The creditor in the looking glass. ‘Reflective loss’ principle confined to shareholder claims.

 

In July 2013 Marex Financial Ltd (“Marex”), obtained judgment for over US$5.5 million, plus costs of£1.65 million against various companies. Subsequently, one Mr Sevilleja allegedly procured the offshore transfer of over US$9.5 million from the Companies’ London accounts into his personal control and by the end of August 2013, the Companies’ assets were just US$4,329.48, such that Marex could not receive payment of its judgment debt and costs. The Companies were then placed into liquidation in the BVI with alleged debts in excess of US$30m.

Marex claimed damages from Mr Sevilleja in tort for (1) inducing or procuring the violation of its rights under the July 2013 judgment and orders, and (2) intentionally causing it to suffer loss by unlawful means. The Court of Appeal had found that the claims were barred by the rule against recovery of ‘reflective loss’ in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, noted here https://iistl.blog/2018/06/26/midsummer-blues-if-youre-a-judgment-creditor/ This laid down a rule of company law that a diminution in the value of a shareholding or in distributions to shareholders, which is merely the result of a loss suffered by the company in consequence of a wrong done to it by the defendant, is not in the eyes of the law damage which is separate and distinct from the damage suffered by the company, and is therefore not recoverable.. The Supreme Court in Sevilleja (Respondent) v Marex Financial Ltd (Appellant) [2020] UKSC 31, has now overturned that decision.

The majority concluded that the rule did not apply to claims brought by creditors of the company. Lord Reed concluded that the rule in Prudential seemed to be expanded in Johnson v Gore Wood & Co [2002] 2 AC 1, in which Lord Millett treated the “reflective loss” principle as a wider principle of the law of damages, based on the avoidance of double recovery. After reviewing subsequent cases, Lord Reed concluded that it was necessary to distinguish

“(1) cases where claims are brought by a shareholder in respect of loss which he has suffered in that capacity, in the form of a diminution in share value or in distributions, which is the consequence of loss sustained by the company, in respect of which the company has a cause of action against the same wrongdoer, and (2) cases where claims are brought, whether by a shareholder or by anyone else, in respect of loss which does not fall within that description, but where the company has a right of action in respect of substantially the same loss” [80].

Case one is barred by the rule in Prudential, regardless of whether the company recovers its loss in full, but in case two recovery is permissible in principle, although it may be necessary to avoid double recovery. The rule in Prudential did not apply to Marex, which was a creditor of the Companies, not a shareholder.

The minority also decided in favour of Marex but took a different view of the effect of Prudential. Lord Sales stated that the case did not lay down a rule that would exclude a shareholder’s recovery where, factually, the loss was different from that of the company.  The governing principle was avoidance of double recovery, as was the view of the Law Lords in Johnson (contrary to the view expressed by Lord Reed).

Although there was necessarily a relationship between a company’s loss and the reduction in share values that it causes, “the loss suffered by the shareholder is not the same as the loss suffered by the company” and there is no one-to-one correspondence between the two [132].” A shareholder ought not to be prevented from pursuing a valid personal cause of action; double recovery can be prevented by other means Even if the Prudential principle were accepted, it should not be extended to cover a case involving loss suffered by a creditor of the company.

 

An odd decision over contribution, but no need to worry.

As they used to say as often as they could in the Hitch-Hiker’s Guide to the Galaxy, “Don’t panic!”

What rules govern contribution proceedings between tortfeasors? In Roberts v SSAFA [2020] EWCA Civ 926 a little boy, presumably a service child, was injured in hospital in Germany owing to SSAFA’s negligence. SSAFA claimed contribution from the MoD, alleging they were concurrently liable. The MoD said, correctly, that German law applied to the contribution proceedings and under German law they were out of time. SSAFA said yes, but then struck a remarkably nationalistic note. The English Civil Liability (Contribution) Act 1978, it argued, ought to apply to all proceedings in the English court even if the liability would otherwise be governed by foreign law: and since that said the claim against the MoD wasn’t statute-barred that was an end of it.

One decision directly in point, Arab Monetary Fund v Hashim [1994] CLY 3555, supported SSAFA; the law professors, by contrast, broadly supported the MoD. The Court of Appeal, after a lengthy analysis of the 1978 Act, came down on the side of SSAFA: on a proper interpretation the Act it, and its scheme of liability, were meant to apply to any proceedings brought here, full stop.

To put things neutrally, this blog would have been with the law professors. The decision will hardly do much for comity; nor does the result make much sense as part of a sensible scheme of private international law, since where it applies it is an open invitation to come and do some socially-distanced forum-shopping in England.

But, as we said at the beginning, don’t panic. The parties’ names in this case might well have been not Roberts and SSAFA but Jarndyce and Jarndyce: the events took place as long ago as 2000 (!). Since 2009 we have had a more sensible rule about contribution in Art.10 of Rome II, which essentially subjects contribution claims to the law governing the main tort. In just about every case you come across these days, barring outliers like this one, it will apply. Whatever else you may think of the EU, Rome I and Rome II are much better provisions than the common law rules they replaced; and even better than that, it seems a racing certainty they will they will continue serenely on post-Brexit. So litigation lawyers can pour that large gin and tonic with a clear conscience this evening.

Careful who you sell that ship to!

Safety in ship recycling has been a priority of the EU for more than seven years. Under EU Regulation 1257/2013, in force since 2018, there is a complex system of EU approval of ship recycling facilities, it being illegal to send an EU-registered ship for recycling to an unapproved facility (meaning as often as not a not-very-deserted beach in India or Bangladesh, where she is broken up essentially by hand). This Regulation is to be retained EU law post-Brexit, though from the end of this year it will be significantly narrowed, in that it will only apply to UK-registered vessels (i.e. pretty few).

But quite a lot of ship recycling is outside the regulation. A case in point was the Maran Centaurus, a vessel previously in the news as the victim of a high-profile Somali hijacking in 2009 that led to payment of a then-record ransom of about $7 million. Owned by Greek interests, at the end of her life she was reflagged to Palau and sold to a buyer for demolition, who in turn resold her to a beachside Bangladeshi concern. During demolition a worker operating in very dangerous conditions was killed. His widow rightly concluded that the demolishers were not worth powder and shot. She instead sued the owner’s managing agents, a UK company who acting under the owners’ instructions had arranged the sale, alleging that it should have been foreseeable that unless they took steps to ensure that the vessel ended up in the hands of responsible breakers she would be broken up — as she was — without any serious regard for worker safety. The agents denied fault and applied for a strikeout, on the basis that a seller of a ship owed no duty in respect of dangerous practices that might later occur in relation to her. This was not, they said, a case of damage caused by hazardous materials aboard the vessel injuring a worker: there was nothing more here than a sale indirectly to a person likely to have a less than satisfactory attitude to industrial safety.

This writer has quite a lot of sympathy for this view. But in Begum v Maran (UK) Ltd [2020] EWHC 1846 (QB) Jay J declined a strikeout, regarding it as highly arguable that, despite the vessel herself not being unusually hazardous, this was a case where the defendants had created a foreseeable risk of harm and as such potentially owed a duty of care to the worker concerned.

Note that this is not a holding that there was a duty of care: merely that the argument that there was one wasn’t a non-starter. Nevertheless, it should worry shipowners everywhere (and cause them to check on their insurance coverage). It might even extend further: for example, what of a shipowner who sells (or bareboat charters) a vessel to an operator known to have a dodgy safety record: the logic of the Maran case seems to apply here too, and if it is followed we cannot rule out liability in the seller or owner.

Admittedly the if might be a biggish one. We said that we had sympathy for the defendant’s argument. The chances are that this case will now settle so we won’t ever get a final answer here. But the defendants’ case is strong. The case for making owners responsible for policing the safety records of disponees is by no means obvious, any mote than it is obvious that in selling my car I should have to take care lest the buyer is a known drink driver. It may well be worth fighting this issue again if, as seems highly likely, it comes back to the English courts in another case.

The Alien Tort Statute on its deathbed? SCOTUS grants certiorari in two aiding and abetting cases.

The US Judiciary Act of 1789, 28 U. S. C. §1350. which is now known as the Alien Tort Statute, provides: “The district courts shall have original jurisdiction of any civil action by an alien for a tort only, committed in violation of of the law of nations or a treaty of the United States.” For nearly forty years it has been used as the gateway to bring suits in the US District Courts against individuals and corporations based on alleged violations of norms of international law.

The Supreme Court has three times considered the scope of the ATS: in Sosa in 2004 when it decided that the norms of the ‘law of nations’ had to be as well established as the three such norms in existince when the ATS was passed in 1789 (piracy, offences against ambassadors, violations of safe conducts); in Kiobel in 2013 when it decided that the ATS was subject to the presumption against extra-territorial application of US standards and; in Jesner v Arab Bank in 2018, when it decided that foreign corporations could not be subject to liability under the ATS. But what about US corporate defendants?

It now seems that there is a chance of killing off the ATS altogether, although ATS type claims could still be brought in the future as tort claims in the state or federal courts. On 2 July the US Supreme Court granted certiorari to hear appeals in two Alien Tort Statute decisions, involving claims against Nestle and Cargill alleging aiding and abetting forced labour by farmers in Côte d’Ivoire from whom they bought cocoa.

The questions presented, each of which is the subject of a circuit conflict, are:

  1. Whether a defendant is subject to suit under the ATS for aiding and abetting another person’s alleged violation of the law of nations based on allegations that the defendant intended to pursue a legitimate business objective while knowing (but not intending) that the objective could be advanced by the other person’s violation of international law.
  2. Whether the “focus” test of Morrison v. National Australian Bank, Ltd., 561 U.S. 247, 248 (2010), governs whether a proposed application of the ATS would be impermissibly extraterritorial under Kiobel v. Royal Dutch Petroleum Co., 133 S. Ct. 1659 (2013).
  3. Whether there is a well-defined international-law consensus that corporations are subject to liability for violations of the law of nations.

The third question is particularly interesting in that this is the same issue as came before the Supreme Court of Canada in the strike out decision in Nevsun v Araya in its decision at the end of February 2020. Almost all the material on this issue derives from the decisions of US federal courts in ATS cases. As they say, “If you want to know about customary international law, ask an American lawyer.” – and you will get no definite answer on this one.

Of weekend sailors, docks and marinas.

Decisions that amuse law professors often end up as footnotes in law books because they’re not very significant in the great run of things. One suspects this is true of Teare J’s erudite judgment about marinas today in Holyhead Marina Ltd v Farrer [2020] EWHC 1750 (Admlty), but it’s still worth a short note.

Holyhead marina, like most marinas, is a floating labyrinth of wooden pontoons and walkways designed to cram in as many weekend sailors’ prides and joys as it can. A couple of years ago it was hit by Storm Emma and boats moored there suffered over £5 m worth of damage. The hull insurers sued, whereupon the marina raised the issue of limitation, claiming that under s.191 of the MSA 1995 it could limit liability to a fairly piddling sum based on the limitation figure applicable to the largest vessel (yacht) that had visited it in the previous five years.

This gave rise to the first issue: the right to limit was limited to “docks”. Was a marina, an erection that floated on water rather than solid land that abutted it, a “dock” — a term that included “wet docks and basins, tidal docks and basins, locks, cuts, entrances, dry docks, graving docks, gridirons, slips, quays, wharves, piers, stages, landing places and jetties”? Teare J had no doubt that it was, despite its relative insubstantiality and lack of any connection with commercial shipping. We suggest that this must be right. True, a mere buoy or dolphin shouldn’t be a dock, but beyond that essentially anywhere where vessels can tie up and people can board and disembark should be included. It is useful to have confirmation that s.191 will be generously construed, and technical pettifogging about the definition of a dock discouraged. Insurers now know where they stand.

A few minor points. First, the hull insurers argued that Holyhead was guilty of conduct breaking limitation. Although Teare J refused to strike out this plea as hopeless, he was clearly very sceptical of it, again one suspects with reason. Secondly, the hull insurers advanced a hopeful argument that because the marina was in vhf contact with users all over Holyhead Port, its limit fell to be reckoned by that applicable to the large Irish Sea ferry that visited the port. This received short shrift: what mattered was the area of which the marina was in effective physical or legal control.

Thirdly, an interesting question: why didn’t the marina have a clause limiting its liability to the yacht owners who used it under contract? Or did it, but was it sceptical of the ability of such a clause to withstand scrutiny under the Consumer Rights Act 2015 (yachtsmen being consumers)? It’s likely we’ll never know. But marinas up and down the kingdom, together with their liability insurers, might do well to look through their standard contract terms, if they wish to avoid having to argue the toss in future about an obscure provision in the Merchant Shipping Act.

Transnational corporations and tort. Crunch time in the UK Supreme Court.

Today the Supreme Court, comprising Lord Hodge, Lady Black, Lord Briggs, Lord Kitchin, Lord Hamblen, will hear the appeal in Okpabi v Royal Dutch Shell.  The issue is:

“Whether and in what circumstances the UK-domiciled parent company of a multi-national group of companies may owe a common law duty of care to individuals who allegedly suffer serious harm as a result of alleged systemic health, safety and environmental failings of one of its overseas subsidiaries as the operator of a joint venture operation.”

Previously the lower courts have found that there was no plausible case for a duty of care being owed by Royal Dutch Shell to those affected by the alleged negligence of its Nigerian subsidiary in failing to maintain its oil pipelines.

The case may turn out to be a landmark in the law of tort. In a previous decision in Vedanta v Lungowe in April 2019, the Supreme Court upheld the decisions of the lower courts that there was an arguable case that the parent company owed a duty of care to those affected by the operations of its Zambian subsidiary. The observations of Lord Briggs at [61] may prove to be important in today’s contest.

  1. [B]ut I regard the published materials in which Vedanta may fairly be said to have asserted its own assumption of responsibility for the maintenance of proper standards of environmental control over the activities of its subsidiaries, and in particular the operations at the Mine, and not merely to have laid down but also implemented those Page 23 standards by training, monitoring and enforcement, as sufficient on their own to show that it is well arguable that a sufficient level of intervention by Vedanta in the conduct of operations at the Mine may be demonstrable at trial, after full disclosure of the relevant internal documents of Vedanta and KCM, and of communications passing between them.

Kick off is at 10.30 and can be watched by video link.

 

 

Corporate human rights due diligence and direct liability. Switzerland gets serious.

 

In Switzerland a public initiative supported by at least 100,000 signatories can become the topic of a nationwide referendum.  Such an initiative in 2016 obtained the requisite number of signatures and put forward a wide ranging proposal which would:

require companies headquartered or registered in Switzerland to respect human rights and international environmental standards in their operations abroad, and to ensure that companies under their control respect these standards as well. makes it mandatory to conduct human rights and environmental due diligence;

introduce direct liability of companies for violations of human rights and environmental standards by companies under their control; and

reverse the burden of proof in part, requiring the company to establish that it took the requisite care to prevent such violations, or that the damage would have occurred even if the requisite care had been taken.

Under Swiss law, a counter-proposal may be provided by Parliament which if accepted by the organisers of the proposal obviates the need for a referendum. Early this month Parliament came up with a watered down version of the proposal without the provision for liability of parent companies under Swiss law for actions of their controlled companies abroad.

The organisers of the referendum proposal have rejected this. It therefore seems that the referendum will go ahead later this year along with the Parliamentary counter-proposal.

 

What a (public) nuisance. Two climate change suits in California to stay in the state courts.

 

This blog recently discussed climate change tort suits in the US. https://iistl.blog/2020/04/15/climate-change-and-tort-the-jurisdictional-battlefield-in-the-us/  The battleground has been keeping the suits in the US state courts and stopping their removal to the federal courts. The reason goes back to two previous decisions: the decision of the Supreme Court in American Electric Power Co. v. Connecticut, 131 S. Ct. 2527 (2011) (AEP),  and that of the Ninth Circuit in Native Village of Kivalina v. ExxonMobil Corp., 696 F.3d 849 (9th Cir. 2012), that such actions, at least when they relate to domestic GHG emissions caused by the defendant, are pre-empted by the Clean Air Act.

On 26 May 2020 the Ninth Circuit gave two favourable decisions to the municipalities claiming damages for what they estimate they will have to spend to mitigate the effects of climate change in future years. First they reversed the earlier decision in the claim brought by the City of Oakland against BP and other energy majors that the case should be removed to the federal courts. The Ninth Circuit held that the cities’ state-law claim for public nuisance did not arise under federal law and the cities’ nuisance claim did not raise “a substantial federal question.”  The Ninth Circuit rejected the companies’ argument that the Clean Air Act completely preempted the cities’ public nuisance claim and held that  the cities had not waived their arguments in favour of remand by amending their complaint to add a federal common law claim; the cities’ reservation of rights was sufficient. The case will now return to the district court to determine whether there was an alternative basis for federal jurisdiction, of the sort claimed, and rejected, in the San Mateo case.

Secondly, in the case brought by the County of San Mateo against Chevron Corp and other energy majors, the decision at first instance that the claim should not be removed from the state courts has been upheld. The Ninth Circuit held that its jurisdiction to review was limited to whether the cases were properly removed under the federal-officer removal statute and then that the companies had not proved that federal-officer removal could be invoked. under its existing precedent, it had jurisdiction to review the issue of federal-officer removal but not the portions of the remand order that considered seven other bases for removal. Conducting a de novo review of the issue of subject matter jurisdiction under the federal-officer removal statute, the Ninth Circuit found that the energy companies had not proven by a preponderance of the evidence that they were “acting under” a federal officer in any of the three agreements with the government on which the companies relied for federal-officer removal jurisdiction.

 

Classification societies are commercial — OK?

There is an easy side, and also a more wide-ranging and difficult one, to the CJEU’s decision last week in RINA SpA, Case 614/18, ECLI:EU:C:2020:349 on a point concerning the Brussels I Regulation.

Something over 14 years ago, a Red Sea ro-ro ferry, the Al Salam Boccaccio 98, sank with horrendous loss of life on a voyage between Duba in Saudi Arabia and Safaga in Egypt. She was registered in Panama and classed with Italian classification society RINA SpA.

A number of passengers sued RINA in its home state, Italy, for negligently certifying the vessel fit to sail, relying on what is now Art.4 of Brussels I Recast (the case actually concerned the previous 2001 jurisdiction regulation). RINA however had a trick up its sleeve. It pleaded sovereign immunity, on the basis that although it had been chosen and paid by the owners of the vessel, it had been acting on behalf of the Panamanian government. For that reason it argued that the Italian court had no jurisdiction over it in this respect, and that the Brussels Regulation was beside the point since this was not a civil or commercial matter. The Tribunale di Genova, faced with interesting issues of EU and public international law, understandably made a reference to the CJEU on the matter; was the claim covered by the Regulation?

The court, following the Advocate-General, had no doubt that RINA’s plea was misconceived. Even if the society had been acting for the Panamanian authorities in certifying the vessel so that those authorities in turn could, as the organs of the state of registration, give her the necessary clean bill of health, this was a matter governed by private law principles. According to the generally accepted rules of public international law, there was no way this could be construed as an act iure imperii; it was therefore covered by the Regulation.

It follows that in so far as it is sought to make a classification society liable for damage, loss or injury (a matter on which European and other legal systems differ considerably, and which we have no intention of going into here), lawyers can at least sleep easy on this point: as regards jurisdiction, it is simply a matter of looking up the relevant provisions of Brussels I Recast. It is a fair inference that the same also goes for other certification bodies (something likely to be relevant for international product liability cases) and probably state licensing bodies such as the CAA in so far as they are sued under private law provisions.

So much for the easy bit. Now for the harder one. Does this mean that state immunity law has now been quietly Europeanised as a matter of principle? This issue is not dealt with as such, and was explicitly left open by the Advocate-General in Para [106] of his opinion. The original Jurisdiction Regulation said nothing about it either; and although the Recast version adds a further few words to Art.1.1 saying explicitly that it does not apply to acts done iure imperii, this takes us little further.

The answer seems to be that we do have de facto Europeanisation, but only partly. RINA, read closely, says merely that in so far as Brussels I applies to an EU-based defendant, it is not open to a member state to apply a more generous home-grown version of state immunity and decline jurisdiction. It does not state the converse; namely, that if EU law regards a matter as covered by state immunity then an EU domestic court must not take jurisdiction at all. Why the case ended up in the CJEU in the first place is apparent only from a careful look at the facts: Italy indeed does as a matter of domestic law apply a very generous doctrine of state immunity, and it was this that the claimant sought, successfully, to sideline.

So for the moment – and, assuming Lugano or something similar to Brussels I applies after the transition period – English lawyers can breathe easy on this point too. There’s life yet in their well-thumbed copies of the State Immunity Act 1978.

PASSENGERS SUE CRUISE LINES FOR NEGLIGENCE OVER COVID-19 OUTBREAK

Ever since January 2020, it became evident that COVID-19 will place significant hurdles on cruise ship operators. The quarantine of approximately 2,500 passengers on board Diamond Princess off the coast of Japan that led to 700 confirmed cases of coronavirus was the first hard knock on the cruise industry. However, this was not enough to urge cruise ship operators to temporarily suspend their activities to minimise new transmissions on cruise vessels, or at the very least, to implement policies to prevent similar outbreaks.

Cruise ship operators continued their business as usual for more than a month. It was only mid-March, when some of the major cruise ship operators announced the voluntary suspension of scheduled cruises amid the severity of the public health crisis. Arguably, this delayed response on the part of cruise ship operators led to more passengers being exposed to COVID-19 with several passengers testing positive on cruise vessels around the world.

It now comes as no surprise that several claims have been brought against cruise ship operators over their response to COVID-19 outbreak. In early April, former passengers of the cruise ship Grand Princess filed lawsuits against the ship’s operators in federal courts of the US, claiming negligence on the part of the company in failing to ensure the health and safety of its passengers. The claims ask for compensatory and punitive damages for lost earnings, medical expenses and mental distress.

The Grand Princess departed on February 21 for a cruise from San Francisco to Hawaii. Before sailing to Hawaii, the ship made a 10-day round-trip to Mexico, and 62 passengers and more than 1,000 crewmembers continued on the voyage to Hawaii. On February 25, a man, who had been on the Mexico trip, died of the coronavirus. At this point, some members of the ship’s crew had already shown COVID-19 related symptoms. The Grand Princess turned back to the US mainland and skipped a planned stop in Mexico. On 5 March, passengers were quarantined in their cabins. However, COVID-19 had already been spreading on the ship, and 103 would ultimately test positive, with two passengers and one crew member now dead. On 9 March, passengers were moved into quarantine ashore.

The claims allege that the cruise ship operators were negligent in failing to inform Hawaii passengers that several passengers on the Mexico trip had shown COVID-19 related symptoms, failing to disinfect the ship thoroughly after the Mexico trip, and failing to screen passengers and crew before departing for Hawaii. In this respect, the claims mention that on the Grand Princess, the ship’s crew only asked passengers boarding the ship to ‘fill out a piece of paper confirming they were not sick’. The claims further allege that the cruise ship operators were negligent during the cruise in failing to inform passengers about the former passenger’s death and failing to quarantine passengers in their cabins on February 25.

Like in all personal injury claims, the liability of cruise ship operators for a passenger’s illness, injury or death will turn upon two legal questions. The first is whether the company was in any way negligent. In this respect, the claimants will have to prove that the ship operators did not exercise reasonable skill and care to ensure the health and safety of their passengers. On the facts, this may be possible, especially if it is proven that the company knew that several passengers on the Mexico trip had contracted COVID-19 and failed to disinfect the ship or at least to warn passengers boarding the ship in San Francisco.

The second is whether the company’s negligence caused the passenger’s illness. That is more problematic because it is hard to trace the exact moment when a person is infected with COVID-19. According to the official guidance of the WHO, the incubation period of COVID-19 (i.e. the time between catching the virus and beginning to have symptoms of the disease) ranges from 1 to 14 days, most commonly around 5 days. It is, thus, possible that some passengers had already been infected with COVID-19 when boarding the Grand Princess on February 21. Nevertheless, an argument may revolve around the fact that the company allowed 1,000 potentially infected people to share confined space with approximately 2,000 potentially uninfected passengers.

Assuming that both these questions will be answered in favour of the claimants, then a further question will arise as to whether the passengers of Grand Princess were in any way negligent in contracting COVID-19. If so, the company will be able to benefit from the defence of contributory negligence.

It is, thus, interesting now to see whether these claims will actually reach the courts or whether they will be settled in private.