The commercial liTigaTion journal€¦ · The commercial liTigaTion journal January/February 2020 • Number 89 FRESH PERSPECTIVE As a team recognised for our innovative thinking

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A sense of forebodingBad omens after a contract fails to predict the future

Better judgementReasonableness in contractual discretion

Say the wrong thingWhen defamatory statements cause serious harm

Pulling the ladder upParties unjustly enriched at another’s expense

Cryptic cluesHow to use digital contracts and assets

Can’t win them all…Costs when succeeding on only one head of claim

Reward for bad behaviour?No company winding up after misconduct

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Contents The Commercial Litigation Journal

Insights by Penningtons Manches Cooper: second sight or hindsight? Page 2Clare Arthurs and Nicole Finlayson peer into their contractual crystal ball

Contractual discretion: the age of reason? Page 6David Hall, Tom Whittaker and Harry Jewson condense the lessons to be learned five years post-Braganza

Defamation: out of harm’s way Page 11Hannah Kent discusses defamation claims

Contract: give it back Page 14Lynsey Oakdene and Claire Acklam review recent case law on restitution

Cryptoassets: contracts Jim, but not as we know them Page 16Jeremy Richmond and Christopher Recker boldly explore the status of cryptoassets and smart contracts

Costs: triumph(ant)? Page 20Giles Tagg and Zak Mehmood report on a recent costs judgment

Shareholder disputes: getting your hands dirty Page 22Peter Brewer considers the consequences of misconduct

2 The Commercial Litigation Journal January/February 2020

Second sight or hindsight?

Clare Arthurs (pictured top) is an associate director and Nicole Finlayson a knowledge lawyer with Penningtons Manches Cooper LLP

T he facts of Barton v Gwyn-Jones [2019] appear straightforward. When Mr Barton verbally

contracted with Foxpace Ltd to be paid a £1.2m fee if Foxpace’s property sold for £6.5m to a purchaser introduced by him, both parties regrettably lacked any premonition of the financial fallout if the property was sold for less. In the event, the property, Nash House, sold for £6m (the reduction in price agreed to reflect the risk it might be compulsorily purchased for HS2).

Foxpace subsequently argued that Mr Barton was entitled to nothing, because a £6.5m purchase price had not been achieved, and instead offered the sum of £400,000 as a ‘goodwill gesture’. Rejecting that offer and no doubt mindful that fortune favours the bold, Mr Barton cast the runes and sought his destiny in the courts.

Destiny’s childThe first instance judge, HHJ Pearce, foresaw Mr Barton’s future rather differently to Mr Barton (Barton v Gwyn-Jones [2018]). Divining from the tea leaves evidence that an oral agreement had been concluded between the star-crossed parties for Foxpace to pay Mr Barton £1.2m if Nash House sold for £6.5m to a purchaser introduced by him, the judge held that as Nash House had in fact sold for only £6m, the claim in contract necessarily failed. (He did not address the possibility of an implied term, something that would later loom large in Mr Barton’s fortunes.)

Mr Barton also pleaded an alternative case for compensation for unjust enrichment. Turning to this and applying four questions identified in the case of Benedetti v Sawiris [2014], HHJ Pearce accepted that Foxpace had indeed been enriched at Mr Barton’s

expense: the issue at the heart of the dispute was whether that enrichment was unjust. In addressing that question, he applied the principle in Costello v MacDonald Dickens & Macklin [2011], being that a claim in unjust enrichment should not be allowed to undermine the contractual arrangements between the parties. In Costello, Etherton LJ had said (at para 23):

The general rule should be to uphold contractual arrangements by which parties have defined and allocated and, to that extent, restricted their mutual obligations, and in so doing, have similarly allocated and circumscribed the consequences of non-performance. That general rule reflects a sound legal policy which acknowledges the parties’ autonomy to configure the legal relations between them and provide certainty, and so limits disputes and litigation.

In Barton, the parties had not defined an obligation within the contract for Foxpace to pay a fee where Nash House sold for less than £6.5m, when they could have done so. Describing the granting of relief in such circumstances as, in his view, amounting to ‘an obvious interference with the freedom of the parties to define and allocate their obligations’, HHJ Pearce held it (para 191):

… incumbent on the Appellant to show why the court should in effect interfere with the allocation of risk by imposing an obligation on the Respondent to pay money in circumstances other than those contemplated by and defined in the contract.

The judge then considered factors in favour of the argument that the court

InsIghts by PennIngtons Manches cooPer

‘The parties simply had not turned their minds to the set of circumstances that actually arose, ie a sale at a sum other than the sum contemplated.’

Clare Arthurs and Nicole Finlayson peer into their contractual crystal ball

The Commercial Litigation Journal 3


January/February 2020

should find that Mr Barton was not in fact taking on the risk of not being paid for introducing the buyer. However, he declined to determine what would have been on the (tarot) cards had the parties specifically turned their minds to the question of an introduction fee for a reduced sale price (something which he found, as a fact, they had not considered): to do so, he felt, would be (para 198):

… speculating about what parties in a commercial relationship might have been willing to agree to and would have been substituting assumptions as to how they would have behaved in place of their freedom to negotiate.

He therefore also rejected the claim in unjust enrichment.

On the subject of the evidence however, the judge expressly rejected Foxpace’s solicitor’s testimony that Mr Barton would receive the £1.2m ‘if, and only if’ Nash House sold for £6.5m, and that nothing was payable to him if it sold for less. Having found that the parties had not given any thought to circumstances other than a sale at £6.5m, he commented that it would be ‘bizarre’ for Mr Barton to enter into a contract on such terms: that would mean leaving himself open to the possibility of receiving nothing at all in the event of only a small reduction in the purchase price. Regardless of this, he still considered that on a true construction of what was agreed, and despite having found that it would be bizarre for the parties to have agreed it expressly, nothing was payable to Mr Barton if the property sold to his purchaser for under £6.5m. The judge’s reasoning was that the parties had, through their agreement, allocated the risk of a sale for less to Mr Barton, which, applying the principle in Costello, consequently excluded a claim in unjust enrichment.

Finally, although he had rejected the claims, for the sake of completeness the judge also addressed the value of the benefit conferred on Foxpace by Mr Barton’s services. The judge gave little weight to the fee agreed between the parties because it was based not on the actual value of the services, but on other factors such as Mr Barton recovering fees lost in previous failed property transactions. Consequently,

and in the absence of expert evidence on the point, he determined the proper value by reference to other introduction fees that Foxpace had agreed on related failed transactions. The midpoint of those was held to be 7.25% of the sale price, equating to £435,000.

Destined for greater things?Unable to resign himself to this fate, Mr Barton again spun the wheel of

fortune and took the case to the Court of Appeal. Permission to appeal was granted on four grounds:

• that the judge was wrong to conclude that the terms of the agreement excluded a claim to a reasonable sum for the benefit conferred on Foxpace if the property sold for less than £6.5m;

• that he was wrong to hold that the unjust enrichment claim was barred by the general principle in Costello;

• in the event, however, that the claim was barred by the general principle in Costello, that the principle should not apply on the facts of this case; and

• that the judge erred in valuing the benefit of Mr Barton’s services provided to Foxpace at £435,000: rather, the correct value was £1.2m or at least £800,000, or at any rate more than 7.25% of the purchase price.

Asplin LJ, who gave the leading judgment, began by construing the terms of the agreement in order to determine whether those terms defined and allocated, and to that extent also restricted, the mutual obligations of the parties. Referencing Wood v Capita Insurance Services Ltd [2017], the landmark authority on contractual construction and interpretation, she asked, what would a reasonable person, with all the background knowledge which would have reasonably been

available to the parties (but without a crystal ball), have understood the parties to have meant by the terms of the agreement as found by the judge?

In answering that question she weighed up the submissions, agreeing with Mr Barton’s counsel that the case of Firth v Hylane Ltd [1959] (involving a buyer introduced by an estate agent, who purchased the property in question for less than the asking

price) was generally supportive of the argument that the agreement (para 26):

… should not, without more, be construed to mean that Mr Barton should receive nothing unless the £6.5 million purchase price was achieved and as a result to have allocated the risk of a sale at a lesser sum to Mr Barton.

In Firth, it was found that an obligation to pay arose because if a service is rendered and a specific charge has not been agreed, then a reasonable sum becomes payable.

However, both Asplin LJ and Davis LJ (in a concurring judgment) rejected the submission that Firth was binding upon the present court. Indeed, it was noted that such cases generally turn on their facts, as they depend on the precise terms of the particular contract in question.

On the other hand, the Court of Appeal found Foxpace’s arguments on the construction of the contract problematic. Relying on Luxor (Eastbourne) Ltd v Cooper [1941], the thrust of the argument was that Mr Barton’s entitlement to payment was only triggered on the happening of a specific event (a sale at over £6.5m to a purchaser introduced by him), this being a term of the contract, and Mr Barton had taken the risk of non-payment if a lesser purchase price was achieved, thereby excluding a claim for reasonable remuneration.

The difficulty with this was that HHJ Pearce had already rejected

In Firth, it was found that an obligation to pay arose because if a service is rendered and a specific charge has not been agreed, then a

reasonable sum becomes payable.

4 The Commercial Litigation Journal



Foxpace’s solicitor’s evidence that Mr Barton was to be paid ‘if, and only if’ a £6.5m purchase price was achieved, and Foxpace’s argument here effectively required the agreement to be construed as if that defence had not been rejected. Asplin LJ gave this short shrift, finding decisively on the first ground of appeal that there was

nothing in the terms of the agreement, objectively construed, which meant that Mr Barton should receive nothing at all unless the £6.5m purchase price was achieved. The contract did not restrict payment to ‘the happening of a specific event’ (para 32).

An inauspicious pathNotwithstanding this construction of the contract, could the claim nonetheless be excluded by the principle in Costello? Costello concerned claimant builders who had entered into an agreement for the construction of houses with a company, the shareholders and directors of which owned the land. When the company failed to pay a judgment against it, the builders sought to go behind the company and pursued the shareholder directors for unjust enrichment. Although they succeeded at first instance, the decision was overturned by the Court of Appeal; the contract was between the builders

and the company, and the parties had chosen to restrict their obligations and allocate the risk of non-performance in that way.

Asplin LJ observed that the circumstances of Costello were completely different to the present case. That case concerned builders who were not allowed to circumvent

the contractual arrangements they had entered into. To allow their claim would have been to bypass the contract completely, ignore the separate legal identity of the company and, in effect, render the shareholder directors as guarantors where no guarantee existed. In contrast, here, the agreement was silent as to what would happen if Nash House was sold for under £6.5m, and HHJ Pearce had determined that it was not an ‘if, and only if’ agreement and that the parties simply had not given any thought to the circumstances of a sale at any other price. Objectively construed, the agreement did not restrict payment to only the happening of a specific event.

Accordingly, although Asplin LJ agreed with the judge that (para 31):

… there can be no doubt that a claim in unjust enrichment should not be allowed to alter or undermine the express allocation of risk and obligations arising from a contract

and the autonomy of the parties to configure their contractual relations…

it was found that the principle was not applicable in this case, for the reason that the parties had not expressly allocated the risk to Mr Barton.

Nothing therefore precluded Mr Barton from a claim in unjust enrichment, because in awarding such a remedy, the court would not be undermining a contractual allocation of risk negotiated by the parties (as would have been the case in Costello), as the contract simply did not address the situation that arose at all. Had it included express terms excluding payment if a sale at a lesser sum was agreed, then the principle in Costello would clearly have applied in order to prevent a claim in unjust enrichment undermining the parties’ contractual freedom. But that was not what happened. As Asplin LJ summarised (para 37):

The contractual arrangements did not extend to the circumstances which arose and, accordingly, there was no contractual allocation of risk.

Thus, on the second appeal ground, the judge had been wrong to apply the principle in Costello, and as such, there was no need for the third appeal ground to be considered.

Channelling a different spiritMight the same result have been achieved by means of an implied term rather than a claim in unjust enrichment? With the benefit of hindsight, the answer is a resounding yes. As Asplin LJ put it, such a term (para 41):

There was nothing in the terms of the agreement, objectively construed, which meant that Mr Barton should receive nothing at all unless the £6.5m purchase price was achieved.

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… would not contradict the express terms of the Agreement, is capable of clear expression, is so obvious that it goes without saying and is necessary to give the Agreement business efficacy and it lacks commercial coherence without it.

In his concurring judgment, (mystic) Males LJ agreed that the contract did not stand in the way of a remedy in unjust enrichment, and indicated that the claim could also have been framed in quantum meruit, ie for a reasonable sum in respect of the services supplied. In his view it made no difference, on the facts of this case, which approach was taken.

Davis LJ went further however, opining that on a correct legal analysis, the case should not have been regarded as one of unjust enrichment, but as one of reasonable remuneration being payable as a matter of quantum meruit pursuant to an implied term. He explained (para 75):

… in terms of conceptual approach, and even though both kinds of claim ultimately form part of the law of obligations, there is a real difference. For claims of unjust enrichment ordinarily operate outside any subsisting contract and focus on the benefit said to have been received by the defendant; whereas claims for payment by way of quantum meruit pursuant to an implied term operate within a contractual setting and focus on a sum claimed to be due to the claimant. I consider that the present case is to be analysed as a quantum meruit case just because I consider that it was inherent in – that is to say, an implied term of – the introductory agreement which was concluded that the appellant would be reasonably remunerated for successfully introducing a purchaser (even if at a price less than £6.5 million).

Numerology The final ground of appeal concerned the value of the benefit conferred by Mr Barton upon Foxpace. Although, having rejected both claims at first instance, HHJ Pearce did not need to decide the value of the benefit, he did indicate how he would have determined it in a parallel universe where Mr Barton succeeded, arriving at a value of £435,000.

One does not have to be psychic to predict that on appeal, Mr Barton

would argue that the fee should be higher. Unfortunately though, Lady Luck was not on his side. The Court of Appeal agreed with HHJ Pearce that there was good reason not to place any weight on the figure of £1.2m, as it was not reliable evidence of the objective value of Mr Barton’s services.

Endorsing the judge’s approach on this point, Asplin LJ noted that he had based his conclusion on the only reliable evidence as to market value available ie the fees that Foxpace had agreed with introducing agents on similar transactions. She also added that it was likely that the same conclusion would have been reached had the claim been framed by way of an implied term for reasonable remuneration. Davis LJ also noted that his conclusion here would not have been any different had the claim been formulated as a quantum meruit claim.

Twist of fateThus, although the Court of Appeal unanimously allowed Mr Barton’s appeal, the value of the fee awarded to him (only £35,000 more than that already offered to him by Foxpace) did not make his venture a fortuitous one. This was arguably an ill-fated endeavour for all concerned… hindsight is a wonderful thing.

The complexity in the case arose out of the fact that, as the first instance judge found, the parties simply had not turned their minds to the set of circumstances that actually arose, ie a sale at a sum other than the sum contemplated. There had been no allocation of risk, as required to engage the Costello principle; merely an absence of allocation because the contract failed to address the circumstances in question. The Court of Appeal was mindful of the distinction between interfering where the parties have contractually allocated risk, and where there has simply been no such allocation because

the circumstances that have arisen are ones to which the contractual arrangements did not extend.

The case therefore serves to emphasise the importance of parties having the foresight to consider and address alternative possible outcomes at the time of negotiating

an agreement. While 20/20 vision of all possible outcomes might not be feasible, the parties should at least seek to contractually address the consequences should certain foreseeable situations arise. Relying on telepathy to assume that the parties are on the same page is ill-advised…

The case also emphasises the importance of terms being written in the stars down on paper, in order to minimise the chances of an unforeseen outcome. This is especially important because such cases are likely to be fact-specific – Asplin LJ emphasised that (para 20):

… contracts of this kind do not follow a single pattern and it is important in each case to ascertain the meaning of the express terms.

As for practitioners advising on such claims, our sixth sense prophesises an increase in implied term/quantum meruit claims pleaded in the alternative to arguments based on unjust enrichment. n

The case emphasises the importance of terms being written down on paper, in order to minimise the

chances of an unforeseen outcome.

Barton v Gwyn-Jones & ors [2018] EWHC 2426 (Ch); [2019] EWCA Civ 1999Benedetti v Sawiris & ors [2013] UKSC 50Costello & anor v MacDonald Dickens & Macklin (a firm) [2011] EWCA Civ 930Firth v Hylane Ltd (1959) EGD 212Luxor (Eastbourne) Ltd v Cooper [1941] AC 108Wood v Capita Insurance Services Ltd [2017] UKSC 24


The age of reason?

David Hall (pictured top) is a partner, Tom Whittaker (pictured bottom) is an associate and Harry Jewson is a solicitor in the dispute resolution team at Burges Salmon

I n Braganza v BP Shipping Ltd [2015], the Supreme Court held that, where one party to a contract

had the right to exercise a discretion or to form an opinion which might be to the detriment of the other party, steps might have to be taken to ensure that such rights were not abused. Protection was provided by implying a term as to the manner in which such discretion should be exercised.

Braganza concerned a dispute over employment (death-in-service) rights, but in the five years since the Supreme Court’s decision, the principles of the case have been applied to a wider variety of contracts.

What was decided in Braganza?Mr Braganza, an employee of BP Shipping, disappeared without trace in 2009 while working on one of BP’s oil tankers. Under the terms of his employment contract, BP did not have to pay death-in-service benefits to his widow if, in BP’s opinion, Mr Braganza’s death resulted from his wilful act, default or misconduct. BP’s conclusion that Mr Braganza had committed suicide meant that no benefits were payable.

The Supreme Court held that the clause that required BP to form an opinion as to the circumstances of Mr Braganza’s death was subject to an implied term requiring BP to do so ‘rationally’. This was not a radical decision; terms had been implied before Braganza which required a decision-maker to exercise discretion in a way that was not arbitrary, capricious or irrational (Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd [2013]).

However, the Supreme Court specifically applied public law principles to a private law matter,

holding that the two limbs of the Wednesbury unreasonableness test (Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1947]) should apply to a contractual discretion clause. This required the courts to consider whether:

• the right matters had been taken into account in reaching the decision; or

• the result was so outrageous that no reasonable decision-maker could have reached it.

The result was that BP’s conclusion that Mr Braganza had committed suicide was unreasonable and in breach of the implied term. Mrs Braganza’s claim for death-in-service benefits succeeded.

Braganza therefore is a rare example of judicial intervention to limit private parties’ freedom to contract.

This article looks at how the courts have applied Braganza and offers practical tips for those who want to exercise contractual discretion.

When is a Braganza term implied?Braganza has not opened the floodgates and those cases in which a Braganza term has been implied are few and far between.

Indeed, the courts appear more likely, at least in the cases to date, to find that the relevant decision-maker was not exercising a discretion but rather a contractual power – to which Braganza is not relevant.

Contractual powerA contractual discretion affords a party some freedom to decide what should be done or what opinion to reach. A party

contractual dIscretIon

‘In those cases where a Braganza term has been implied, there is a clear justification that the term is necessary in order to prevent, or protect against, an abuse of power by the decision-maker.’

David Hall, Tom Whittaker and Harry Jewson condense the lessons to be learned five years post-Braganza




may, for example, be required to exercise its discretion over the interest rate for a loan or, as in the case of Braganza, form an opinion as to how an employee died. In contrast, a contractual power is binary: a party may exercise the power or not. Post-Braganza, the courts have been willing to find that many disputed clauses, including those that refer to a party’s ‘discretion’, are, in fact, powers that are not subject to the implied term.

For example, in Shurbanova v Forex Capital Markets Ltd [2017], the defendant (FX) revoked Mrs Shurbanova’s forex trades on the basis they had been ‘abusive’, in breach of its terms of business.

Mrs Shurbanova argued that FX’s decision was either:

• an exercise of contractual discretion by which FX chose how to respond to abusive trading; or

• a determination, in FX’s opinion, as to whether there had been abusive trading.

In either case, the decision should be subject to an implied Braganza term that it be exercised rationally.

HHJ Waksman QC was unpersuaded by Mrs Shurbanova’s arguments, holding that FX’s stated contractual remedies could not be subject to a rationality provision and that, in any event, FX’s decision had been the exercise of a binary contractual power (there either had, or had not, been abusive trading), and not a discretion.

In contrast, in BHL v Leumi ABL Ltd [2017], the bank’s entitlement to charge the claimant an additional collection fee at up to 15% of amounts of receivables collected was subject to the implied term. HHJ Waksman QC found that ‘otherwise [the bank’s right] could be exercised oppressively or abusively’ and ‘must be exercised in a way which is not arbitrary, capricious or irrational in the public law sense’. The bank could not simply charge 15% because it wanted to.

Braganza and abuse of powerIn those cases where a Braganza term has been implied, there is a clear justification that the term is necessary in order to prevent, or protect against, an abuse of power by the decision-maker. There are

two occasions in particular when this might happen.

First, where the decision-maker has a conflict of interest when exercising their discretion or forming their opinion. Clearly, in Braganza, BP had an interest in the outcome of its factual inquiry into Mr Braganza’s death that

would either result in BP paying, or not paying, death-in-service benefits.

Secondly, where there is an imbalance of power between the parties. In the employment context, an employee often has to contract on the employer’s terms and the employer has greater negotiating power and resources.

There may not be an imbalance of power in other contexts, such as banking disputes. Take, for example, UBS AG v Rose Capital Ventures Ltd [2018]. UBS provided a loan to Rose that gave UBS an ‘absolute discretion’ to require repayment on three months’ notice. A factor in favour of finding that there was no implied term limiting how UBS could exercise its discretion was the relative balance of power between UBS and Rose.

NecessityThe Braganza term will also only be implied if it is necessary to make the contract work or if its inclusion would have been so obvious at the time of contracting that it goes without saying (UBS and Watson v Watchfinder.co.uk Ltd [2017], both applying Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015]). Chief Master Marsh saw no basis in UBS for implying a Braganza term because, in part, mortgage lending has built up its own protections in the form of the duty of good faith.

What are the practical issues when exercising contractual discretion?Five years after Braganza, the courts continue to scrutinise contractual discretion clauses where an imbalance of power and a conflict of interest

could lead to the decision-maker abusing their powers. However, a proper application of Braganza will depend on the facts of each case, and this generates uncertainty for parties trying to apply the judgment in Braganza in practice. Looking at both the exercise and outcome of

the discretion raises two practical problems: one for the claimant/decision-recipient and one for the defendant/decision-maker.

Claimant problem: demonstrating irrationalityHow can a claimant demonstrate that a decision-making process was irrational? Both parties will know the outcome. The claimant will rely on the contract and its context to explain, in their opinion, why the outcome was so unreasonable that it breached the Braganza requirement for a reasonable decision.

If the outcome is clearly unreasonable, the claimant may also be able to argue that the decision-making process was prima facie irrational – it would, arguably, be difficult for a defendant to maintain that an unreasonable outcome was the product of a rational decision-making process. As a result, the claimant may be able to shift onto the decision-maker the burden of proving that the process adopted was rational.

But what can the claimant do if the outcome appears reasonable? Only the decision-maker will know what its decision-making process was, and it is likely that only it holds the evidence that will demonstrate the rationality, or otherwise, of that process.

Individuals, including those in the employment law context, may be able to access relevant information by making a data subject access or Freedom of Information Act request. The information provided in response may only paint a limited picture of the decision-making process, but this may nevertheless be sufficient to suggest the decision-making process was irrational

Only the decision-maker will know what its decision-making process was, and it is likely that

only it holds the evidence that will demonstrate the rationality.




and, in turn, shift the burden onto the employer to justify its decision (UBS).

In other contexts, such as disputes between a bank and a corporate borrower, we do not yet know at what point the burden of proof may pass to the decision-maker. At the very least, claimants must adduce sufficient

evidence that there has been a breach of the Braganza term (UBS). We anticipate that pre-action disclosure will become a key battleground in these disputes going forward, as claimants seek to gather enough evidence of irrationality to transfer the burden of proof.

Defendant problem: how to make a decisionThis will depend, in part, on what standards the decision-maker is expected to meet under the implied

term. In Braganza, the Supreme Court said that (our emphasis):

It may very well be that the same high standards of decision-making ought not to be expected of most contractual decision-makers as are expected of the modern state.

There is a great deal to be uncertain about in this statement:

• Are contractual/commercial decision-makers held to the (very) high standards applied to state actors or not?

• If they are, do those standards

apply to all contractual/ commercial decision-makers or just some?

• If a line is to be drawn, where is it drawn and what is the difference in standard on either side of the line?

BHL is an interesting decision in which the court applied a higher standard to the defendant’s decision-making. The defendant, Leumi, was a sophisticated organisation with experience of performing collections of receivables. It was familiar with the process for estimating collection fees and, therefore, the court held that it was appropriate to hold Leumi to a high standard when considering its decision.

The nature of the decision to be reached will also be relevant. In Braganza, the fact that suicide was an ‘improbability’ meant ‘cogent evidence [was] required to form the positive opinion that it [had] taken place’.

How should a decision-maker evidence their decision? Evidence was an issue in Watchfinder The claimants sought specific performance of a share option agreement between themselves

BHL is an interesting decision in which the court applied a higher standard to the defendant’s decision-making.

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and Watchfinder in which the claimants would receive options in Watchfinder if they introduced new shareholders to the company. Watchfinder relied on a clause which it said gave it a right to veto the option being exercised, but the claimants contended that the clause amounted to a discretionary power which should be subject to an implied Braganza term. HHJ Waksman QC held that the clause was subject to an implied term; the issue then became whether it had been breached.

Watchfinder provided inconsistent evidence about who was involved in making its decision, when it happened, and what (if any) discussion led to the decision. This was, in part, because the directors worked on the mistaken belief that they had an unconditional right to veto any payment to the claimants. As a result, the claimants were able to establish breach. In the extreme, if there is no evidence, it might appear that the decision was made ‘by throwing darts at a dart board’ (Hills v Niksun Inc [2016]).

The nature of the evidence needed to demonstrate that a decision-making process was rational will depend on the facts of each case, but evidence of how, when and by whom the decision was made will be a starting point for any decision-maker seeking to resist a claim. The decision-maker will also need to follow any contractually agreed procedures (Daniels v Lloyds [2018]). Balance needs to be struck between the provision of sufficient evidence to show that the discretion was exercised properly but not so much that, if disclosed, it could be used against the decision-maker.

Can the implied term be excluded?A final, short, point on exclusion. A Braganza term acts as a brake on a potential abuse of power and as such, it is extremely difficult, although not impossible, to exclude its application to a contract (Mid Essex). Rather than exclusion, it may be preferable to draft a contract to avoid the need for a Braganza term at all.

As we have highlighted above, a clause which grants a contractual power rather than a discretion is not

subject to a Braganza implied term. Similarly, providing a contractual mechanism for determining what action a party should take, as in Mid Essex, provides operational certainty and removes the need for a Braganza implied term.

However, drafting a contractual power or mechanism may not be suitable in all circumstances; the decision-maker may need flexibility over the decision that they need to reach. For example, a bank may require flexibility to set interest rates in case unforeseen economic problems arise.

In UBS, a case in which there was no implied term, the court appeared to attach a great deal of relevance to the contractual words ‘absolute discretion’. However, the court also had regard to the underlying banking relationship, which placed UBS under a duty of good faith and which itself operated as a restraint on UBS’s powers. In those circumstances, it was not necessary for the court to find that a Braganza term should be implied.

In its most basic form, the position of the law, at present, is that:

• if the court determines that the circumstances require an implied Braganza term, it is highly unlikely that any attempt to exclude the term will succeed; but

• if the circumstances suggest either that the decision-maker’s authority is borne from a contractual power rather than a discretion, or that the decision-maker is otherwise obliged to treat the other party fairly, exclusion of a Braganza term is unlikely to be necessary.

ConclusionThere will always be a need for certain contracts to grant one party

the authority to reach a decision or form an opinion on a matter which impacts on the other party. We anticipate that, over the coming years, we will see a growth in Braganza-type disputes and the development of a body of legal

guidance on the key principles. For now:

• contractual parties should scrutinise clauses which deal with decision-making authority and ensure clarity of intention, scope and operational mechanics; and

• decision-makers should ensure that they understand why and how contractual decisions are to be made, be certain that they are made by appropriate personnel, and follow (any) necessary procedures on the basis of accurate information or evidence. n

Drafting a contractual power or mechanism may not be suitable in all circumstances; the decision-maker may need flexibility over the

decision that they need to reach.

Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1947] EWCA Civ 1BHL v Leumi ABL Ltd [2017] EWHC 1871 (QB)Braganza v BP Shipping Ltd [2015] UKSC 17Daniels & anor v Lloyds Bank plc & anor [2018] EWHC 660 (Comm)Hills v Niksun Inc [2016] EWCA Civ 115Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd & anor [2015] UKSC 72Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd [2013] EWCA Civ 200Shurbanova v Forex Capital Markets Ltd [2017] EWHC 2133 (QB)UBS AG v Rose Capital Ventures Ltd & ors [2018] EWHC 3137 (Ch)Watson & ors v Watchfinder.co.uk Ltd [2017] EWHC 1275 (Comm)

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LAW REPORTS

The Commercial Litigation Journal 11January/February 2020

Out of harm’s way

Hannah Kent is an associate with Charles Russell Speechlys LLP

A claimant cannot have an actionable defamation claim unless the allegedly defamatory

statement has caused or is likely to cause serious harm to the reputation of that claimant. For bodies trading for profit, harm to the reputation of the claimant cannot be serious harm unless it has caused or is likely to cause serious financial loss to that claimant. This doctrine, known as the ‘serious harm requirement’, has been debated at length in a number of well-known cases. The Supreme Court’s decision in Lachaux v Independent Print Ltd [2019] would appear to settle that debate, at least for now.

The Defamation Act 2013A statement is defamatory if ‘the words tend to lower the plaintiff in the estimation of right-thinking members of society generally’ (Lord Atkin in Sim v Stretch [1936] at 1240). Historically at common law it was presumed that, in libel claims, harm had been caused to a claimant’s reputation if a defamatory statement was made. Amid criticism that this insufficiently protected freedom of speech, the requirement that such a statement must surpass a threshold level of seriousness was subsequently developed by case law (notably in Dow Jones & Co Inc v Jameel [2005] and in Thornton v Telegraph Media Group Ltd [2010]).

The Defamation Act 2013 (the Act) introduced a number of significant changes to remedy the ‘surprisingly low hurdle’ (according to the Joint Committee on the Draft Defamation Bill in October 2011) to actionable defamation claims, including the ‘serious harm requirement’ (s1):

Serious Harm

(1) A statement is not defamatory unless its publication has caused

or is likely to cause serious harm to the reputation of the claimant.

(2) For the purposes of this section, harm to the reputation of a body that trades for profit is not ‘serious harm’ unless it has caused or is likely to cause the body serious financial loss.

Section 1(2) was introduced into the Defamation Bill at a very late stage, as an amendment in the House of Lords, two days before royal assent. As can be seen from the explanatory notes to s1 of the Act, the draftsmen were aware that bodies trading for profit were already, in practice, likely to have to show actual or likely financial loss. The requirement that this loss be serious is consistent with the serious harm test in s1(1).

It was accepted by those drafting that there would be a period of litigation in which the precise meanings of the terms were thrashed out, in the interests of creating a better balance between free speech and reputation. Lachaux arguably sets the high-water mark in this debate.

LachauxMr Lachaux was a French aerospace engineer who had been living in the United Arab Emirates with his British wife and their young son before commencing divorce proceedings in the UAE courts. The publishers (Independent Print Ltd and Evening Standard Ltd) produced articles reporting about his alleged violent conduct towards his ex-wife. He commenced libel proceedings, following which the publishers argued that the articles had not caused, nor were likely to cause, serious harm to Mr Lachaux. At first instance, the High Court found in favour of Mr Lachaux, and held that the articles caused serious harm. The publishers appealed first to

defaMatIon

‘It is important to bear in mind a claimant company’s particular circumstances. A particular statement may cause greater or lesser financial loss to a company, depending on their circumstances and the reaction of those to whom it is published.’

Hannah Kent discusses defamation claims


defaMatIon


the Court of Appeal, which upheld the High Court’s finding, and then to the Supreme Court.

While the Supreme Court in Lachaux was not directly concerned with the interpretation of s1(2) of the Act, it considered its application

and interpretation, particularly with reference to the serious harm requirement. Its decision will be of interest to bodies trading for profit when deciding whether to bring a claim for defamation.

The Supreme Court held that s1(1) is to be read in accordance with s1(2) in that it requires its application to be determined by reference to the actual facts about its impact and not just to the meaning of the words.

The financial loss incurred by a body trading for profit is the ‘measure of the harm and must exceed the threshold of seriousness’. While traditionally at common law libel was actionable per se, this statutory amendment means that an investigation is required into

the actual financial impact of the defamatory statement. Financial loss cannot be ascertained only by reference to the inherent tendency of the words; rather, when establishing ‘serious harm’, claimants must show that they have investigated the actual financial impact of the defamatory statement.

In welcome news for companies, Lachaux confirms that ‘serious financial harm’ is not the same concept as special damage and should be treated

differently. This is important since special damage is much harder to prove and quantify than serious financial loss and often requires extensive (and expensive) expert reports. While a claimant can seek to recover special damage in addition to the general damages for libel at common law, it requires evidence of pecuniary loss caused by the publication of the defamatory statement. A claim that might overcome the serious harm threshold could fail to show special damage on the basis that the allegations are too vague and are not supported by sufficient evidence.

Serious financial lossIn the context of s1(2) ‘serious’ is to be read as an ordinary English word, to be given its ordinary meaning (as set out by the High Court in Lachaux v Independent Print Limited [2015]). This ordinary meaning of ‘serious’ is something that is significant or substantial in terms of quality. Parliament, in the drafting of the Act, has left it to the judges to apply the serious harm requirement on the basis that ‘serious’ is an ordinary word in common usage. Evidently, the interpretation of this section requires a common-sense approach.

Whether the loss is serious must depend on the context (as held in Brett Wilson LLP v Person(s) Unknown [2015]). When assessing the seriousness of the defamatory statement, it is important to bear in mind a claimant company’s particular circumstances. A particular statement may cause greater or lesser financial loss to a company, depending on their circumstances and the reaction of those to whom it is published. For example, the loss of a single client to a small firm of solicitors could be serious (as in Brett Wilson), as could the loss of a single client from a dating agency (as the High Court held in Burki v Seventy Thirty Ltd [2018]).

Proving serious financial lossSerious financial loss should be capable of inference from the evidence, similar to other forms of serious harm. By way of the example used by the Court of Appeal in EuroEco Fuels (Poland) Ltd v Szczecin and Swinoujscie Seaports Authority SA [2019], a loss to investors is not automatically to be viewed as a loss to the company (in the company accounts, for example).

In welcome news for companies, Lachaux confirms that ‘serious financial harm’ is not the same concept as special damage and should be treated differently.

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However, it can make borrowing more expensive, and the raising of equity more difficult. This would, in turn, likely result in serious financial loss. A further example offered in the same case is where suppliers would no longer offer a company as competitive rates as previously offered, evidencing a serious financial loss of another kind.

The test of financial loss should focus on whether there has been, or is likely to be, a serious loss of custom directly caused by defamatory statements. The most obvious example of this would be where the publication of the statement has led to a material reduction in customer numbers, or turnover generally.

Injury to goodwill is not sufficiently actionable for a company to bring a libel claim, nor is any expense incurred in the mitigation of damage by a company (for example, spending money on advertising campaigns to counter the impact of a defamatory statement).

A company is not entitled to rely on a fall in share price, since this loss is suffered by the shareholders, rather than the company itself. If a business trading for profit can prove a general downturn in business as a consequence of a defamatory statement, even if it cannot prove the loss of specific customers/contracts, this would suffice as a form of actual loss (albeit unquantified).

Impact on potential claimantsUltimately, Lachaux is not so much a revolution of the law of defamation as an affirmation of Parliament’s intentions. While some may argue that the balance has swung away from claimants in favour of defendants, particularly in relation to claims brought by individuals, for bodies trading for profit it remains business as usual. It is implicit that, in order to have an actionable claim, claimants must demonstrate harm. For bodies trading for profit, this requires demonstrating actual or likely financial loss.

This of course places a burden on the claimant to undertake an evidence-gathering exercise, thereby front-loading costs – something that has been widely criticised by claimant law firms. However, as with most forms of litigation, it is beneficial for a claimant to understand and prepare its case fully from the outset. Further, the Supreme Court has left open to claimants the type of evidence that

can be used, affording claimants some flexibility in this regard.

This interpretation is in line with the Joint Committee’s intentions. The Committee acknowledged that companies might find it difficult to prove actual financial loss, so it favoured requiring proof of the

likelihood of such loss. This would often be a matter of legitimate inference from the nature of the allegation and the extent of publication.

The Supreme Court expressly held that although claimants may provide witness evidence about the impact of a defamatory statement, there is no requirement to do so and cases will not necessarily fail if such evidence is lacking. Where relevant ‘impact’ evidence is adduced, it could be as simple as an email passing comment on the article.

Points to rememberThe introduction of the new Pre-Action Protocol for Media and Communications Claims in October 2019 means that any claimant should include how or why the statement complained of has caused or is likely to cause serious harm. In the case of companies trading for profit, a claimant should demonstrate any details available of the nature and value of the serious financial loss that has been caused (or is likely to be caused) as a result of the publication. If a special damages claim is going to be made, full details of this must be set out in the letter of claim.

The most important thing for claimants to remember is to ensure some supporting evidence can be provided for the claim. While this can be a high threshold to overcome, the burden is eased somewhat by the possibility for companies to demonstrate the likelihood of serious financial loss, rather than the actual loss. However, it is of course more helpful if claimants can point to evidence of actual harm done.

The decision in Lachaux demonstrates that this is a matter

of not only ascertaining the meaning of the words, but the impact that these words have had (by way of financial loss). The seriousness of the financial loss will depend on the claimant’s circumstances and tends to be proportionate to the size of a company. While the loss of one

client could be extremely significant for one company, it would not even be a drop in the ocean for a larger company and resources may be best spent elsewhere, for example in the mitigation of a defamatory statement.

Claimants should also bear in mind however that the award of damages in cases such as these is often significantly lower than the costs of taking a defamation claim through to trial. When undertaking a cost-benefit analysis, claimants should consider whether to settle claims at an early stage, particularly if an apology is offered or a retraction published.

While there are likely to be further tests to the meaning of ‘serious financial loss’ and how to demonstrate this, for now the dust appears to have settled owing to some much-needed clarity from the Supreme Court. n

Ultimately, Lachaux is not so much a revolution of the law of defamation as an affirmation of

Parliament’s intentions.

Brett Wilson LLP v Person(s) Unknown, Responsible for the Operation and Publication of the Website www.solicitorsfromhelluk.com [2015] EWHC 2628 (QB)Burki v Seventy Thirty Ltd & ors [2018] EWHC 2151 (QB)Dow Jones & Co Inc v Jameel [2005] EWCA Civ 75 EuroEco Fuels (Poland) Ltd & ors v Szczecin and Swinoujscie Seaports Authority SA & ors [2019] EWCA Civ 1932Lachaux v Independent Print Ltd [2015] EWHC 2242 (QB); [2017] EWCA Civ 1334; [2019] UKSC 27Sim v Stretch [1936] 2 All ER 1237Thornton v Telegraph Media Group Ltd [2010] EWHC 1414 (QB)


Give it back

Lynsey Oakdene (pictured top) is a director and Claire Acklam a senior associate at Walker Morris LLP

Q uantum meruit is a principle of natural justice which, in the absence of any other

(contractual, tortious or statutory) cause of action, may provide a claimant with a remedy based on what it deserves. Quantum meruit is a facet of the equitable law of restitution (or ‘unjust enrichment’). Two claims for restitution/unjust enrichment succeeded in the Court of Appeal and the High Court in late November 2019.

What is restitution? Restitution is a remedy which can operate alongside or distinct from contractual or tortious claims, and which can be available in a claim which arises either as a matter of law or in equity. Restitution restores the claimant to the position it was in before the defendant had been unjustly enriched at its expense.

For a claim in restitution to succeed, the claimant must show the following:

• The defendant has been enriched. This could be in terms of money, but can also be other benefits, whether direct or indirect, and includes saving from expense and discharging obligations.

• The enrichment was at the claimant’s expense.

• The enrichment was unjust. There may be one or more of a number of reasons why enrichment may be unjust, including (non-exhaustively) mistake, duress, undue influence, failure to provide consideration for a benefit, illegality, and so on.

A restitution claim advanced on the basis of unjust enrichment focuses on the benefit received by the defendant, whereas a restitution claim advanced on the basis of quantum meruit focuses on the benefit which the claimant deserves to receive.

Why are these cases of interest?The cases of Barton v Gwyn-Jones [2019] (discussed in detail in ‘Second sight or hindsight?’ on p2) and Quinn Infrastructure Services Ltd v Sullivan [2019] are of interest because:

• they are examples of circumstances in which restitution can assist a claimant where other causes of action do not exist or would fail;

• they reinforce the importance for commercial parties of a properly and comprehensively drafted written contract;

• they highlight the conceptual differences between unjust enrichment and quantum meruit claims; and

• they are potentially indicative of a growing trend towards claimants advancing and litigating commercial disputes in increasingly inventive ways. The latter generally occurs less

frequently in times of economic prosperity. In uncertain times, therefore, it is prudent for potential commercial claimants and defendants alike to understand all available legal issues and options.

What practical advice arises?Any restitution claim necessarily involves the court deciding what is

contract

‘Proceeding to do business without a comprehensive written contract, and ultimately having to rely on a restitutionary remedy, can prove a false economy.’

Lynsey Oakdene and Claire Acklam review recent case law on restitution

The Commercial Litigation Journal 15January/February 2020

contract

While restitution can step in where there is no other cause of action or where, say, a contract falls

short, relying on such a claim is rarely the ideal solution for any party.

just or fair. In considering whether a party has been unjustly enriched or whether a party deserves an award, the court can take into account factual and commercial considerations such as:

• whether the enrichment or service provided was of a kind that would normally be provided freely;

• the nature of the benefit received by the defendant;

• the nature of the risks incurred by the claimant; and

• whether the defendant has behaved unconscionably in declining to pay. (This latter consideration is likely to be a strong indicator in favour of making a restitutionary award.)

While restitution can step in where there is no other cause of action or where, say, a contract falls short, relying on such a claim is rarely the ideal solution for any party. Case law has frequently confirmed that it is not the role of this area of law to create contracts for parties where they have failed to do so, and that there is no general right in English law to payment in the absence of a contract. As such, when it comes to restitution claims, there can be no guarantee of success.

By far the better course is for parties to understand the basics of commercial contract formation and, in particular, to ensure that their business arrangements are properly and comprehensively recorded in formal written contracts.

Sometimes the mere process of recording an arrangement in writing – never mind instructing a specialist solicitor – immediately prompts the necessary questions: have we covered everything; what if this or that happens; who should pay for what and when; etc. (It is easy to imagine in Barton (see below) that had the parties tried at all to articulate their arrangement in writing, the question would immediately have arisen: what if we sell for some other amount?)

Proceeding to do business without a comprehensive written contract, and ultimately having to rely on a restitutionary remedy, can prove a false economy. A written contract will ideally govern the parties’ dealings with each in such a way as to avoid disputes arising in the first place; and if/when

disputes do arise, clearly drafted contracts can contribute hugely to their swift, amicable and efficient resolution. However, it is of some comfort to know that where you do not have a contract, the law may still step in to assist you in some circumstances.

What happened in the particular cases?In Barton the defendant had agreed to pay an introduction fee of £1.2m if a property owned by it was sold for £6.5m to a buyer introduced by the agent. The arrangement between the defendant and the agent was an informal, oral agreement, rather than a formal written contract. When the property sold for £6m to a buyer introduced by the agent, the defendant refused to pay the (or any) introduction fee. The Court of Appeal held that, while unjust enrichment claims should not be permitted to undermine the express allocation of risk and obligations set out in a contract (ie the Costello principle, Costello v Macdonald Dickens & Macklin [2011]), here there was no such express allocation. The contract was not comprehensive, it was simply silent on what would happen if a sale completed at below £6.5m. There was therefore nothing to preclude a restitution claim.

The agent had formulated its claim on the basis of unjust enrichment. In fact, the Court of Appeal considered that the correct formulation was quantum meruit. (The claim’s focus was that the agent deserved to be

paid a fee at a reasonable level, as the property had been sold to a party introduced by it, albeit at a price that had not been catered for in the informal oral agreement.) On the facts of this particular case that distinction didn’t matter because the restitutionary remedy would be the same calculated on either basis. The

Court of Appeal noted, however, that this would not necessarily be the case on different facts.

In Quinn, a number of different parties and contractual arrangements were in play. Claims brought in contract and against the first, second and fourth defendants failed for various reasons, and it is the restitution claim against the third defendant that is of interest. A contract arose between the claimant and the third defendant as a result of conduct (namely, the provision of services and invoices by one party, and payment by another). There was no written contract to govern the arrangement between the parties. When, as part of the overall arrangements, the third defendant took payment from the claimant for BT software hosting services and did not account to the claimant for savings made on those services when lesser sums were actually paid to BT, there was no contractual provision on which the claimant could rely. The law of restitution stepped in, however, and a successful unjust enrichment claim saw the third defendant account to the claimant for hosting services savings in the sum of £76,000. n

Barton v Gwyn-Jones & ors [2019] EWCA Civ 1999Costello & anor v Macdonald Dickens & Macklin [2011] EWCA Civ 930Quinn Infrastructure Services Ltd v Sullivan & ors [2019] EWHC 2863 (Comm)


Contracts Jim, but not as we know them

Jeremy Richmond (pictured top) is a barrister at Quadrant Chambers and Christopher Recker is an associate with Trowers & Hamlins LLP

I n November 2019 the UK Jurisdiction Taskforce (UKJT) published a legal statement on

the status of cryptoassets and smart contracts following the issuing of its consultation paper in May 2019. As Chancellor Vos noted in the foreword to the legal statement, there is no doubt that some of the matters covered in it will in the future be the subject of judicial decision. The ever-increasing use of cryptoassets and smart contracts has given rise to some difficult and subtle issues of contract, insolvency and property law, not to mention conflicts of law. This article seeks to summarise some of the main points in the legal statement with an emphasis on these areas of law. The legal statement is broadly divided into, respectively, the treatment of cryptoassets as property, and smart contracts. It is to these two areas that we now turn.

Cryptoassets as propertyThe UKJT noted that there is no universally accepted definition for the term ‘cryptoasset’. At a very high level of abstraction a cryptoasset is defined by reference to the rules of the system in which it exists. Functionally it is usually represented by two parameters: one public, and one private. The public parameter contains encoded information about the asset like ownership, value and transaction history, which information is available to all participants in the system or the world at large. The private parameter – the private key or keys – allows dealings in the cryptoasset to be cryptographically authenticated by digital signature. The UKJT identified

some principal and novel features of cryptoassets including:

• intangibility;

• cryptographic authentication;

• use of a transaction ledger, the function of which is to keep a reliable history of transactions and so prevent double spending;

• the distribution transaction ledger may be distributed and decentralised in the sense that it is shared over the network with no one person having a responsibility for maintaining it, or any right to do so; and

• rule by consensus in that the rules governing dealings are established by the informal consensus of participants rather than by contract or in some other legally binding way.

A pressing consideration for commercial lawyers is whether a cryptoasset is capable of being property. If the cryptoasset is capable of being property, then among other things the holder of a proprietary right over the cryptoasset may have priority over claims by creditors in an insolvency context, and may be able to create a security interest over the cryptoasset, which otherwise might not be possible.

The UKJT after an extensive analysis arrived at the conclusion that cryptoassets should be treated in principle as property because of the following:

cryPtoassets

‘The significance and potential applications for smart contracts are diverse; in the construction industry it is thought that smart contracts could be implemented to simplify greatly and automate the payment of contractual obligations.’

Jeremy Richmond and Christopher Recker boldly explore the status of cryptoassets and smart contracts


cryPtoassets


• Cryptoassets have all the indicia of property, namely, they are definable, identifiable by third parties, capable in their nature of assumption by third parties, and have some degree of permanence or stability: per Lord Wilberforce in National Provincial Bank v Ainsworth [1965]. The conclusion that cryptoassets have the indicia of property is consistent with the relatively limited English case law on point to date: see Vorotyntseva v Money-4 Ltd [2018] (interim proprietary injunction granted over Bitcoin and Ethereum cryptocurrency valued at £1.5m); and Robertson v Persons Unknown [2019] (where an asset preservation order was granted over Bitcoin).

• The novel features of some cryptoassets – intangibility, cryptographic authentication, use of a distributed transaction ledger, decentralisation, rule by consensus – do not disqualify them from being property.

• Nor are cryptoassets disqualified from being property by reason of being ‘pure information’, or because they might not be classifiable either as things in possession or things in action.

Since a cryptoasset cannot be physically possessed and is, as such, virtual, the UKJT arrived at the following conclusions concerning the potential security or other interest that could be taken over them:

• As a matter of law, cryptoassets could not be the object of a bailment since bailment requires the transfer of possession. Since cryptoassets are not capable of being possessed, they could not be the subject of a bailment.

• Only some types of security could be granted over cryptoassets. The UKJT confined itself to the question of consensual security of which there are four kinds in English law: pledge, (contractual) lien, equitable charge and mortgage. It considered that pledges and liens can only be created by transferring possession of an asset. As such,

since cryptoassets could not be possessed it would not be possible to create a pledge or lien over them. However, the UKJT considered that if a particular cryptoasset was property, a mortgage or equitable charge could be created over it

in the same way a mortgage or equitable charge could be created over other intangible property and subject to the same requirements.

• Cryptoassets are not documents of title, documentary intangibles or negotiable instruments (though some form of negotiability could arise in future as a result of market custom).

• Cryptoassets are not instruments under the Bills of Exchange Act 1882 so that the provisions of that Act do not apply.

• Cryptoassets are not goods within the meaning of s61(1) of the Sale of Goods Act 1979 so that the provisions of that Act do not apply.

The UKJT expressed the view that since cryptoassets can be property at common law, they could be property for the purposes of the Insolvency Act 1986. In an interesting observation, the UKJT also considered that where a particular cryptoasset was not property at common law, it might still be property within the meaning of the Insolvency Act 1986. This was because s436(1) of the Insolvency Act 1986 defined property to include:

… money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property.

A cryptoasset that was not property at common law could still be property under the Insolvency Act 1986 insofar as it could be considered an ‘obligation [or a] description of interest… arising out of, or incidental to, property’.

The UKJT also considered some difficult choice of law problems that arise in the treatment of cryptoassets. Generally, English law treats questions of:

• how property is to be classified; and

• how and when a transfer of property affects third parties,

as questions of the lex situs, that is to say the law of the country where the property is situated at the relevant time. Since cryptoassets are intangible property it is not altogether obvious how the lex situs would be identified or indeed whether the general rule would (or should) apply at all. Other candidate choice of law rules might include the country where the cryptoassets have some sort of central control; or the law which governs the transaction between the parties (as in cases where a tangible asset is in transit so that its location is really a matter of chance or is unknown). The UKJT considered that these complex conflicts of law issues should be resolved by legislation most likely following international cooperation.

Smart contractsThe UKJT’s analysis is welcome and comes at an important time; smart contracts are becoming increasingly utilised and embraced by businesses.

The significance and potential applications for smart contracts are diverse; in the construction industry it is thought that smart contracts could be implemented to simplify greatly and automate the payment of contractual obligations. In the insurance industry, smart

The UKJT expressed the view that since cryptoassets can be property at common law, they could be

property for the purposes of the Insolvency Act 1986.


cryPtoassets


contracts are being explored as mechanisms for both the purchase of policies, and the fast resolution and settlement of claims. The key theme is efficiency:

Before considering those issues, it is worth describing why smart contracts warrant consideration. In summary, it is because they improve the efficiency, speed and performance of contracts. Efficiency is improved because of the automation of contractual actions, which reduces the need for human involvement and, as a result, the potential for human error. Speed is improved as actions can occur in real time as information is collected and verified. Performance is improved as the terms are unambiguous and results predictable and auditable.

(Farrell, Machin and Hinchliffe, ‘Lost and found in smart contract translation – considerations in transitioning to automation in legal architecture’.)

In contrast, issues have also been raised about the extent to which too much trust is being placed in the software rather than the other party to a contract. The concern is that no code is perfect and, therefore, the more complex it is, the greater the risk:

A similar situation took place in 2017 and concerned the already mentioned QuadrigaCX. The company lost US$14 million in cryptocurrency [Ethereum (ETH)] because of the defective smart contract which processed the transactions involving ETH. Apparently, an update of the algorithms caused an error in the code, which disabled the correct acceptance of payments in ETH. The defect was noticed after a couple of days, when it was found that ETH was ‘blocked’ in the smart contract.

(Hulicki, ‘Cryptocurrencies – a legal dilemma of the digital age’).

The UKJT’s positionThe UKJT highlights that contract law ‘is concerned with the enforcement of promises’ and addresses the argument that a smart contract’s code will do ‘what it is programmed to do’. This is where the primary risk sits; the quality of the code will in principle dictate the quality of the performance of the aspects governed by the smart contract itself. The UKJT, however, also makes the valid point that there could be external factors which affect the performance of the code. A party can, therefore, on a case-by-case basis, argue that a smart contract is or is not legally binding.

The UKJT points out that the concept of a contract under English law is not defined, and there is generally no particular ‘form’ that a contract must exist in. The courts will enforce a promise provided that the constituent common law requirements are met (offer and acceptance, certainty, an intention to be legally bound by the agreement and consideration). The court would, of course, also take into account what the UKJT refers to as ‘vitiating factors (such as duress, misrepresentation or illegality)’.

The UKJT highlights that ‘the precise role played by the software in a smart contract can vary’. This is important. The interpretation of the contractual relationship will be governed on its merits. Parties to a contract may wish for a smart contract to define all of their obligations, merely enforce them or use some other hybrid arrangement. Other parties may not wish to utilise any code at all. The enforceability and scope of the contract, as the UKJT points out, will be a matter of analysing the words and conduct of the parties to determine objectively what was agreed.

A few examples are explored, and the theme raised by the UKJT is that the further away the parties move from the ‘conventional’ methods of contracting with each other, the less straightforward the position:

• A natural language contract with certain performance obligations executed with code. In these circumstances, the contractual

interpretation should not be controversial; any differences in relation to performance (including the operation of the code) can be determined by reference to the contract.

• A natural language contract but with some terms in code (such code likely being embedded in the contractual documentation, and/or on an execution platform). Here, the question is of the constituent parts; has an agreement been reached, was there sufficient intention and has there been sufficient consideration? It is not envisaged that there is significant material difference to the category appearing immediately above given that there is some form of underlying natural language contract.

• A contract with no natural language is most problematic, given that this would mean that the entire agreement existed in code. The terms of the agreement will be enshrined within the source code, and any consideration ought to be identifiable by an examination of that code or considering the code’s behaviour. The challenge is assessing whether or not an agreement has been reached at all, and whether there was an intention to create legal relations. The analysis of those aspects will need to be explored by reference to the code itself, and any applicable evidence (such as written correspondence) which may indicate what the parties intended.

• A party utilises code on a distributed ledger platform, where in exchange for payment or transfer of value, the platform performs a service (such as algorithmic investment). A third party who is not known to the party deploying the code could potentially form a unilateral contract with the other party. The underlying analysis would be very fact specific, and would evidentially depend on the nature of the platform and the arena in which it operated (among other things).

National Provincial Bank v Ainsworth [1965] UKHL 1Robertson v Persons Unknown (2019) unreported, High Court, Moulder J, CL-2019-000444Vorotyntseva v Money-4 Ltd [2018] EWHC 2596 (Ch)


cryPtoassets


• A party deploys code to set up a decentralised autonomous organisation (DAO), but has no intention to participate or enter into contracts with other parties. Entirely separate third parties will contract with each other in accordance with the terms of the smart contract running the DAO. The UKJT points to the challenges with identifying who the parties are to those contracts, and establishing whether any legally binding agreement has been reached. Helpfully, the UKJT compares this situation with transacting with an unincorporated association, whereby each member of that association contracts with the membership as a whole and intends to be bound by the applicable rules of that association (even though each member does not necessarily know the identities of the others).

The English court’s applicationThe rules of contractual interpretation in England and Wales are well known; the court will determine what the reasonable reader would consider the parties objectively intended (which will call for an analysis of the language utilised in the agreement). The court generally relies on what was stated in an agreement, unless the language is unclear or ambiguous.

The UKJT points out that these rules do not easily reconcile with a contract containing terms exclusively in code. However, to the contrary, the UKJT suggests that a contract of that nature could be interpreted as nothing more than:

… an extreme example of a contract whose language is clear, with the result that there is no justification to depart from it.

It still, however, begs the question as to what happens if the code itself is not clear (and which may give rise to different meanings or interpretations). The UKJT envisages that these issues would be resolved by either:

• reference to other parts of the

code which are clear; or

• looking ‘beyond the four corners of the code to interpret it’.

The court’s role in that scenario is to assess all of the admissible evidence and make findings relating to whether or not the code actually defined the obligations, or was intended to merely implement them. This will of course dictate the nature of the evidence (including expert evidence) required.

The parties to a dispute may, therefore, ask the court to consider specific issues. The UKJT points out that, by way of example, one of the parties may argue that the code needs to be rectified, which would require analysis beyond the outcome or operation of the code itself. The UKJT also considers that the usual rules relating to the court’s interference in circumstances of duress, fraud and misrepresentation would continue to apply.

The UKJT clarifies that there is no requirement under English law for parties to a contract to know each other’s real identities and, therefore, sees no issue with smart contracts being utilised in this manner. The issue of knowing the contracting party is, however, an important one for enforcing the terms of a contract following a breach.

Smart contracts and writingAnother issue raised relates to the use of a private key as a mechanism for satisfying a statutory signature requirement. The UKJT acknowledges that electronic signature can generally satisfy these requirements (depending on the precise statutory instrument) and that a private key is a type of electronic signature when used in this way. The key issue the UKJT has raised:

… is not what the signature looks like, but whether or not it is clear that the party intended to authenticate the full terms of the document.

The UKJT takes this further and considers whether or not the statutory ‘in writing’ requirement could be met by a smart contract composed partly or wholly of computer code. The UKJT points to the wide definition of ‘writing’ in the Interpretation Act 1978, and on balance considers that it is likely the statutory requirement would be satisfied given that:

… the fact that the code might not be comprehensible to an uninitiated English speaker without an expert translator is irrelevant.

Other mattersThe legal statement provides a comprehensive overview of smart contracts but for understandable reasons does not purport to analyse comprehensively every possible legal issue that may arise in the area. We tentatively suggest that two technical areas that may merit further consideration are:

• whether or not it is possible to obtain a court order securing the rectification of a blockchain ledger; and

• the extent to which a judgment could be obtained in a virtual currency.

SummaryIn summary, the UKJT has helpfully clarified that smart contracts are in principle capable of satisfying the constituent parts of contractual common law. As with the status of cryptoassets, we expect that the legal status of each smart contract will need to be considered on a case-by-case basis. As a result, the law around cryptoassets and smart contracts will no doubt develop and be refined over time. n

To download the UKJT’s ‘Legal Statement on the Status of Cryptoassets and Smart Contracts’, see www.legalease.co.uk/cryptoassets

Scott Farrell, Heidi Machin and Roslyn Hinchliffe ‘Lost and found in smart contract translation – considerations in transitioning to automation in legal architecture’, Journal of International Banking Law and Regulation 2018, 33(1), 24-31

Maciej Hulicki ‘Cryptocurrencies – a legal dilemma of the digital age’, International Trade Law and Regulation 2019, 25(4), 203-209

References


Triumph(ant)?

Giles Tagg is a partner and Zak Mehmood a trainee solicitor with Beale & Co T he recent case of Triumph Controls

UK Ltd v Primus International Holding Co [2019], heard in

the Technology and Construction Court, serves as a timely reminder on the rules surrounding costs awards. Specifically, it draws attention to the factors which ought to be taken into account by a court in deciding the amount of costs payable to the ‘winning’ party.

The case also raises the peculiar question of whether a party can lose on costs, despite winning the claim.

BackgroundThe underlying case related to a breach of warranty claim made by Triumph against Primus. Triumph was successful in its claim, with the court handing down judgment in its favour on 11 March 2019. A further judgment was handed down on 13 August 2019, with the court determining the outstanding issues on quantum. The court also ordered that issues as to costs would be determined on paper following the exchange of short written submissions by the parties.

The parties’ respective positionsTriumph’s position was that as the successful party it was entitled to the usual order that costs should follow the event. Triumph submitted that while numerous arguments were made by both parties, and although it did not succeed on all of its pleaded arguments, the overall outcome in the case was in its favour.

Conversely, Primus’ position was that Triumph should be awarded a reduced percentage of its total costs. In support of this, it pointed to Triumph’s reliance on three heads of claim, but its success on only one. In short, Primus argued that this led to additional and avoidable costs being incurred by both

parties (and so any costs order made ought to reflect this).

A reminder of the rulesIn making its assessment, the court has discretion as to whether costs are payable by one party to another, the amount of those costs and when they are to be paid (CPR 44.2(1)). The general rule is that the unsuccessful party will be ordered to pay the costs of the successful party, although the court may make a different order (CPR 44.2(2)) – which is what Primus was seeking in this case.

CPR 44.2(4) provides that in deciding what (if any) order to make about costs, the court will have regard to all the circumstances in the case, including the conduct of the parties and whether a party succeeded on part of its case, even if that party has not been wholly successful.

CPR 44.2(5) provides that the conduct of the parties includes:

• conduct before, as well as during, the proceedings and in particular the extent to which the parties followed the Practice Direction – Pre Action Conduct and Protocols or any relevant pre-action protocol;

• whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue;

• the manner in which a party has pursued or defended its case or a particular allegation or issue, and;

• whether a claimant who has succeeded in the claim, in whole or in part, exaggerated its claim.

costs

‘Primus argued that a proportional costs order would be appropriate, submitting that Triumph brought forward three claims, one of which was unreasonably brought and led to identifiable, substantial and severable costs.’ Triumph Controls UK Ltd & anor v

Primus International Holding Co & ors [2019] EWHC 565 (TCC)

Giles Tagg and Zak Mehmood report on a recent costs judgment


costs


As to the types of order made, the court may make an issues-based costs order but before doing so, will consider whether it is practicable to make an order limiting the costs payable to a proportion of the overall costs (CPR 44.2(6) and (7)).

How the rules were applied in this caseType of costs orderThe court found it to be common ground that Triumph, having obtained an award of substantial damages in its favour against Primus, was entitled to recover at least part of its costs. Triumph’s position was that it had shown reasonable conduct, had properly advanced its arguments and did not exaggerate its claim (even on the points it lost on). Accordingly, it stated that neither an issues-based or proportional costs order would be appropriate.

On the other hand, Primus argued that a proportional costs order would be appropriate, submitting that Triumph brought forward three claims, one of which was unreasonably brought and led to identifiable, substantial and severable costs.

In making her decision, O’Farrell J concluded that an issues-based order was not required. However, she ruled that a proportional costs order was appropriate in this case, given that one of the claims:

… caused Primus to incur costs in successfully defending the claim that would not have been otherwise incurred.

The proportional costs order dictated that Primus should pay 85% of Triumph’s costs. The costs

would still be subject to a detailed assessment on the standard basis.

Costs assessmentCPR 44.2(7) provides that where the court orders that a party is to pay costs subject to detailed assessment, it will order that party to pay a reasonable sum on account of costs, unless there

is good reason not to do so. Where the amount of costs is to be assessed on the standard basis:

• the court will only allow costs which have been reasonably incurred and are reasonable in amount, resolving any doubt in favour of the paying party (CPR 44.3(1) and (2)); and

• the court will only allow costs which are proportionate to the matters in issue (CPR 44.3(2)).

In assessing the ‘reasonableness’ of the costs incurred, pursuant to CPR 44.4, the court will have regard to all of the circumstances of the case, including the conduct of the parties, the value of the claim, the importance of the matter to the parties, the complexity of the issue, and the skill, time and effort involved.

In this case, O’Farrell J provided a favourable assessment of the

costs incurred, believing them to be reasonable and stating that:

… the overall figures identified do not appear to be disproportionate to the claims. Having seen the volumes of factual and expert evidence in this case… and having heard the trial, it does not come as any surprise that

the estimated costs for one party exceed £6 million… taking the above matters into account, I consider that a reasonable sum on account of costs is £3 million.

CommentWhile Triumph was not successful in convincing the court to make a costs order in line with its submissions, it was ultimately triumphant, following the judge’s review of its costs breakdown.

The case does have valuable lessons, given Primus saved a rather significant sum by obtaining a proportional costs order. The key takeaway for unsuccessful defendants, therefore, is that they should ensure that where exaggerated or unmeritorious claims are brought by a claimant (as part of a wider claim), they seek to document the effect these have on the costs of the case. This should increase the chances of a percentage saving on costs. n

The court found it to be common ground that Triumph, having obtained an award of substantial damages in its favour against Primus, was entitled

to recover at least part of its costs.

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Getting your hands dirty

Peter Brewer is a partner with Clarke Willmott LLP

L aw students will remember the maxim ‘he who comes to equity must do so with clean

hands’. What this essentially means is that a person seeking equitable relief must not have engaged in wrongful conduct themselves. The wrongdoer must not benefit from their wrongdoing.

The recent Court of Appeal ruling in the matter of Badyal v Badyal [2019], where the petitioner had caused the breakdown in the relationship by setting up, and then concealing, a competing business, shows this maxim being deployed by the courts.

The court upheld the decision of Carr J to refuse a just and equitable winding up in circumstances where all the parties agreed that there had been a breakdown of the mutual trust and confidence between them, but the findings of fact showed that the breakdown was the result of the applicant’s conduct. This was improper conduct and had led to the respondents losing any trust and confidence in him. It was therefore inappropriate for him to be awarded the relief that he sought.

BackgroundThe company had been incorporated and was held jointly between the petitioner, the two respondents (all of whom were brothers) and the parties’ father. The company was a quasi-partnership.

The petitioner moved to India and established a number of businesses there. The family also acquired and then developed a number of business interests in the UK.

As the businesses developed and became increasingly valuable, the relationship between the brothers began to sour. They discussed a

split of the family business assets, but those discussions did not result in a resolution. The petitioner then presented a petition claiming that his interests as a minority shareholder had been prejudiced by the actions of his brothers, who were the majority shareholders. The petition was presented under s994 of the Companies Act 2006.

The two respondents defended, claiming that the root cause of the breakdown in the relationship between the brothers was that the petitioner had established a business which directly competed with the company without disclosing that business to them. They went on to say this was a breach of the mutual obligations of trust and confidence that underpinned the quasi-partnership and was also a breach of the petitioner’s statutory and common law duties. They felt that they could not trust the petitioner.

The petitioner responded by amending his petition to seek an order that the company be wound up on a just and equitable basis.

The remedies under s994 of the Companies Act 2006The remedies available to a petitioner seeking relief under s994 of the Companies Act 2006 are set out in s996 of the Companies Act 2006.

Essentially, the court has a very wide discretion to make any order that regulates the position. Such orders can include:

• an order regulating of the future affairs of the company;

• an order that the company either should do or should refrain from doing something; or

shareholder dIsPutes

‘Winding up a company because the directors have fallen out can affect a lot of innocent people and so it is not a remedy that the court grants freely.’

Peter Brewer considers the consequences of misconduct




• an order that legal proceedings be authorised to be brought in the name of the company (akin to a derivative claim under s260 Companies Act 2006).

However, in practice, the most common form of remedy (particularly in the context of quasi-partnerships) is that the majority shareholders are ordered to buy out the shares of the complaining minority shareholder, with the shares valued without them being discounted on the basis that they are minority shares held in a private limited company.

The buyout remedy is one that, while statutory in nature, is assessed on equitable principles. This means that a petitioner could not rely on their own wrongdoing (for example a shareholder alleging that they had been excluded from a company because of their own theft would then struggle to rely on the unfair prejudice provisions).

For whatever reason, the petitioner in the case decided to amend his petition, claiming that

the company ought to be wound up on just and equitable grounds, pursuant to s122(1)(g) of the Insolvency Act 1986.

What is a just and equitable winding up?A just and equitable winding up is a remedy available under the

Insolvency Act 1986; basically it allows the court to wind a company up when it is just to do so. Good examples might be where the management has fallen out to such an extent that the company cannot move forward, there has been a fundamental breach of the articles of association or a shareholders’

agreement, or the objects of the company have become frustrated. In all of these examples, the company becomes deadlocked and cannot continue in its current form.

It is often described as the ‘nuclear’ option in terms of corporate litigation, as it is so far reaching. It results in the liquidation of the company, which

inevitably involves the disposal of assets and redundancies where the company has employees. The ultimate objective of the process is that the company ceases to exist.

Evidently, winding up a company because the directors have fallen out can affect a lot of innocent people (the employees, any suppliers, etc)

The buyout remedy is one that, while statutory in nature, is assessed on equitable principles. This means that a petitioner could not rely on their

own wrongdoing.

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and so it is not a remedy that the court grants freely.

In addition, a liquidator is appointed to manage the affairs of the company in an orderly way. That means that the assets are disposed of at ‘best value’ by the liquidator, which given the fire sale nature of the disposal may mean

that the price actually achieved is discounted as against their real value. Also, there is an additional layer of professional costs.

The just and equitable route is therefore very much seen as the solution of last resort, and as such is rarely pursued.

The outcomeThe petitioner was not successful in his attempts to wind up the company on the just and equitable basis. The court deemed that he had been the wrongdoer on these facts, and that it would be unjust for him to benefit and for the respondents and their employees and other stakeholders to be harmed by any relief that the court imposed.

The wrongdoing was triggered by the petitioner setting up a competing business and then concealing that from the company and his co-directors. Such conduct is a flagrant breach of the duties owed by directors to companies, and fundamentally undermines the mutual relationship of trust and confidence that ought to exist between the participants in a quasi-partnership business.

What if the petitioner had behaved properly? It is obviously very difficult to predict what might have happened had the petitioner not set up a competitive business, and I am unware of what facts were advanced during the trial (and claims of this nature are highly fact sensitive). However, if the petitioner had done no wrong, then one suspects

that he would not have had to resort to the fairly extreme measure of presenting a petition for the just and equitable winding up of the company.

Assuming that the company had some value in it, then it is likely that a buyout order would have been made, meaning that the petitioner

would have exited the company, but would also have received some value for his shares.

The reality is that such an order is often in the best interests of all of the parties. A buyout order separates the warring shareholders and also frees the company up to become successful; at the same time the complaining shareholder is free to pursue other interests free from the burden of trying to work with people that they cannot get on with.

It is for that reason that an early offer made by the company to buy out the petitioner’s shares on an undiscounted basis (commonly known as an O’Neill v Phillips offer) is sensible. Firstly, this is because, if the offer is accepted, the future stress and costs of the litigation can be avoided. Secondly, and from the respondents’ point of view, the petitioner is being offered all that they might reasonably achieve at trial. Consequently, if such an offer is rejected on an unreasonable basis then the respondents may be able to apply to have the petition struck out, on the basis that its pursuit has become an abuse of process.

ObservationsNo one unfair prejudice petition is the same as another and this case highlights the extreme fact sensitivity in this area of the law. However, some conclusions can be drawn:

• If there are any questions as to a potential petitioner’s conduct,

then serious thought must be given to not starting proceedings at all.

• Seeking a just and equitable winding up as primary relief is very aggressive. Again, think long and hard before pressing that nuclear button.

• I do not know the amounts involved but this is likely to have been an expensive day in court for the petitioner. He lost at trial and then in the Court of Appeal and will have to bear his own costs and probably also those of the respondents. That is likely to have been a very substantial sum of money.

• In denying the petitioner any relief, the dispute between the parties remained unresolved. The parties will therefore need to work hard and in a collaborative way to try and resolve these problems, or else risk completely destroying any remaining value there is in the company.

Mediation I also wonder, as a recently qualified mediator, whether mediation was attempted in this case. We will never know as the process is both without prejudice and confidential.

However, at some stage the parties were certainly discussing a division of the jointly held assets, and so the parties clearly seem to have been minded to attempt a settlement at some point. Mediation may have given them the prod they needed to get a deal finalised, and therefore manage the risk that was evident in this case.

Mediations can appear to be expensive if looked at in isolation, but they are certainly significantly cheaper than litigating a case like this and then losing. They are therefore a highly effective method for the parties to manage their risk, and to avoid the kind of adverse outcome suffered by this petitioner. n

If the petitioner had done no wrong, then one suspects that he would not have had to resort to the fairly extreme measure of presenting a petition for the just and equitable winding up of the company.

Badyal v Badyal & ors [2019] EWCA Civ 1644O’Neill & anor v Phillips & ors [1999] UKHL 24

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