UK Supreme Court Blog

EDITORS: Dan Tench, Emma Cross, Zainab Hodgson, Francesca Knight, James Warshaw and Natalie Haefner (CMS)
Hugh Tomlinson KC, Matthew Ryder KC, Nandini Bulchandani and Daniel Rudd (Matrix)

Before the Supreme Court term commences next week, Cathryn Hopkins and Ryan Dolby-Stevens take the opportunity to look back at some of the key judgments that the Court handed down in 2015 in the areas of contract law, public law, tort and fraud, and highlight the points for commercial law practitioners to be aware of.

1. CONTRACT

There has been an increase in recent years in the application of public law principles in private law cases, and this was well-demonstrated in the Court’s judgment in Braganza v BP Shipping Ltd & Anor [2015] UKSC 17 (Case Comment here).  This case concerned the entitlement of the widow of an engineer on a BP oil tanker to the ‘death in service’ benefit pursuant to the engineer’s employment contract.  Such a benefit could be excluded if, in the opinion of BP or its insurers, the death resulted from, amongst other things, the engineer’s wilful act, default or misconduct.  BP had excluded the benefit on the basis that a BP-commissioned report had found that it was most likely that the engineer had committed suicide.

It was accepted by the parties that BP’s decision had to be ‘reasonable’.  The Court was therefore asked to consider (i) the meaning of the requirement that the decision of a contractual fact-finder must be a “reasonable” one; and (ii) the proper approach of a contractual fact-finder who is considering whether a person may have committed suicide.

The Court held that the standard required when reviewing a contractual decision is akin to that adopted for judicial review of administrative action (i.e. Wednesbury unreasonableness, so the Court would not interfere unless the decision was so outrageous that no sensible person who had applied their mind to the question to be decided could have arrived at it).  On this basis, the Court held that a contractual term would be implied into the contract that the decision-making process be “lawful and rational in the public law sense” but that the requisite standard would depend on the particular context.  In this case, the Court held that the finding of a conclusion of suicide had to be held to a higher evidential standard of inquiry than a simple finding that the cause of death could not be concluded on.  The special nature of an employment contract was a relevant factor for the application of the test.

More recently, the Supreme Court considered the general rules governing the implication of terms into contracts, in the case of Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd & Anor [2015] UKSC 72  (Case Comment here).  The issue here was the correct approach to the contractual interpretation of a break clause in a lease.  The tenant had exercised a break right, following which the landlord had refused to refund advance rent paid by the tenant in respect of the period beyond the termination date. There was no express obligation in the lease for the landlord to refund the apportioned rent, although the tenant had argued that there should be a term implied into the lease obliging the landlord to refund the advance rent in proportion to the amount of time the tenant was actually in occupation.

Dismissing the appeal, the Court held that the tenant was not entitled to a refund.  The Court stated that a term will only be implied if it satisfies the case of “business necessity” or it is “so obvious that it goes without saying”.  Further, the Court held that the implication of a term is not dependent on proving the intention of the actual parties, but rather on what notional “reasonable people” in the position of the parties at the time of contracting would have agreed. The Court also held that it is a necessary but not a sufficient condition for implying a term that it appears fair or that one considers that the parties would have agreed it if it had been suggested to them at the time of contracting.  The Court also commented that practitioners have incorrectly interpreted the 2009 Privy Council case of Belize Telecom [2009] UKPC 10 as requiring an implied term to satisfy merely the requirement of “reasonableness”.  The Court clarified that implying terms into a contract was a separate process to construing the terms of a contract and as such was subject to different rules of contractual interpretation (a distinction which had been slightly obscured by Belize).

A case that has not just clarified, but in effect re-written, the rules on a fundamental principle of contractual law is the seminal case of Cavendish Square Holding BV v Talal El Makdessi and ParkingEye Ltd v Beavis [2015] UKSC 67 (Case Comment here).  In these joined cases, the Court took the opportunity to re-write the penalties doctrine, which had not been considered by the House of Lords or Supreme Court since the 1914 case of Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1914] UKHL 1.  The Court has held that the “genuine pre-estimate of loss” test from Dunlop that has been applied during the century following that case is now no longer appropriate for more complex cases, and the Court has re-cast the key questions for a court to consider when determining whether a clause is a penalty.

Under the new test, a court should look to whether the stated remedy in a contract is proportionate to the legitimate interests of the innocent party (which could go beyond the interest in merely being compensated for financial loss). The Court also clarified the types of clauses which will potentially fall within the penalties regime, holding that the regime is restricted to “secondary obligations” only – which are broadly (but not exclusively) obligations which arise upon breach of a primary obligation (for example, a provision for payment of a sum of money upon a breach of contract).

Several uncertainties remain (i.e. the interpretation of a secondary obligation in unclear circumstances, what might constitute “legitimate interests” and when a clause is deemed proportionate to those), although the majority of the Court found that there is now a strong presumption in favour of parties to commercial contracts being able to decide for themselves whether something is proportionate to their legitimate interests.

The Court’s reluctance last year to interfere with parties’ freedom of contract is also apparent in the contractual interpretation case of Arnold v Britton & Ors [2015] UKSC 36 (Case Comment here).  This case concerned the interpretation of service charge clauses in leases for 25 chalets in a Welsh holiday park.  Mrs Arnold (the lessor) argued that the service charge clauses should be interpreted such that the lessees were obliged to pay a fixed yearly amount, increasing at the fixed compound rate of 10% per annum, irrespective of the actual cost to her of providing repair and maintenance work. The lessees argued that this would result in such an absurdly high annual service charge in the later years of the leases that it cannot be right, and the clause should be read such that the service charge was variable according to the lessor’s actual expenses in a given year, and be subject to a cap on increases of 10% per annum.

The Court held that when interpreting written contracts, it should consider “what a reasonable person having all the background knowledge… would have understood them to be using the language in the contract to mean”.  In considering that question, the Court should have regard to the natural and ordinary meaning of the clause, any other relevant provisions in the contract, the overall purpose of contract, the facts and circumstances known or assumed by the parties at the time the document was executed and commercial common sense.  However, it should disregard subjective evidence of either party’s intentions. Lord Neuberger was also keen to stress that commercial common sense (which had been applied in Rainy Sky SA v Kookmin Bank [2011] UKSC 50 where there was ambiguity in the interpretation of a clause) should not be “invoked to undervalue the importance of the language of the provision which is to be construed”. That is, if the language is clear as to the meaning of the clause, then that should be followed even though it may appear contrary to common sense.

2. PUBLIC LAW

The recent increase in data-related litigation has started to reach the highest court in both private and public law actions.  In the linked cases of R (Catt) v Commissioner of Police of the Metropolis & Anor and another case [2015] UKSC 9 (Case Comment here), the Court was asked to consider whether the retention of records by the police relating to acts that occurred in public (in these cases, protesting and an argument with a neighbour) could be contrary to the right to privacy.  The information held on both individuals was fairly minimal, and neither had received a conviction, but they argued that the retention of data constituted a disproportionate interference with their rights under Article 8 of the European Convention of Human Rights.

The Court concluded that there was no breach. Whilst the retention of data clearly interfered with the individuals’ rights under Article 8, the Court held that such an interference was not disproportionate: the information is not sensitive, the primary facts have always been in the public domain, the material is disclosable only for police purposes and there are public policy reasons for not restricting this means of intelligence gathering.

On a more domestic-law level, the much-publicised case of R (Evans) & Anor v Attorney General [2015] UKSC 21 (Case Comment here) concerned the ten-year battle for the public disclosure of letters between HRH the Prince of Wales and various governmental departments following a 2005 request by a journalist under the Freedom of Information Act 2000 (“FOIA”) and the Environment Information Regulations 2004 (“EIR”), which enable members of the public to see (subject to various exceptions) documents held by public bodies and containing “environmental information” respectively.  Following a complaint to the Information Commissioner, and appeals to the Information Tribunal and the Upper Tribunal (“UT”), the UT (a judicial body with the same status as the High Court), had decided that many of the letters should be disclosed.  Following that decision, the Attorney General (“AG”) had issued a certificate pursuant to section 53(2) FOIA and regulation 18(6) of EIR stating that he had, on “reasonable grounds”, formed the decision that the departments had been entitled to refuse disclosure.  The Court was required to consider the validity of the certificate, and held (by a 5:2 majority) that the AG had not been entitled to issue the certificate since (a) regulation 18(6) of the EIR 2004 is incompatible with Council Directive 2003/4/EC on public access to environmental information, and (b) section 53 FOIA did not permit the AG to override a decision of a judicial tribunal or court merely because he took a different view.

Moving away from data and information to a more ‘classic’ public law case, towards the end of last year the Court conducted a comprehensive review of proportionality in R (Lumsdon & Ors) v Legal Services Board [2015] UKSC 41 (Case Comment here).  This case concerned a judicial review challenge by a number of barristers of the Quality Assurance Scheme for Advocates (“QASA”), which requires barristers in the criminal courts to be assessed by judges before they are allowed to take on certain categories of cases.  EU directive 2006/123/EC (the “Directive”) and its domestic implementing measure dictate whether services can be regulated by authorisation schemes (such as QASA). The Legal Services Board (the “LSB”) claimed that the Directive did not apply to QASA and the barristers disagreed.  The Court proceeded on the hypothesis that the Directive did apply to QASA, and continued to consider whether QASA satisfied two key conditions as set out in the Directive: (1) whether the need for the scheme was justified by an overriding reason relating to the public interest; and (2) whether the objective pursued by the scheme could be attained by means of a less restrictive measure – essentially, the proportionality test as a matter of EU law (given that an EU measure, i.e. the Directive, was being considered).

The Court reviewed the case-law of the Court of Justice of the European Union (the “CJEU”) on proportionality and from this Lord Reed distilled the principles to be applied:

1. it was for the Court to decide whether the scheme is proportionate;
2. the Court should approach the matter in the same way in which the CJEU would approach the issue in enforcement proceedings;
3. the Court must decide whether the LSB has established that the objectives cannot be attained by means of a less restrictive scheme;
4. that does not involve asking whether the LSB’s judgement was “manifestly wrong”; and
5. in considering the question of necessity, it should be borne in mind that EU law permits Member States to exercise a margin of appreciation as to the level of protection to be afforded to the public interest pursued, and to exercise discretion as to the choice of means of protecting such an interest.

Pursuant to these principles, the level of review required by EU law when assessing proportionality is more intensive than in past domestic public law cases.  However, even based on that more intensive level of review, the court found that the LSB’s decision was proportionate.

3. TORT

In Sea Shepherd UK v Fish & Fish Ltd [2015] UKSC 10 (Case Comment here), the Court considered the test for joint liability in tort of a third party for the tortious acts of the principal tortfeasor.  The principal tortfeasor was the US-based Sea Shepherd Conservation Society (the “SSCS”).  As part of an environmental campaign called “Operation Blue Rage”, the SSCS had rammed the respondent’s vessel, resulting in the release of the tuna fish that the respondent was carrying.  The appellant was a UK subsidiary of SSCS, who had participated in the fundraising for Operation Blue Rage and had recruited a couple of volunteers for that campaign.  The Court agreed that a third party will be liable if he: (1) acts in a way which furthers the commission of the tort by the principal tortfeasor; and, (2) does so in pursuance of a common design to do or secure the doing of the acts which constitute the tort.  The Court held by a majority of 3:2 that in this case the appellant was not liable as although the appellant and SSCS share a common design, the first instance judge had been entitled to find that the appellant’s contribution was minimal and played no effective part in the commission of the tort.

Lord Neuberger (in the majority) also pointed out that any analysis of the connection between the parties (i.e. the common design point) would be highly fact-specific and pointed out that the second defendant’s assistance must be substantial rather than minimal for a finding of joint liability.  Once assistance reaches a threshold where it is “more than trivial”, a third party’s relatively unimportant contribution should be reflected through the Court’s power to apportion liability and then order contribution between the third party and the principal tortfeasor.  Lords Sumption and Mance, dissenting, found that in this case the fundraising assistance given by the appellant could not be described as minimal.

Another tort case, that looked specifically at the scope of the tort of intentionally causing physical or psychological harm under Wilkinson v Downton, was James Rhodes v OPO (by his litigation friend BHM) & Anor [2015] UKSC 32 (Case Comment here).  This case concerned an autobiographical book which Rhodes sought to publish and the ensuing claim brought on behalf of his son (a child) for an injunction preventing publication of the book unless certain passages were removed. The injunction had been refused at first instance but was granted by the Court of Appeal, which held that publication of the book might constitute the tort of the “intentional infliction of mental suffering”.

The Supreme Court identified that there were three key elements required for the tort of intentionally causing psychological harm: (1) a ‘conduct element’ requiring words or conduct directed towards the claimant for which there is no justification; (2) a ‘mental element’ that the defendant had the actual intention to cause severe emotional distress (recklessness is not enough); and (3) a ‘consequence element’ whereby either physical harm or a recognised psychiatric illness must arise as a result of the action.  Only elements (1) and (2) were issues in the appeal, and the Court held that neither was satisfied.  Firstly, Rhodes was justified in telling his story (the Court emphasised that the law places a very high value on the freedom of speech) and secondly, there was no evidence to suggest that Rhodes intends to cause distress to his son.

The Court also objected to the wording of the injunction (it prohibited the publication of any “graphic language”, it being insufficiently clear what “graphic” means) and issued a reminder that injunctions should be “expressed in terms which are clear and certain”.

4. FRAUD/INSOLVENCY

The Court clarified the scope of the defence of illegality in the context of an insolvent company’s claims against directors and third parties that had committed frauds against it in the case of Jetivia SA and another v Bilta (UK) Ltd (in liquidation) & Ors [2015] UKSC 23.  This was the second and more notable of the two issues the Court was asked to consider, the first being whether section 213 of the Insolvency Act had extra-territorial effect and therefore could be brought against a defendant resident in a foreign jurisdiction (i.e. Jetivia).

The case concerned the alleged commission of carousel fraud through the trading of carbon credits by a number of parties, including the appellants and respondents to the claim.  The fraud’s ultimate victim was HMRC, who was owed a significant amount of money in tax from what were now insolvent companies. In order to recover monies for the company’s creditors, the liquidators of Bilta brought a number of actions against the companies involved in the fraud, including the appellant. In respect of the first issue, the Court held that Parliament clearly intended for section 213 to have extra-territorial effect.  To suggest otherwise, Lord Sumption stated, would be to frustrate many of the legitimate objects of UK corporate insolvency law and to ignore the unqualified terms in which section 213 was drafted.

The second issue considered whether Bilta’s liquidators were barred from bringing a claim against its ex-directors on the grounds that Bilta, as a separate entity, was equally caught up in the illegality of the carousel fraud?  In running this argument, Jetivia relied on the House of Lords’ much-criticised 2009 decision in Stone & Rolls Ltd (In Liquidation) v Moore Stephens (A Firm) [2009] UKHL 39.  The argument tested the notion of whether the ‘mind’ of the company was distinct from the mind of its directors. The Court recognised the problems with such an argument: it would mean that provisions which, at their heart, were intended to protect the company and its creditors from the nefarious activities of its directors, would be rendered useless as the company would be deemed to have shared the same malicious intent and therefore be barred from bring the claim.  As such, the Court rejected Jetivia’s argument and held that Bilta was not so barred.

Interestingly, although the justices reached the same conclusion, they diverged on the grounds for doing so: some of the justices were of the view that the illegality defence should not be available on grounds of public policy.  Lord Sumption, however, reached his decision on the basis that since the action was as between Bilta and its former directors for a breach of duty, the fraud exception applies (that is, in an action of for breach of duty against directors there cannot be attributed to the company a fraud which is being practised against it by its agent) and as such the illegality defence cannot lie.

The Court was keen to stress that this case was not an appropriate forum in which to issue a comprehensive and determinative ruling on the illegality defence: that was for another occasion.  However, this case has made it clear that a fraudulent director of a company cannot rely on the illegality defence for claims brought against him by the company or its liquidators; in fact Lord Neuberger concluded that Stone & Rolls should be “put on one side and marked ‘not to be looked at again’”.

Another notable fraud case heard in 2015 was JSC BTA Bank v Ablyazov [2015] UKSC 64  (Case Comment here).  This case represented another part of the on-going, high-profile litigation involving the former chairman of JSC BTA Bank, Mr Ablyazov, and his alleged misappropriation of $10 billion of the bank’s money for his own personal gain. The issue in dispute in this claim was whether, in directing funds available to him under loan agreements to make certain payments, Mr Ablyazov had breached the terms of a standard Commercial Court freezing order which the bank had placed over his assets in November 2009.

The fundamental issue for the Court to consider was whether the funds under the loan agreement that were directed for certain payments were “assets” and therefore caught by the terms of the freezing order. The Court rejected the argument that the mere right to draw down under a loan agreement constituted an asset for the purposes of the freezing order and therefore that Mr Ablyazov had disposed of or dealt with an asset.  However, they considered the extended wording of paragraph 5 of the Commercial Court freezing order and held that Mr Ablyazov had indeed breached its terms by “directly or indirectly disposing of or dealing with” assets as if they were his own.  Although Mr Ablyazov was not the legal or beneficial owner of the money held by the lender under a loan agreement, he could direct the lender to deal with the money as he, Mr Ablyazov, wished, thereby dealing with the money as if it was his own.  This judgment has accordingly closed the loophole whereby a defendant could incur increased indebtedness or direct money under a credit facility, whilst continuing to obey the strict terms of a freezing order.