What Happens To Privilege When A Company Ceases To Exist?

In late 2019 the English Court of Appeal delivered a trenchant defence of legal professional privilege, declining to recognise a novel exception notwithstanding that the holder of the privilege had ceased to exist (Addlesee v Dentons Europe LLP [2019] EWCA CIV 1600). The specific issue was what happens to legal advice privilege attaching to communications between a company and its lawyers, once that company has been dissolved.

By way of background, a large group of investors invested in a scheme marketed by a company called Anabus Holdings Ltd, which was subsequently dissolved. But prior to that, Anabus had sought and obtained legal advice from its law firm, Dentons. The investors issued proceedings against Dentons for deceit and negligence, and sought to obtain copies of the documents which had passed between Dentons and its client. The question on appeal was whether legal advice privilege could be asserted, notwithstanding the dissolution of the client. In other words, is privilege lost if there is no person entitled to assert it at the time when a request for disclosure is made.

The Court of Appeal relied heavily on the decision of the House of Lords in Three Rivers (Three Rivers DC v Governor and Company of the Bank of England (No 6) [2004] UKHL48) as articulating the underlying policy behind the recognition of legal advice privilege. That policy requires that once privilege has been conferred, a client can be certain that, subject to certain limited exceptions, the information she has imparted will never be revealed without consent.

Privilege attaches to a communication because of the nature of the communication and the circumstances under which it is made. Thus established, the privilege remains absolute unless it is waived.

Privilege does not cease on the death of a living person, but is instead conferred on that person’s successors. Even though the authorities refer to privilege as a “right”, and in the case of a company there is no successor in title, the privilege continues to exist. The Court in Dentons rejected the argument that a right must belong to someone, or that the right cannot exist if there is no-one to whom it can be said to belong.

Notwithstanding there was no identifiable prejudice to the client arising from disclosure of the legal advice the investors were not entitled to it. The strong underlying policy arguments in favour of protection of legal professional privilege prevailed.

I believe a New Zealand court would be likely to take a similar approach.

Restitution for Unlawful Regulatory Charges

A recent decision of the English Courts in Vodafone Ltd v Office of Communications [2019] EWHC 1234 concerned what approach a court should take to calculating restitution for a wrongly imposed regulatory levy.

The case was brought by a group of mobile network operators against Ofcom, the statutory body responsible for the management and licensing of radio spectrum in the United Kingdom. The mobile network operators were required to pay a licence fee for spectrum which was prescribed by Ofcom in 2011 regulations. In 2015 Ofcom announced a revision of the 2011 regulations and these changes were implemented by the 2015 regulations. The 2015 regulations were subsequently found to be unlawful and were set aside.

It was common ground that the mobile network operators were in principle entitled to restitution to the extent that the licence fees they had paid were exacted from them by a public body acting without lawful authority. The question was what was the appropriate measure of restitution.

The mobile network operators claimed that the amount of restitution to which they were entitled was the difference between the sums they had paid under the unlawful 2015 regulations and the sums properly due under the lawful 2011 regulations (which the Court referred to as the ‘net sum’ calculation). Ofcom argued that the appropriate measure was the amount which the claimants would have been required to pay if Ofcom had acted in accordance with law (which the Court referred to as the ‘counterfactual sum’ calculation).

The Court rejected the counterfactual measure of damages. It said that this was tantamount to a “but for” analysis which might be appropriate in a private law context, but was not of uniform and compulsory application in every case. In this particular case, it required an assumption that the regulator had in fact acted lawfully. This assumption was inconsistent with the fundamental principle of legality, namely that a public authority cannot retain a tax or duty or levy which it has collected unlawfully.

A counterfactual measure of damages also raised immediate practical questions as to the legitimate parameters of hypothesising what the regulator would or would not have done. Ofcom’s case required the court to hypothesise not just the filling of the gap, but the replacement of the existing law with something different.

In determining whether a lawful fee could and would have been charged and, if so, the amount of that fee (in this case, the amount likely to be charged under the 2011 regulations), it was permissible to hypothesise the taking of necessary administrative steps which may have been omitted for the purpose of fixing the proper amount. But it was not permissible to hypothesise a new legal entitlement or one involving a change in the law.

Accordingly, the mobile network operators were entitled to succeed in their claims for the net sum.

Wrotham Park Damages: The Turn of the Singapore Court of Appeal

Following hard on the heels of the UK Supreme Court’s decision in Morris-Garner and Anor v One Step (Support) Ltd [2018] UKSC 20, [2018] 2 WLR 1353, the Singapore Court of Appeal has now issued a judgment which contains an equally comprehensive analysis of Wrotham Park damages.

Turf Club Auto Emporium Pte Ltd & Ors v Yeo Boong Hua & Ors [2018] SGCA 44 concerned the appropriate remedy for breach of a contract arising from settlement of a dispute between joint venturers.

The parties were in a joint venture to develop land.  They each held shares in certain JV Companies. The land in question was leased by one of the parties (SAA) who in turn granted sub-tenancies to the JV Companies. A dispute developed but this was ultimately settled and the terms of the settlement were set out in a Consent Order.

The Consent Order required valuations to be conducted and for each party to bid for remaining shares in the JV Companies.  The valuation process was delayed and in the meantime SAA renewed the head lease but did not grant sub-tenancies to the JV Companies. The Court found that SAA had breached the terms of the Consent Order, and then turned to consider the question of damages.

After an extensive review of the authorities, the Court held that Wrotham Park damages should, as a matter of principle, be recognised as a head of contractual damages under Singapore law. The Court also concluded that Wrotham Park damages are compensatory, rather than restitutionary, in nature.  However, they play a limited role and apply only in a specific type of case. Wrotham Park damages can be awarded when three requirements are satisfied:

• First, as a threshold requirement, the court must be satisfied that orthodox compensatory damages (measured by reference to the plaintiff’s expectation or reliance loss) and specific relief are unavailable.

• Second, it must, as a general rule, be established that there has been (in substance, and not merely in form) a breach of a negative covenant.

• Third, the case must not be one where it would be irrational or totally unrealistic to expect the parties to bargain for the release of the relevant covenant, even on a hypothetical basis. In other words, it must be possible for the court to construct a hypothetical bargain between the parties in a rational and sensible manner.

Wrotham Park damages are to be measured by such a sum of money as might reasonably have been demanded as a quid pro quo for relaxing the negative covenant. The assessment is objective and by reference to a hypothetical bargain rather than the actual conduct and position of the parties. It is assessed by reference to the information available at the time, and the commercial context. The relevant date is the date of breach: post-breach events are generally irrelevant.  Tentatively, in the Court’s view, causation and remoteness of damage are not relevant. Given the hypothetical nature of the assessment, a “rough and ready” approach as opposed to a precise one is acceptable.  

The UK Supreme Court decision in Morris-Garner was handed down after the hearing in Turf Club but before the Singapore Court had handed down its own judgment. The Singapore Court saw many similarities between its own decision and that in Morris-Garner.  However, to the extent that Morris-Garner must be read as limiting the availability of Wrotham Park damages (termed by the UK court, “negotiating damages”) to cases involving the infringement of property rights or analogous interests, the Singapore Court did not agree. It considered that such a limitation would unduly narrow the scope of the Wrotham Park doctrine, and should be rejected as a matter of principle. But it left open the possibility of further argument.

Plainly, cases which meet the criteria for an award of damages of this kind are rare – and we in New Zealand may need to wait for some time before such a case comes in front of the courts. But the fact that Wrotham Park damages have now been recognised by two overseas appellate courts suggests that our courts may do so as well. In appropriate cases, this is a potentially powerful avenue for plaintiffs to claim relief.

Judicial Recognition of No Oral Modification Clauses

Along with the recent run of fine weather we also appear to be enjoying a run of significant appellate cases in the area of contract law.  Indeed, as Lord Sumption noted in his 16 May judgment in Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24: “Modern litigation rarely raises truly fundamental issues in the law of contract.  This appeal is exceptional.  It raises two of them”.

The first was whether a contractual term prescribing that an agreement might not be amended except in writing (commonly called a “no oral modification” or “NOM” clause) is legally effective.  The second was whether an agreement whose sole effect is to vary a contract to pay money by substituting an obligation to pay less money or to pay the same money but later, is supported by consideration.

The parties in this case had entered into a license agreement.  The agreement included an entire agreement clause but also stated: “All variations to this License must be agreed, set out in writing and signed on behalf of both parties before they take effect”.

Rock Advertising accumulated arrears.  Representatives of MWB purported to enter into an oral agreement varying the license agreement to provide that the schedule of payments would be deferred, and accumulated arrears spread over the remainder of the license term.  Rock Advertising defaulted and MWB eventually terminated the license and sued for arrears.  Rock Advertising claimed that the variation was ineffective as it was not in writing.

Lord Sumption, on behalf of the majority of the Court, noted the conceptual reasons invariably given for treating NOM clauses as ineffective. Variation of an existing contract is itself a contract and because the common law imposes no requirements of form on the making of contracts the parties may agree informally to dispense with an existing clause which imposes requirements of form - the mere act of agreeing a variation informally must be taken as an intention to do so.

Contrary to those objections the Court found that the law should give effect to a contractual provision requiring specific formalities to be followed for variation and so a NOM clause will be effective.

In making that finding, Lord Sumption recognised the commercial drivers for including such clauses in contracts.  The first was to prevent attempts to undermine written agreements by informal means.  Secondly, in circumstances where oral discussions can easily give rise to misunderstandings, NOM clauses avoid disputes not just about whether a variation was intended - but also about its terms.  Thirdly a measure of formality in recording variations makes it easier for corporations to police internal rules restricting the authority to agree them.

These were all legitimate commercial reasons for such clauses.  There was no mischief in NOM clauses and they did not frustrate or contravene any policy of the law.  The law does not normally obstruct the legitimate intentions of business persons.  By contrast, the reasons given for disregarding such clauses were entirely conceptual.

Recognition of NOM clauses was consistent with the Court’s acceptance of entire agreement clauses.  Both were intended to achieve contractual certainty about the terms agreed.

Having determined that the clause in question was valid, the Supreme Court declined to consider the question of whether or not consideration had been provided, preferring to leave that until a sustained consideration or re-examination of the decision in Foakes v Beer could be undertaken.  

https://www.supremecourt.uk/cases/docs/uksc-2016-0152-judgment.pdf

Negotiating Damages for Breach of Contract

The recent decision of the United Kingdom Supreme Court in Morris-Garner[1] is one of the most significant cases on damages to emerge from an appellate court for some years.

The underlying facts were simple enough. One Step (Support) Ltd alleged that the Morris-Garners had breached certain non-compete covenants in a sale and purchase agreement between them and One Step. The trial judge found the Morris-Garners to be liable and the case proceeded through the appellate courts on the question of how damages should be quantified.

With few exceptions, damages for breach of contract are assessed on a compensatory basis. In the case of breach of non-compete covenants, the ordinary measure is the value of the business profits which the claimant would otherwise have made but which it has lost as a result of the defendant’s unlawful behaviour.

So-called Wrotham Park damages are damages calculated as an amount which would notionally have been agreed between the parties, acting reasonably, as the price for releasing the defendant from its obligation. They are also known as “negotiating damages” or “release damages”. The term arose from the decision of Brightman J in Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798. Since then, the concept of damages assessed on the basis of a notional release fee, has been applied in a variety of quite disparate contexts. Those cases have generally been:

• Cases in which the claimant’s rights have been infringed, but the claimant has not suffered any apparent pecuniary loss (for example, trespass, wrongful use of property, disclosure of confidential government information);
• Cases in which the claimant would ordinarily be entitled to the enforcement of its rights, but the notional release fee is the price of non-enforcement (for example, as a substitute for an injunction when an injunction is not appropriate for some reason);
• Cases where the claimant has suffered pecuniary loss, and the notional release fee is used as evidence of that loss i.e. as a surrogate for calculation of loss of profits from breach (eg patent infringement).

The Supreme Court has now clarified the theoretical basis for such awards of damages, and the circumstances in which they are available.

The Court held that negotiating damages are available in cases of breach of contract when they can be assessed by reference to the economic value of the right which has been breached, considered as an asset. They are therefore consistent with the compensatory purpose of contractual damages because the claimant has in substance been deprived of a valuable asset.

The general availability of negotiating damages has yet to be recognised in New Zealand, and following this judgment are unlikely to be, as a separate head of damages at least.  But the Supreme Court’s careful articulation of the framework within which compensatory damages are awarded will be useful in this country, especially in cases involving intellectual property rights or breach of a confidentiality agreement.

[1] Morris- Garner and Another v One Step (Support) Ltd [2018] UKSC 20.

A Client’s Right to Exclusivity

The courts have considered the question of whether a lawyer may act for a client in one set of proceedings but against that client in another set of unrelated proceedings. In some cases the court will not permit this even though there is no same matter conflict or suggestion that confidential information might be disclosed.

This was the outcome of Mike Pero Mortgages Limited v Mike Pero Mortgages Limited [2014] NZHC 2798.  A Wellington-based partner of Buddle Findlay acted for Mike Pero Mortgages in two proceedings against, variously, Mike Pero Marketing and Mr Mike Pero.  Meanwhile a partner in another office of Buddle Findlay was acting for Mr Pero in litigation against a third party. Buddle Findlay was therefore acting on litigation against one of its own current clients.

Mike Pero Marketing successfully applied to have Buddle Findlay restrained from acting for Mike Pero Mortgages.

The Court reiterated the principle of fundamental importance, being the Courts’ rights to determine which persons should be permitted to appear before it as advocates (as recognised in Black v Taylor). This arises from the Court’s inherent jurisdiction to restrain a barrister from acting where the interests of justice so require.

The relevant test from Black is that of the reasonable observer: the appearance of justice turns on how the conduct in question would appear to those reasonable members of the community knowing of the background.

Associate Judge Matthews undertook a detailed review of related case law including from other jurisdictions and concluded:

• Different principles apply to lawyers appearing for clients in litigation to those acting on commercial matters.
• Lawyers owe a fiduciary duty to clients, a fundamental aspect of which is the duty of loyalty. The duty of loyalty to an existing client is breached by acting against that client in litigation. The fact that the risk of passing on confidential information is controlled, does not alter that position.

On that basis, Buddle Findlay was restrained from acting against Mike Pero Mortgages. The decision was not appealed and has not been overruled – and remains good law. Its practical application is that in some circumstances of a long-standing relationship between lawyer and client, the courts will not permit the lawyer to act against the client notwithstanding the absence of a conflict of interest.

The Conduct Rules and In-House Counsel

The Lawyers and Conveyancers (Lawyers: Conduct and Client Care) Rules 2008  apply to all lawyers.  “Lawyer” is defined in the Lawyers and Conveyancers Act 2006 as anyone who holds a current Practising Certificate.  In the case of in-house counsel, the Rules only apply to the extent that in-house counsel provide regulated services.  It follows that the Rules would not apply to the extent that in-house counsel are acting in a purely commercial as opposed to a legal role, although in practice the line can be difficult to identify.

Chapter 15 of the Conduct Rules deals with the special position of in-house counsel.  It provides that the provision of regulated services by in-house counsel to the client (in this case, the employer) must be pursuant to a lawyer/client relationship.  An in-house lawyer must not enter into any agreement with his or her employer that prevents compliance with any of the obligations under the Act or the Conduct Rules.  The Conduct Rules specifically deal with the question of in-house lawyers acting for entities other than that by whom they are employed.  They state:

Section 15.2.4

Where an in-house lawyer is engaged by –

(a) a controlling entity, the lawyer may provide regulated services to a subsidiary entity of the controlling entity; or

(b) a subsidiary entity, the lawyer may provide regulated services to the controlling entity and to any other subsidiary entity of the controlling entity; or

(c) the Crown, a Crown organisation, or a Statutory Officer,

the lawyer may provide regulated services to the Crown and to any Crown organisation or Statutory Officers.

However,  in doing so, an in-house lawyer must comply with the provisions of the Act and the Rules apart from Chapter 4 (cab rank rule) and Chapter 9 (fees).

In practical terms the circumstances in which an in-house counsel may face issues of conflict of interest are likely to be fairly rare.  Likely scenarios are:

• a “classic conflict” between the personal interests of the in-house lawyer and the client (usually the employer) in relation to the matters upon which the in-house lawyer is providing regulated services; and
• for entities with subsidiaries or related entities, where the in-house legal team is providing advice to more than one entity there must in theory be a risk of a conflict of interest between the parent entity and subsidiary.  For example, an in-house lawyer is employed Company A.  She is asked to provide advice to Subsidiary B in relation to a Services Agreement between Company A and Subsidiary B.  While in most instances the interests of the two will be aligned this may not always be the case.

In which case, the Rules concerning same-matter conflict and information conflict apply with equal force. 

Discovery And Judicial Review: Have The Goal Posts Moved?

The standard advice I have given clients both contemplating bringing an application for review, and defending one, is that discovery is not generally required. 

There are a number of reasons for that.  First, the incentives are generally on decision-makers to fully disclose the background to their decisions – whether by initial disclosure of documents, or in affidavits.

Secondly, the narrower ambit of the court’s review jurisdiction means that documents are usually less probative than they would be in a commercial case between private parties.

Finally, the ability to request documents under the Official Information Act often goes some way to providing the type of material ordinarily obtained through discovery.

A recent case has caused me to ask whether that approach is unduly conservative.  In New Zealand Steel Limited v Minister of Commerce of Consumer Affairs [2017] NZHC 3232, NZ Steel brought judicial review of a decision by the Minister that steel imports were being subsidised by China to a de-minimis level only, and the subsidisation was not causing material injury to New Zealand markets. New Zealand Steel was concerned that reports from various foreign regulatory investigations had found countervailing subsidisation in the steel sector, and suspected that MBIE may have disregarded key findings in those reports. It also questioned reliance on some evidence.

In its application for review NZ Steel sought discovery of various categories of documents including:

• correspondence relating to MBIE’s investigation, including internal correspondence and correspondence between Government agencies and with foreign Governments (Category 1);
• working documents including drafts of the various reports (Category 2); and
• material considered and/or relied by MBIE in preparing the various reports (Category 3). 

Her Honour Justice Thomas reviewed both the 2012 amendments to the High Court Rules, and the Judicial Review Procedure Act 2016. She concluded that there was no apparent  difference between discovery in judicial review and discovery in an ordinary civil proceeding. It all came down to the issues and to questions of relevance and proportionality.

NZ Steel argued that the relevant test was (following the decision of the Court of Appeal in Air Nelson Limited v Minister of Transport [2008] NZCA 26) whether the report prepared by MBIE for the Minister had given the Minister a fair and accurate picture of what had been in front of MBIE. To determine that, NZ Steel argued, it needed to know what was not in the final report. MBIE by contrast relied on the line of cases which have held that internal deliberations are not discoverable.

Her Honour dismissed the application for discovery in relation to Category 1 and Category 2 material. She found that the Category 1 material would not assist resolution of the pleaded issues. The Category 2 material went to internal deliberative processes of MBIE and under orthodox principles were not discoverable.

However, she concluded that the Category 3 material was relevant and that discovery was proportionate and in the interests of justice. Her Honour could not see the apparent logic in discovery being considered relevant for materials relied on by MBIE in preparing its final report but not  for the earlier reports that were also part of the statutory process. 

So standing back, what does this mean? On the one hand it is easy to dismiss the case as an example of an unusual statutory framework. On the other hand there is some superficial appeal to the argument that a party alleging failure to have regard to relevant considerations “doesn’t know what it doesn’t know” and therefore should be entitled to discovery. If that line of analysis gains any further traction then it would appear likely that applications for discovery will increase although whether or not they are successful remains another matter. This suggests that the costs of potential discovery need to be factored in when advising clients on judicial review options. It might also suggest that a more fulsome approach to initial disclosure in order to head off an application for discovery could be prudent in appropriate cases.