Sponsored briefing: Is a rise in insurance coverage litigation good news or bad for policyholders?

Posted on |
Sponsored briefing: Is a rise in insurance coverage litigation good news or bad for policyholders?

Aaron Le Marquer and James Breese examine some of the key themes in insurance disputes over the past year and look forward to cases on the horizon in the coming year

Introduction

The world has seen turbulent times in recent years, and the insurance industry can perhaps be forgiven for struggling to keep up. Policyholders and insurers alike are grappling to understand and address a series of geopolitical events of increasing severity as well as the exponential evolution of novel risks, such as cyber and environmental, social and governance (ESG). When coupled with a global contraction of capacity producing a hard market, it is perhaps no surprise that the English courts have recently seen a marked increase in insurance coverage litigation.

This review examines some of the key themes seen over the past year and looks forward to cases on the horizon in the coming year.

Covid-19 business interruption (BI) litigation – the story so far

Since shortly after the first UK national lockdown in March 2020, a slow-motion avalanche of Covid-19 business interruption litigation has propelled insurance coverage to a more prominent position in the public consciousness than probably any time in the recent past. The reason is the scale of the problem: the entire nation was affected by the UK government restrictions in one way or another and by the FCA’s estimation, around 370,000 commercial policyholders, ranging from SME family businesses to FTSE100 giants, were directly affected by the insurance industry’s outright refusal to cover business interruption losses caused by the lockdowns.

The FCA was quick to act with a test case (FCA v Arch) launched within a matter of weeks after the commencement of the first lockdown. The case was fast-tracked to a Supreme Court judgment within approximately eight months. This resolved the coverage issues in favour of a majority of policyholders insured under various ‘non-damage’ BI extensions and overturned one of the only existing English authorities on business interruption coverage, Orient Express v Generali. FCA v Arch thus represented the most detailed examination of business interruption coverage in the English courts to date and initiated an entirely new line of common law authority in this field.

Although commenced against eight insurers and examining no less than 21 different policy wordings, it was always recognised that the FCA test case could never be comprehensive in light of the variety of wordings used in the market. Further litigation has inevitably ensued, testing points of coverage that fell outside the original test case and issues of construction going to the quantum of covered claims.

Significant decisions since FCA v Arch include:

  • Rockliffe Hall v Travelers, which confirmed that disease clauses responding to a specified list of diseases, including ‘plague’, did not extend to cover losses caused by Covid-19;
  • TKC v Allianz, which established that the loss of commercial use of premises caused by Covid-19 lockdowns did not amount to ‘loss of property’ within the meaning of a traditional damage-linked BI cover;
  • Policyholders v China Taiping, in which Lord Mance applied the Supreme Court’s conclusions on concurrent causation in FCA v Arch to prevention of access clauses for the first time;
  • Corbin & King v Axa, which applied Lord Mance’s reasoning in China Taiping to the Axa prevention of access clause, thereby departing from the Divisional Court ruling in FCA v Arch;
  • Stonegate v MS Amlin, which tested aggregation of losses, post-policy period causation and treatment of government support, including furlough.

Covid-19 business interruption – the future

Despite the slew of decisions cited above, the story is far from over. In 2022, more Covid-19 BI claims were filed in the English courts than during the previous two years.

In 2023, at least two further grouped test cases are set to proceed, including:

  • London International Exhibition Centre v RSA & ors, a set of six linked test cases, which will determine whether the Supreme Court’s ruling on concurrent causation applies equally to ‘at the premises’ disease clauses as to ‘radius’ disease clauses. This litigation may unlock coverage for many thousands of policyholders with previously declined claims, and
  • Gatwick Investments v Liberty Mutual, a set of six linked test cases in which Liberty Mutual seeks to overturn Mrs Justice Cockerill’s decision in Corbin & King and reopen the question of coverage under prevention of access clauses.

Both of these cases are widely expected to proceed to the Court of Appeal, no matter the outcome at first instance, and it is thereby hoped that these proceedings will bring some finality to the issues at hand.

Other issues affecting yet further large cohorts of policyholders with outstanding claims include coverage of loss of rent claims presented by commercial landlords and damages for late payment of claims under section 13A of the Insurance Act 2015. Further litigation will undoubtedly be required to settle these points. The Covid BI coverage saga clearly has some way still to go, even before the reinsurance implications are considered.

Russia-Ukraine losses

Like the pandemic, the Russia-Ukraine conflict is a geopolitical event with ongoing global impact, albeit of a different nature, the implications of which for insurance coverage are only starting to emerge. The conflict has been ongoing for over a year, and beyond the terrible human consequences, the economic impact is evident in a number of insured sectors.

Aviation

One of the most immediate sources of significant insured loss has been the aviation sector. In March 2022, in response to the initial wave of sanctions imposed by the West in response to Russia’s invasion of Ukraine, Vladimir Putin signed a new law entitling Russian airlines to retain and operate aircraft rented from foreign lessors that were forced to sever ties with their Russian counterparties due to sanctions.

Total estimates of the number of lost aircraft range between 400-600, with a commercial value of between $10-$13bn. Amongst other avenues of redress, lessors have turned to their insurance policies (which tend to be a highly bespoke form of cover specific to the industry) in search of indemnification.

First out of the gates was Aercap v AIG. In its claim against two panels of insurers led by AIG and two Lloyd’s syndicates, Aercap seeks recovery of almost $3.5bn under two independent sections of its aviation policy, effectively two separate policies underwritten by different panels of insurers. Under its claim under section 1 of the policy, Aercap claims for wrongful deprivation of physical possession of the aircraft, which it claims amount to a total loss for insurance purposes. Aercap’s alternative case, if the losses are not covered under section 1, is that they are covered under section 3 of the policy, which provides express war risks coverage.

Following Aercap, at least five similar claims have been issued against various insurers by other lessors, essentially seeking to determine the same or similar issues. As a result, the Commercial Court has created a dedicated list for these aviation coverage disputes in the same way that it has for Covid-19 BI disputes, with a view to case managing the various proceedings in a coordinated and efficient way. Given the scale of losses under consideration, the cases will no doubt be hard-fought and will take some time to work through the full judicial process.

Political risk

The aviation sector is not the only industry to be directly affected by the Russia-Ukraine conflict and the response of the international community, including economic and trading sanctions. Global enterprises of all sorts have suffered severe losses from sudden legal and regulatory changes that have forced them to withdraw from Russia and/or affected their operations in other parts of the world.

Those with significant investment in Russia and/or Ukraine may well find that their losses, including from expropriation or deprivation of property, are wholly or partially covered under political risk policies issued or reinsured by London market insurers and will have notified claims for losses that may not yet have fully crystallised. The terms of such policies are generally not standardised, so these losses are unlikely to lend themselves to the type of test case litigation seen in the Covid-19 BI context. Nonetheless, the losses are self-evidently significant and their factual circumstances are complex. As a result, a wave of political risk litigation may follow the existing suite of aviation cases in relation to losses suffered in a diverse range of industries with Russian exposure, such as energy, infrastructure, construction and shipping.

Cyber

Another line of business affected by evolving war risks is the relative newcomer of cyber. Over the past 10-15 years, insurers have fallen over themselves to write this business and establish market share in what they see as a sector of major future importance. However, in more recent times, a hard market has seen an abrupt change in underwriting appetite, with reduced capacity and restricted terms available in the face of rapidly escalating risk.

With much talk of the possibility of cyber warfare emanating from Russia against Western supporters of Ukraine, the cyber market may have been alarmed by the decision of Superior Court of New Jersey in Merck v ACE in January 2022. In that case, the court found that the hostile/warlike action exclusion in various property policies did not prohibit coverage for the NotPetya cyberattack launched by the military arm of the Russian Federation against Ukraine. The court found that the terms of the exclusion were only intended to encompass traditional warfare and did not extend to cyber-attacks. Merck was, therefore, entitled to seek coverage of losses estimated at $1.4bn.

Upon closer examination, the Merck judgment may be of limited direct relevance to London market cyber insurers. It was not an English law decision and related to a claim under a traditional property policy with no cyber exclusion but with a war exclusion. Nonetheless, in the present market conditions, it is unsurprising that insurers are extremely wary of covering cyber risks associated with the ongoing war in Ukraine and that the market is taking proactive steps to limit its exposure.

Taking the lead has been Lloyd’s. In August 2022, it issued a market bulletin requiring all cyber policies to include a suitable clause excluding liability for losses arising from any state-backed cyber-attack. The circular confirms that model clauses issued by the Lloyd’s Market Association (LMA) in November will be sufficient to meet the requirements, although the LMA clauses are not mandatory. The Lloyd’s market bulletin and LMA clauses have met with staunch opposition from many brokers and policyholders. While they recognise the legitimate desire of insurers to exclude genuine war risks from what are essentially ‘all-risks’ cyber policies, some fear the proposals go too far in circumscribing the cover available under Lloyd’s cyber policies.

The difficulty lies primarily in the question of attribution. The LMA clauses include a mechanism by which state-backed cyber operations are to be identified primarily on the basis of attribution by another state. Pending any such attribution, insurers are relieved from paying any loss. There are obvious problems with this approach from the policyholder’s perspective. In the present climate, it seems highly unlikely that a policyholder can expect prompt payment of any significant claim under a policy containing such a clause.

The requirements from Lloyd’s take effect from 31 March 2023. In light of the volume of debate generated by these exclusions even before their introduction, it seems likely that their application will prove contentious and may soon lead to the first focused cyber coverage litigation in the UK courts.

Turkey – Syria earthquakes

In February 2023, two devastating earthquakes struck southern and central Turkey and northern and western Syria in quick succession. The quakes were the second strongest on record in Turkey, with over 52,000 deaths recorded and 15 million people affected. Economic losses have been estimated at over $100bn, and insured losses at $5bn.

The implications from a property insurance perspective at local level are obvious. To facilitate local recovery efforts, the local authorities will need to participate with local insurers and international reinsurers to adopt a speedy and efficient mechanism for administering, adjusting and resolving huge volumes of claims. The establishment of the dedicated Canterbury Earthquakes Tribunal in New Zealand following the 2011 Christchurch earthquakes may provide a model.

Parallels might also be drawn with the 2011 Thai floods, which were the most severe on record, with an estimated $12bn of insured losses, including a number of substantial commercial combined property/BI losses. A significant proportion of those losses was (re)insured into the London market, meaning that UK loss adjusters and claims handlers were engaged in the claims process from the outset, and the consequent reinsurance and retrocession litigation over aggregation of losses continued for several years after the floods had receded. Cases such as Tokyo Marine v Novae and the more recent decision in the Covid BI context of Stonegate v MS Amlin (currently under appeal) may well come under further scrutiny in the context of aggregation of Turkish earthquake claims.

Amid allegations of widespread negligence and corruption in the design, construction and inspection of buildings that failed to meet local standards, it is also likely that liability coverages, including professional indemnity and director’s and officer’s insurance (D&O), will be engaged. Arguments over who is at fault and liable to meet the losses caused will likely take many years to resolve.

Comment

As the world continues to grapple with a series of overlapping and interlinked geopolitical challenges, the economic consequences will continue to surface in London’s global insurance market. Some commentators might view the accompanying rise in insurance coverage litigation in the English courts as a cause for concern for policyholders, but the fact is that novel and emerging risks require insurers to issue innovative insurance products that carry an inherent degree of uncertainty in their application.

Conducted sensibly and responsibly on both sides, litigation in the English courts can be an effective mechanism to clarify to policyholders and the insurance market the exact nature and extent of coverage provided under untested policies or clauses. London’s insurance market is therefore fortunate to have access to the English common law legal system as an efficient means of developing and shaping a nuanced and flexible body of insurance law without statutory intervention. In that sense, the current uptick in insurance coverage litigation is perhaps welcome evidence that the system is working.

Authors


Aaron Le Marquer
Partner, head of policyholder disputes
T: +44 (0)20 7822 8150
E: alemarquer@stewartslaw.com


James Breese
Senior associate, policyholder disputes
T: +44 (0)20 7822 8118
E: jbreese@stewartslaw.com

Return to the Disputes Yearbook 2023 menu

Sponsored briefing: Fraud and litigation – why are banks getting caught in the crossfire?

Posted on |
Sponsored briefing: Fraud and litigation – why are banks getting caught in the crossfire?

Tim Symes and Alice Glendenning discuss the common claims of online and open banking and the difference between dishonest and negligent banks

We reported in our 2021 Yearbook article on the close link between recessions and fraud. This was clearly seen in the fallout from the 2007-8 crisis when fraud cases increased year-on-year by value and volume. The recession and the subsequent company failures allowed officeholders to uncover the full extent of unethical or fraudulent behaviour previously hidden by ‘business as usual’ activity.

It also drove officers to further fraudulent behaviour attempting to cover up the true state of a company’s finances and their own conduct. Take the use of Repo 105 at Lehman Brothers, an accounting loophole used to artificially improve the bank’s leverage ratio and assist it in issuing billions of dollars in worthless securities prior to filing for bankruptcy. Similarly, the use of circular loans of €7.2bn by Anglo Irish Bank to bolster its balance sheet and keep under wraps hundreds of millions in unreported directors’ loans. Likewise, the fabrication of stories by Stanford International Bank to hide the reality when investors rushed to redeem their deposits as the crisis hit (namely, the second largest Ponzi scheme in history).

In that article, we considered the likelihood of a similar surge in the wake of the Covid-19 pandemic, anticipating that the successive lockdowns and economic crisis would prove fertile ground for fraudulent behaviour. We picked up this theme in our 2022 article, where we also considered the recent developments in case law to banking litigation.

The rise in claims against banks and financial institutions can be attributed, at least in part, to the changing nature of banking in recent decades, both from a regulatory and technological standpoint. Following the 2008 crisis, there was a global effort to increase the regulation and supervision of financial institutions, as well as improve standards of conduct in the sector. This has come hand in hand with the digitisation of the industry, which was given a huge impetus by the pandemic.

Online banking and the rise of open banking (the ability for third parties to access customers’ data, such as bank balance and transaction history), among other developments, signals a welcome overhaul of the sector. However, it also invites new threats. Alongside cyberattacks and the risk of digital assets being used for illegal purposes, technological developments have led to ever more opportunities for fraudsters, with a 149% increase in digital fraud attempts between 2020 and 2021. In short, the task of banks and financial institutions to scrutinise payments and police transactions in line with technological developments comes at a time when the concomitant threats are greater than ever.

Where banks or financial institutions fail to prevent these frauds or are found to have assisted them, their deep pockets and the growing body of victim-friendly judicial authorities make them an attractive target for victims seeking to recover their losses.

We consider below the most common claims we are seeing in this context. One way to distinguish the kinds of claims a bank can face is by drawing a line between the dishonest banks and the honest (but negligent) ones.

Dishonest banks

1. Fraudulent trading

Fraudulent trading claims can be brought by insolvency officeholders where a company has been wound up or has entered administration, and the business of the company was carried on with the intent to defraud creditors (whether that be the company’s or anyone else’s) or for any fraudulent purpose.

The net is cast wide when it comes to who can be liable. A claim can be brought against any persons who were ‘knowing parties’ to the carrying on of the business in a fraudulent manner, even if they were not involved in the management of the company and were outsiders to the company. Following the important case of Bank of India v Morris [2005] EWCA Civ 693, more claims have been made against banks.

2. Dishonest assistance

Likewise, banks or financial institutions can be held to have dishonestly assisted a person who holds a position as a trustee of the misapplied assets, for example, in making unauthorised transfers. Company directors are trustees of the company’s assets, so a misapplication of company funds assisted by a bank can render the bank liable in dishonest assistance. See the case of Abou-Rahmah v Abacha, where it was claimed that the City Bank of Lagos, the fifth defendant, had dishonestly assisted fraudsters in receiving and transmitting misappropriated funds which had been paid to facilitate the investment of a family trust fund worth $65m (which never existed) in an Arab country.

The application of these claims against ‘dishonest’ banks and financial institutions (more fairly put as dishonest players within these organisations) played a significant role in the long-running Bilta litigation brought by insolvency officeholders of Bilta UK Ltd, which was involved in carbon credit trades giving rise to VAT fraud in 2009. In Bilta’s claim against Natwest Markets Ltd, it was held that the bank’s carbon desk traders were liable under fraudulent trading and dishonest assistance for their role in facilitating the wrongdoing. Likewise, in Bilta’s claims of fraudulent trading and dishonest assistance against Tradition Financial Services (TFS), a broker and intermediary in the carbon trading fraud, the Court of Appeal recently confirmed that fraudulent trading does not just apply to persons with a controlling or managerial function at the company and could therefore apply to an outsider who knows that the business he is dealing with is fraudulent.

Negligent banks

Cases where banks or financial instructions are found to have been dishonest, thankfully, do not occur at anything like the rate of frauds, although neither are they as rare as we might hope. That is not to say that ‘honest’ banks are immune to claims where frauds have been perpetrated, as was established by the courts some 30 years ago in the landmark case of Barclays Bank plc v Quincecare.

1. Quincecare

Following Quincecare, banks and financial institutions may be held to have breached their duty of care to their customer if they execute what turns out to be a fraudulent payment order. For so long as a bank is ‘on inquiry’, ie it has reasonable grounds to believe an order may be an attempt to misappropriate funds, it should refrain from executing a customer’s order. If it fails to do so, it can be held liable for any losses suffered.

Historically, this claim was only successful when the purported agent for the customer had given payment instructions to the bank directly. Following the Court of Appeal decision in Philipp v Barclays Bank UK plc, an individual customer can now rely on Quincecare even where they issued the payment instruction to the bank themselves. In that case, Mrs Philipp fell victim to an authorised push payment (APP) fraud when a scammer posing as a Financial Conduct Authority operative tricked her into transferring £700,000 to two bank accounts in the UAE. Mrs Philipp was successful on appeal. It was held that Quincecare could extend to circumstances where an individual customer instructs their bank to make a payment when that customer is a victim of APP fraud. The Supreme Court has now heard the appeal, and judgment is awaited.

2. Claim in debt?

An alternative to bringing a Quincecare claim against an honest but negligent bank may be available following the Hong Kong Final Court of Appeal judgment in PT Asuransi Tugu Pratama Indonesia TBK V Citibank N.A. In that case, the applicant (Tugu) sought to recover funds totalling $52m transferred out between 1994 and 1998 from its account with Citibank on the dishonest instructions of its signatories, who were officers of the company. Tugu brought claims against Citibank (i) for Quincecare breach of duty; and (ii) in debt on the basis that the unauthorised debits were a ‘nullity’ (ie legally void). It was held that Tugu’s Quincecare claim failed because it was statute barred, and in any event, Tugu would have been held to be contributorily negligent for 50% of its losses. On final appeal, the debt claim was upheld: a customer is entitled to disregard an unauthorised debit as a nullity and bring a claim in debt for the reconstituted balance of the account, payable on demand.

While of persuasive authority only, this decision may offer an alternative means for officeholders and companies to recover misappropriated funds when looking at historical transactions or those where officers of the company have been complicit in the misappropriation.

Conclusion

As insolvencies pick up following the pandemic and more recent headwinds, and officeholders begin to investigate companies’ affairs, we can expect to find more banks in the hot seat for their role in facilitating wrongdoing, whether wilfully or negligently. Technology has been at least one driver of the rise in fraud, leading to claims against banks for failing to identify and prevent it. Technology is also likely to be the industry’s lifeline. UK Finance has reported that banks are investing in advanced security systems, including real-time transaction analysis, tracking technology, the imposed implementation of multi-factor authentication, and the exploration of ‘behavioural biometrics’ to identify suspicious activity.

It is hoped such developments will practically automate the identification and prevention of fraud. While a positive step, the counterpoint to this will be that it will be much harder for banks to argue they did not have the requisite knowledge of wrongful conduct or have been ‘put on inquiry’ when funds have been misappropriated in spite of these systems.

Authors:


Tim Symes
Partner
T: +44 (0)20 7822 8113
E: tsymes@stewartslaw.com


Alice Glendenning
Associate
T: +44 (0)20 7903 7916
E: aglendenning@stewartslaw.com

Return to the Disputes Yearbook 2023 menu

Sponsored briefing: Navigating cross-border data flow issues in the UAE

Posted on |
Sponsored briefing: Navigating cross-border data flow issues in the UAE

Alsuwaidi & Company discusses issues of personal data privacy as regulated by the Abu Dhabi Global Market (ADGM), particularly from a cross-border transfer perspective

The value of data

Worldwide, the intrinsic value of data is universally accepted, and its scale and value are on the increase: in 2017 the digitally transformed world was generating 2.5 quintillion bytes of data daily, digital technology in international trade was valued between US$800 and $1,500bn in 2019, and global spending on AI is forecast to accelerate from $50.1bn to $220bn in 2024.

The recent fine imposed on Amazon for $888m is a very sobering example of the financial cost of a data breach. However, the cost is not just limited to a fine. Other adverse considerations include damage to reputation and loss of consumer confidence. Marriot’s acquisition of Starwood in 2018 illustrates this point. Unbeknown to Marriot, Starwood had already been hacked resulting in the personal data of millions of customers being compromised. The United Kingdom (UK) privacy watch dog fined the hotel chain £18.4m. Had this issue been known prior to the merger, through the due diligence of data privacy issues, the whole deal could have been compromised once the magnitude of the breach was discovered because reports are that the breach had taken place as far back as 2014 and affected over 300 million customers. In 2018 Marriot had spent $28m because of the breach and is facing multiple actions for damages from aggrieved customers.

Whilst we only hear of the largest data breaches and most significant fines, these are alarm bells that start-ups and small companies in the ADGM cannot ignore. Firstly, because the ADGM data privacy regime makes it obligatory to protect personal data. Secondly, consumers are alive to these issues, and a failure to adequately deal with data protection will result in a loss of confidence. Thirdly, a failure to apply data privacy safety measures is an invitation to hackers. The unwitting sharing of data with cyber criminals is an unquantifiable loss but is certainly relevant in an age where the smallest competitive advantage converts to massive gains.

Cross-border transfer under the ADGM regulations

In 2021, the ADGM introduced its second version of its data protection regulations (regulations), and as with many other jurisdictions, they are closely based on the European Union’s General Data Protection Regulation (GDPR). Under part VI, the regulations establish an Office of Data Protection headed by a Commissioner of Data Protection who has a wide range of functions and powers to monitor and enforce compliance.

The coordination and regulation of cross-border transfer is by its nature a veritable minefield of uncertainty. It requires not only for different jurisdictions to be in sync with one another, but also their combined anticipation of the future impact of legislative and innovation changes.

The importance of cross-border transfers of data is recognised by the ADGM in its affiliation with the Global Privacy Enforcement Network (GPEN), an international organisation promoting the cooperation in cross-border enforcement of laws protecting privacy. On its website, the ADGM maintains a published list of jurisdictions it deems to have adequate data privacy and protection measures.

Under part V of the regulations there is a general prohibition on cross-border transfer unless certain preconditions are met. This general prohibition should be considered alongside article 3 which makes it clear that the regulations also apply to ADGM entities processing data outside its jurisdiction. An obvious example are entities who outsource telemarketing. For example, Etisalat have recently established a Do Not Call Registry governing and protecting individuals from unsolicited or malicious calls. ADGM entities utilising telemarketers in, for example the UK, calling a data subject with an Etisalat will be required to adhere to the Do Not Call Registry and will be in breach of the regulations if they do not. From a co-operation and enforcement perspective, the ADGM would in terms of article 46 of the regulations no doubt encourage and develop its international co-operation mechanisms with the UK to give effect to any transgression of the Do Not Call List, whether it took place within the ADGM or in the UK.

The regulations, under part VII, provide the Commissioner with authority to actively monitor compliance and secondly to sanction entities found wanting in compliance with the regulations, ranging from simply ordering the production of required information reasonably required to conduct its duties to a fine of up to $28m. These administrative decisions, if disputed can be scrutinised by the ADGM Court. At the time of writing this article the ADGM has not published any fines nor are there any cases concerning the administrative decisions of the Commissioner.

Cross-border transfer: the future

With the monetising of artificial intelligence (AI) gaining traction (Open AI Generative Pre-trained Transformer (ChatGPT) assisted in the drafting of this article), we can expect more changes to data privacy law regimes. Currently the most comprehensive on the issue of AI are the GDPR and the California Consumer Privacy Act (according to ChatGPT), but there are already questions arising that require attention.

For example, according to article 4(1)(b) and (c) of the regulations, personal data must be collected for a specific purpose and cannot be used for a purpose other than originally intended (this is in line with article 5 of the GDPR). This means that data cannot be collected for an unspecified reason on the gamble of its future potential. It also means that once the data is used for its specified purpose it cannot be used for another purpose. Under article 15(1)(a) of the regulations a data controller is obliged to erase the personal data once it is no longer necessary for its intended purpose.

The opinion of this author is that this is probably too regimental because it prohibits the collection of data before its benefit is understood, which is the antithesis of AI. Additionally, once the data is collected it can only be used for its original intended purpose, requiring a data controller to again ensure compliance before using the same data for another purpose. This will increase costs and delay the potential benefit of its new purpose, resulting in an unnecessary restriction of innovation.

Another example is the requirement for the human review of significant decisions made by automated decision making, which is a principle based on article 23 of the GDPA and found in the regulations at article 20. This is a significant barrier to innovation. This restriction may be linked to a distrust of automation in the field of personal data, which may or may not be justified, but could be balanced out by the simple understanding that the consequences of any error in the automated process lies at the feet of the data controller and processor.

The real value of data is found in its transformation into information and then to knowledge. Data becomes even more valuable when combined with other information. The regulations define this as ‘pseudonymisation’ which is comprehensively covered in the regulations.

What is less clear is a distinction between ‘automated process’, the use of technology to perform tasks that would otherwise be done manually and ‘artificial intelligence’ being the use of algorithms and machine learning. The regulations do not define either of these concepts. Perhaps this is so because the distinction is obvious but referring to AI as an automated decision maker has the ring of referring a calculator to an abacus.

In defence of the regulations, there is the argument that the definition of ‘processing’ is wide enough to cover AI, and it would be absurd to consider this definition to exclude AI. Article 30 is also relevant to the yet unknown changes that AI will bring. In the context of security of processing, it refers to the ‘State Of The Art’, which is a term also used in many patent laws. As defined in the regulations it means the ‘current state of technological development’. This together with the wide definition afforded to ‘processing’ could include a reference to AI.

Intellectual property issues aside, data used by one does not prevent its use by another. In this way, data is a unique asset to be exploited by multiple parties at the same time for the same or for varying reasons. It is non-rivalrous. Thus, the benefit of data to a particular controller or processor could be useless tomorrow, but may (through, for example the use of AI) have value the next day, but for a different reason. Currently, this potential advantage must be balanced with the obligation to erase data once it has served its purpose.

It remains to be seen how the ADGM will continue to strike a balance to protect privacy and at the same time not restrict innovation.

Author


Craig Cothill
Senior associate
E: c.cothill@alsuwaidi.ae

Return to the Disputes Yearbook 2023 menu

Sponsored briefing: Honey, I shrunk the tax base: transfer pricing litigation in Switzerland

Posted on |
Sponsored briefing: Honey, I shrunk the tax base: transfer pricing litigation in Switzerland

Lenz & Staehelin looks at the rise of transfer pricing litigation in Switzerland

Transfer pricing litigation on the rise in Switzerland

Switzerland’s generally low corporate income tax rates and a lack of detailed transfer pricing legislation meant that for a long time (except in obvious cases) transfer pricing proceedings in Switzerland were primarily concerned with corresponding adjustments after a primary adjustment abroad. This has changed in the last couple of years. The Swiss Federal Tax Administration (SFTA) as well as the tax administrations of large cantons (such as Zurich or Geneva) have built specialised transfer pricing teams, transfer pricing has hence become a main focus of tax audits and Swiss tax authorities are more and more willing to litigate transfer pricing cases.

Primary adjustments following a tax audit

Transfer pricing conflicts often start with a tax audit. A successful defense strategy, however, begins already earlier: although Swiss tax law does not require formal transfer pricing documentation, it is best practice to prepare appropriate transfer pricing documentation in advance and possibly also seek confirmation of the arm’s-length-nature of important controlled transactions through an advance unilateral tax ruling. Proper and comprehensive documentation is not only important to defend the taxpayer against tax liabilities, but also to protect a company’s board and management from criminal tax proceedings which are more and more often pursued in conjunction with transfer pricing cases.

Before a transfer pricing case is taken to court, there is a (oftentimes lengthy) administrative procedure where the taxpayer can present its arguments and submit additional evidence. A taxpayer should already be represented during the tax audit and the administrative procedure by counsel with broad experience not just in tax law but also in administrative procedural law and criminal tax law. From our experience, it is very difficult to correct strategical and tactical mistakes that occur in the administrative proceedings once the case lands before the courts, where the main focus lies on the correct application of the law only and less on the presentation of the facts, which are of course central to a transfer pricing case.

Once the tax authorities have issued their final decision, such decision may be appealed in front of the cantonal courts or, as the case may be, federal courts and, in last instance, to the Swiss Federal Supreme Court.

Last, the exchange of information between the different tax authorities within Switzerland has improved significantly over the last decade. A taxpayer should for example be prepared that the SFTA will communicate the results of a VAT audit to the competent Swiss cantonal tax authority, which may subsequently open a corporate income tax audit.

Mutual agreement proceedings to avoid double taxation

Once a domestic law transfer pricing audit has concluded with an upward adjustment in Switzerland, a taxpayer may need to dispute this matter on an international level also, in order to avoid double taxation. This is achieved by requesting a mutual agreement procedure (MAP) based on an applicable tax treaty.

A MAP request filed by a taxpayer to the Swiss competent authority may either result in the opening of a formal MAP process with the concerned treaty state or a domestic law agreement to adjust the tax base unilaterally (so-called internal convention), if it is clear that the primary adjustment undertaken by the Swiss tax authority is not (fully) justified. Transfer pricing cases are, however, rarely resolved through such internal conventions, as they will rarely be clear enough to be fully solved unilaterally.

Swiss MAP proceedings run in parallel to and completely independently of domestic law procedures. It is hence important to continue the litigation in front of domestic authorities and courts within the applicable deadlines. It is, however, common practice to request a suspension of domestic law procedures until a MAP is concluded. This allows the taxpayer to revive domestic law procedures, in particular if it does not approve of the result of a MAP or if the competent authorities cannot satisfactorily resolve the MAP. A taxpayer will, however, be required to waive its right to domestic law procedures if it agrees to the implementation of a MAP or an internal convention.

Once a binding mutual agreement or internal convention has been reached, all Swiss tax authorities are required to implement it. If the tax period under review is already definitively assessed, the tax authorities will issue a new tax assessment or revise the original one. In case the tax assessment is not yet final, it will simply be prepared taking the agreed upon results into account. An agreement also has an effect on criminal tax proceedings, for which penalties may be mitigated or completely waived based on the MAP.

The MAP is valid for all covered taxes of the respective treaty, ie usually Swiss income and capital taxes, as well as withholding tax. Particular care, however, needs to be taken with respect to withholding tax, as the SFTA has developed a strict practice on withholding tax on certain primary and secondary transactions from Switzerland, especially in cases of abuse, which would not be part of the MAP agreement.

Increased complexity of transfer pricing disputes

In Switzerland, the importance of transfer pricing disputes has increased drastically in the last couple of years, in particular with regards to primary adjustments originating from Switzerland. In addition, the disputes are becoming more and more complex and multi-faceted, both from a procedural and material perspective. The coordination of both domestic and international transfer pricing proceedings is thus crucial.

For example, tax criminal proceedings are often linked with Swiss primary adjustments, and such sanctions can often be waived or mitigated in case of a successful MAP. This element should hence be factored in the decision to request a MAP, rather than relying on domestic proceedings only. Particular care also needs to be taken to the withholding tax perspective of a case, as strict rules apply in this respect.

Law firms with expertise in tax litigation are uniquely positioned to handle complex international transfer pricing cases and successfully navigate and coordinate both domestic and international tax proceedings.

Authors


Jean-Blaise Eckert
Partner, head of tax
E: jean-blaise.eckert@lenzstaehelin.com


Rébecca Dorasamy
Associate
E: rebecca.dorasamy@lenzstaehelin.com


Lukas Aebi
Associate
E: lukas.aebi@lenzstaehelin.com

Return to the Disputes Yearbook 2023 menu

Sponsored briefing: From an island in the heart of the Caribbean Sea

Posted on |
Sponsored briefing: From an island in the heart of the Caribbean Sea

Pellerano Nadal provides a brief glimpse into the Dominican Republic’s judicial system

The Dominican Republic is internationally known to tourists looking for white sand beaches, to investors and multinationals looking to develop projects or establish a presence in the country, or to manufacturers and distributors that have trade business with local counterparties. While these things are generally positive, as in any jurisdiction, sometimes conflicts may arise in these cases.

In the Dominican Republic, disputes that arise between parties are settled, depending on the matter, in: (i) jurisdictional and (ii) administrative.

(i) The common or ordinary law (not to be confused with common law as it is a civil law jurisdiction), is within the jurisdictional scope and includes Peace Courts, Courts of First Instance and Courts of Appeal. For labour matters, the Labour Courts of First Instance and Labour Courts of Appeal are competent. In the case of administrative disputes, the Administrative Dispute Court and the Superior Administrative Court are competent.

For all these branches within jurisdictional scope, there is the Supreme Court of Justice which is in charge of setting the guidelines of the jurisprudential criteria and examining only the proper application of the law without going into the facts. This court is composed by three chambers: the Civil and Commercial Chamber, the Criminal Chamber and the Labour, Land, Administrative and Tax Chamber.

For constitutional actions, any Court of First Instance may act as a Constitutional Court and any related appeal may be brought to the Constitutional Court under the constitutional remedy, where only the breach (or not) of a constitutional right is analysed.

(ii) In the administrative jurisdiction, it is the competence of the public entities (mandataries of the executive branch), to receive complaints, petitions, reconsiderations, and hierarchical appeals filed by individuals or entities against the acts issued by such institutions, which, by virtue of the petitions or appeals, make the decision to modify, reiterate, or revoke their administrative acts.

To provide the necessary support before a dispute that may or may not give rise to a jurisdictional or administrative trial, or even in arbitration matters, the dispute resolution practice of Pellerano Nadal has lawyers with more than three decades of experience in the Dominican Republic, who have the expertise and skills to assist national and international clients in any negotiation that arises in the course of their commercial activities. Therefore, we have the expertise to mediate any complex and high-impact dispute or litigation, combined with a business approach, for the benefit of our clients’ interests, with the purpose of avoiding and identifying the risks involved in these proceedings, ensuring a successful conclusion to the dispute. We do not limit our practice to the courts, as we have a broad vision and crisis management approach that allows us to guide our clients towards an appropriate and assertive public relations management in the face of any nature of conflicts that may arise.

In recent years, the Dominican legal framework has undergone modifications and innovations with the aim of pursuing efficiency, quality, and the correct practice of dispute resolution laws. Our constitution was amended in 2010, with the objective of strengthening Dominican political institutions, creating an electoral jurisdiction, recognising certain fundamental rights, such as the right to life from conception, and the creation of the Constitutional Court as a supra-jurisdictional body.

Most recently, Law no. 2-23 was enacted to create a new process of the appeals remedy before the Supreme Court of Justice, which allows the review of the applicable law in the decisions issued by the lower courts, a regulation that aims to introduce significant changes in the actions of the chambers that make up this court.

This new law aims to make the judicial procedure before the Supreme Court of Justice more efficient and dynamic. To this end, a procedure is established that eliminates the suspensive effect of the appeal, the delays due to the inactivity of the parties or due to the constant sending to the lower courts, and the holding of unnecessary hearings only for the fulfillment of the old inefficient protocol.

A few years ago, the Criminal Procedure Code was amended and among its novelties, we can mention the maximum extension to four years of judicial proceedings, and it grants the power to any person to file a complaint against the faults committed by public officials.

The team

Our dispute resolution practice is led by partner, Gustavo Mena García, who has wide experience in all kinds of dispute matters, both in main and incidental proceedings, as well as in environmental law, with more than three decades of practice. García has irrefutable expertise in handling and resolving conflicts by any legal means required.

Senior associate, B. Genesis Rodriguez, is also part of the team and has experience in the areas of constitutional, environmental and administrative law. Her practice encompasses both litigation and regulatory and compliance matters, advising clients on areas such as labour, advertising, data privacy, consumer rights, taxation and customs, free trade zones and aviation law.

The disputes team is further complemented by three associates: Sekira Hernández, who has been recognised by The Legal 500 in the past for dispute resolution. Hernández focuses her practice in general litigation matters and, in recent years, has also focused on labour and environmental law.

Carlos Matos concentrates his legal practice in the areas of succession, administrative and taxation law, and has also assisted various clients in foreign investment projects, other litigation proceedings and environmental law.

Jean Franco focuses his legal practice in the areas of environmental law, environmental criminal law, environmental constitutional actions, and general litigation proceedings. Franco also assists clients with immigration law matters.

Furthermore, the team includes experienced paralegals, José Agüero and Ricardo Sánchez, who assist the lawyers with the necessary support in order to provide an exceptional client service experience.

And with this, we say goodbye from an island in the Caribbean, giving you a brief glimpse into our judicial system and hoping that you are never in a conflict in this beautiful place; but if you are, do not hesitate to reach out.

Authors


Gustavo Mena García
Partner
E: gmena@pellerano.com


B. Genesis Rodriguez
Senior associate
E: brodriguez@pellerano.com


Jean Franco
Associate
E: jfranco@pellerano.com


Sekira Hernández
Associate
E: shernandez@pellerano.com


Carlos Matos
Associate
E: cmatos@pellerano.com


José Agüero
Paralegal
E: jaguero@pellerano.com

Return to the Disputes Yearbook 2023 menu

Sponsored briefing: Tackling recalcitrant parties and guerrilla tactics in arbitration – an Indian perspective

Posted on |
Sponsored briefing: Tackling recalcitrant parties and guerrilla tactics in arbitration – an Indian perspective

Sneha Jaisingh discusses guerrilla tactics in Indian arbitral proceedings

Professor William Park compared arbitration to fine dining, which, unlike the messy hamburger of litigation, provides a balanced meal of efficiency, expediency, party autonomy and due process principles. Alas, today, arbitration in India is more messy mince and less fine dining, largely due to recalcitrant parties adopting guerrilla tactics.

‘Guerrilla tactics’ refers to deliberate attempts by certain parties – usually the respondents to arbitrations – to derail and obstruct arbitral proceedings, often as a ground to challenge the final award. While some argue that these tactics should not be categorised as guerrilla tactics as they are merely defensive in nature, one cannot deny their existence. Parties must, therefore, be mindful when dealing with counterparties in an arbitration. While there can never be a straitjacket formula to address guerrilla tactics, there are a few points that parties should bear in mind.

At the outset, to avoid a challenge to the existence of an arbitration agreement, when drafting and negotiating an arbitration clause or agreement, parties must ensure that the clause or agreement is easy to interpret and unambiguous. Where an institution is being chosen to administer the disputes and, or, govern the procedural law, parties must choose the institution that is most likely to suit their needs, and understand the nature of the potential disputes. The institution should also be cost effective. Next, when faced with a dispute, parties must exercise proper diligence when appointing arbitrators and ensure that relevant disclosures have been made with respect to any matters that may give rise to a justifiable doubt as to the independence or impartiality of an arbitrator.

Once the arbitral tribunal has been constituted, it must proceed with the first hearing and the first procedural order. This is particularly important as, under the Arbitration and Conciliation Act, 1996 (Act), a tribunal has wide discretion to determine how arbitral proceedings will be conducted, provided that each party is treated equally and given a full1 opportunity to present their case. Consequently, a robust first procedural order will likely pay dividends later. If issues such as place and applicable law of the arbitration have not already been agreed to, they must be addressed at the first hearing. Parties may also address whether there is any jurisdictional challenge, interim measure or other preliminary issue that needs to be determined. More procedural aspects such as length of pleadings, filing of documents, simultaneous exchanges of pleadings or documents, communications with parties and arbitrators, how to deal with impromptu applications, rules of evidence, costs including on account of adjournments should also be addressed. It is also good practice to try and obtain the consent of the counterparty on such issues so that the tribunal’s scope is narrow.

Guerrilla tactics often also include attempts to bring matters that are extraneous to the arbitration before the tribunal. Illustratively, a party may make allegations of oppression and mismanagement in the case of shareholder disputes, raise issues such as invalidity of patents in disputes pertaining to recovery of royalty fees, allege that the underlying agreement which is the subject matter of the dispute is anti-competitive, or is vitiated by fraud. As the same factual matrix may give rise to various causes of action, it is critical that parties ensure that the scope of the arbitration is well defined and that a party only raises claims which are arbitrable in nature. Equally, where a counterparty has sought to raise claims in respect of extraneous matters, a party may be able to establish that the extraneous proceedings filed by the counterparty are vexatious and designed to thwart the arbitration.

Other intimidation tactics may include the counterparty filing large volumes of pleadings or evidence which are irrelevant. In such cases the admission and denial of documents is crucial so that the onus of proving the existence and the relevance of extraneous documents is on the counterparty seeking to introduce them. To some extent, the filing of voluminous pleadings and, or, evidence may be obviated through the tribunal’s first procedural order.

Counterparties seeking to delay proceedings may also file for discovery or the production of documents as part of a fishing expedition or roving enquiry. Although the Act does not prescribe procedures for discovery and production of documents, Indian courts have held that principles of evidence and procedure for civil suits would apply to arbitral proceedings. Parties should, therefore, bear in mind that the discovery and production of documents sought must be relevant and material to the case. Discovery will not be allowed on matters which relate solely to a party’s own case. A party is entitled to inspection of all documents which do not constitute exclusively the other party’s evidence of their case.

Briefly, an arbitral tribunal has wide ranging powers to control proceedings. However, there is always a risk that, when faced with guerrilla tactics, the tribunal may fall prey to due process paranoia. It is, therefore, imperative that the party against whom such tactics are being employed provides the tribunal with adequate support to enable it to take takes steps against the recalcitrant party keeping in mind principles of equity and natural justice.

Authors


Sneha Jaisingh
Partner
E: sneha.jaisingh@bharucha.in

  1. Sohan Lal Gupta v. Asha Devi Gupta(2003) 7 SCC 492 holds that for a fair hearing each party must have: (i) notice of the hearing; (ii) a reasonable opportunity to be present at and throughout the hearing, together with advisers and witnesses; (iii) a reasonable opportunity to present evidence and arguments in support of its case and to test the opponent’s case by cross-examination, rebuttal evidence and oral arguments; and (iv) unless expressly agreed, presented the whole of their evidence and argument at the hearing.

Return to the Disputes Yearbook 2023 menu

Sponsored briefing: South Korea: the next hub for international dispute resolution?

Posted on |
Sponsored briefing: South Korea: the next hub for international dispute resolution?

Yulchon LLC’s insight on South Korea’s recent implementation efforts to further integrate international arbitration and mediation in its legal system

Following the emergence of arbitration as an alternative dispute resolution mechanism in consequence to the costly and time-consuming traditional method of litigation, it became more attractive and reliable, triggering the flourishment of the arbitral market in Asia. As more ongoing engagement in cross-border investments occurred in Asia, it led to the continuous growth and refinement of national arbitral rules and laws across many jurisdictions, resulting in the establishment of arbitral hubs and institutions. Among the arbitral institutions, the Hong Kong International Arbitration Centre (‘HKIAC’) and the Singapore International Arbitration Centre (‘SIAC’) grew exponentially in size, but also in popularity. Therefore, by successfully ranking globally and becoming the most preferred arbitral seats, it brought forth a substantial number of case filings.

On the other hand, as the ‘youngest’ and most recently established institution, the Korean Commercial Arbitration Board (‘KCAB’) is gradually progressing and steadily catching up with its neighbouring confreres. KCAB was established in 1966 with the main purpose of resolving disputes quickly and impartially through arbitration, mediation and conciliation. In South Korea, not only has the government and judiciary encouraged the use of arbitration to resolve disputes between domestic parties, but it has also amended and enacted the Korean Arbitration Act in 2016 by incorporating recent developments in international arbitration practice, in order to promote domestic and international arbitrations in South Korea. In particular, recent Korean court case precedents have demonstrated an ‘arbitration-friendly’ approach from the courts, which foster more organisations to consider South Korea as a potential arbitral seat, and to select KCAB as its arbitral institution of choice.

In 2017, the Arbitration Industry Promotion Act came into effect, providing for long-term planning and financial support by the Korean Government for the promotion of international arbitration in Korea. Article 3 of the Act, in particular, provides that the Minister of Justice shall establish and implement a master plan to promote the arbitration industry every five years. Accordingly, the Korean government has set up a plan for 2019-2023 to increase KCAB’s capabilities of handling international matters by providing a KRW2.4bn annual budget and to become the arbitration hub of Northeast Asia.

Moreover, in 2022, the South Korean Ministry of Justice collaborated with the Korean Council of International Arbitration (‘KOCIA’) by commissioning a research service report with the objective of revitalising Korea’s international arbitration industry to a global level through an overseas case study. The report was prepared by the research group, in which Ms Jeonghye Sophie Ahn, co-chair of the international dispute resolution team from Yulchon LLC participated together with other reputable and knowledgeable arbitration experts and practitioners in South Korea. The research group carefully examined overseas arbitral institutions, and in particular, it benchmarked SIAC while studying the background of Singapore and how it quickly became a world-class international arbitration hub.

With respect to the overall results of the report, the research group noted several key points. For one, while the Korean government made considerable and progressive efforts from a legislative standpoint, there were several unique features that KCAB can adapt by benchmarking Singapore’s international arbitration industry. In particular, there is the necessity in seamlessly involving the international arbitration community, such as lawyers and practitioners of various nationalities, and to get their input in order to continuously make changes to the existing system. But also, it is important to sufficiently promote Korea’s infrastructure and arbitration-friendly system by developing accessible resources in English, or to organise offline in-person events to actively publicise these resources. In contrast, some features were deemed solely unique to Singapore, making it more difficult to benchmark to the Korean system, such as the official language of the country and the different legal systems.

Therefore, it was suggested that by taking into consideration Korea’s language barrier issues and civil law characteristics, an independent international commercial court should be created, in which it would directly deal with arbitration-related cases while also recognising and enforcing any international arbitration awards seated in Seoul. At the same time, it was also proposed that KCAB establish a committee that can provide a choice to the parties of an arbitration to either resort to the courts or to proceed with the annulment of the arbitral award directly through the committee.

In conclusion, while some of Singapore’s features can be easily integrated into Korea’s international arbitration industry, others may need to be acclimatised and tailored uniquely to Korea. Nonetheless, based on the results of the report, it can be inferred that the Korean government is making great progress towards its objective in making Korea the next arbitral hub in Asia.
On another note, in 2019, Korea signed the UNCITRAL’s Convention on the Enforcement of Mediation Settlements (‘Singapore Convention’), and from 2021, it initiated a task force on domestic legislation, in order to implement the Singapore Convention. Moreover, in 2020, the Korea International Mediation Centre (‘KIMC’) was established, in which Mr Yun Jae Baek, co-chair of Yulchon LLC’s international dispute resolution team is actively participating as a mediator. Based on these recent developments, with Korea’s endeavours to concurrently promote international commercial mediation, it may ultimately strengthen KCAB’s capability to becoming the hub for international dispute resolution in Northeast Asia.

Yulchon LLC

Yulchon LLC is a full-service international law firm headquartered in Seoul, South Korea. It employs more than 600 professionals, including more than 60 licensed in jurisdictions outside of Korea, and has offices in Shanghai, Hanoi, Ho Chi Minh City, Moscow, Jakarta, and Yangon. An acknowledged market leader in the development and practice of law, it has been named as ‘the most innovative law firm in Korea’ by the Financial Times on three separate occasions. It is frequently retained to negotiate complex transactions, help draft new legislation and regulations, and represent clients in high-stakes adversarial proceedings. As one of Korea’s premier law firms, Yulchon maintains its high standards of excellence by valuing a culture of collaborative problem-solving.

Authors


Yun Jae BAEK
T: +82 2 528 5473
F: +82 2 528 5228
E: yjbaek@yulchon.com
Yun Jae Baek is a partner at Yulchon LLC and the co-chair of its international dispute resolution team. He received an LLB from Seoul National University and an LLM from Harvard Law School. Mr Baek has acquired unparalleled knowledge and experience for over three decades and is qualified to practice in both Korea and New York. He is considered one of Korea’s top lawyers in the areas of international arbitration, M&A, aviation, and general corporate practice. Currently, Mr Baek serves as arbitrator for many arbitral institutions including the KCAB, AIAC, and the ICC. His reputation has led to him being selected as a leading lawyer by renowned publications such as Chambers Global and Who’s Who Legal.


Jeonghye Sophie AHN
T: +82 2 528 5306
F: +82 2 528 5228
E: jhahn@yulchon.com
Jeonghye Sophie Ahn is a partner at Yulchon LLC and the co-chair of its international dispute resolution team. She received an LLB from Seoul National University and an LLM from Harvard Law School. Ms Ahn focuses on international disputes and has acted as counsel and arbitrator in international arbitrations administered under the SIAC, ICC, KCAB, and UNCITRAL Rules arising from a diverse range of commercial and corporate transactions including joint venture, intellectual property, media and telecommunication, and construction. She also specialises in arbitration-related proceedings in court and has represented both foreign and domestic corporations in seeking or resisting enforcement of awards, interim measures, and injunctions.


Hyunah PARK
T: +82 2 528 5747
F: +82 2 528 5228
E: hapark@yulchon.com
Hyunah Park is a partner in the international dispute resolution team at Yulchon LLC’s dispute resolution practice where her practice is mainly focused on domestic litigation as well as international arbitration and other types of international disputes. She also specialises in insurance law and has been dealing with many insurance-related cases, and regularly provides legal advice with regards to insurance disputes. Ms Park received an LLB from Korea University and an LLM from University College London. She is licensed to practice in Korea.


Seyoung CHOE
T: +82 2 528 5233
F: +82 2 528 5296
E: sychoe@yulchon.com
Seyoung Choe is a foreign attorney in the international dispute resolution team at Yulchon LL, licensed in Ontario, Canada. Her practice is mainly focused on international arbitration and cross-border litigation. Ms Choe received a JD from the University of Ottawa in 2016 and an LLB from the Université de Montréal in 2015.

Return to the Disputes Yearbook 2023 menu

Sponsored briefing: Protecting lawyers’ rights for society and the people

Posted on |
Sponsored briefing: Protecting lawyers’ rights for society and the people

Ashkhan Candey advocates access to justice for clients at risk of insolvency

Since 2009 CANDEY has striven to embrace contingency fees. First in the form of conditional fee arrangements and thereafter damages-based agreements. As a boutique firm we have always been able to onboard such matters quickly, with conflict checks and a decision to self-fund being made in a matter of hours.

Parliament dropped the ball when it came to drafting and so the unintelligible damages-based agreements regulations which could have been evolutionary have been avoided by most firms. Academic commentators observe that you would be crazy to enter into one. Sadly they are not written in plain English, have led to significant legal argument and if current Court of Appeal authority stands (CANDEY v Tonstate 2022), they discriminate against defendants as they are only available to claimants. This cannot be right or fair as the cornerstone of English law is that parties must always be on an equal footing. Except we all know that in a capitalist society parties are rarely ever on an equal commercial footing for unfunded claims (typically funders need it to be £5m+ to work as otherwise they take all the proceeds on success).

Thus the ordinary woman on the street may be eaten alive by the corporate she takes on, as absent bad publicity a loss is just a rounding figure for the corporate whereas for her she risks losing everything. Despite our advances as a society, the rich continue to have the upper hand in commercial litigation. In a civilised society this cannot be right, yet the government appears wholly disinterested in putting it right. Somehow it has been missed off the levelling up agenda. Whilst we read in the news about cases won or lost nothing is ever said about the vast majority of people for whom justice was never available as they could not hire a decent lawyer.

Leadership in this area is to be found in the Supreme Court. Lords Briggs and Leggatt and others are gravely aware of the moral inadequacy in our system and in a trio of ‘lien’ cases have championed the access to justice cause laying down and clarifying the ambit of an effective roadmap for lawyers to be paid first from the fruits of litigation. Whilst this does not address the risk of adverse costs, it does at least provide a litigant with a meritorious claim with the option of instructing solicitors and barristers on a no-win no-fee basis without having to rely on Dickensian forms of charity. Sadly the Tories have been asleep on the job or too busy on Brexit and the pandemic. Meanwhile Labour are disinterested in any policy that may appear to simply help lawyers get richer.

The fact remains that despite strides by the Supreme Court, those without cash remain unable to get before a judge. At the heart of the problem is the risk of insolvency. If litigants with meritorious claims were flush with cash, they would fund their own cases. But so often, they simply do not have the financial wherewithal to do so. Ironically, this is all too often a result of their opponent breaching obligations, contractual or otherwise, leaving them starved of cash and facing insolvency. It is at this critical point that the law, and the procedure that underpins it, should come to a litigant’s aid. But how can lawyers agree to act for them on a no-win no-fee deal if there is a significant risk that their client will go bust? We may have a wonderfully strong relationship with our trusted client but if on insolvency the lawyer is sacked and replaced by a disinterested administrator, liquidator or trustee then what? The officeholder is under no obligation to retain you. How can a firm protect themselves in that scenario from ranking as an unsecured creditor and recovering only pennies in the pound? The lien or equitable charge does not protect a lawyer who has not achieved a win. Unless they are subsequently held to have been instrumental the lawyer gets burnt. In CANDEY v Crumpler we protected our fixed fee by taking a floating charge in the BVI. In the High Court on the question of the value of our floating charge this was valued at £3.8m but on appeal and remission back to the High Court was found to be the lower hourly rate figure of time expended at just over £1m. In the intervening period we also argued in parallel proceedings that by retaining the discretion to be paid first we had reserved our lien. It is that application which ended up in the Supreme Court in 2022. The liquidators at KPMG in that case, whom we have fought for eight years (like a dog with a bone), would no doubt have sacked us immediately upon assuming office had they thought that we had a lien and used other lawyers on hourly rates instead. It was because they continued to use us to prepare for trial that we were able to invoke the lien once success had been achieved. As a footnote and by way of an interesting way of getting paid, the Court of Appeal in the first Candey and Crumpler Court of Appeal judgment (there were three) found that a payment by way of security for costs on success would revert to the client’s insolvent estate, would not be new monies generated by the liquidators, and so our charge could bite on those monies. Thus security paid into court provides a fund that can serve two purposes, to pay security for costs and in the event of success constitute a fund to pay the lawyers. As a further footnote there is old High Court authority to say that a lien would not bite on monies simply returned but I personally think that decision was wrongly decided.

Absent statutory invention by a government actually interested in access to justice the only real option as I can see it is to permit lawyers acting on a contingency to have a claim transferred to them in the event of insolvency. Obviously, the new fee agreement itself would have to survive the existing test of reasonableness, with independent advice required. It could not trespass over the existing rules for CFAs and DBAs, respectively, charging a maximum of double hourly rates or 50% of the winnings including counsels’ fees and VAT. It was thus that against the odds we fought the case of CANDEY and Miller (Court of Appeal 2022) in the hope that the Supreme Court would hear the case and determine that with the advent of contingency agreements the prohibition on champerty was dead and we should be able to have a claim transferred to us, where we had essentially been the funder, on insolvency. The Court of Appeal would have to follow existing case law forbidding transfers of claims to lawyers but the Supreme Court could depart. Sadly, the Supreme Court declined to hear the case so what could have been a revolutionary moment for access to justice fizzled out. For now.

As commercial lawyers we always stand accused of wanting to make a fast buck. We should make no apology for that. If we can help a client, take significant risk and be handsomely rewarded then what is the problem? Bankers, funders and entrepreneurs have always acted in the same way. Unlike judges, we are not civil servants. Most big firm commercial lawyers are paid very well, win or lose, so there must be an upside to incentivising lawyers to take risk, to help those who desperately need our help and must otherwise rely on the hope that they can find a pro bono lawyer. The national pro bono centre and judges such as Mr Justice Knowles have been wonderful in leading the charge to persuade lawyers to act pro bono but volunteers will never be a cure to a flawed system. Until such time that we as lawyers collectively exercise more muscle to reform the law we sadly retain the shame of a system that relies on Victorian charity or expects litigants in person to know the law and the White Book.

In the case of CANDEY v Bosheh (2022) the Court of Appeal narrowed the test of the iniquity principle: in that case we discovered that our client was not in fact our client but a dishonest solicitor who masqueraded as our client. To establish the fraud we relied on privileged communications relying on the iniquity principle but we got smacked by the court for doing so. In other jurisdictions such as the USA fraud is a clear exception to privilege, and it is immensely disheartening for the profession that that panel effectively granted immunity from prosecution to anyone who might defraud a lawyer. In this respect our rights as lawyers to assert our rights rank below that of everyone else, creating another barrier or disincentive to any lawyers prepared to depart from the hourly rate paid up front.

Judicial initiatives to cap legal costs might seem to be a good idea but they will have a dreadful impact. Whilst they admirably reduce the quantum of adverse costs the reality is that they will only be undertaken by call centre claims handlers. What would actually make a huge difference for the ordinary person would be to reintroduce the ability to defer and recover the insurance premium paid for adverse costs, typically around 35% of the actual sum insured. In that scenario on a win the loser would pay that premium.
For now, we as a firm fight on for lawyers’ rights convinced that absent government cash (which is not an option) only by advocating to protect lawyers who work and win on risk, can we broaden access to justice.

Author


Ashkhan Candey
Solicitor, barrister and managing partner
E: acandey@candey.com

Return to the Disputes Yearbook 2023 menu

Sponsored briefing: How to select an arbitrator in an arbitration in mainland China

Posted on |
Sponsored briefing: How to select an arbitrator in an arbitration in mainland China

Commerce & Finance Law Offices navigate the most important aspects for the client to consider in the arbitration process

In modern commercial disputes, arbitration is often preferred over litigation by parties in large and complex transactions. Reasons include efficiency and economic advantages brought by the arbitration’s system of a single and final award, and, more importantly, the fact that the parties have a say in selecting arbitrators. Compared to litigation where judges are assigned by the court and parties have little room to comment, in arbitration parties are free to choose who hears their dispute instead of being at the mercy of God. As early as 1907, the Hague Convention for the Pacific Settlement of International Disputes has a precise description of the arbitral tribunal, which is the ‘judges of their own choice’. Needless to say, selecting the right arbitrator is the key to getting off to a good start in arbitration.

Arbitrators in China mainly consist of senior practitioners in the legal profession, who must satisfy requirements of both professional expertise and practical experience. Article 13 of the Arbitration Law provides the threshold qualifications for an arbitrator. Multiple Chinese arbitration institutions actively maintain and update their panels of arbitrators on a regular basis with stringent criteria for qualifications. The arbitration rules of some institutions in China do not mandate the parties to select the arbitrator only from their panel list. Nevertheless, it is advisable for the parties to choose from such panels, unless they have specific requirements, valid reasons, and a clear choice of an arbitrator outside of the panel. Generally speaking, panels of the arbitration institutions include the top and most active arbitration practitioners of the day, and can be of much help for parties to make their nomination of arbitrator.
From my experience acting as the arbitrator in hundreds of cases over the years, I have summarised some general considerations in selecting arbitrators and common mistakes in practice. The following are some general tips for the reader’s kind reference when examining the potential candidates of arbitrators.

First, legal expertise. The parties may get a first impression of a prospect arbitrator’s legal expertise by examining his or her educational background, practice experience, research publications, etc. Also, the arbitrator’s experiences in research and practice sometimes reflect his or her area of specialisation, accordingly parties may choose an arbitrator to fit their specific area of dispute.

Second, expertise in the business area or the industry relating to the dispute. Some industries have certain professional barriers, such as construction, maritime trade, bills and patents. For disputes in these areas, adequate technical expertise of the industry may be more important than knowledge of legal issues. Specifically, parties may draw their attention to whether the prospect arbitrator has relevant professional and technical qualifications, or experience in the industry.

Third, the availability to hear the case. While the professionalism and experience of top-level arbitrators are beyond doubt, it is sometimes possible that a well-known arbitrator may be preoccupied by many other cases and societal responsibilities. In some disputes, such as the ones that heavily rely on a large volume of factual evidence, parties are advised to carefully consider the availability of the arbitrator, rather than making the selection simply by the reputation or seniority of the candidate.

Fourth, previous views and inclination on disputable academic topics. Some cases involve legal issues that are still disputable. These issues are often unaddressed by existing rules in legislation. Sometimes the judicial practice over such disputes have been inconsistent for long as well. Usually, they are also topics in heavy debate in the academia. For such disputes, it is important for the parties to examine whether the candidates for arbitrators have expressed any view on relating topics, or might have certain inclinations. Academical stands or values
do not mean the arbitrators will not remain impartial when hearing the case. However, to the best interest of the party, it is better to exclude any candidate that holds or might hold a position on the relating topic that is opposing to the party.

For the parties, it is never a good idea to waive the right to choose an arbitrator. Sometimes certain parties lack experience in arbitration. Another common mistake is to exceed the time limitation of selecting arbitrators. Some parties, especially when being the respondent, often have insufficient time to hire counsels, which often results in overdue selections of an arbitrator or hasty selections without professional advice. Another situation is that the parties could misunderstand that the period for selecting an arbitrator is automatically suspended under certain circumstances. My team once encountered a case in which the respondent, in the 15-day period for selecting an arbitrator, filed a proceeding in local court to confirm the invalidity of the arbitration agreement. The respondent held misconceptions that the arbitration proceeding would be automatically suspended once the judicial proceedings were initiated, and the period for selection of arbitrators would resume from the date of resumption of the arbitration proceedings. However, it is actually the tribunal or the arbitral institution that have the power to suspend the arbitration proceeding, and the commencement of judicial proceeding does not lead to the automatic suspension of the time limits in the arbitration. Due to the misunderstanding of the arbitration rules and the legal principles, the party failed to select an arbitrator within the prescribed period. When it ultimately failed to obtain a favourable award, this party applied to cancel the arbitral award on this ground but was not upheld by the court either.

The selection of an arbitrator is a time-critical matter, involving numerous factors, but has limited public information available. It must be nonetheless considered carefully by the parties. Generally, lawyers, arbitrators, staff of arbitral institutions, corporate counsels who have the hands-on experience, are more likely to have a deeper insight of the whole picture and make appropriate selection. It is advisable for parties who are unfamiliar with the arbitration to take advice from professionals, in order to get the arbitration process off to a good start and to lay the groundwork for a good outcome.

Authors:


LI HONGJI
Partner, head of dispute resolution
Commerce & Finance Law Offices


CUI QIANG
Partner
Commerce & Finance Law Offices

Return to the Disputes Yearbook 2023 menu

Sponsored briefing: Class actions defence

Posted on |
Sponsored briefing: Class actions defence

PLMJ on class action litigation and the future trends and potential pitfalls for businesses to keep in mind when facing a claim in Portugal

Who we are

We are a leading, national and independent law firm in Portugal that is focused on providing legal advice to the business sector, and we have one of the largest teams of lawyers in the country.

Our dispute resolution team supports our clients in highly complex disputes critical to their business and reputations, and we work consistently on the most sophisticated and sensitive Portuguese and international disputes.

Class action litigation in Portugal:a few points to note

Legal framework – the general legal framework for class actions is set out in the Class Action Act (83/95). There are also sector-specific class action rules (eg the Private Damages Act when there is a breach of competition law).

‘Opt-out’ representative basis – the general rule under Portuguese law is that all class actions proceed on an opt-out representative basis. If the class action is accepted by the court, class members will be served (i) to join and participate in the proceedings proactively if they wish; or (ii) to state that they do not agree to be represented by the claimant(s). The right to opt out may be exercised by class members until the end of the evidential stage of proceedings. Not opting out of an action by the deadlines set will result in automatic opt-in.

Absence of a separate certification stage – Portuguese law does not provide for a standalone class certification process. However, for a class action to proceed in Portugal, the court must carry out a preliminary analysis of the claim. In that assessment, the court can summarily reject the claim if it considers that it is manifestly unlikely to proceed. One of the grounds for such a decision can be the absence of a proper class. It is rare, however, for class actions to fail at this stage of proceedings. Notwithstanding the above, the parties to class action proceedings can make submissions regarding class membership prior to judgment. As a rule, the court will rule on all substantive issues – including class membership – in the final judgment.

Relatively low costs for bringing class actions – the general rule is the ‘loser-pay rule’. Costs comprise court fees and adverse costs, including the prevailing side counsel’s fees. Under the specific class action rules, if the court finds even just partially in favour of the claimant, the claimant will be exempt from court costs. If the claim is universally unsuccessful, claimants will be ordered to pay an amount to be fixed by the court as costs. This amount will range from 10% to 50% of the amounts due in ordinary civil claims. In determining the specific amount to be paid by an unsuccessful claimant, the court will consider the economic situation of the claimants and the reasons why the claim did not succeed. Conversely, defendants in class actions must pay court costs, as is the case in any other civil proceedings.

Third-party funding is not yet specifically regulated in Portugal – to date, there is no identifiable established case law on whether and to what extent third-party funding arrangements are lawful in Portugal. Until very recently, third-party funding was very rare. However, since December 2020, several class actions backed by litigation funding arrangements have been brought before the Portuguese courts. The extent to which litigation funding arrangements common in jurisdictions such as the US, the UK and Australia are permitted by Portuguese law is not yet clear.

Typically available defences – several procedural and substantive defences are available in class action proceedings in Portugal.

The key procedural defences brought in class action litigation include (i) lack of jurisdiction of the Portuguese courts; (ii) limitation; (iii) the absence of interests covered by the class action regime (diffuse interests); and, in class actions where the claim is brought by consumer associations, (iv) a defence as to whether the association in question meets the requirements as a class representative and therefore has standing to bring the claim.

The key substantive defences brought in class action litigation in Portugal include (i) the absence of any unlawful behaviour or, in the case of standalone competition litigation, any infringement of EU and/or domestic competition law; (ii) the absence of causation of any damage arising from the conduct at issue; (iii) the absence or miscalculation of any alleged damage to the claimant(s); and (iv) pass-on (in the case of competition law class actions).

There are a number of additional defences that are currently being run in Portuguese class action litigation. The extent to which these defences will remain available in the future will depend on the outcome of current litigation.

Compensation is set globally – the court has the discretion to set the compensation of unidentified claimants as a whole, considering the overall damage. This amount must be reduced by the amount of compensation due to claimants who opted out. Identified claimants will be compensated according to the general rules of civil liability (ie according to the damage they have actually sustained).

Class action landscape and future trends

The class action litigation landscape in Portugal is evolving rapidly. Since December 2020, self-proclaimed consumer associations have brought numerous class actions against both multinational and domestic firms, especially competition and consumer law class actions. Many of these actions are copycat cases of class actions brought in other jurisdictions. We expect the volume of class actions to continue to increase in the short to medium term and witness the rise in privacy/data breach, Big Tech and crypto class actions litigation. The ESG movement may lead to class litigation in the near future as well. It is to be expected that Portugal will soon have transition steps underway to implement the EU Directive on Representative Actions ((EU) 2020/1828).

Anticipating potential pitfalls

Businesses would be advised to keep the following key points in mind when facing a claim in Portugal:

  • Anyone can bring a class action and the general rule is that class actions are opt out.
  • There is no separate class certification stage. A decision on the class of potentially harmed consumers is only made on final judgment. This means that a claimant is not burdened by a procedural hurdle which in other jurisdictions can result in delays to a final hearing on the merits and final judgment.
  • The costs associated with bringing class actions are relatively low. Judicial costs are only due on final judgment and the claimant is exempt from any court costs if the claim is totally or partially upheld. If the claim fails entirely, judges have the discretion to cap cost orders against claimants. Based on past judicial practice, it is unlikely that a claimant will be burdened with an order to pay a large amount of the defendant’s costs in the event that the claim is dismissed in its entirety.
  • Portugal is a one-shot jurisdiction. This means that a defendant must present all of its procedural and substantive defences in its defence to a claim. This can often place a defendant on the back foot, as the deadlines for submitting a defence are very tight – a domestic defendant will need to respond to a claim within 30 calendar days of service on the last defendant, while a foreign defendant has 60 days to respond from service on the last defendant.

The combination of these reasons makes Portugal an attractive jurisdiction for class action claimants and can put Portuguese proceedings at or near the front of a defence strategy for a defendant facing similar/identical claims across jurisdictions. This is because, as noted, a defendant must submit all defences at a very early stage of litigation. As a result, while in other jurisdictions a defendant may be litigating class certification, in Portugal the same defendant will have to have developed all its arguments on the merits of the case in addition to presenting any procedural defences.

We are ready to help you navigate complex class actions

Our team has represented clients in defending high stakes class actions that require a multifaceted approach, including liability of directors of listed companies and manufacturers’ civil liability. We also have extensive experience representing clients in competition class action claims before the Portuguese Competition Court.

We are mindful that class actions are a rough sea for businesses: they entail significant risks, including high monetary exposure and reputational hazard. Our class actions defence lawyers are well placed to work with our clients facing class actions and employ their specialised skills and strategic experience to achieve positive outcomes. We have an in-depth knowledge of the substantive and procedural aspects of class actions in Portugal and keep a close eye on the international landscape to monitor emerging trends. We invest strongly in detailed case planning and assessments, especially in the case of multi-jurisdictional and cross-border actions. Last but not least, we do not overlook the importance of working with leading national and/or international economic experts and providing our clients with robust and cost-effective defences.

Authors


Petra Carreira
Managing associate in the dispute resolution practice


Rita Samoreno Gomes
partner and co-head of the dispute resolution practice

Return to the Disputes Yearbook 2023 menu