see e-bulletin.)

The consultation recognises concerns that an opt-out class action may encourage vexatious or unmeritorious claims, and the perceived “excesses” of the US class action model which is often alleged to encourage defendants to settle for large sums in order to avoid the cost of further litigation. The government believes these concerns can be addressed by various safeguards, including a thorough certification process, retention of the “loser pays” rule, and a continued prohibition on contingency fees in collective action cases. We therefore assume, though it is not stated expressly in the consultation, that such actions would be carved out from the proposals currently before Parliament to permit contingency fees, or “damages-based agreements”, for civil litigation (see post on the introduction of legislation to implement the Jackson reforms).

The government has made it clear that it does not support a generic collective redress mechanism which would apply to all sectors. However, if these proposals are successfully implemented for competition law claims, it may make it more likely that similar initiatives will be brought forward for other sectors. Click here for more detail on the proposals from our competition litigation group.

At our seminar on 19 January (Litigation: asset or liability? How contingency fees could change commercial litigation) Lord Justice Jackson outlined some of the detailed issues that are still to be worked out in relation to contingency fees and suggested that a working party might usefully be set up to consider those issues, similar to the CJC working group that produced the code of conduct for litigation funders (see post). That has now happened, and we await the group’s report with interest.

Background

One of Lord Justice Jackson’s key recommendations, which is being implemented through legislation currently before Parliament, is to remove the restrictions on DBAs for civil litigation. DBAs allow lawyers to conduct a case in return for a share of any damages.

Although the lawyer’s fee under a DBA will be based on the damages awarded, a losing defendant will only have to pay costs on a conventional basis (i.e. hourly rates and disbursements). The claimant will be liable for any shortfall between the amount recovered and the lawyer’s fee.

DBAs are currently permitted for employment tribunal cases, but not for civil litigation. The fee that can be charged in tribunal cases is capped at 35% of damages (including VAT).

Terms of reference

The working party’s main terms of reference are to consider and make recommendations as to:

• the conflicting interests which are in play when proceedings are brought or defended on a DBA;
• how DBAs should be regulated, for example limiting the percentage that lawyers should be entitled to recover or requiring court approval in certain circumstances;
• whether there should be rules of court in relation to assessment of costs under DBAs;
• what matters should be provided for in any DBA;
• whether, and in what circumstances, a lawyer acting under a DBA should be liable for adverse costs;
• whether it should be possible to enter partial DBAs, analogous to the “no win, low fee” conditional fee agreements (CFAs);
• whether there should be an obligation to notify opposing parties that the lawyers have entered into a DBA.

Subject to any appeal (for which permission has been granted) this case illustrates that a party facing parallel proceedings in breach of an arbitration agreement should consider amending its claim to include a claim for damages and/or a declaration for an indemnity as soon as the respondent brings parallel proceedings. Click here to read more about the decision on our arbitration blog.

This is the first case in which an English court has ruled that it has the power to stay English proceedings brought against an English domiciled defendant where the dispute relates to the validity of decisions of the organs of a company situated in a non-EU state, in this case Ukraine.  Although obiter, the Commercial Court also indicated that it would have a similar power to stay proceedings where the other party has commenced earlier proceedings in the non-EU state which are sufficiently related to give rise to a risk of conflicting judgments.  The court expressly disapproved the earlier decision in Catalyst Investment v Lewinsohn [2009] EWHC 1964 (Ch), in which the court decided that it did not have the power to stay its proceedings in favour of earlier competing proceedings commenced in the US (see e-bulletin).

If this decision is followed by other courts (and subject to any appeal) this will mean a greater risk that parties may not be able to avoid “unfavourable” jurisdictions by suing an English “anchor” defendant if the foreign proceedings are commenced first or the subject matter of the dispute falls within one of the categories which justifies the foreign court exercising an exclusive jurisdiction.

	Murray Rosen QC Partner, head of advocacy unit +44 20 7466 2262
	Simon Bushell Partner +44 20 7466 2024
	Pamela Kiesselbach Professional support lawyer +44 20 7466 3385

The debate

There has been considerable doubt as to whether an EU member state court which has jurisdiction based upon the domicile of a defendant may decline to exercise its jurisdiction or stay proceedings in favour of a foreign (non-EU) court where the subject matter of the dispute relates (for example) to rights in a property or to company law issues regarding a company situated in a non-EU state. Similar doubts exist as to whether an EU member state court may stay its proceedings if one of the parties has brought earlier identical proceedings (between the same parties regarding the same cause of action) or related proceedings in the courts of a non-EU member state.

This is as a result of the ECJ’s decision in Owusu v Jackson (Case C-281/02) in which the European Court of Justice (ECJ) held that an EU member state court which had jurisdiction based upon a defendant’s domicile did not have a discretion to stay proceedings on the basis that the courts of another state had a closer connection to the dispute and were therefore a more appropriate forum. Although there are provisions in the Brussels Regulation which require or allow a court to stay proceedings in the case of competing exclusive jurisdiction of another EU member state court based upon the subject-matter of the dispute (Article 22) or competing earlier proceedings commenced in another EU member state court (Articles 27 and 28), there is some controversy as to whether these rules should be given “reflexive effect”, that is whether they should also be applied in favour of non-EU courts.  

It is noteworthy in this context that as part of the on-going reforms of the Brussels Regulation there have been suggestions that all of these provisions should be amended to provide for a reflexive effect, but that the EU Commission’s proposal only provides for a stay in the case of competing identical proceedings, but not in the other cases.

The facts of the case

The case relates to a long standing battle over the ownership of a Ukrainian mine fought between Mr Zhevago (a Ukrainian national acting through Swiss companies) and Mr Babakov (a Russian national acting through English companies).  Mr Babakov had brought proceedings in the Ukrainian courts seeking declarations that certain shareholders’ resolutions of the Ukrainian mining company were invalid and that as a result his ownership of shares in the company should be reinstated.  Mr Zhevago countered with the English proceedings (suing Mr Babakov’s English companies) in which he sought a declaration that his company was the lawful owner of the disputed shares. 

Mr Babakov challenged the English court’s jurisdiction on the basis that (i) the Ukrainian courts had exclusive jurisdiction and/or (ii) preference should be given to the earlier related Ukrainian proceedings as the relevant provisions in the Brussels Regulation should be applied reflexively. Mr Zhevago argued that the English court should exercise its jurisdiction based on (i) the English domicile of the defendant companies and (ii) the assertion that he would not get a fair trial in the Ukrainian courts. 

The Court’s decision

The judgment, which runs to over 58 pages, contains a detailed analysis of the issues and the case law relevant to two topics which are of increasing importance in jurisdiction battles involving courts which face issues such as corruption and political interference:

• Should the Brussels Regulation rules which provide for a stay in case of certain subject matters with a closer connection to another jurisdiction or earlier competing proceedings be given reflexive effect in favour of non-EU member state courts?
• How specific and detailed must evidence be to show that there is “cogent” evidence that a party faces a “real risk” of injustice in a foreign court?

In relation to the first issue the court decided that Owusu did not prevent the “reflexive” application of Article 22 Brussels Regulation as the principles underlying Article 22 were widely recognised across EU and non-EU legal systems. In doing so the court followed the majority view expressed by leading English private international law text books. 

The court then had to decide whether the subject-matter of the dispute fell within Article 22(2), i.e. was “principally concerned” with the validity of shareholders’ resolutions.  Whether the validity of a company’s decision is the principal object of, or only incidental to, a dispute has been subject of a number of recent English court decisions and the ECJ decision in Berliner Verkehrsbetriebe (BVG), Anstalt des oeffentlichen Rechts v JPMorgan Chase Bank NA (Case C-144/10).  For a summary of these decisions see our Banking Litigation update.  

The court took the view that when deciding whether a dispute is principally concerned with matters falling within Article 22(2) one should “not have regard only to what is pleaded in the particulars of claim or the form of relief sought by the claimants” but “must look realistically at what is the real nature of the dispute that is to be litigated” and that this nature may be determined by matters raised subsequently in the defence. Applying these considerations the court came to the conclusion that the dispute was principally concerned with the validity of the Ukrainian company’s shareholders’ resolutions and that therefore the Ukrainian courts should have exclusive jurisdiction.

The court went one step further and held, obiter, that it would also have stayed the English proceedings in light of the earlier related proceedings brought in the Ukrainian courts, i.e. that Articles 27 and 28 Brussels Regulation should also be given “reflexive” effect. This finding was however subject to the interesting wrinkle that the court found that after the joinder of the English claimant in the Ukrainian proceedings there were in fact identical proceedings (involving the same parties and the same cause of action) on foot and that in this respect the English proceedings had been commenced first.

In relation to the second issue, the court undertook a detailed analysis of the evidence provided by the claimant but came to the conclusion that the evidence was not sufficiently detailed or cogent to show that the claimant faced a real risk of injustice in the Ukrainian courts. For example the court found that expert evidence was unsubstantiated by independent evidence and that examples of flawed past decisions regarding Mr Zhevago’s companies lacked relevant detail. Although the court observed that there were “grounds for some general concern about the independence of the judicial system in Ukraine” there was a lack of cogent evidence of a real risk that the claimant would not receive justice. The court found that “looking at the material as a whole, it is too fragmentary, too vague and often too unreliable in its nature to justify such a conclusion”.

Comment

This is an important decision for parties involved in disputes connected with “unfavourable” jurisdictions. It will have to be seen whether this decision is appealed and, if so, whether there will be a reference to the ECJ on the issue of whether an English court may stay proceedings (involving an English defendant) in favour of the courts of a non-EU state.

Meanwhile, however, the decision provides evidence of a willingness of the English courts to stay proceedings where a matter falls within one of the exclusive jurisdiction categories listed in Article 22 (eg where a dispute relates to issues regarding the internal administration or decision making process of a foreign company) or where there are parallel foreign proceedings on foot which give rise to the risk of inconsistent judgments. 

Put differently, it may not be enough to find an English “anchor” defendant in order to establish the unassailable jurisdiction of the English courts vis a vis the courts of a non-EU jurisdiction. A party who wishes to avoid the “unfavourable” jurisdiction will want to ensure that the English proceedings are commenced first, and that the subject matter of the dispute does not fall within one of the Article 22 categories, bearing in mind that these categories are to be given a restrictive interpretation.

The decision also provides important guidance on the strict standards applied to evidence required to show that a party is likely to suffer injustice in the foreign court. One of the very few examples in which a party was able to persuade the Court of Appeal that he would not get a fair trial in the otherwise appropriate forum is the case of Cherney v Deripaska [2009] EWCA Civ 849 in which evidence was adduced of the strong links between Mr Deripaska and the Russian government (and hence the risk of interference in the judicial process) and that Mr Cherney had received death threats and could provide evidence that he would be prosecuted based upon “trumped up” charges if he returned to Russia (see e-bulletin).