Tune in to ThinkHouse - another way to keep up to date with the legal issues and developments affecting in-house lawyers
Commercial litigation, Clark Sargent - ThinkHouse September 2011
Clark Sargent digests key commercial litigation cases and their implications.
Amanda Grace: So Clark, the decision in the Akzo Nobel case, what do in-house lawyers really need to know?
Clark Sargent: I think a couple of key things come out of it. First, this is the third challenge on this topic and third level of appeal lost again. This is probably an end to it now, we have a final decision, we are at the end point. Secondly, of course, that end point is that the advice that in-house lawyers give to their employers in relation to competition aspects that then turn into an EU commission-led, competition enquiry that advice is not privileged. That's different to if they were using external lawyers, the external lawyers' advice would have privilege, the in-house lawyer does not. And of course that was the basis of the challenge because it was unfair.
The reason that the court has come to that decision each time it has been around this question of independence. Every time the court has said that for EU purposes the in-house lawyer is not sufficiently independent of the employer and that even if that in-house lawyer is also a member of an independent bar or a law society and so regulated by professional conduct rules from that professional body, it's not enough. It's probably worth bearing in mind that in the Akzo Nobel case there was a real concern that the piece of advice which was the subject of all of the scrutiny was actually feeding into the policy, which of course the competition investigation was challenging. The court viewed that as always likely to veer away from sufficient independence whether in fact it did or did not.
Amanda Grace: What can an in-house lawyer do to mitigate risk?
Clark Sargent: It looks like a challenging decision because privilege does not attach, that's the headline. But actually there is a lot of different bits and flows underneath that.
First off, it's a bit trite but it won't be necessarily popular in the in-house community, but you can always go out and instruct an external lawyer. They will always be delighted to help. Obviously, of course there is a cost element to that. It is why they have got in the in-house team in the first place to try and avoid that, it is a solution if you're worried about it, it gives you sort of an insurance policy.
There is the issue about when you have internal advice coming, whether you should be going on to paper or whether you should try and use conversations more so, so you don't have records that the commission can then come and look at. Obviously, there is a real business aspect in that-sometimes you do need some written advice so that everybody knows what the position is.
Thirdly of course, you should still mark everything privileged and confidential that has been generated out of the in-house legal team. There is a couple of reasons for this; one is it's always worth having a go, so err on the side of being as wide as you possibly can be and as protected as you can be. Secondly this Azko Nobel case is just about commission-led investigations, so if it's an OFT-led investigation in the UK, Azko Nobel doesn't apply. In the UK, the advice given by in-house lawyers is privileged, so the mark it as privelged because if it's an OFT-led investigation it will be privileged. And actually, in any other kind of court dispute, it will be privileged, a legal advice privilege will attach, so mark it as priveleged anyway.
It is also worth reminding ourselves that in Azko Nobel the court made it very clear that if the commission do come and knock on the door they are not allowed to look at the documents that you say are privileged. You challenge their right to inspect. They did in Azko Nobel, they were told off, that was wrong, they are not allowed to look, it goes straight into an envelope and it goes to the court for that aspect to be decided. So bear that in mind as well; if they do come knocking they are not allowed to look.
The final thing that you can look at, and this is perhaps a bit towards perfection rather than realistic, is running a document list internally so that if somebody comes in and challenges you can go through the list and work out whether you know you think something is privileged or not. Therefore nobody needs to go and look at the source document, you can decide off the list. In reality running that kind of list and know-how database is very challenging indeed, but that's perfection if you wanted it.
Amanda Grace: Can you give me a quick update on all of the issues relating to reasonable endeavours?
Clark Sargent: Yes, there has been a recent case on that actually, quite an interesting case, it concerns Jet2 and Blackpool Airport and it's about a low cost flier, Jet2, which was contracted to flying in and out of Blackpool Airport about five years ago. One of the contracted clauses was that Blackpool would use all reasonable endeavours to assist Jet2 in running a low cost airline. And if you can imagine, you're a low cost airline and you need to keep your costs low, so that means that you fly in and out of airports as many times in a day as you can. That means you need to start early and finish late to get in the maximum number of flights and because it's cheaper to land at six o'clock in the morning than at midday.
The two parties had run the contract on that basis for four years but Blackpool Airport was then taken over by a new shareholder and on a review, wanted to increase its own profitability. So what it decided to do was to narrow the timeslots that it offered to Jet2 because that would reduce its own costs base. By this I mean it would make more profit and it did that on seven days' notice. Of course, that created a problem for Jet2 and they objected to it.
It ended up in court on an expedited hearing arguing over whether what Blackpool had done was or was not within the confines of this all reasonable endeavours obligation that it had taken on. There was a question about what that meant for Blackpool Airport and what did the all reasonable endeavours entitle it to do. Historically there has been a view that that clause did not mean that a party should act against its own financial interest. This case puts a separation between doing something new that is an additional cost to you, which Blackpool wouldn't have had to do, as opposed to having run a contract a certain way for four years allowing this concession and then changing your mind because it suits you financially to close that down because you'll then make more money and profit. Blackpool Airport had an issue about its profitability and wanted to up its profitability, so that's why it did what it did. However the court said that was too much, that was a breach of the obligation.
The interesting sting in the tail is that the court also said all reasonable endeavours is not an absolute obligation, so it's not an absolute obligation on Blackpool over the next ten years to honour (necessarily) these extended hours it had been running to for four years. Over the next ten years the parties will have to agree effectively what all reasonable endeavours means, what did they have in mind by that. If they can't agree they will end up back in court for a final determination. But on the expedited hearing the court took for this decision, it said I'm not prepared to impose what the answer to that is, the parties can go away and come back again for further direction if they need it (at their future cost and expense). The lesson to be learned from that, of course, is what the courts are trying to force you to do, or the suggestion in the case is, please be as specific as you can in your contracts rather than using these loose endeavours/obligations when you could have provided certainty.
Amanda Grace: What about entire agreement clauses?
Clark Sargent: Again, a recent case, Axa Sun Life and Campbell Martin, looked at a couple of streams around entire agreement clauses. The first one was around misrepresentation excluded by putting in an entire agreement clause. The court was very clear once again in saying if you want an entire agreement clause to exclude a misrepresentation you have to say so very, very clearly. If you just put the word 'representation' into your entire agreement clause, with, no inclusion of prior warranties, representation, promises, then the court will view that as basically a contractual representation, i.e. a collateral warranty. You will exclude that there can be a collateral warranty attached to the side of your contract. You will not exclude a misrepresentation giving rise to a claim in tort, not in contract, that you entered into the contract because somebody told you something which you then relied on to your detriment in contracting with them. The court said that won't work. You need to be very, very clear indeed if you want to exclude a misrepresentation and you're back to some of those complicated recent cases coming out of the finance sector about how to exclude a misrepresentation which one, say so clearly or two, say that there haven't been any representations on which either party agree. Or, say that if there had been representations, neither party had relied on them. So you almost need a part two of your entire agreement clause to deal with that aspect.
And the second stream just concerned whether the unfair contract terms could apply to an entire agreement clause. The court said it could in theory, because actually you are limiting your performance to that in the expectations around the contract rather than what somebody might expect you to be doing because of the things you said beforehand.
So the court said, in theory UCTA does therefore apply, technically you are within the bounds of UCTA and the clause can be struck down if not reasonable, in theory. In practice it went on to say actually that it will almost never happen, it will always be reasonable. Always expect an entire agreement clause to be reasonable. Why's that? Well first, the parties would expect their contract to be all encompassing and not to have to go and find bits of their contract or their deal outside the contract, that's sort of what you have a contract for, to put it all in one place. Second, they add certainty, and the parties should like certainty. The court also said we like certainty because certainty means you don't come and argue things in front of us, taking up our very valuable judicial time on your spats. Third these clauses appear in nearly all contracts now and certainly in all commercial contracts, so it's completely reasonable, you know to be expected, get on with it.
Amanda Grace: Thank you Clark.
This video may contain information of general interest about current legal issues, but does not give legal advice.