Dispute update – August 2013

Boardroom Briefing

Those long enough of tooth to remember the shock of the Woolf reforms will probably have spent much of the last decade wondering what the fuss was about. The rules changed, but many of our old habits were too ingrained to change.

Lord Justice Jackson’s review of civil litigation is intended to give effect to many of the recommendations made by Lord Woolf in the 1990s which somehow got lost along the way. In particular, lawyers managed to keep in check the apparent ambition of the Civil Procedure Rules to streamline processes and reduce the cost of litigating. New rules mean Lord Woolf’s ambitions are probably going to be realised.

The biggest drag on the likely effectiveness of the Jackson reforms is likely to be the willingness of the judiciary to depart from the practices of the last few years. The district bench will deal with the changes most often on a day to day basis and there has been alarm that they have received only a day’s training each, and none since March.

Given that many of the reforms only apply to cases issued after 1 April, most of which will only now be coming before the court for case management conferences, there is a danger that the judiciary will be feeling their way as tentatively as the rest of us. Another common complaint from judges is that most of them have been out of legal practice for many years and they no longer have a feel for the cost of litigation. Both of those fears are likely to lessen as more and more cases become subject to the new rules.

We have reported in the past on the main changes to the rules which affect business disputes. Here’s how some of those changes have taken effect:

• The new rules have already seen the courts taking a much more robust approach to deadlines. No longer can parties miss deadlines and expect sympathy from the court. In the long term, this will make litigation more efficient but for now expect inconsistency between judges. It is also leading more parties to settle, rather than face the risk of judicial criticism.
• The courts now have to manage the costs of the case from the outset. Case budgets have to be approved at an early stage and the court will either approve the budget or not. Anecdotally, this is leading lawyers to agree budgets without the court’s involvement, or to avoid the process by agreeing to early settlement talks.
• Justice no longer comes “at any price”. Costs must be proportionate if they are to be recovered. Before allowing the parties to take any steps in the case, the court will look at the costs involved. If disproportionate costs are likely to be spent, the parties will be told they cannot do what they want to do.
• Disclosure of documents in litigation has always been contentious. Since 1 April, it has also been tougher and more confusing. A form now has to be sent to court at an early stage listing the broad categories of documents in your possession. In cases worth more than £25,000, the parties also have to complete a long questionnaire about documents they hold in electronic or digital format.
• The court has a much wider range of powers to order parties to disclose their documents to the other side. This might range from no disclosure at all to handing the other side the keys to the document store. For the time being, most lawyers seem reluctant to ask the court for more than “standard disclosure” (in essence, the documents which help or hinder your case).
• The small claims limit has been raised from £5,000 to £10,000 and there remains no costs recovery even if you win. At the higher end, these are substantial cases and it is not usually cost effective to instruct lawyers. All company directors and senior managers now need a basic understanding of the system because they are far more likely to appear in court representing their business without legal assistance.
• Conditional fee agreements are still being used widely, even though the success fee (which can be up to 100% of costs) can no longer be recovered from the other side. They still give clients a “no win no fee” option and success fees are now being set at a lower level, usually around 25-50%.
• “After the event” insurance is now a much less attractive option, because premiums cannot be recovered from the other side. In cases where there is a higher risk and the other side’s costs might be high, they remain an option. Most ATE providers still offer deferred premiums.
• Many are now offering a combination of insurance and third party funding for appropriate cases. Third party funding brings in experienced investors who fund the costs of litigation in the expectation that they will recover their outlay if the case succeeds.
• There was a lot of excitement initially about the new form of litigation funding known as damages based agreements (“DBAs”), a type of “no win, no fee” agreement. The idea was that if the case succeeded, the lawyer would keep up to 50% of the damages. DBAs have not been widely taken up because the regulations are very tightly drafted and the lawyer is expected to fund all expenses including counsel.

There remains a lot of uncertainty in the system, and it seems people are holding back from issuing cases until the new rules have bedded in and the approach of the judiciary is more consistent. The next year is likely to see lots of disputes about the application of the new rules and we’ll keep you updated.

Legal Update

This month, we’re looking at some interesting recent decisions, although not necessarily the biggest cases in recent weeks. The courts have kept law firm commentators busy this year on the continuing flood of cases on contractual good faith provisions. That’s something we’ll look at in our next issue.

For now, we’re going to send you on your summer holidays with a heady mix of football and cheese.

• Manton Hire Sales Ltd v Ash Manor Cheese Co Ltd [2013] EWCA Civ 458

Every law student knows that you’re under a duty to mitigate the loss you suffer as a result of someone else’s wrongdoing. But how far does that “duty” go?

In this case, Ash Manor Cheese approached Manton for a fork lift truck to use in its warehouse. A Manton representative took measurements of the racking and storage space and recommended two alternatives, one of which Ash Manor Cheese selected. The truck was purchased on finance.

Soon after delivery, Ash Manor Cheese discovered that the forklift did not fit within the racking, and took the view that it was not fit for purpose. They notified Manton and the finance company that they did not want the truck and stopped making the finance payments.

Manton proposed to remove the truck and have it modified, by removing parts of the protective cage, but the proposal remained vague. Ash Manor Cheese were concerned that the truck might not then comply with health and safety legislation. Correspondence between the parties became less conciliatory and discussions broke down, and the truck was rejected by Ash Manor Cheese.

In the meantime, the finance company sued Ash Manor Cheese and, after some resistance, that claim was conceded with legal costs. Ash Manor Cheese brought this claim to recover the amount they had paid the finance company. The court found that there had been a misrepresentation by Manton and that they were liable. The sole issue was whether Ash Manor Cheese had failed to mitigate its loss by rejecting Manton’s proposed solution. The court found that blessed were the cheesemakers, who had acted reasonably.

Manton appealed. The Court of Appeal rejected Manton’s argument that Ash Manor Cheese had failed to mitigate. Manton had not put forward an offer that Ash could reasonably have been expected to accept. Ash had not shut the door to negotiations; its inflexibility to negotiate had to be considered in light of the argumentative tone of Manton’s correspondence.

On the facts, there was nothing to prevent Manton putting forward a detailed proposal supported by a proper specification and drawings, as well as information as to how the relevant legislative and regulatory requirements would be met. In the circumstances, it was held that Ash had not acted unreasonably. This case confirms that the onus is on the defendant to show that the claimant failed to act reasonably, and the standard of what is reasonable for these purposes is not a high one.

• Henning Berg v Blackburn Rovers Football Club and another [2013] EWHC 1070

Henning Berg was appointed manager of Blackburn Rovers FC in 2012 on a 3 year fixed term contract. Just 57 days later he was unemployed. His dismissal by the club triggered a clause in his contract entitling him to payment of his basic salary for the balance of his fixed term, equating to £2.25m (almost £40,000 for every day worked, similar to a partner in a Magic Circle law firm).

Initially, the Club admitted the claim and sought time to pay. It then applied to the High Court to withdraw its admission on that ground that the Managing Director who had agreed the relevant term of the contract didn’t have the authority to do so, and that the term in question constituted a penalty. The High Court dismissed both arguments and ordered the Club to pay the full amount claimed.

The law on penalties does not apply where the trigger for payment is not a breach of contract. In this case, the payment was triggered by the application of contractual mechanisms, not a breach of contract. That meant there could be no argument that the payment was an unlawful penalty.

Enjoy the holidays!