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The role of government has never been more critical IFI Update - London

August 2006 Salans is a full service international law firm with offices in Almaty, Baku, Berlin1, Bratislava, Bucharest, Budapest2, Istanbul, Kyiv, London, Moscow, New York, Paris, Prague, Shanghai, St. Petersburg and Warsaw.

Contents may exist in the tort of negligence in a claim In this issue, we examine the following topics: for pure economic loss.

A bank’s duty of care concerning an asset freezing order 1 A bank operating in England may be served with notice of an asset freezing order (which Insolvency: transactions at an undervalue and used to be called a Mareva injunction) that transactions to defraud creditors 8 has been issued at the behest of a claimant

Cross-border insolvencies: S. 426 of the in litigation against a customer of the bank. Insolvency Act 1986 11 In fact it happens quite frequently. The order is intended to prevent the defendant from Conflict of laws rules for tortious issues 16 dissipating its assets or removing them from

Conflict of laws: the quantification of damages the jurisdiction before the claim against it in tort 21 has been heard. Such an order will usually be intended to freeze the customer’s Conflict of laws: reform of the law concerning account at the bank, along with its other claims in tort 23 assets. If the litigation is successful then the

claimant will be able to enforce its judgment

by taking execution proceedings against the

frozen assets. It should be noted, however, A BANK’S DUTY OF CARE CONCERNING that the freeze on the assets achieved by AN ASSET FREEZING ORDER the order does not, of itself, confer a security In the December 2004 edition of this Update right in favour of the claimant which obtained we reported upon the decision of the Court the freezing order: see Edwards & Smith v. of Appeal in Commissioners of Customs and Flightline Ltd; Re Swissair Schweizerische Excise v. Barclays Bank PLC [2004] EWCA Luftverkehr AG [2003] EWCA Civ 63; [2003] Civ 1555, [2005] 1 WLR 2082. The case 1 WLR 1200, Jack J in Technocrats was taken on appeal to the House of Lords, International Inc v. Fredic Ltd [2004] EWHC which has now handed down its decision 2674 (QB), [2005] 1 BCLC 467 and the and overturned the result in the Court of comments of Arden LJ in Dadourian Group Appeal. Apart from the immediate relevance International Inc. v. Simms [2006] EWCA to banks in relation to their responsibilities Civ 399, [2006] 3 All ER 48. when they are served with notice of an asset

freezing order, the judgments in the House The jurisdiction of the court to issue such an of Lords are of more general importance on order was established in Nippon Yusen the wider issue of the approaches to be Kaisha v. Karageorgis [1975] 1 WLR 1093 taken when determining if a duty of care and Mareva Cia Naviera SA v. International

Bulkcarriers SA [1975] 2 Lloyd’s Rep 509 received the notice and written the letter of and was also considered, in relation to a acknowledgement, but before it was bank that has received notice of such an received by the claimants. In the other case, order relevant to a customer’s account, in Z the failure occurred after the bank had Ltd v. A-Z and AA-LL [1982] QB 558. The received the notice but before it wrote the effect of the order, once it has been notified letter. The claimants subsequently to the bank, is to require that the bank recovered judgments against the debtor should freeze the account (either absolutely companies, which remained largely or, if otherwise so stated, up to the amount unsatisfied. The claimants sued the bank for specified in the order) so that the customer the amounts that would have been cannot transfer funds out of the account in recovered from the accounts had the bank breach of the order. There will usually be an prevented the withdrawals from taking place. exception which allows the bank to debit the Presumably, the computation of the account for transactions effected before it recoverable loss would eventually have received notice of the order, such as for re- taken into account the claims of other imbursement of credit card payments. The creditors as well. The bank challenged the order will also permit the bank to charge the claim on a preliminary issue that, even if the claimant for its reasonable costs in facts were proved, it would not be liable to complying with the order. Once it has been the claimants because it would not have notified of the order, a bank will be in owed them a duty of care. The judge at first contempt of court if it knowingly breaches, or instance, Colman J, found in favour of the knowingly participates in a breach of, the bank. The Court of Appeal reversed his order. decision and found that a bank would have a duty of care in the tort of negligence to a The claimants in the case were HM claimant which had obtained such a freezing Commissioners of Customs and Excise order. Accordingly, the bank could be liable (since renamed the HM Commissioners for in damages to such a claimant where the Revenue and Customs), who had obtained bank permitted its customer to withdraw freezing orders against the assets of two funds from the account after the bank had companies that they were pursuing for received notice of the order. The House of unpaid VAT. The orders specifically referred Lords reversed that decision. to the companies’ accounts with the bank, by name and number. The claimants faxed The House of Lords took the view that, in copies of the orders to the bank, which the circumstances, it was not fair, just or wrote to the claimants acknowledging reasonable to impose a duty of care on the receipt of the notifications, confirming that it bank, which was placed in an involuntary would observe the terms of the orders and position upon being notified of the court’s requesting payment of its charges for order and should not, simply because of compliance with them. By an oversight, the such a notification, be taken to have bank failed to prevent its customers from accepted a responsibility towards the withdrawing funds from the accounts. In one claimants or be considered to be in a case the failure occurred after the bank had sufficiently close or proximate relationship

with the claimants. Each of the five Law in three cases: Spring v. Guardian Lords who sat on the appeal delivered his Assurance plc [1995] 2 AC 296, Henderson own separate opinion and there is some v. Merrett Syndicates Ltd [1995] 2 AC 145, variation in the analysis contained in their at 178 and White v. Jones [1995] 2 AC 207, opinions. There have been divergent at 268. Lord Goff based it, in particular, on approaches in the case law over the years, Lord Devlin’s speech in Hedley Byrne & Co. particularly in the House of Lords, in Ltd v. Heller & Partners Ltd [1964] AC 465, determining the circumstances under which at 528 to 529. The second test is the a duty of care may arise in cases involving a “threefold” test, which was outlined by Lord new situation where the claim has been for Bridge of Harwich in Caparo Industries plc v. pure economic loss. The divergence of Dickman [1990] 2 AC 605, at 617 to 618. approach in the case law is acknowledged The three elements of the test are, (a) by Lord Bingham of Cornhill, the Senior Law whether the loss to the claimant was a Lord, in his own opinion (at [4]) and is reasonably foreseeable consequence of echoed in the opinions of the other Law what the defendant did or failed to do, (b) Lords who heard the appeal (Lords whether the relationship between the Hoffmann, Rodger of Earlsferry, Walker of defendant and the claimant was one of Gestingthorpe and Mance). It is unfortunate sufficient proximity and (c) whether in all the that the opportunity was not taken in this circumstances it was fair, just and case for the House, speaking with one reasonable to impose a duty of care on the voice, to provide some much needed clarity defendant towards the claimant (which, Lord and precision in an important area of the Bingham noted, Kirby J had labelled as law. “policy” in Perre v. Apand Pty Ltd [1999] HCA 26, (1999) 198 CLR 180 at para. 259). In an attempt to make sense of the The third test is the “incremental” test and is approaches that were taken in the case, based upon the observation of Brennan J in what follows will set out the views expressed Sutherland Shire Council v. Heyman (1985) by Lord Bingham, with cross-references to 157 CLR 424, at 481 (which was approved the opinions of the other Lord Lords on the by Lord Bridge in Caparo Industries plc v. various issues that were raised. Dickman [1990] 2 AC 605, at 618), to the effect that the law should develop new Lord Bingham began (at [4]) by outlining the categories of negligence incrementally and three possible tests that had been put by analogy with established categories and forward in the case law to determine if a not by extending the categories in a massive duty of care exists in a situation that is not manner with only limited and ill-defined covered by existing authority. The first test is restraints. that of an “assumption of responsibility”, that is, whether the defendant voluntarily Each of the Law Lords made the point that assumed responsibility for what he said and no one of those tests will always be did vis-à-vis the claimant, or is to be treated determinative in every situation. See, for by the law as having done so. The first test instance, the review conducted by Lord was championed by Lord Goff of Chieveley Mance and his summary at the end of his

review (at [93]). In some cases, the responsibility when it knew or ought to have assumption of responsibility test will be known that the claimant would rely upon the appropriate and in other cases it may be defendant. In that situation, the test of more appropriate to apply the threefold and voluntary assumption may effectively incremental tests. subsume all of the aspects of the threefold test. Lord Bingham then made five observations as to the application of the tests. Secondly (at [5]), the assumption of responsibility test is to be applied objectively First (at[4]), that in some cases a party can and not just by a consideration of the be said to have assumed responsibility and defendant’s subjective thoughts or intentions that can be seen as a sufficient condition of (see Lord Griffiths in Smith v. Eric S. Bush liability, but such an assumption should [1990] 1 AC 831, at 862, Lord Oliver in never be regarded as a necessary condition Caparo Industries plc v. Dickman [1990] 2 of liability. The paradigm situation where AC 605, at 637 and Lord Slynn in Phelps v. such an assumption may exist being where Hillingdon LBC [2001] 2 AC 619, at 654). there is a relationship having all of the Lord Mance also referred on this point to characteristics of a contract, save for the what Lord Goff had said in Henderson v. presence of consideration. Lord Bingham Merrett Syndicates Ltd [1995] 2 AC 145, at said that this was the position in Hedley 181. Lord Bingham said that the further the Byrne & Co. Ltd v. Heller & Partners Ltd assumption test is removed from the [1964] AC 465, White v. Jones [1995] 2 AC subjective considerations so that the more it 207 and in Henderson v. Merrett Syndicates becomes a notional assumption of Ltd [1995] 2 AC 145. Presumably the same responsibility, the less of a distinction will could be said in cases where a claim in tort exist between this test and the threefold test. is brought as an alternative to a claim in Lord Mance referred (at [93]) to the contract (see Lord Goff in Henderson v. distinction between an assumption of Merrett Syndicates Ltd [1995] 2 AC 145, at responsibility for the task, rather than of 184 to 194). Lord Walker said (at [73]) that legal liability, in which case questions of the concept of a “voluntary” assumption foreseeability, proximity and fairness, meant a conscious, considered or deliberate reasonableness and justice may become decision on the part of the defendant. very relevant. Lord Rodger said (at [52]) that the assumption of responsibility test was not Lord Mance said (at [92] to [93]) that the an over-arching rule and that there would be concept of an assumption of responsibility situations where it did not provide the may be particularly useful in two situations answer, when the court would have to apply concerning special relationships that had the threefold test. been identified by Lord Browne-Wilkinson in White v. Jones [1995] 2 AC 207, at 273-274, Thirdly (at [6]), the threefold test does not namely, where the defendant had a fiduciary provide a straightforward answer, in a novel duty towards the claimant and where the situation, to the difficult issue of whether the defendant had voluntarily assumed defendant owes a duty of care to the

claimant (see Lord Bridge in Caparo the facts of the case. Lord Hoffmann (at Industries plc v. Dickman [1990] 2 AC 605, [36]) made the same point and referred to at 618 and Lord Roskill in the same case, at one of his earlier judgments in Morgan 628). Nonetheless, Lord Hoffmann has said Crucible Co. plc v. Hill Samuel & Co. Ltd in another recent case that the threefold test [1991] Ch 295, at 300 to 303. provides the “standard framework” within which the question of whether a duty of care Lord Hoffmann said (at [35]) that labels such exists will usually be examined (Sutradhar v. as “proximate”, “fair, just and reasonable” Natural Environment Research Council and “assumption of responsibility” are often [2006] UKHL 33, at [32]). used as slogans rather than as a practical guide in determining the existence of a duty Fourthly (at [7]), the incremental test is of of care. He went on to say (at [35] to [36]) little value in itself and will only be of use that the quest was to discover what could when combined with one of the other tests. reasonably be inferred from the defendant’s The closer the case is to the facts of a conduct against the background of all of the previous case where a duty of care has circumstances of the case. As it was a legal been found to exist, the more willing the inference to be drawn from that conduct and court will be, by use of the incremental test, those circumstances, it was not just a to find a duty of care based on one of the question of fact, as questions of fairness and other two tests. The converse will also be policy would also enter into the decision. true. The purpose was to find, in relation to the loss that was suffered, if there was a Fifthly (at [8]), Lord Bingham was of the view sufficient relationship for a duty of care to that the same outcome would have been have arisen. The existence of that achieved in each of the leading cases, relationship and the foreseeability of whichever test had been applied. In economic loss would make it unnecessary to consequence, it was important to examine make any further enquiry as to whether it the detailed facts and circumstances of each was also fair, just and reasonable to impose case and the relationship between the liability. Equally, it would follow that if it were claimant and the defendant, in the context of fair just and reasonable to impose liability, the legal and factual situation as a whole. there would also be a sufficient relationship. Lord Rodger (at [53]) also quoted Lord He said that the real question in Henderson Bridge in the Caparo case in making the v. Merrett Syndicates Ltd [1995] 2 AC 145 point that the concepts of proximity and was not whether there had been an fairness are not capable of a precise assumption of responsibility but whether the definition and are only convenient labels. necessary relationship existed between the The existence of a duty of care arises parties for a duty of care to arise. Lord pragmatically from a detailed examination of Hoffmann had earlier made the point (at all of the relevant circumstances. Lord [35]) that in determining if a relationship has Mance said (at [83]) that each of the tests arisen in cases of loss caused by the operates at a high level of abstraction. What provision of information (and also, matters is their interpretation in practice to presumably, advice), it was critical to

determine if it was the defendant, as a report, managing an insurance syndicate opposed to someone else, who had or making ginger beer. It does not matter assumed the responsibility from which the why the defendant decided to do it. It might, alleged relationship arose (cf. Williams v. for instance, engage in the relevant activity Natural Life Health Foods Ltd [1998] AC 830 for profit or pursuant to a statutory duty, as and the discussion concerning liability in a in Phelps v. Hillingdon LBC [2001] 2 AC 619 case where there are “chains” of contractual and in Ministry of Housing and Local relationships in the Court of Appeal in Riyad Government v. Sharp [1970] 2 QB 223. But Bank v. Ahli United Bank (UK) Ltd [2006] the existence of a statutory duty or a court EWCA Civ 780), to whom the obligation had order is not enough, in itself, to cause a duty been assumed (cf. Smith v. Eric S Bush of care to arise. In that sense, the law of [1990] 1 AC 831, Henderson v. Merrett negligence does not impose liability for mere Syndicates Ltd [1995] 2 AC 145 and White omissions. In this case the duty was not v. Jones [1995] 2 AC 207) and for what alleged to have arisen from what the bank purpose the information had been provided had decided to do but from the imposition (cf. Caparo Industries plc v. Dickman [1990] upon it of a duty and its omission to observe 2 AC 605). the requirements of what had been imposed upon it. After some discussion concerning freezing orders, Lord Bingham then turned to the Lord Mance said (at [109] to [111]) that the facts of the case (at [14]). It could not be “determinative factor” in the case was the said that the bank had assumed absence of any voluntary aspect to the responsibility towards the claimants. Its bank’s involvement. He distinguished this position was entirely involuntary. It had been case from other cases where, despite the served with notice of the freezing order and background of a contractual duty to another had no choice but to comply. His Lordship party or the imposition of a statutory duty to also said that the claimants could not show undertake the relevant task, there was that they had relied upon the bank in the something additional from which it could be sense that they would have acted differently said that there was an element of voluntary but for any reliance they placed upon the behaviour from which it was fair to impose a bank. Lord Rodger said (at [65]) that the duty. claimant relied not on the defendant but on the court to enforce its order and, within that, Lord Bingham then moved to considering was subjected to the qualification that the the application of the threefold test to the court would only take action against the facts of the case (at [15]). He said that the bank if it was knowingly involved in a breach first part of the test was satisfied as it was of the order. clearly foreseeable that the claimants would suffer loss if the bank failed to observe the Lord Hoffmann said (at [38] to [39]) that a requirements of the freezing order. Lord duty of care is usually generated by Hoffmann commented (at [31]), however, something that the defendant has decided to that foreseeability of loss on its own is not do, such as by giving a reference, supplying sufficient to give rise to a duty of care. Lord

Rodger said (at [55]) that a duty of care will Bingham said that the claim must be not arise simply because the defendant was assessed. This, ultimately, was the view of told that the claimant would suffer loss if the all of the Law Lords. In Lord Bingham’s view defendant did not take steps to prevent it. and the view of the other Law Lords, the However, Lord Mance (at [89]) referred to a claim should be rejected on this ground. passage of Lord Oliver’s speech in Caparo Lord Bingham advanced six reasons for his Industries plc v. Dickman [1990] 2 AC 605, view, which are as follows. at 633 in which it was said that in some cases the degree of foreseeability may be First (at [17]), the regime of a freezing order sufficient in itself from which to deduce a makes perfect sense if the only duty that is proximity of relationship. owed by a notified party, such as the bank, is to the court. Lord Mance said (at [113]) Lord Bingham was less certain that there that this reflected a fair and normally was a sufficient degree of proximity between effective balance, without the need to the parties, commenting that “the concept of impose an additional duty of care. proximity in the context of economic loss is notoriously elusive” (at [15]). Lord Rodger Secondly (at [18]), as the bank’s customer (at [65] to [66]) said that there was no (which is the defendant in the principal relationship between the parties from which proceedings) owes no duty of care to the any proximity could be derived. They were claimant, because they are opposing parties at arm’s length. On the other hand, Lord in litigation, it would be anomalous that a Mance thought that the facts disclosed “a person who was notified of the freezing most proximate relationship” between the order might have a duty of care for actions bank and the claimants (at [99]). In another taken by the defendant. In his Lordship’s case which involved physical injury alleged words, “It would be a strange and to have arisen from a negligent statement, anomalous outcome if an action in Lord Hoffmann said that the concept of negligence lay against a notified party who proximity involved the defendant in having “a allowed the horse to escape from the stable measure of control over and responsibility but not against the owner who rode it out.” for” the situation giving rise to the loss, in (at [18]). This had been the deciding factor distinction to the loss merely being in the decision of Colman J at first instance foreseeable but outside that element of in this case. Lord Hoffmann, on the other control and responsibility (Sutradhar v. hand, said (at [40]) that he placed no weight Natural Environment Research Council on this matter as a relevant factor and Lord [2006] UKHL 33, at [38]. See also Lord Mance took a similar view (at [108]). Brown of Eaton-under-Heywood in the same case, at [48]). Thirdly (at [19]), whilst there were cases where a person who was under a statutory It was the third element of “policy” (per Kirby or contractual duty had also been held to J in Perre v. Apand Pty Ltd) that is, whether owe a duty of care at common law, he knew it was fair, just and reasonable to impose of no case where a non-consensual court liability on the defendant, on which Lord order had given rise to a duty of care that

was owed to the person who had obtained Lord Mance provided (at [100] to [105]) the order. some other factors that might be relevant in considering if it might be fair, just and Fourthly (at [20]), there was no comparative reasonable to impose a duty of care. These jurisprudence in other common law factors might have weighed in favour of the jurisdictions under which the duty had been claimants but were ultimately defeated by imposed and it was not supported by his Lordship’s conclusion that it would be academic comment. unfair to impose a duty on the bank because of the involuntary nature of its involvement. Fifthly (at [21]), none of the cases that were First, if there might be an indeterminate cited as being analogous were really so liability imposed upon the defendant, which upon examination (eg. Al-Kandari v. JR was not the case here. Secondly, whether Brown & Co [1988] QB 665 and Dean v. the claimants had satisfactory protection Allin & Watts [2001] EWCA Civ 758, [2001] from an alternative source, which they did 2 Lloyd’s Rep 249 were cases where there not have. Thirdly, the availability to each had clearly been a voluntary assumption of side of insurance cover. The bank might responsibility). have had cover but it was unlikely that the claimants would have had cover. Fourthly, if Sixthly (at [23]), it would be unjust and there was an inconsistency in the duty that unreasonable that by being notified of an the defendant might owe to the court and order which the bank could not resist, the any duty of care to the claimants. There was bank might become exposed to a liability no such inconsistency. Fifthly, if a duty to which, in another case, could be for a very the claimants might be inconsistent with the large amount. Save for a relatively valueless bank’s duty to its customers. Again, there right to be reimbursed for its costs of was no inconsistency, as the freezing order compliance, the bank was given no reward effectively suspended the bank’s obligations and had nothing to gain from the situation, to its customers. which was hardly consistent with the imposition of a duty of care. Lord Walker, on HM Commissioners of Customs and Excise the other hand, would have been prepared v. Barclays Bank plc [2006] UKHL 28 to impose a duty upon the bank if it were the (21/6/2006). only person that might be involved (see at [75]). However, if the bank was under a duty then so would any other person which held INSOLVENCY: TRANSACTIONS AT AN assets of a defendant and which had been UNDERVALUE AND TRANSACTIONS TO notified of the freezing order. That would DEFRAUD CREDITORS produce results that were unfair, unjust and The Court of Appeal has considered various unreasonable. Without distinguishing issues relating to transactions at an between the bank and other persons in the undervalue and transactions to defraud same way, Lord Rodger (at [61]) felt it would creditors. The case concerned claims not be fair to impose liability in tort on any brought by a trustee in bankruptcy under Ss person who was notified of a freezing order. 423-425 of the Insolvency Act 1986 but the

issues concerning transactions at an ii) that the debtor entered into a transaction undervalue, which were amongst the with that other person for a matters considered by the court, are also consideration the value of which, in relevant to Ss 238 and 339 of the Act. S. money or money’s worth, is significantly 238 concerns transactions at an undervalue less than the value, in money or that have been entered into by a company, money’s worth, of the consideration S. 339 concerns transactions at an provided by the debtor. undervalue that have been entered into by an individual and Ss 423-425 concern It is also worth noting that a “transaction” is transactions at an undervalue that have defined in S. 436 of the Act to include “a gift, been entered into by either a company or an agreement or arrangement and [that] individual with the intent to defraud its or his references to entering into a transaction creditors. In this note, for convenience, the shall be construed accordingly”. person entering into the transaction will be called the “debtor”. It was argued by the trustee in bankruptcy in this case that the debtor had entered into a The principal judgment in the Court of series of transactions at an undervalue. The Appeal was given by Arden LJ. Waller LJ debtor had given three sets of security to and Sir Martin Nourse (sitting as an secure indebtedness already due by him to additional member of the court) agreed with the recipient of the security, in all of the points covered by Arden LJ except circumstances where he had not been on an issue concerning the limitation period obliged to give the security and the recipient in which a claim may be brought under Ss was not in a position to exert any pressure 423-425. On that point, Sir Martin Nourse upon him to do so (ie. the recipient was gave a different judgment and Waller LJ unable to demand payment and so there agreed with him. was no question of any forbearance being given by the recipient in return for the giving The definition of “transaction at an of the security). The trustee claimed that the undervalue” is in a common form, except giving of the security in such circumstances that Sections 339 and 423 provide that a amounted to a transaction at an undervalue, transaction which is entered into by the either on the basis (within the first part of the debtor in consideration of marriage can also above definition) that the conferral of the be a transaction at an undervalue. security by the debtor amounted to a gift or Otherwise, the definition contains two that the debtor received no consideration for alternatives, which are: it or, alternatively (within the second part of the above definition), that the value of the i) that the debtor has made a gift to consideration that the debtor received for another person or has entered into a giving the security was significantly less in transaction with that other person on monetary terms than the value of the terms that provide for the debtor to consideration which it provided. receive no consideration, or

The recipient of the security resisted the relevant. Here, on the other hand, it was trustee’s argument, relying upon the relevant as plainly no consideration had judgment of Millett J in Re MC Bacon Ltd been given to the debtor for the granting of [1990] BCC 78, at 91-92, [1990] BCLC 324, the security. In those circumstances there at 340-341, in which his Lordship had held had been transactions at an undervalue that the granting of security could not within the first part of the above definition. constitute a transaction at an undervalue The debtor had received no consideration within the second part of the above for entering into the transactions by which it definition. Millett J said that, gave the security.

“The mere creation of a security over a Her Ladyship also said, in obiter comments, company’s assets does not deplete them that the granting of the security by the and does not come within [the second part debtor in this case might be considered as of the above definition]. By charging its being transactions at an undervalue within assets the company appropriates them to the second part of the above definition. In meet the liabilities due to the secured arriving at that conclusion, she cast doubt on creditor and adversely affects the rights of the correctness of the decision in the MC other creditors in the event of insolvency. Bacon case (and its approval by Balcombe But it does not deplete its assets or LJ in the Court of Appeal in Menzies v. diminish their value. It retains the right to National Bank of Kuwait SAK [1994] BCC redeem and the right to sell or remortgage 119, [1994] 2 BCLC 306), in so far as it the charged assets. All it loses is the related to the second part of the definition of ability to apply the proceeds otherwise a transaction at an undervalue. She said than in satisfaction of the secured debt. that the definition did not necessarily require That is not something capable of valuation that there was a diminution in the debtor’s in monetary terms and is not customarily assets or in their value, nor did it require that disposed of for value.” there was a grant of proprietary rights by the debtor. A grant by the debtor of other rights It should be noted that Millett J recognised in could be considered as falling within the the case before him that the first part of the definition and so could constitute the giving above definition did not apply because the of consideration by the debtor (in this recipient of the security, a bank, had given regard, it is commonly accepted that the consideration by forbearing to make demand giving of a guarantee can, in some for repayment and by continuing to make its circumstances, amount to a transaction at facilities available to the debtor. an undervalue). In any event, she considered that there might have been a Arden LJ upheld the trustee in bankruptcy’s disposition of property rights by the debtor. argument. On the argument as to the Whilst the grant of security does not involve applicability of the first part of the above an outright transfer of ownership in assets definition, she held that the MC Bacon case so as to deprive the debtor of its physical could be distinguished because in that case connection with them (although a legal or the first part of the definition had not been equitable mortgage does involve a notional

transfer of title, subject to the debtor’s equity sufficient to show a positive intention, which of redemption), it does involve the granting substantially motivated the debtor in of a right of recourse to the assets and a entering into the transaction. commensurate granting of priority in the assets over the claims of other creditors of In relation to the issue concerning limitation the debtor (Arden LJ referred, in this periods, Sir Martin Nourse held that there respect, to what was said by Lord Hoffmann was a limitation period within which a trustee and Lord Millett in Buchler v. Talbot [2004] in bankruptcy (or a liquidator or UKHL 9, [2004] 2 AC 298, at [29] and [51], administrator) had to bring a claim under S. respectively, as to the consequences of a 423. He held that the period would begin to grant of security). There was no reason why run from the date on which the bankruptcy the value of the right to have such recourse order was made, even though the trustee and to such priority should be left out of the might be bringing the claim on behalf of account in determining if there had been a victims whose own claims had become transaction at an undervalue. stale, as being separately outside the limitation period. As it was a claim to have a Arden LJ also considered a number of trust settlement set aside, the claim related issues that are relevant only to Ss 423-425 to an “action upon a specialty” within S. 8(1) and which are not of concern to Ss 238 or of the Limitation Act 1980 and the limitation 339 of the Act, but which will now briefly be period would be 12 years. His Lordship did addressed. In relation to S. 423, she said not say when the limitation period for any that a person may be a “victim” of a separate claims of any “victims” under S. transaction, and thus a person whose 423 would begin to run but it would appear interests may be protected by an order from his comments that it would commence under S. 423(5), even though the debtor’s at the time the debtor had entered into the purpose in entering into the transaction, as relevant transaction. referred to in S. 423(3), may not have been to prejudice that person but, rather, Hill (as Trustee in Bankruptcy of Nurkowski) someone else. The debtor may have been v. Spread Trustee Co. Ltd [2006] EWCA Civ unaware of the victim when the transaction 542 (12/5/2006). was entered into. Nor was it necessary that the purpose of the debtor could be achieved by entering into the transaction. Similarly, CROSS-BORDER INSOLVENCIES: S. 426 the debtor could have the necessary OF THE INSOLVENCY ACT 1986 purpose even though he was mistaken in In the December 2005 edition of this Update believing that he could achieve that purpose we reported upon the decision of David by entering into the transaction. It was the Richards J in the case of In the matter of entry into the transaction, not the outcome of HIH Casualty and General Insurance Ltd; the transaction itself, which must have the McMahon v. McGrath [2005] EWHC 2125 necessary purpose. The concept of purpose (Ch). In essence, his Lordship held that in would not be satisfied by evidence that the English insolvency proceedings involving a debtor only had a mere hope, but it would be foreign company that was the subject of

winding up proceedings in its own Regulations implement within Great Britain jurisdiction (which would be considered as the UNCITRAL Model Law on cross-border the main insolvency proceedings), the insolvency (see the commentary on that English court, whilst regarding its own subject in the April 2006 edition of this proceedings as being ancillary to the foreign Update). Art. 21(2) in the First Schedule to main proceedings, had no power (either at the Regulations provides that, common law or pursuant to S. 426(4) of the Insolvency Act 1986) to direct the English “Upon recognition of a foreign proceeding, insolvency practitioners to transfer funds whether main or non-main, the court may, that had been realised in the English at the request of the foreign representative proceedings to the foreign liquidators for [ie. the foreign insolvency practitioner], distribution in the foreign proceedings, if the entrust the distribution of all or part of the scheme for the pari passu distribution debtor’s assets located in Great Britain to amongst creditors in that winding up was not the foreign representative … provided that substantially the same as under English law. the Court is satisfied that the interests of The case involved a number of Australian creditors in Great Britain are adequately insurance companies that were the subject protected.” of winding up proceedings in Australia. Petitions had been presented for their It will be seen that under that article, the test winding up in England and provisional for co-operation in relation to the foreign liquidators had been appointed by the proceedings, by entrusting assets to a English court but no winding up orders had foreign insolvency practitioner for yet been made in England. The Australian distribution, is whether “the interests of liquidators were proposing to implement creditors in Great Britain are adequately schemes of arrangement in Australia. The protected” (under the comparable provisions evidence had shown that under the relevant of para. 1522 of Chapter 15 of the US provisions of Australian insolvency law, the Bankruptcy Code, the test is whether the US Australian creditors would receive creditors are “sufficiently protected”). It is not preferential treatment to that which the clear what is intended by the phrase, English creditors would receive under “adequately protected” but it will probably Australian law. On that basis, his Lordship involve a fairly pragmatic factual test which had refused to direct the English provisional will take into account the overall liquidators to transfer funds obtained by circumstances of the case. It may well be them in the realisations of assets in England that, in future, foreign insolvency to the Australian liquidators. practitioners may prefer to request co- operation from the English courts under the It is important to note that the case could not Regulations (in situations where they apply) have been brought within the Cross-Border rather than relying upon the jurisdiction of Insolvency Regulations 2006 (SI the English courts to render assistance 2006/1030), which came into effect on 4th under the common law or under S.426 of the April, 2006, because the regulations do not Insolvency Act 1986, because of the apply to insurance undertakings. The difficulties that exist in meeting what might

be the stricter requirements for assistance under S. 426 (4). David Richards J had held under the common law and S. 426, as that although Australia was a “relevant demonstrated by this case. country” within S. 426(4), he considered that it would not be permissible to order a One particular issue that was dealt with by transfer of the funds pursuant to a request David Richards J concerned the application made by the Australian court under S. of Ss 426(4) & (5) of the Insolvency Act 426(4). The effect of making the order would 1986. That issue has now come before the be contrary to the substantive principles of Court of Appeal, which upheld the decision English insolvency law for the pari passu at first instance, but after taking a different treatment of unsecured creditors and so it approach to the meaning of those would not be an order that could properly be provisions. The principal judgment in the granted. He also held that this view applied Court of Appeal was delivered by the even though winding up orders had not yet Chancellor, Sir Andrew Morritt. Tuckey and been made by the English court, as there Carnworth LJJ agreed with him. was a significant prospect that such orders might be made in the absence of schemes The subsections provide as follows: of arrangement approved by the English court. (4) “The courts having jurisdiction in relation to insolvency law in any part of the The Chancellor referred to his own judgment United Kingdom shall assist the courts in Hughes v. Hannover Re [1997] 1 BCLC having the corresponding jurisdiction in … 497, at 516 to 517, [1997] BCC 921, at 937 any relevant country or territory. to 939, in which his Lordship had said that subsection (5) extends the general (5) For the purposes of subsection (4) a jurisdiction and powers that an English court request made to a court in any part of the would have in insolvency proceedings. In United Kingdom by a court in … a relevant consequence, an English court to which a country or territory is authority for the court request for assistance is made under S. to which the request is made to apply, in 426(4) has available to it, in addition to its relation to any matters specified in the own general jurisdiction and powers, either request, the insolvency law which is the powers conferred on it by English applicable by either court in relation to insolvency law or so much of the law of the comparable matters falling within its relevant foreign country as “corresponds” to jurisdiction. English insolvency law. However, it was implicit in the fact that the powers were In exercising its discretion under this conferred on a court that the exercise of subsection, a court shall have regard in those powers was qualified by what the particular to the rules of private court may properly do as a court, that is, to international law.” do justice in accordance with the law, which was wider than simply being confined to The Australian court, which was the foreign matters relating to the observance of public court concerned, had issued a request policy. The court had to consider, within its

discretion, if the assistance that had been priorities, preferential creditors and pari requested could properly be granted, which passu distribution between creditors in the may include a consideration of whether, if it same class. The law also provides for could not accede to the request in the form it certain situations where the court may vary had been made, assistance in some other the statutory scheme. way might be given. The fact that the request had been made was a weighty In considering the position under Ss 426(4) factor to be taken into account but it was not & (5), Sir Andrew Morritt C said that David conclusive. Richards J had gone too far when he said that the court could never accede to a In considering the request for remission of request if it was contrary to the substantive the assets collected by the English requirements of the statutory scheme for provisional liquidators to the Australian distribution. The Chancellor said that if the liquidators, Sir Andrew Morritt C said that companies had been in liquidation in the matter should be approached in two England pursuant to an order under S. 221 stages. First, to consider if the court would of the Insolvency Act 1986, the court would accede to the request if the companies were have jurisdiction to entertain a request under in liquidation in England and, secondly, if it S. 426 to order a transfer assets to the made any difference that winding up orders foreign liquidator in the principal had not yet been made. proceedings even though the result of the transfer would be to interfere with the On the first issue, his Lordship began by statutory scheme for distribution imposed by referring to the power of the court to make a the Act. It was not relevant whether or not winding up order against a foreign company this would be a matter of disturbing a under S. 221 of the Insolvency Act 1986. He substantive or a procedural rule of the referred to the three requirements that had statutory scheme. been set out by Lloyd J in Stocnia Gdanska v. Latreefers Inc (No 2) [2001] 2 BCLC 116, His Lordship arrived at this conclusion [2001] BCC 174 (and approved by the Court notwithstanding earlier cases where the of Appeal in the same case). Once a courts had refused to countenance making winding up order has been made, the orders which would have upset the English provisions of the Insolvency Act 1986 statutory scheme. He distinguished them on applicable to a winding up will apply (see Re the grounds that in none of those cases had International Tin Council [1987] Ch 419, at there been any countervailing advantage to 446). The statutory scheme for winding up the creditors which they would have gained does not confer on any individual creditor a if the orders that had been requested had right in the assets but it does give the been made. Predominant amongst those creditors a right to have the assets cases was the decision of Sir Richard Scott administered in accordance with the V-C in Re BCCI (No 10) [1997] Ch 213, in statutory scheme (see Mitchell v. Carter which the then Vice-Chancellor (one of Sir [1997] 1 BCLC 673, at 686). The statutory Andrew Morritt’s predecessors in what has scheme includes the provisions as to now been re-named as the office of

Chancellor, although in that case Sir Richard formulation of the basis on which the court Scott was sitting on his own at first instance) can take account of the provisions of the had concluded that, at common law, an relevant foreign insolvency law, as he had English court could not override the stated it in Hughes v. Hannover Re. He had substantive requirements of English said in that case that pursuant to S. 426(5), insolvency law in pursuance of rendering the English court may apply either English assistance to principal insolvency insolvency law or, to the extent it proceedings in a foreign jurisdiction (in that “corresponds” to English insolvency law, the case, concerning the mandatory law of the court that had made a request to requirements for the application of the English court. A provision of a foreign insolvency set-off). That has usually been law which was contrary to the mandatory taken as a strong statement of a fairly provisions of English insolvency law could fundamental principle of the law of not be said to “correspond” to English law insolvency and was so treated by David and therefore should not be applied. It was Richards J at first instance in this case. The quite clear in the present case that the Chancellor distinguished Re BCCI (No 10) provisions of Australian law were on two grounds. The first was that it did not inconsistent with the principle of pari passu involve a consideration of S. 426, which was distribution amongst unsecured creditors as certainly true, as the foreign insolvency required by English law. The Australian rules proceedings were in Luxembourg, which is did not correspond to English law and so, on not a relevant country for the purposes of S. the test his Lordship had formulated in 426. The second was that no countervailing Hughes v. Hannover Re, could not and advantage had been put to Sir Richard Scott should not have been applied by the English which might have justified a decision to court in pursuance of S. 426. override the English statutory requirements. Having decided that an English court could, With respect, the grounds advanced by the if it wished, make the order that had been Chancellor for refusing to follow the principle requested by the Australian court, the set out in Re BCCI (No 10) are open to Chancellor said that it would then be a some doubt. Whilst no countervailing matter for the English court, in the exercise advantage was put forward in that case, it is of its discretion, to decide if it should make difficult to believe that Sir Richard Scott V-C such an order. That would involve a would have refrained from mentioning the consideration of all of the circumstances, matter, at least as a theoretical possibility, if including whether the transfer would it had existed. His Lordship had been clear prejudice the English creditors or any in enunciating the principle that at common particular class of them and whether there law an English court was bound by the might be other advantages or considerations substantive requirements of English that would be sufficient to counteract such insolvency law, to which there was no prejudice. He had earlier given examples of possible exception. Furthermore, in relation such counteracting matters, such as where to S. 426(5), Sir Andrew Morritt would the relevant creditors had consented, where appear to be contradicting his own there were sufficient savings in costs by

avoiding duplication so as to overcome any a situation where it was questionable if financial prejudice that might otherwise have winding up orders would be made. arisen or where there would be an increase in the overall pool to offset any loss in In the matter of HIH Casualty and General priority. In this case, however, there were no Insurance Ltd [2006] EWCA Civ 732 such counteracting advantages or (9/6/2006). considerations and so, if the companies had been in liquidation in England, it would not have been right for the court to accede to CONFLICT OF LAWS RULES FOR the request. TORTIOUS ISSUES Aikens J in the High Court has considered The Chancellor also said that he gained no the conflict of laws rules, under English law, assistance in considering the question of the for issues that relate to a claim in tort. The court’s jurisdiction and the exercise of its relevant rules are to be found in Part III of discretion by the concluding sentence in S. the Private International Law (Miscellaneous 426(5) which stated that, “In exercising its Provisions) Act 1995. Much of the judgment discretion under this subsection, a court is concerned with the meaning of those shall have regard in particular to the rules of provisions and how they should be applied. private international law.” He agreed with Lawrence Collins J in Re Television Rentals The facts of the case are complicated and Ltd [2002] BCC 807, at [17], that the words the following is only a brief summary. The were obscure and ill-thought out and so he claim arose in consequence of the alleged took no regard of them. discrepant presentation of documents under a letter of credit and the subsequent failure Having decided the first issue, the to cure the problems with the Chancellor then moved on to the second of documentation. The issuer of the L/C, a the matters that he had outlined, namely, if it Korean bank, had brought proceedings in made any difference to his conclusion as to Korea against the beneficiary under the L/C the application of S. 426(4) that winding up for the loss that the issuer had suffered in orders had not yet been made against the consequence of being unable to assert a companies by the English court. He agreed security claim over the relevant goods (oil) with David Richards J that it did not make which had been unloaded and released to any difference. The companies were plainly the applicant for the L/C without the insolvent. In the absence of binding presentation of the bills of lading for the schemes of arrangement sanctioned by the shipment of the goods from Indonesia to English court, any creditor would have been Korea. The various events that were entitled to request that the winding up orders relevant to the claim took place in a number should be made by the court. There would of different countries, including Korea, be no good reason to refuse the making of Singapore, Indonesia, England and Japan. such orders. As he was addressing the The L/C, the various relationships arising specific facts of the case, it is not clear if his under it, an indemnity provided in place of Lordship would have taken the same view in the bills of lading and the underlying

commercial contract for the sale of the (a) [claims for death or personal injury] goods, were governed by English law. Proceedings were commenced in England (b) [claims for damage to property] by the beneficiary to obtain a declaration of non-liability and for an anti-suit injunction to (c) in any other case, the law of the restrain the continuance by the issuer of the country in which the most significant Korean proceedings. element or elements of those events occurred. The following provisions, taken from Part III of the Act, are relevant to the judgment (3) … delivered by Aikens J: 12 (1) If it appears, in all the circumstances, “9 (1) The rules in this Part apply for from a comparison of— choosing the law (in this Part referred to as ‘the applicable law’) to be used for (a) the significance of the factors determining issues relating to tort … which connect a tort … with the country whose law would be the (2) The characterisation for the purposes applicable law under the general rule; of private international law of issues and arising in a claim as issues relating to tort … is a matter for the courts of the (b) the significance of any factors forum. connecting the tort … with another country, (3) …. that it is substantially more appropriate (4) The applicable law shall be used for for the applicable law for determining the determining the issues arising in a issues arising in the case, or any of claim, including in particular the those issues, to be the law of the other question whether an actionable tort … country, the general rule is displaced has occurred. and the applicable law for determining those issues or that issue (as the case (5) … may be) is the law of that other country.

11 (1) The general rule is that the applicable (2) The factors that may be taken into law is the law of the country in which the account as connecting a tort … with a events constituting the tort … in country for the purposes of this section question occur. include, in particular, factors relating to the parties, to any of the events which (2) Where elements of those events constitute the tort … in question or to occur in different countries, the any of the circumstances or applicable law under the general rule is consequences of those events.” to be taken as being—

The first question that Aikens J dealt with tort. This might include, for instance, a claim was whether the case involved any “issues for compensation for breach of an alleged relating to tort” within S. 9(1). He pointed out fiduciary duty in which there was not a that the Act does not define what is meant demand for the return of mis-applied of by either “tort” or “issues relating to tort”, assets, as could be the case in claims which he said should be interpreted in relating to a conflict of interests, a breach of accordance with the English law principles a duty of confidence or for a failure by the of statutory construction. Some assistance fiduciary to exercise proper care and skill. in that task was given by S. 9(2), which Such an approach would be inconsistent provides that the characterisation for the with that taken in other cases. In Base Metal purposes of private international law of the Trading Ltd v. Shamurin [2004] EWCA Civ relevant issues in a claim as issues relating 1316; [2005] 1 WLR 1157, the Court of to a tort should be conducted in accordance Appeal was concerned with a case involving with the law of the forum hearing the case. a claim that a director of a foreign company The use of the words, “for the purposes of had breached his fiduciary duty towards the private international law” meant that the company. It would appear from that case court should perform the task of that an English court would determine the characterisation not only by reference to underlying basis of the relationship on which English domestic legal concepts and it was alleged that the duty arose and then it classifications, but also by taking a broad would apply the law that governed that “internationalist” view of legal concepts, relationship to determine the nature and particularly those that might apply in any extent of any duty that might arise from it, as other relevant system of law. From this his well as the consequences of any breach of Lordship concluded that the word “tort” that duty. In the Base Metal Trading case it should be given a broad construction, “so as was held that the claim against a director of to embrace non-contractual civil wrongs that a company for an alleged breach of his give rise to a remedy”. Having determined fiduciary duty as a director to exercise what was meant by the word “tort”, Aikens J proper care and skill was a claim concerning then said that, “the phrase ‘issues in tort’ issues relating to a company matter and so must mean all those relevant factual issues was governed by the law of the place of which relate to the civil wrong in dispute incorporation of the company. That law between the parties.” As the case involved a governed the relationship between a claim under Korean law for a non- company and its directors, being inherently contractual civil wrong, Aikens J took that a matter of company law. Even though the into account in concluding that the claim was alleged facts raised the possibility of one for issues relating to tort within S. 9(1). concurrent claims for breach of the director’s contract of employment or in tort, neither the The approach to the construction of Ss 9(1) law which governed the contract nor the law and (2) as taken by his Lordship is very of the tort was applicable in determining the wide. On that basis, any non-proprietary law which governed the claim for breach of claim for a restitutionary remedy might be the fiduciary duty. It was also held that it considered as a claim relating to an issue in would be a matter for the law of the place of

incorporation, being that which governed the there. Although the loss was also significant, fiduciary duty, to determine if the nature or it was not the most significant element (see, scope of that duty could be modified by the similarly, the approach taken by Moore-Bick contract of employment. J in Protea Leasing Ltd v. Royal Air Cambodge Co. Ltd [2002] EWHC 2731 Having decided that the claim concerned (Comm), at [76] to [80]). issues relating to tort, Aikens J then had to decide which law would be identified under Aikens J then turned to consider if the the general rule in S. 11 as the putative finding of an applicable law under S. 11 applicable law of the tort. As the elements of might be displaced by the application of S. the relevant events had occurred in several 12. That involved a consideration of whether different countries and the case did not there were any factors that connected the involve a claim for death, personal injury or tort constituting the claim with a country damage to property, it was necessary under other than Singapore and, if so, if the S. 11(2)(c) to determine “the country in significance of those factors was such that it which the most significant element or was substantially more appropriate for the elements of those events occurred.” Relying law of that other country to be applied as the upon the judgment of Mance LJ in Morin v. applicable law relating to the claim. Bonhams & Brooks Ltd [2003] EWCA Civ 1802, [2004] 1 Lloyd’s Rep 702, at [16], and His Lordship said that there was no his own judgment in Dornoch Ltd v. precondition to the court considering if S. 12 Mauritius Union Assurance Co. Ltd [2005] should be considered and that the section EWHC 1887 (Comm), at [104], the judge was broadly stated. Although there were said that he had to identify all of the some specific factors identified in S. 12(2), elements of the tort that were relied upon by they were not exclusive. Mance LJ in Morin the parties and he had then to make a value v. Bonhams & Brooks Ltd (at [21]) had said judgment regarding the significance of the that the factors that might be considered different elements in making up the alleged under S. 12 could be wider than those that tort. He also said that cases concerning Art. might be relevant to S. 11 (2)(c). The 5(3) of the EC Regulation on jurisdiction and relevance of S. 12 would depend on the judgments (EC 44/2001 OJ L12/1 facts of the individual case; in some cases 16/1/2001) and its predecessor in the there may only be a limited scope to Brussels Convention were of no help. One consider the application of S. 12, whilst in relevant element in this case was the others there may be more scope. Aikens J suffering of the loss and where that also said that the decision to apply S. 12 occurred, which was in Korea. Other involved a value judgment as to the elements had occurred in Singapore. Having significance of the factors that pointed to an attempted to value the significance of all of applicable law other than that identified by the elements, his Lordship came to the view the application of the general rule under S. that the most significant elements took place 11. It was for the party seeking to rely on S. in Singapore, because the acts upon which 12 to demonstrate that the factors relevant the claim was principally based occurred to S. 12 clearly lead to the result that it was

substantially more appropriate to apply the outside a contractual relationship, would be law found by S. 12 to determine the issues whether that person could effectively than the law found under S. 11. It is worth stipulate that any duty it might have, and any noting, however, that Waller LJ said in consequent liability, was to be determined in Roerig v. Valliant Trawlers Ltd [2002] EWCA accordance with a stated law. It is submitted Civ 21, [2002] 1 WLR 2304, at [21(v)], that that in both circumstances the choosing or the general rule under S. 11 “is not to be specifying of the relevant law could be dislodged easily” by S. 12. considered to be a significant factor under S. 12. However, it cannot be presumed that it His Lordship considered if the concept of the would always be treated as a conclusive “factors which connect a tort” with a country factor that outweighed all the other relevant might include the parties’ express or implied factors. As Aikens J made clear, each case choice of the law to govern a relevant pre- will depend upon its own facts and a existing contractual relationship, which was decision under S. 12 involves a value connected with the events that gave rise to judgment which has to be arrived at by the tortious claim. Mance LJ had mentioned weighing up all of the relevant factors of the this possibility, without determining the point, case. in Morin v. Bonhams & Brooks Ltd (at [23]). Aikens J said that the phrase in S. 12(2), On the facts of the case, his Lordship held “factor relating to the parties” was broad that all of the relevant pre-existing enough to include the fact of a pre-existing contractual relationships (except for one relationship between the parties, whether insignificant contract) were governed by contractual or otherwise. It also included the English law and the tortious claim was law that the parties had expressly or connected with those relationships. The impliedly chosen to govern that relationship. most significant of the relationships arose If that relationship gave rise to the events out of the L/C which was governed by which constituted the alleged tort, then the English law. That relationship gave rise to factual and contractual context in which the the necessary connection from which, in events took place and the governing law of turn, the alleged tortious duties arose. That the related contracts were factors within S. factor connected the alleged tort to England, 12(2). He also mentioned that a chosen as English law was the governing law of the jurisdiction provision within such a contract pre-existing contractual relationships. On the could be a relevant factor. other hand, the factual connection of the events with Singapore was “adventitious”; A question that was not addressed is they could have occurred in any number of whether the parties can conclusively agree places and it was a coincidence that they that any claim in tort should be governed by had happened to take place in Singapore. It a chosen law, where there is no other would be “bizarre” for the law of Singapore contractual relationship between them. A to be applied in preference to English law. In different question, which could be very terms of S. 12, it was substantially more relevant to a person providing an opinion, appropriate that the applicable law for advice, information or services to a recipient

determining the issues in tort should be quantification of damages was a procedural English law. matter to be determined by the law of the Trafigura Beheer BV v. Kookmin Bank Co. forum, which was English law. The Court of [2006] EWHC 1450 (Comm) (16/6/2006). Appeal, by majority (Arden LJ and Sir William Aldous, Waller LJ dissenting) disagreed and held that, pursuant to S. 14 of CONFLICT OF LAWS: THE the Private International Law (Miscellaneous QUANTIFICATION OF DAMAGES IN Provisions) Act 1995 (which is within Part III TORT of the Act), it was a substantive matter which The House of Lords has considered whether was governed by the law of NSW as the the quantification of damages in tort was a applicable law of the tort. The House of question of procedure, to be governed by Lords reversed the decision of the Court of the law of the forum, or a substantive matter Appeal and restored the decision of the trial that was governed by the applicable law of judge. the tort. The principal judgment was given by Lord Hoffmann. Lord Rodger of Earlsferry The relevant parts of S. 14 provide as delivered a judgment in agreement with Lord follows: Hoffmann. Lords Bingham of Cornhill and Woolf agreed with Lords Hoffmann and “(2) Nothing in this Part affects any rules Rodger. Lord Carswell agreed in the result of law (including rules of private but arrived at his conclusion by a different international law) except those route. On the important point as to the abolished by section 10 above. distinction in the case law between substance and procedure, he was in the (3) Without prejudice to the generality of minority. This note will concentrate on the subsection (2) above, nothing in this approach taken by Lord Hoffmann. Part—

The case concerned a motor vehicle (a) … accident that occurred in NSW, Australia. The claimant was badly injured in the (b) affects any rules of evidence, accident in a car driven by the defendant. pleading or practice or authorises The claimant and the defendant were both questions of procedure in any resident in England, where the claimant proceedings to be determined brought his proceedings. Liability in otherwise than in accordance with the negligence was admitted. However, the law of the forum.” defendant pleaded a defence as to the quantum of damages based upon NSW Lord Hoffmann examined the conflict of laws legislation which limited the amount of position at common law before the passing damages that could be awarded for injuries of the Act, as exemplified in the decision of suffered in a motor accident. There is no the House of Lords in Boys v. Chaplin [1971] such limitation under English law. The trial AC 356. In actions in tort with a foreign judge, Elias J, had held that the element, the common law had drawn a

distinction between the kind of damage that Part III does not affect any rules of law which constituted an actionable injury which, except those abolished by S. 10. That being substantive, was determined by the section was only concerned with the rules law of the tort (the “lex causae”), as opposed that determined, “whether a tort … is to the assessment of compensation actionable”. It did not purport to abolish the (damages) for the injury, which was rules that were concerned with the remedies procedural and was determined in that were available for an actionable injury. accordance with the law of the forum (the In support of his view, his Lordship referred “lex fori”). Thus rules which excluded to the Law Commission’s Consultation damage from the scope of liability on the Paper that had preceded the Act. As the grounds that it did not fall within the ambit of matter was clear it was unnecessary to liability or that there was no causal refer, under the principle stated in Pepper v. connection of the damage to the liability or Hart [1993] AC 593, to the Parliamentary that the damage was not foreseeable, were proceedings concerning the passing of the substantive matters going to the existence of Act. However, they clearly showed that his liability. By contrast, whether the award to interpretation was what had been intended be made should be money damages and the by Parliament. amount of damages or whether there should be restitution in kind, were questions of It was then necessary to determine if the remedy and so were procedural. In Boys v. NSW legislation should be characterised as Chaplin the majority of the House of Lords relating to actionability, and thus substantive had held that the relevant foreign law which and governed by NSW law as the applicable denied liability for non-economic damage law of the tort, or as going to procedural was a substantive requirement of the lex remedies for quantification of damages and causae. All of the Law Lords who heard that thus irrelevant, as such matters would be case, however, had agreed that the governed by English law as the lex fori. It quantification of damages for actionable had been suggested that a statutory limit or heads of damage under the lex causae was cap on the damages that were recoverable a question of remedy or procedure and in a claim should be regarded as substantive should be determined by the lex fori. rather than procedural, based on the decisions at first instance and in the Court of Lord Hoffmann said that the distinction Appeal in Cope v. Doherty (1858) 4 K&J 367 between questions of liability and questions and (1858) 2 DeG&J 614. Lord Hoffmann of remedy or procedure had not been said that those decisions had been affected by Part III of the Act. Although S. misconstrued. The correct proposition to be 14(3)(b) only uses the word “procedure”, it drawn from them was that a contractual term was clearly intended to refer as well to which limits the obligation to pay damages “remedies”, as the words had been used for a breach of contract or a tort, and a interchangeably in the case law before the statutory provision which is deemed to Act was passed. In addition, S. 14 (3) is operate as such a term of a contract, expressed to be without prejudice to the qualifies the substantive obligation and its generality of S. 14(2), which in turn provides effect will fall to be determined by the lex

causae. It will not fall within the province of Lord Hoffmann concluded that there was no the lex fori as a procedural matter. doubt, however, as to the continuance of a Lord Hoffmann went to say that on the basis general rule that issues relating to the of a decision of the High Court of Australia in quantum or measure of damages are Stevens v. Head (1993) 176 CLR 433, the governed by the lex fori. In this case, the provisions of the NSW statute should be NSW statute should be seen as having a regarded as procedural only. His Lordship merely procedural effect, rather than being a said that the subsequent revision of that substantive issue arising under the lex view by the High Court of Australia in its causae, and so it was not relevant in the later decision in John Pfeiffer Pty Ltd v. English proceedings in determining the Rogerson (2000) 203 CLR 503 should be quantum of the claimant’s damages. seen as a decision based on the federal principles in the Australian Constitution and Harding v. Wealands [2006] UKHL 32 not as affecting the traditional approach (5/7/2006). taken at common law (see also the decision of the High Court of Australia in Regie National des Usines Renault SA v. Zhang CONFLICT OF LAWS: REFORM OF THE (2002) 210 CLR 491, at para. 76). LAW CONCERNING CLAIMS IN TORT In light of the two cases discussed in the Lord Hoffmann also referred to the possible preceeding outlines, it should be noted that difficulties that might arise in some cases, the European Commission has put forward a which might not fall within the confines of the proposal (COM (2006) 83 final, Brussels principle that he said was to be derived from 21/2/2006) for a Regulation which would Cope v. Doherty, in determining if a statutory provide a uniform set of conflict of laws rules limitation was intended to have substantive throughout the EU to determine the effect. In some cases it may be difficult, if applicable law relating to non-contractual not impossible, to determine a distinction obligations in civil and commercial matters. between the concept of actionable damage The Regulation would apply in a case and the concept of a remedy for that involving a non-contractual claim, such as damage. This may arise, for instance, if the one in tort, brought before a court in a statute then under consideration lays down member state of the Eurpoean Union, with a rule that a tort or other wrongful act gives the exception of Denmark. If the proposal is rise to a liability to pay a “conventional sum implemented, it would lead to a different set of money”. In such a case, it might be better of rules from those which currently apply to infer that the statutory limitation lays down under English law, which have been the conditions under which the claimant is discussed above. entitled to payment of a prescribed amount. His Lordship declined to explore this area Under the proposal, the parties to a dispute any further and it is not clear what could choose which should be the applicable conclusions should be drawn from the law to resolve the dispute that has arisen, example that he mentioned. although that choice could not bind a third party. Where all the parties exercise

commercial activities, they may agree provided, the assessment of damages and beforehand on their choice of the applicable the liability of a defendant for the acts of law. In the absence of such a choice, the another person. general rule would be that the applicable law should be the law of the country in which the There would be various exceptions to the damage had arisen, irrespective of the place application of the Regulation or the or places in which the event or events giving particular rules that would otherwise apply rise to the damage occurred or the country under it. For instance, the Regulation would or countries in which the indirect not apply to the obligations arising under a consequences of that event or those events written inter vivos trust and to the negotiable might arise. However, where it was clear rights of the parties under a negotiable from all the circumstances, such as under a instrument. The forum hearing a claim may pre-existing relationship arising from a apply its mandatory rules or the mandatory contract, that the tort was manifestly more rules of another country with which the closely connected with another country than situation was closely connected, if they were that ascertained under the general rule, the inconsistent with the appplicable law of the law of that other country would apply. The tort. There would also be an exception to the applicable law as found by the rules laid effect that the applicable law should not down in the Regulation would apply even if apply if it was manifestly incompatible with that was the law of a country outside the EU. the public policy of the forum.

1 The Berlin office is organised as a Limited Liability Partnership registered The applicable law would govern most of the in London with Registration Number OC 316822. Registered Office, matters that would arise in a claim in tort, Millennium Bridge House, 2 Lambeth Hill, London EC4V 4AJ including the rules as to liability, the kinds of 2 Affiliated Office loss for which compensation may be

Prepared by Andrew McKnight

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