Litigation Review - Winston & Strawn

London

Litigation Review SEPTEMBER 2014

In this edition we review recent significant procedural developments in the English Courts, including: the Court’s approach to breaches of its procedural rules; the use of injunctions; cross-border issues; and disclosure and privilege. We welcome feedback on our briefings. Please do not hesitate to contact the team members listed below should you have any comments or questions.

The Cost of Non-Compliance with Procedural Rules The Civil Procedure Rules (“CPR”) have, as their overriding objective, that cases should be dealt with justly and at proportionate costs. This includes ensuring parties are on an equal footing and progressing cases expeditiously and fairly. In 2013, the overriding objective was amended to increase the focus on compliance with the CPR and orders. The Courts embraced these changes with an almost “zero tolerance” approach to non-compliance. In the lead case1, the Court of Appeal said that relief from non-compliance should only be granted where the breach was “trivial” or if there was some other good reason to do so. That decision produced a flood of “satellite litigation” as parties sought to take advantage of others’ mistakes which became the subject of significant debate and criticism. In July 2014, the Court of Appeal2 felt obliged to clarify the earlier guidance which it said had been misapplied and misunderstood. The Court said that in future a three stage test will be applied in deciding how to deal with non-compliance with the CPR and orders. This involves: i. assessing the significance of the breach (instead of triviality) (e.g., is the breach likely to imperil the conduct of the litigation); ii. investigating why the default occurred; and iii. evaluating all the circumstances of the case.

1 Mitchell v News Group Newspapers Limited [2013] 2 Denton v White; Decadent Vapours v Bevan; Utilise TDS Limited v Davies [2014]

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The Court indicated that contested applications for relief against sanctions should only arise in exceptional cases. It emphasised that the overriding objective intended to foster a culture of compliance with the rules and cooperation between parties and their lawyers. The Court said that in future it will penalise the opportunistic party or lawyer that unreasonably refuses to agree an extension of time or opposes an application for relief against sanctions. Although this revised guidance was widely welcomed it is unlikely to be the end of the matter. The significant costs of litigation combined with the ‘loser pays’ costs rules is already a source of much satellite litigation. One of the Court of Appeal Judges in the Denton case (Jackson LJ), who was the author of the report which led to the new rules in 2013, indicated that he did not share the view that the Courts should consider all the circumstances of the case as a separate factor. Instead, the other two factors (i.e. significant of the breach and why the default occurred) should be specifically considered in the context of the case as a whole. Jackson LJ recognised that this difference of opinion might lead to differing results in future cases but expressed the view that the measures aimed at discouraging satellite litigation and encouraging co-operation between parties should avoid the type of strategic applications that had arisen following the introduction of the new rules. Only time will tell whether this comes to fruition, anecdotal evidence so far is that there has been a significant drop in contested applications for relief from non-compliance.

Injunctions Interim injunctions are granted in the course of proceedings to preserve the status quo pending the full trial of a case. Prior to granting an interim injunction, the Court will require the applicant to provide a cross undertaking to ensure that parties affected by the injunction are adequately compensated if it transpires that the injunction was wrongly granted. In AstraZeneca AB (“AZ”) v. KRKA

London Litigation Review [2014], AZ obtained an interim injunction in October 2009 preventing KRKA from selling (in the UK) a drug which AZ said infringed the patent of its proton pump inhibitor (PPI) drug Nexium. It became apparent to AZ in July 2011 that it would fail at the trial of its claim and it agreed that the injunction should be discharged allowing KRKA to sell its drug in the UK, which it had always maintained had been developed without infringing the Nexium patent. By the time KRKA was ready to market its drug in September 2011, a number of generic manufacturers were launching PPI drugs in the UK in direct competition with KRKA and Nexium. KRKA claimed against AZ for losses suffered for the period that the injunction had been in place saying if it had been allowed to market its drug in 2009, it would have had two years head start on the generic manufacturers to establish a significant market presence. The Judge upheld the claim for damages. The case of AB v. CD [2014] cconsidered the test the Courts should apply when deciding to grant an interim injunction. The principles were established in 1975 in the case of American Cyanamid v Ethicon Ltd and require the Court to be satisfied that:

be recast and said that the right question in future should be “is it just in all the circumstances that the claimant be confined to his remedy in damages?”

Cross-Border Issues The case of Bank St Petersburg OJSC v. Arkhangelsky [2014] is a rare example of the Court granting an antienforcement injunction to prevent a breach of an exclusive jurisdiction clause. The principle establishing antienforcement injunctions dates from 1928, where the Court said that if it considered it inequitable and conscience bound not to allow a party to enforce a foreign judgment, it would injunct that party. In this case, the parties had agreed that the substantive dispute between them should be decided in England. However, the Claimant sought to enforce (in England) judgments that it had previously obtained in Russia. The Court held that an injunction was necessary to protect the Defendants against a breach of the jurisdiction clause in the agreement.

΅΅ Damages would not be an adequate remedy; and

In JSC VTB Bank v Skurikhin [2014], the Court reviewed the principles applied by the English Courts to the enforcement of foreign judgments. The starting position is that final and conclusive foreign judgments for a definitive sum are generally enforceable. There are however four material exceptions:

΅΅ The balance of convenience between the parties of the effect of the injunction.

΅΅ where the judgment has been obtained by fraud either on the part of the judgment creditor or the Court;

In this case CD sought an injunction restraining AB from terminating a licensing agreement which would have effectively put CD out of business. The Court had to consider whether a clause in the licencing agreement which excluded liability for loss of profits and put a cap on damages recoverable for breach of contract meant that no injunction could be granted as the parties had identified in the contract that damages that would provide an adequate remedy.

΅΅ where enforcement would be against public policy;

΅΅ There is a serious issue to be tried;

The Court of Appeal held that it could not be just to allow a party to avoid compliance with contractual obligations in such circumstances. To do so could allow a cynical contract breaker to ignore its obligations under a contract with impunity. The Court observed that the primary obligation and commercial expectation of a party is performance of the contract. The requirement to pay damages in the event of a breach was a secondary obligation. The Court held that the rule that an injunction should not be granted where damages would be an adequate remedy should

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΅΅ where the judgment is for a fine or a penalty; and ΅΅ if the proceedings in which the judgment was obtained were contrary to natural justice In this case the Defendants resisted enforcement of Russian judgments relying on all four exceptions. So far as the claim of fraud was concerned, the Judge dismissed this indicating that this exception was carefully delineated and the allegations of fraud were an artificial construct to avoid the enforcement of what seemed straightforward debt claims. As the public policy and natural justice defences also relied on the fraud allegation, they too were dismissed. However, an element of the sums claimed included interest at levels which were considered penal. The Judge refused to give summary judgment of that element of the claim and referred the issue to a full trial to determine whether to allow such penalty interest would be contrary to English public policy.

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London Litigation Review Prior to enforcing a foreign judgment, the English Court will also wish to ensure that the Defendant had submitted, either by contract or by conduct, to the jurisdiction of the foreign court. This issue arose recently in the case of Desarrollo Immobilario v Kader Holdings [2014]. The background to the dispute between the parties concerns the construction of a toy factory in Mexico. Desarrollo agreed to undertake the construction and entered into a lease with a subsidiary of Kader, whose obligations were guaranteed by Kader. Various issues arose between the parties and proceedings were brought by Desarrollo against Kader in Arizona in accordance with the lease jurisdiction clause. Kader challenged this on the grounds that the lease provisions did not apply to the separate guaranty. Judgment was entered against Kader in the Arizona Court for $10 million, although the Court recognised that Kader had not waived its right in Arizona to challenge the jurisdiction of the Court. When the judgment came to be enforced in England, the Court held that in deciding as a matter of international law whether a party had submitted to a foreign jurisdiction, the test was not whether the party had waived its right to contest jurisdiction abroad, but whether the party had submitted to the foreign jurisdiction. The Court held that as Kader had issued a counterclaim in the Arizona proceedings in which it litigated the merits of the claim under the guaranty it had submitted to the jurisdiction as a matter of international law and the English Court would not allow Kader to play the system by contesting the merits of a case and then denying jurisdiction should it lose. Enforcement proceedings were also taken in two other common law jurisdictions. In Bermuda, the Court took a slightly more cautious approach and decided that the question of submission to the jurisdiction should only be determined after an investigation of all the facts. In Hong Kong a similar position was adopted although the Court was sufficiently skeptical about Kader’s defence that it refused to order security for costs against Desarollo in its HK enforcement proceedings.

Disclosure & Privilege As a general rule, a reference by a party to a document in a witness statement is a statement that the document exists and therefore constitutes disclosure. In Ward Hadaway v

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DB (UK) Bank [2013], the Court had to consider whether to order disclosure of a banking manual which had been referred to in a separate, already disclosed, document. In reaching his decision the Judge considered the Claimant's solicitor's detailed witness statements which stated that there was nothing in the manual with a bearing on the key causation issue in the case. The Court held that it was not bound to order a document to be made available simply because it has been referred to in another, disclosed, document. It also made clear that unless there is good reason, the court will not "go behind" the evidence of the solicitor of a party resisting disclosure English law distinguishes between two types of legal professional privilege: legal advice privilege; which is designed to protect all confidential communications between a lawyer and his client, created for the purpose of obtaining legal advice; and litigation privilege which is wider in scope and covers confidential communications between any of a client, its lawyer and a third party which are for the sole or dominant purpose of preparing for or dealing with reasonably contemplated litigation. In Rawlinson and Hunter Trustees S.A. v Akers [2014], the Court of Appeal considered the extent to which an accountancy firm could claim privilege over reports prepared for an internal investigation by a financial institution. It held that the burden of proof is on the party claiming litigation privilege. The party claiming privilege must establish that litigation was reasonably contemplated or anticipated and it is not sufficient to show that there is a mere possibility of litigation or that there was a distinct possibility that someone might at some stage bring proceedings or a general apprehension of future litigation. Furthermore, it is not enough for a party to show that proceedings were reasonably anticipated or in contemplation. The party must also show that the relevant communications were for the dominant purpose of (a) enabling legal advice to be sought or given and/ or (b) seeking or obtaining evidence or information to be used in connection with such anticipated or contemplated proceedings. Where communication may have taken place for a number of purposes the party claiming privilege must establish that the dominant purpose was litigation itself. In this case the claim for privilege was denied.

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London Litigation Review

London Commercial Litigation Partners

Michael Madden

Justin McClelland

Joe Tirado

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