Accountability - December 2013

19 minute read
10 December 2013

After a short break, Accountability is back. Look out for our revised, shorter publications every other month. We'll still be highlighting interesting legal cases and industry news, but on a more regular basis. We hope you will find this useful.

In our latest edition we look at several cases which:-

We also take a look at the permission granted to Deloitte to appeal against certain findings in the MG Rover tribunal decision and the Competition Commission's amendments to its proposed audit reforms.

Can a contract be made in two different jurisdictions? Yes says the High Court...

In Conductive Inkjet Technology Ltd v Uni-Pixel Displays Inc, the court has confirmed that, where the negotiations are complex, a contract can be made in two jurisdictions, applying the decision of Mann J in Apple Corps v Apple Computer from 2004 ([2004] EWCH 768 (Ch)).

Conductive Inkjet Technology (CIT) was an English technology company operating in the field of inkjet printing. Uni Pixel Displays (UPD) was a Texan company involved in the design and manufacture of films to be incorporated into touch panels.

In May 2005 UPD and CIT (together with another associated company) entered into a non-disclosure agreement (NDA) regarding the use of CIT's technologies for a particular project (the 2005 NDA). The 2005 NDA contained no governing law or jurisdiction clause.

In July 2006, the associated company sent CIT a draft proposal it had prepared for UPD regarding the use of CIT technology, which was sent to UPD in September 2006. A further proposal, in similar terms, was sent to UPD in March 2007. Neither proposal contained a governing law or jurisdiction clause.

After a hiatus period, there was further contact between CIT and UPD in 2010 regarding the use of CIT technology and, in response to this, the parties entered into a further non-disclosure agreement (the 2010 NDA). The governing law clause for the 2010 NDA was the laws and state of Texas.

CIT issued two sets of proceedings against UPD in the English courts, one for declarations pursuant to the Patents Act 1977 (the Patents Action) and consequential injunctions and another for breach of confidence/breach of the 2005 NDA (the Breach Claim).

For the purposes of the Breach Claim, CIT had sought and obtained permission to serve the English proceedings out of the jurisdiction under one of the jurisdictional gateways set out in CPR Rule 6.36 and PD 6B paragraphs 3.1(6)(a) and/or (b), namely that the 2005 NDA was made within the jurisdiction and/or is governed by English law.

On UPD's application to set aside the permission granted to CIT, one of the issues before the English court was whether the court had and should exercise jurisdiction over UPD in respect of the 2005 NDA. The evidence in respect of the 2005 NDA was that UPD had sent the final version of the document for approval to CIT by way of an email attachment. CIT had agreed to print out and sign originals and then send them back to UPD. In sending the final version UPD had not accepted CIT's request regarding the governing law and jurisdiction provisions and both parties had agreed to leave out any such provision.

The judge concluded that the parties had expressly agreed not to incorporate a choice of law or jurisdiction clause. He accepted that it would be artificial to determine the place of making of a contract by applying the traditional "posting" rule.

The judge therefore found that CIT had a good arguable case that the 2005 NDA was made in both England and Texas. On the basis that the principle underlying the jurisdictional gateway was to establish a sufficient connection to the jurisdiction, the judge found that it would be arbitrary to do so on the basis of the order in which the document was signed.

The increasing use of email and telephone calls in international business make it more likely that if there is a dispute over where a contract is formed, a court will hold that it was made in both jurisdictions rather than try to work out by conventional offer and acceptance rules who "spoke last".

If there is no jurisdiction clause, a party may need to rely on where the contract was made to engage the jurisdiction of a particular court. This ruling may give that party more options in relation to where to sue but it makes matters less certain for the other party.

Including a jurisdiction clause may assist in limiting that uncertainty. For example, by making it an exclusive jurisdiction clause, the parties must sue in that jurisdiction irrespective of where the contract was made.

This case illustrates that failure to include a jurisdiction clause can lead to unwanted and expensive court battles solely on jurisdiction.

As a consequence there will be uncertainty of outcomes and it will be difficult to assess both the risks and/or merits of any proposed litigation.

Ignore requests to mediate at your peril

In Halsey v Milton Keynes General NHS Trust [2004] EWCA Civ 567, the Court of Appeal held that the court should not compel parties to mediate; however, a refusal to engage in ADR could amount to unreasonable conduct and expose a party to cost penalties.

The court has taken this principal further in what has been described as a "modest extension" of the principle set out in Halsey. In PGF II SA v. OMFS Company 1 Limited, [2013] EWCA Civ 1288, the Court of Appeal considered that, as a general rule, a failure to respond to an invitation to participate in ADR is itself unreasonable, irrespective of whether a party has a good reason not to mediate.

The claimant claimed some £1.9 million in relation to alleged breaches of a tenant's repairing covenant. Following two Part 36 offers from the claimant (in October 2010 and April 2011), it wrote to the defendant inviting it to participate in mediation; it repeated the invitation some months later. Both requests to mediate went unanswered. The claimant sent a further Part 36 offer three weeks before the trial. The defendant also made a Part 36 offer in April 2011 and it was this offer that was accepted by the claimant the day before the trial was due to start.

The judge at first instance decided that the defendant should be subject to a costs sanction for its unreasonable failure to mediate. He held that ignoring the request to mediate amounted to a refusal. Under Part 36 rules, the defendant should have been due its costs from the date of expiry of the relevant period (May 2011) to the date of acceptance of the Part 36 offer (January 2012).

The judge refused to award the defendant these costs due to its unreasonable refusal to engage in ADR, however, he also refused to allow the claimant to recover its costs from the defendant for the same period.

Both parties appealed. The defendant argued that its silence did not amount to a refusal and even if it did, its refusal was not unreasonable. The claimant appealed against the refusal to award the claimant its costs as a result of the defendant's unreasonable failure to respond to its requests to engage in ADR.

The Court of Appeal dismissed both appeals. Engagement with an invitation to mediate, if only to set out reasonable reasons for its refusal, is necessary in order for parties to comply with the overall objective of ADR. Further, a costs hearing is not the appropriate forum for a party to set out, for the first time, its reasons for a refusal to mediate.

The Appeal Judge commented that "this case sends an important message to civil litigants, requiring them to engage with a serious invitation to participate in ADR, even if they had reasons which might justify a refusal". It was noted that a costs penalty may not automatically be appropriate, but that there would be a range of costs penalties which could be applied, with discretion, in any given case.

The Court of Appeal did not accept that the Halsey case required it to go further and award the claimant its costs and thereby further penalise the defendant for refusing to engage in ADR. It was open to the court to make such an order but it should be reserved only for the most serious and flagrant failures to engage with ADR.

Additional payment under Part 36 - discretionary not a right

One of the amendments brought in by the Jackson reforms is the additional payment of up to £75,000 to be made to a claimant by the losing defendant if a claimant makes an offer under Part 36 of the Civil Procedure Rules (Part 36) which it then beats at trial.

Such a payment is to be made pursuant to Part 36.14(3)(d) unless the court considers it unjust to do so. Part 36.14(4) sets out some of the circumstances which should be taken into account when determining whether it is unjust to make an order. Those circumstances include the terms of the offer, at what stage in the proceedings it was made (including how long before the trial started), the information available to the parties at the time the offer was made and the conduct of the parties in giving or refusing to give information so that the offer could be evaluated.

In Feltham v Bouskell, [2013] EWHC 3086 (Ch), the defendant argued it would be unjust to award the additional sum as:

  • The claimant had made its offer very late, with the 21 day relevant period (Part 36.2(2)(c)) expiring immediately before trial.
  • A key allegation upon which the claimant succeeded had not been raised until the opening of the trial.
  • Full disclosure had not been made until immediately before trial.

The defendant argued that the latter two points had made it difficult to fully evaluate the offer which the claimant had only just beaten.

The High Court judge agreed with the defendant that the lateness of the offer, the delay in disclosure and the failure to properly plead the case meant it would be unjust to impose the additional lump sum payment upon the defendant. The judge considered that the fact the offer had not been beaten by much was irrelevant.

This is one of the first reported judgments on the additional payment under Part 36. Had the payment been ordered in this case, the defendant would in effect have been penalised for the claimant's failings. The court clearly thought that unjust.

How fundamental is your expert evidence at trial?

The answer, following the Privy Council decision in Caribbean Steel Company Limited v Price Waterhouse (a Firm) [2013] UKPC 18 is very fundamental.

Caribbean Steel (Steel) brought a claim against Price Waterhouse (PW) in Jamaica for an alleged negligent valuation of Caribbean Cable Company Limited (Cable). Steel alleged it relied on this valuation for the purpose of subscribing to new issue shares, equivalent to 50.1% of Cable's issued share capital.

Steel argued that PW had negligently valued the price of the shares in Cable. Steel claimed that when stating Cable's pension fund had a surplus of $13,897,000 for the purpose of the valuation, PW should also have highlighted borrowings from Cable's pension fund.

Steel's expert had never prepared a valuation of a company or audited financial statements under the Companies Act. His expertise was in the investigation of fraud, whereas PW's expert was a fellow of the ICAJ (Institute of Chartered Accountants of Jamaica) and chairman of its disciplinary committee.

The original trial judge found for Steel. However, this decision was overturned by the Jamaican Court of Appeal, a decision which was upheld by the Privy Council. The Jamaican Court of Appeal found the judge was wrong to ignore the evidence of PW's expert witness, stating a court should be slow to find a professionally qualified person guilty of negligence without evidence from those within the same profession as to the standard properly to be expected.

Throughout the case, PW's expert provided reasoned responses to the questions raised. For example, whether it was reasonable as part of the valuation exercise to take the value of the pension fund surplus into account, having regard to standards and practices at the relevant time. Steel's expert gave no reasoned rebuttal. Another key factor in this case was that Steel's claim proceeded to trial without Steel's legal team realising their expert had referred to the wrong accounting standards in his expert report.

In conclusion, unless there is a sound reason for rejecting an expert's view, a judge cannot properly establish a claim for professional negligence. To ensure you have the best chance of defending a professional negligence claim at trial, it is almost always worth finding the most appropriate expert witness available.

Industry News

Deloitte granted partial permission to appeal MG Rover Tribunal Decision

On 20 November 2013, the FRC announced that it has granted Deloitte LLP partial permission to appeal the decision of the independent Disciplinary Tribunal relating MG Rover Group (the tribunal).

In its report issued in September 2013, the tribunal found that Deloitte and its former corporate finance partner, Maghsoud Einollahi, had failed to adequately consider the public interest when advising MG Rover Group and its owners (the Phoenix Four) on two transactions, known as 'Project Aircraft' and 'Project Platinum', in the period 2001 - 2002.

It also found that they had that they had failed to identify and consider actual or potential conflicts of interest between the Phoenix Four and MG Rover; and had failed to consider or safeguard against self-interest threat in accepting a contingent fee for the engagements.

The tribunal concluded that these findings amounted to misconduct under the Accountancy Disciplinary Scheme. It excluded Mr Einollahi from practising for three years, and imposed a fine of £250,000 on him. Meanwhile, it imposed a Severe Reprimand and a fine of £14 million (the bulk of which appears to represent repayment of fees earned from the transactions, plus interest) on Deloitte.

Deloitte LLP appealed the tribunal's decision on grounds that the findings were perverse; and that the tribunal made mistakes of law by misinterpreting the ICAEW's Fundamental Principles and Guidance as they relate to the question of 'public interest'.

In its Decision on Leave to Appeal, the FRC found that there was no arguable case for appeal of the tribunal's findings in relation to Project Platinum. However, it did grant Deloitte LLP leave to appeal the tribunal's (broadly equivalent) findings on the Project Aircraft transaction, finding that the tribunal's reasoning with regard to that transaction was arguably flawed and its decision arguably perverse.

The tribunal's findings raised important questions for the profession on the nature and extent of the public interest obligation on ICAEW members. That obligation stems from the opening paragraphs of ICAEW's Code of Ethics, which provide, inter alia,

"Professional accountants shall take into consideration the public interest and reasonable and informed public perception in deciding whether to accept or continue with an engagement or appointment".

The appeal, which engages the public interest question in relation to Project Aircraft, will therefore be watched with interest.

A date for the appeal hearing will be announced in due course. If the appeal is successful, the Appeal Tribunal has the power to vary or rescind the tribunal's findings and, by extension, the sanction.

Competition Commission audit reforms - not as strict as first anticipated

The Competition Commission (CC) has been concerned about the lack of competition in the audit market for some time. It reports that this lack is due to factors which inhibit companies from switching auditors and the incentives auditors having to focus on satisfying management rather than shareholder needs.

The CC Final Report (published on 25 October 2013) confirms the CC position that all FTSE 350 companies must put their statutory audit engagement out to tender at least every 10 years - no company will be able to delay beyond 10 years.

This is a retreat from the previously contentious position that audit contracts should be tendered every five years. As a compromise the CC has confirmed that companies should consider going out to tender every five years and if they choose not to at that time, the Audit Committee will be required to report the year it plans to conduct the tender and confirm why that is in the best interest of shareholders.

The reforms differ from those proposed by the FRC, which would require companies to switch auditor after 10 years. There is no requirement for mandatory switching and an incumbent firm can engage in the tendering process.

The CC reforms will also require the FRC's Audit Quality Review team to review every audit engagement in the FTSE 350 on average every 5 years and there will also be a prohibition of 'Big 4 only' clauses in loan agreements.

It is anticipated that the reforms will be in force from the last quarter of 2014, although the CC and FRC will have one eye on the EU audit reforms, which have been given the go ahead for debate between the Council of Members, the European Commission and the European Parliament.

The EU reforms will require mandatory audit rotation after 15 years for banks and other 'important companies' and 20 years for all other companies. This proposal had been opposed by the UK and other countries, however, they have been out-voted by the remaining members. If these reforms are implemented they will have to be adopted by the UK, despite its opposition.

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