28 February 2019

New Year New Litigation Risk What To Expect This Year

By: Natalie Quinlivan,Dorothy Murray,Darren Roiser

Introduction

As we start the Chinese year of the pig, we have been wishing our clients and colleagues prosperity (生意兴隆) and smooth business (工作顺利).

But do we see these wishes reflected in the outlook for international business in the UK in the year to come?

We review Six (六) key commercial litigation and investigation developments of the last year and predict their future impact.  We leave Brexit aside for this post; the levels of uncertainty at the time of writing are too much for any oracle.

Speed-read:

Wealth

Good news for recovering stolen assets – when you have been defrauded, you don’t have to identify the fraudster to preserve stolen assets.   In January 2018, the English Courts granted a worldwide freezing order (WFO) against “persons unknown” allowing Chinese multinational CMOC to trace funds stolen by anonymous hackers in a sophisticated cyber fraud through over 50 international bank accounts.    We predict: the powers of the Court and the nuclear weapon of the WFO will continue to adapt to the internet age.  Expect valid service by WeChat and judges willing to be persuaded to take innovative steps to keep the UK central to global asset recovery actions.

Bad news for illegitimate wealth – the British National Crime Agency secured an “unexplained wealth order” against the wife of the former chairman of the International Bank of Azerbaijan, successfully arguing that her £22m properties and over £16.3m shopping at Harrods must, in the absence of any explanation from her, be laundered proceeds of crime.  We predict: more UWOs, as the UK promotes itself as friendly to good business but no haven for wrongdoers.

Stability

Courts uphold certainty of contracts – in the landmark judgment of Rock Advertising Ltd v MWB Business Exchange Centres Ltd in May 2018, the Supreme Court upheld a contractual provision requiring amendments to be in writing.  We predict: more court decisions cementing the reputation of English contract law as clear and certain.

Courts confirm scope of privilege in litigation – the Court of Appeal confirmed that investigating whistle-blower allegations, dealing with compliance and governance and seeking to avoid or settle a dispute is all captured within “litigation” for the purpose of attracting privilege from disclosure: SFO v ENRC [2018].  Commercial discussions within a board about a settlement are not covered however: WH Holding Ltd v E20 Stadium LLP [2018] We predict: sadly, this area will continue a minefield.  As ever, our advice to clients is to get legal advice early to ensure privilege exists and retained over appropriate documents.

SFO promises businesses DPA certainty – the first deferred prosecution agreement with the Serious Fraud Office came to an end in 2018, after Standard Bank completed the 3-year term following allegations that it had failed to prevent bribery by its subsidiaries in Tanzania.  The new director of the SFO has announced her commitment to ensure a predictable process for other corporates who seek a DPA, so encouraging engagement with regulators and enforcement agencies in cases of suspected wrongdoing.  We predict: active engagement between the SFO and companies to combat corporate crime but preserve businesses and their reputations.

Bad news for parents – the UK is increasingly seeing “class action tourism”, where claimants seek to sue parent companies for damage caused in another jurisdiction by a subsidiary or other group company.  Traditionally these kinds of claims had focused on competition law, personal injury or banking regulation breaches but 2018 saw attempts to bring claims for largescale environmental damage against natural resources groups.  While some claims have been dismissed because the English courts lack jurisdiction over them, the English Supreme Court is considering whether to allow claimants to sue Vedanta, a UK incorporated company, and its Zambian subsidiary, for damage and loss caused by alleged water pollution from mining waste.  Judgment is expected in March 2019 and could open the door to other claims in the future.  We predict: whatever the outcome, claimants will continue to explore new options and parent companies will face continued attack and new risks.

Long-read:

Wealth

1. Good news for recovering stolen assets

Recent innovative action in the Commercial Court in England demonstrated that it is possible to trace, freeze and recover money stolen in a sophisticated computer email hack.  The funds, taken from the bank account of CMOC, a Chinese multinational, was remitted to banks in many foreign countries by the cyber-fraudsters.

Armed only with details of the destination banks and account numbers, the claimant made repeated applications to court to freeze the destination bank accounts using the effective English Worldwide Freezing Injunction and associated procedures.  The innovation here was that the Court did not require the claimant to identify the cyber-fraudsters, who tried to hide behind the anonymity of the Internet.  Instead, they were sued as a class of ‘Persons Unknown’. 

The freezing injunctions were made effective by ancillary orders, requiring 50+ international banks to disclose the identity of persons and companies who held the bank accounts where the stolen money was received, as well as to give details of all relevant account transactions.  That allowed CMOC to trace its money as it moved from bank to bank across the world.

Other ground-breaking developments in the action included obtaining permission to serve court documents, orders and injunctions by Facebook Messenger, WhatsApp and by access to a secure online data room.  It is envisaged that future orders may permit service in China using WeChat.

2019 prediction: With the rise of online and cyber fraud, these developments are of great relevance to all corporations and high-net-worth individuals in China and elsewhere. The principles in the case may also have direct application where Bitcoin or other cyber currency is stolen.  The powers of the English Court and the nuclear weapon of the WFO will continue to adapt to the internet age.  Expect valid service by WeChat and judges willing to be persuaded to take innovative steps to keep the UK central to global asset recovery actions.

2. Bad news for illegitimate wealth

Pursuant to the Criminal Finances Act 2017, unexplained wealth orders (UWO) came into force on 31 January 2018.  Already used to good effect in Australia and Ireland, a UBO effectively reverses the burden of proof, forcing those suspected of gaining assets illegally to prove they were obtained within the confines of the law (see summary here: https://www.linkedin.com/pulse/unexplained-wealth-orders-natalie-b-m-quinlivan-1/).

In February 2018, the UK’s National Crime Agency (“NCA”) secured its first two UWOs against Zamira Hajiyeva, the wife of Jahangir Hajiyeva, the former chairman of the International Bank of Azerbaijan currently serving a prison sentence in his home country for various frauds.  The properties subject to the UWOs were two residential properties valued at approximately £22m held by a BVI registered company beneficially owned by Mr Hajiyeva.  The allegation against Mrs Hajiyeva was that these assets, as well as extravagant spending which included a £16.3m shopping spree in Harrods, were funded by the laundered proceeds of the bank fraud, rather than her or her husband’s legitimate funds.  Interim freezing orders were granted in support of the UWOs to prevent the sale, transfer or dissipation of the properties.

Mrs Hajiyeva challenged the UWOs on the basis that her husband was not a politically exposed person (“PEP”) (by virtue of being a state employee) but rather was a “fat cat banker” and the funds used to purchase the property were his own.  This argument failed and Mrs Hajiyeva is now facing extradition to Azerbaijan over allegations of embezzlement. 

2019 prediction:  The Hajiyeva case demonstrates the UK’s commitment to anti-money laundering enforcement efforts.  The NCA has publicly stated that its Economic Crime team have over 100 live cases where UWOs are being considered.  We expect UK prosecutors to increase the use of UWOs over the coming year to target corrupt PEPs and other individuals suspected of investing illicit funds in British assets as the UK promotes itself as friendly to good business but no haven for wrongdoers. 

Stability

3. Courts uphold certainty of contracts

In May 2018, the Supreme Court overturned a decision that contractual clauses requiring amendments to be in writing would not preclude amendments subsequently being effected orally. 

In Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] the Supreme Court held that if the parties to a commercial contract wish to restrict the manner in which they can amend their contract, there is no policy reason for the law to prevent their doing so.   The previous trend had been to allow parties to vary a contract orally, giving precedent to the subsequent (albeit oral) agreement.

This is an important judgment which means that “no oral modification” (“NOM”) clauses will generally be given effect so as to prevent contracting parties being bound by a subsequent variation unless the specified formalities are complied with.  The majority of the Court identified three commercial reasons for including NOM clauses:

• to prevent attempts to undermine written agreements by informal means;

• to avoid disputes about whether a variation was intended and also its exact terms; and

• to make it easier for corporations to police their own internal rules and policies restricting the authority to agree variations.

2019 prediction: This decision will be welcomed by the business community as the enforcement of NOM clauses provides much needed certainty when included in written agreements.  The requirement that any variation needs to be in writing will also reduce the scope for misunderstandings which are so common in oral agreements.   We predict more decisions like this in 2019 cementing the reputation of English contract law as clear and certain.

4. Courts confirm the scope of privilege in litigation

September 2018 saw the long awaited Court of Appeal decision in ENRC (see summary here: https://www.linkedin.com/pulse/enrc-v-sfo-2018-rhyme-dorothy-murray/). 

The decision in SFO v ENRC [2018] restored the generally held view of the ‘dominant purpose’ test, finding that the purpose of investigating whistleblower allegations and dealing with compliance and governance was all part and parcel of the litigation purpose, and so the test for litigation privilege was met. It also helpfully confirmed that avoiding or settling a dispute, even pre-action, is as much a litigation purpose as defending proceedings.

However, rather unhelpfully, in December 2018 the same court restricted the use of litigation privilege to the purpose of obtaining advice or information and not the conduct of litigation more broadly, such as correspondence with experts. In WH Holding Ltd v E20 Stadium LLP [2018] the Court of Appeal held that emails between a company’s board members which had been prepared to discuss a commercial proposal for the settlement of a dispute were not covered by litigation privilege.  It is not sufficient that it is for the dominant purpose of conducting litigation, in a broader sense.  

2019 prediction: Privilege remains a thorny issue for the coming year.  After successive judgments in 2018 where the English Courts have adopted a conservative view on where litigation privilege applies, extra care must be taken to ensure privilege is maintained.  Also, the long-standing issue of the definition of a client for the purposes of legal advice privilege, as delineated by the Three Rivers No 5 decision, will remain a headache for GCs and external counsel for 2019.  As ever, our advice to clients is to get legal advice early to ensure privilege exists and retained over appropriate documents.

5. SFO promises businesses DPA certainty

In November 2018, the UK’s Serious Fraud Office (“SFO”) announced the end of the UK’s first DPA with Standard Bank.  A DPA is an agreement reached between a prosecutor and an organisation which could be prosecuted, under the supervision of a judge.  The agreement allows a prosecution to be suspended for a defined period provided the organisation meets certain specified conditions.  They are typically used for fraud, bribery and other economic crime. They apply to organisations, never individuals. 

Since their introduction in 2014, four DPAs have been entered into with the SFO.  Standard Bank holds the dubious honour of being the first recipient of one after it was alleged that the Bank had failed to prevent associated persons of its African subsidiary from committing bribery offences.   

The successful conclusion of the UK’s first DPA, following confirmation that Standard Bank fully complied with its terms, is an important milestone for the SFO.  Lisa Osofsky, the SFO’s new director, has stated her commitment to create a predictable landscape for corporates who are seeking a DPA.  To achieve this, she is focused on collaborating with international prosecutors, regulators and law enforcement around the world.  

2019 prediction: The SFO currently has a US Department of Justice (“DOJ”) prosecutor on secondment in London, as well as two prosecutors from the AG’s office in Singapore.  Going forward, we can expect joint investigation teams combining resources with the aim of tackling global corruption issues.  This level of coordination is likely to result in significantly higher fines for offending corporates.  That said, with a commitment to DPAs, we also predict active engagement between the SFO and companies to combat corporate crime but preserve businesses and their reputations.

6. Bad news for parent companies

2018 has been a busy year in the UK for so-called “class action tourism”.  Already common place in the US and Australia, claimant firms and litigation funders are investing heavily in the UK to launch class actions in this jurisdiction.  The cases under the spotlight during 2018 relate largely to incidents in a foreign country, directly effecting a proportion of the local population who seek damages in the UK on the basis that an anchor defendant has a connection to the UK.  

The case of Lungonwe and others v Vedanta Resources plc and & Konkola Copper Mines plc may be the first case where jurisdiction for these types of claims is granted in the UK.  Residents of a Zambian city brought civil proceedings against Vedanta, a UK incorporated parent company, and its Zambian subsidiary, Konkola Copper Mines Plc (“KCM”), claiming that waste discharged from a copper mine - owned and operated by KCM - had polluted the local waterways, causing personal injury to the local residents, as well as damage to property and loss of income.  

The High Court found that it did have jurisdiction to hear claims against Vedanta, even though the alleged tort and harm occurred in Zambia.  The defendants have appealed this decision all the way to the Supreme Court and the two-day hearing took place in January 2019, the judgment of which will be published in March 2019.

2019 prediction: While we await the outcome of the Supreme Court’s judgment in the Vedanta case, multinational corporate clients with a presence in the UK should be aware that this is an increasing area of risk for them.  For 2019, the key areas that we are likely to see targeted are shareholder claims and environmental or human rights-based claims.  For this reason, corporates who may be exposed to this risk should take proactive steps by implementing measures which ensure human rights are given priority throughout their operations. Whatever the outcome in the Vedanta case, claimants will continue to explore new options and parent companies will face continued attack and new risks.

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