2024 is shaping up to be another significant year for the UK’s burgeoning class/collective action regimes. New developments in several areas means that businesses need to have an understanding of their exposure across collective proceedings orders (CPOs) and umbrella proceedings orders in the Competition Appeal Tribunal (CAT), to group litigation orders (GLOs) and representative actions in the High Court.
Overview
2023 saw a continuation of trends from previous years – collective actions in the High Court are still primarily brought on an opt-in basis, either by multiple claims being brought together in a single action (eg, using a schedule of claimants); or the court making a GLO.
In terms of opt-out class actions, the CPO regime continues to be the most active for such claims since the Supreme Court’s lowering of the class certification threshold in its 2020 judgment in Merricks v Mastercard1, and this shows no sign of slowing down. There are now over 40 registered opt-out class actions, involving claimant classes in the millions and potential damages sums in the billions. Representative actions remain an option for opt-out claims in the High Court, but have not seen the same level of activity, following the Supreme Court’s decision in Lloyd v Google2 which raised the bar for the ‘same interest’ criteria that the claimant class must fulfil.
Recent developments
In the CAT
The increase in CPO claims has resulted in parties rigorously testing how various aspects of the regime are to be administered, as claims reach each procedural stage. In particular, we have seen the first settlement in a CPO claim, in the proceedings against the participants of the so called ‘Ro-Ro’ shipping cartel3, where the smallest defendant’s (1.7%) share of the potential damages still amounted to £1.5m. Also arising from a CPO claim, the Supreme Court’s July 2023 judgment in PACCAR4 cast serious doubts over the enforceability of certain litigation funding agreements (LFAs) where the funder takes a percentage of the overall damages awarded. Despite this, claimant firms and funders seem to have taken the judgment in their stride, amending LFA wording to comply with the post-PACCAR requirements. Two amended LFAs have been approved by the CAT to date, with these decisions remaining subject to appeal.
Another key development has been the first environmental disputes brought under the CPO regime. In 2023, six opt-out class actions were commenced against UK water companies, alleging that they abused their dominant positions in the market by under-reporting the number of sewage spills into the environment, and providing misleading information to their regulator. The claimants allege that the defendants benefited from this by charging higher prices than they would otherwise have been able to if they had provided accurate reporting.
In the High Court
Late 2023 and early 2024 saw a surge in activity in the GLO litigation against vehicle manufacturers relating to the alleged use of ‘defeat devices’ to cheat emissions tests. Ten GLOs, which are being collectively case managed, have now been granted (the ‘NOx Group Litigation’). The total claimant group includes over 1.2 million individuals who have brought the claim against the defendant manufacturers and authorised dealerships, with a total of 1,500 defendants. The claim value is yet to be determined, but based on a previous settlement in these proceedings, could be above £2.4bn.
As for representative actions, the January 2024 High Court decision in Commission Recovery Ltd v Marks and Clerk LLP5 demonstrated that despite the setback for claimants in Lloyd v Google, the English courts are amenable to permitting representative actions where the claims take a bifurcated approach. They may be appropriate to deal with issues in which the claimant class do have the ‘same interest’ on an opt-out basis (eg, establishing the defendant’s breach), with individual issues (eg, liability to an individual claimant or quantum of damages) to be dealt with separately at a subsequent stage of proceedings.
What’s next?
There are several noteworthy trials taking place in the coming 12 months in UK class actions.
The first full trial of a claim under the CPO regime in Le Patourel v BT6 commenced in January 2024 for eight weeks, and the certification hearings for many of the pending CPO applications have been listed this year. The first trial using the umbrella proceedings order mechanism will also take place this year in the Merchant Interchange Fee Umbrella Proceedings7, encompassing approximately 1,000 bundled claims by UK businesses alleging damages caused by the defendants’ overcharging of multilateral interchange fees.
Environmental damages claims are expected to continue to grow in prominence in UK class actions, particularly those brought against UK parent companies for the alleged acts/omissions of their foreign subsidiaries. One of these claims, Mariana v BHP8, is listed for trial in October 2024 and is among the largest collective actions ever commenced in England and Wales. The eight-week trial will determine the claims of 700,000 Brazilian claimants who allege that an estimated £36bn in environmental damages arising from the Mariana dam disaster in 2015 was caused by the defendants.
The most progressed GLO in the NOx Group Litigation (against Mercedes) will go to trial in February 2025. It, along with two other GLOs (yet to be determined), will act as test cases, the result of which will bind the remainder.
Important case management decisions are also expected to continue to shape the regimes as they arise.
Outside the courts, there are two important proposed pieces of legislation that may have major impacts on UK class actions if they become law in 2024. The first is a new bill which would reverse the effect of the Supreme Court’s decision in PACCAR, in relation to damages claims brought in the CAT9. The second concerns amendments to the Digital Markets, Competition and Consumers Bill to expand the CPO regime to include consumer rights class actions10. This is one for businesses to watch closely, as it would radically increase the risks of non-compliance with UK consumer protection laws for any companies with a UK customer base.
Footnotes
Mastercard Incorporated & Ors v Merricks [2020] UKSC 51
Lloyd v Google [2021] UKSC 50
Mark McLaren Class Representative Ltd v MOL (Europe Africa) Ltd & Ors (Case no 1339/7/720)
R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal [2023] UKSC 28
[2024] EWCA Civ 9
Justin Le Patourel v BT Group PLC (Claim No: 1381/7/7/21)
Claim no: 1517/11/7/22 (UM)
Municipio de Mariana & Ors v BHP Group (UK) Ltd & Ors (Claim No: HT-2022-000304)
The concept of ESG is not a new one – but the attention it has gained is fresh and here to stay. Put simply: no-one has solved the climate crisis, globalisation has made supply chains harder to monitor, and levels of public scrutiny over companies’ actions (and omissions) has never been higher. The result is that governments and regulators will continue to produce rules and guidelines which demand responsible action by businesses. The trend we’re seeing more of is individual stakeholders using any means available – including litigation – to hold businesses to account where they perhaps don’t feel governments and regulators are acting quickly enough.
Which parts of the acronym do you think will generate the most litigation?
It’s perhaps artificial to carve up ESG when it comes to litigation – if a company is acting in a way which is not sustainable, that activity will arguably involve environmental sins, antisocial conduct and questionable governance at once. The directors’ statutory duty to promote the success of the company explicitly includes reference to the long-term impact of the company’s operations on the community, environment, suppliers, employees. Recent high-profile litigation has focused on governance (ie, derivative actions) in order to try to force a change in company activities. Businesses in the private sector need also to be prepared for more class actions focusing on supply chain practices and seeking compensation related to environmental issues such as carbon emissions and pollution.
What constitutes greenwashing under UK law?
Under English law, there is no single legal definition of ‘greenwashing’. However, the term is commonly used to describe an entity making misleading or unsubstantiated claims about the environmental benefits of its products, services, or practices. The focus has developed swiftly from laws aimed at protecting consumers from false advertising to preventing the anti-competitive nature of greenwashing in a B2B context. It’s not just about what label you put on a product, but how you promote your business more generally. Companies don’t realise that every single statement (whether on their websites, in their sustainability reports, in their recruitment campaigns) that talks about their sustainability credentials is a potential hostage to fortune.
What has been the most significant greenwashing claim to date in the UK and what does it demonstrate?
So far in the UK, there haven’t been many legal cases that could definitively be categorised as greenwashing. There are some examples of derivative actions aimed at forcing a change of approach by companies, but the most high-profile examples of greenwashing have resulted in fines and investigations by the Advertising Standards Agency, rather than legal claims in the courts. Additionally, the Competition and Markets Authority has initiated investigations into green claims made by several prominent companies. The UK’s Financial Conduct Authority has also indicated its intention to crack down on greenwashing within the financial services sector by implementing an anti-greenwashing rule effective from 31 May 2024. This demonstrates that regulatory enforcement is currently the primary battleground for tackling greenwashing in the UK
How are most consumer/competitor legal claims against misleading environmental claims being made and funded in the UK?
As above, most greenwashing claims are pursued by regulators rather than consumers or competitors. However, this situation could change significantly in the coming years as large companies become subject to mandatory sustainability disclosure obligations. This could potentially lead to a surge in litigation based on misleading disclosures in published materials, such as under s90 and 90A (now schedule 10A) of FSMA 2000. The UK is increasingly becoming a favourable legal market for class actions, with a mature litigation funding market and a growing number of claimant law firms operating on a conditional fee agreement basis. Consequently, there may be an increase in class actions against companies engaging in greenwashing practices in the future.
How seriously should companies take the threat of greenwashing accusations?
Companies in the UK should take the threat of greenwashing accusations very seriously. With increasing public awareness and concern about environmental issues, consumers are becoming more discerning and demanding when it comes to sustainability claims. Regulatory bodies, activist groups and shareholders are also actively monitoring and challenging companies’ sustainability claims and practices.
What are the potential legal liabilities for those accused of greenwashing in the UK?
Where a regulator investigates a business for false or misleading green claims it has wide ranging investigatory powers and a range of penalties that can be imposed. At its most serious, both a business and senior personnel within the business can be criminally prosecuted and face a fine or, for individuals, possible imprisonment. However, more typically, businesses may be required to commit to undertakings to prevent greenwashing, which will be enforced by the courts if necessary. In addition, businesses may have to offer compensation or some other form of redress if the greenwashing has influenced consumer transactions and may need to commit to removing any misleading advertising. Outside of regulatory investigations, businesses and individuals are at risk of the usual array of common law legal action to recover damages in contract and tort (including claims for breach of contract, misrepresentation or even fraud), as well as the applicable statutory remedies (for example, individual directors can be disqualified for the most egregious conduct or otherwise fined for reckless or dishonest reporting under the Companies Act 2006).
How can companies best prepare themselves (inc what steps can they take to ensure their environmental claims do not open them up to the risk of legal action)?
The potential developments in ESG litigation are driven by a combination of factors, including societal expectations, regulatory changes, investor demands, and the increasing recognition of the financial and reputational risks associated with poor ESG performance. It is important for companies to proactively assess and manage how their business impacts the environment and human rights at every stage of the value chain. This includes engaging with stakeholders, taking the time to really understand their environmental impact and their supply chains, ensuring accurate reporting, and proactively tracking evolving legal requirements to mitigate the risk of litigation. To meet the raft of new regulatory obligations, businesses also need to collect and store significant volumes of sustainability data and implement new ESG compliance and governance systems.
What legal defences are available to those facing claims?
Defences to claims by regulators include demonstrating adequate due diligence processes, being able to substantiate the claims in question and evidencing compliance with the relevant regulations. Failing that, if the greenwashing allegation is essentially well founded, a company should focus on demonstrating that it took reasonable steps to ensure that the green claim in question was accurate and it had appropriate systems and controls in place regarding making green claims. It should also take immediate corrective action.
How much experience does Osborne Clarke have working on ESG claims generally and greenwashing specifically? Do you have a highlight case and if so why?
Osborne Clarke is currently advising clients who are subject to regulatory investigation for misleading green claims. Our ongoing work means that we have first-hand knowledge of the standards regulators expect businesses to meet to achieve compliance, particularly around the Green Claims Code. This contentious experience has proven invaluable when helping clients assess their current claims, review substantiation, devise playbooks and train marketing and business teams.
What are Osborne Clarke’s plans to build this part of its disputes practice and why? Are there one or two partners with a particular focus on this area?
Around our international network, our lawyers advise across the extensive range of legal services that are touched by ESG and disputes lawyers are just part of the multi-disciplinary team. As the web of public and regulatory interest and legislation grows, so do the contentious risks for our clients and so the team is expanding rapidly.
Katie Vickery and her team regularly advise clients in relation to misleading environmental claims enforced by the CMA and Trading Standards as well as wider ESG compliance, circular economy, deforestation-free products and supply chain risk management. With regard to governance, both Jane Park-Weir and Charlie Crowne are recognised experts in the field of directors’ and officers’ duties, ethics, corporate reporting obligations. Jane has a particular focus on handling complex corporate disputes, including derivate actions against directors and unfair prejudice claims. Charlie has a wealth of experience advising clients in relation to ESG and greenwashing risks in the financial services sector, including pension and investment funds.
Osborne Clarke’s disputes and risk practice group also holds itself accountable in supporting the firm’s broader ESG strategy. Osborne Clarke For Good is the firm’s way of ensuing it’s a good corporate citizen, a good employer and a good business.
When Legal Business first launched its Disputes Yearbook back in 2014 Brexit was barely on the radar, most people had not heard of Wuhan and post-financial crisis disputes work and oligarchs were helping firms cast aside any doubts about how sustainable further disputes growth was at either the biggest players in the City or the boutiques spinning out from them.
What are the key regulatory frameworks that govern the disputes legal market in Cyprus, and how have recent changes impacted the landscape?
The key regulatory frameworks that govern the disputes legal market in Cyprus are European Union law and constitutional law. For civil disputes in the legal market in Cyprus, the key regulatory frameworks include the Civil Procedure Rules. Moreover, one of the key regulatory frameworks is the Civil Procedure Law, which outlines the procedural rules for dispute resolution in the courts and applies to all civil cases before the courts of Cyprus. The most recent change, regarding the implementation of the new Civil Procedure Rules, has a crucial role in the Cyprus legal system since it is aiming to achieve efficiency and timeliness in the resolution of civil disputes.
Can you provide an overview of the major types of disputes handled by legal professionals in Cyprus, highlighting any emerging trends or areas of growth?
The major types of disputes are commercial disputes arising from business transactions and contractual relationships. Further there are major disputes arising in the construction and real estate field. Our firm handles a wide range of cases regarding banking disputes, representing banks and financial institutions regulated by the Central Bank of Cyprus, as well as disputes arising from construction and real estate agreements and disputes relating to corporate litigation.
How do Cyprus courts typically handle commercial disputes, and what alternative dispute resolution mechanisms are commonly utilised in the jurisdiction?
Cyprus courts encourage parties to settle and resolve the arising commercial dispute at a primary stage. The alternative dispute resolution mechanisms which are commonly utilised in the Cyprus jurisdiction are arbitration and mediation. Both arbitration and mediation offer various advantages in terms of speed, cost, flexibility and confidentiality.
What role does international arbitration play in the Cyprus disputes legal market, and are there any recent developments or notable cases that have shaped this aspect of the industry?
International arbitration serves as a valuable tool in the Cyprus disputes legal market by providing a neutral, enforceable and specialised forum for resolving complex issues in a confidential and flexible manner. In the Cyprus legal system, the Arbitration Law governs the legal framework for disputes referred to arbitration. Contractual and commercial agreements may contain specific clauses for the settlement of any disputes that may arise to arbitration. The most notable cases in respect of the choice of international arbitration process concern disputes that may arise between contractors, employers, and the architects of construction agreements. The recognition, registration, and enforcement of international arbitral orders in the Cyprus legal system are also of considerable importance to ensure the protection and promotion of clients’ interests.
How has the adoption of technology and digital tools affected the practice of dispute resolution in Cyprus, and what opportunities or challenges does this present for legal professionals?
The adoption and development of technology and digital tools has affected the practice of dispute resolution in Cyprus. The courts and lawyers have adopted electronic implements to communicate and speed up court processes which have traditionally been bureaucratic and time-consuming. Technology and digital tools in the Cyprus legal system enable the conduct of dispute resolution proceedings remotely, allowing parties to participate from different locations from the early stages of the litigation until the hearing stage. Adversely, the use of technology introduces concerns related to the security and privacy of sensitive legal information. Additionally, digital tools may lack interpersonal dynamics and non-verbal cues present in face-to-face interactions.
What are the key considerations for businesses and individuals seeking legal representation for disputes in Cyprus, and how do legal practitioners differentiate themselves in this competitive market?
Several key considerations are applicable when businesses or individuals are seeking legal representation in disputes. Specifically, clients often look for lawyers with expertise and specialisation in the relevant area of law related to their dispute. Furthermore, they seek legal professionals who are considered efficient, trustworthy and credible. It is also important for a legal practitioner to provide high-quality services at reasonable costs and handle the litigation in the most effective and time-consuming way and in the best interests of the clients. Certainly, legal practitioners can differentiate themselves by specialising in specific areas of law, becoming experts in niche markets, and demonstrating in-depth knowledge.
How has the Covid-19 pandemic influenced the Cyprus disputes legal market, both in terms of case volumes and procedural changes within the legal system?
The pandemic undoubtedly accelerated the adoption of legal technology solutions and digital tools. In reference to the above-mentioned, the outbreak of Covid-19 resulted in the implementation of the electronic justice system. As regards the case volume of legal disputes, the outbreak of the pandemic had as a consequence a decrease in the submission of legal cases before the courts in Cyprus.
Are there any specific industries or sectors in Cyprus that are particularly prone to disputes, and what specialised expertise do legal professionals need to effectively navigate these areas?
It is beyond any doubt that certain industries are more prone to disputes due to their unique complexities, regulatory frameworks and business dynamics. The commercial, lease, banking and corporate fields are the main sectors which are subject to disputes due to the nature of their operations, complex regulations and various interacting parties. Legal professionals need to have an in-depth knowledge of the legal framework and regulations and need to assess the strengths and weaknesses of each legal case to effectively navigate the disputes.
What are the current trends in legal fees and billing structures within the Cyprus disputes market, and how are clients responding to evolving pricing models?
The current trend in legal fees and billing structures within the Cyprus disputes market is scale of court costs, which are determined according to the amount of the claim of each legal case. The legal fees may exceed the billing structures in specific circumstances. Moreover, legal professionals have the option to not follow the scale of court costs when they provide their legal services by offering legal opinions, drafting contractual agreements and resolutions, and providing migration services. Specifically, lawyers have the option to charge clients at an hourly rate, including everyday tasks related to the project’s completion. Typically, clients provide positive feedback as they recognise the high-quality services offered by these professionals.
How does the geopolitical and economic context of Cyprus impact the disputes legal market, especially in relation to international clients and cross-border disputes?
The geopolitical and economic context of Cyprus can significantly impact the disputes legal market, influencing the types of disputes that arise, the demand for specific legal services, and the business environment for law firms operating in the region. Cyprus has positioned itself as an international business hub, attracting foreign investors and companies. Disputes involving international clients may arise from cross-border transactions, investments or commercial activities. The geopolitical and economic context of Cyprus attracts international clients and consequently cross-border disputes may arise. Furthermore, as countries or regions experience growth like Cyprus, there is a higher likelihood of cross-border transactions, mergers, acquisitions and foreign investments.
Can you describe your experience and areas of expertise within the French legal system, particularly in relation to dispute resolution? How do you stay updated with changes in French law and jurisprudence that impact your practice?
I am both an avocat à la cour in France and a solicitor in England and Wales. I became a solicitor while being seconded in the London office of my previous firm. I spent ten years in an international full-service law firm before opening the Paris office of the disputes-focused firm Signature Litigation with two other partners in 2019. Five years later, our Paris office counts six partners and more than 20 associates. We have become one of the largest dispute-only teams in Paris.
My focus has always been to defend manufacturers, whether French or international, doing business in France which are facing litigation and regulators’ investigations.
I am therefore involved in all types of litigation manufacturers can get involved in: commercial litigation (unfair competition, termination of contract, breach of contract); product liability; product safety; toxic tort and hazardous substances; and environment/pollution/climate change litigation. I also help our clients when they are subject to investigations by the French regulators on the compliance of their products or of their selling channels (this is how for instance we have developed specific expertise in assisting marketplaces).
As such, we try cases before commercial, civil, administrative, and labour/social security courts, both at first and appellate levels.
The topics we encounter are very varied and it is important to stay up to date, not just with French law and case law but also at European Union level and even worldwide as product or manufacturing-related issues are generally global and the strategy implemented in one jurisdiction should not impact the strategy that could be developed in other jurisdictions later on. We obviously review case law on a regular basis, as well as new regulation, we follow updates through media statements from the French state and the European Union authorities. We monitor the websites of the French and European regulators and courts. We are also keeping ourselves updated through websites compiling case law and LinkedIn.
What approaches to dispute resolution do you find most effective in France, and how do you decide on the best strategy (litigation, arbitration, mediation) for a particular case? Could you provide an example where a specific strategy led to a successful outcome?
Given my expertise, my clients are often defendants rather than plaintiffs. What we are increasingly seeing is the filing of multiple claims, on different grounds and before different courts, at the same time. We saw this first happening in France in asbestos-related cases where criminal complaints were filed to force the criminal authorities to investigate and identify relevant defendants. In parallel, people who developed what they believe were asbestos-related diseases would file claims before the labour and civil courts. People who have not developed a disease started filing claims on the ground of fear of cancer (so-called anxiety claims). In parallel, the authorities would investigate the working conditions, the compliance with environmental obligations, etc., with administrative and criminal proceedings potentially being initiated. Unions or any member of the population could also try to request from the state the documents the latter has in its possession to determine if all is compliant.
We are now seeing this trend developing these past years outside toxic tort. Similar litigation strategies are indeed implemented in consumer-related claims (notably because collective redress mechanisms have not been much used yet in France) and environment/climate change allegations.
What unique challenges do you face when navigating the judicial process in France for dispute resolution? How do these challenges influence your case strategy and client advisement?
The challenges for our clients when they are involved in litigation in France are multiple. The first one would be around how evidence is gathered and shared. There is no discovery or disclosure in France as there would be in common law systems or in arbitration. Although this could sound favourable to the party which has more data/knowledge than the other, as it can technically pick and select what it wants to share, the reality is that there exist strong presumptions against companies in cases where they face consumers, NGOs, employees, individuals, or regulators. This means that even if they do not have in their possession data that would be useful for their defence, they will be deemed as having them and not wanting to share them, assuming that this data would be detrimental to their position. Winning as a plaintiff in this type of configuration is therefore easier as there is often a shift in the burden of proof.
This brings us to another challenge, which is that French courts are known to be pro-consumers, pro-plaintiffs. The consequence is that some types of damages are recognised in France while they would not be elsewhere, or at least not that easily (eg, the anxiety to develop a disease in the future due to the potential exposure to a chemical substance). To counter such presumptions, it is important to have a full picture of the matter and therefore, even if all will not be disclosed, we recommend conducting a full internal investigation before determining the best strategy to apply.
Another challenge for our international clients is how the trial works. Contrary to many jurisdictions, in France, there will only in very rare circumstances, at least in civil and commercial cases, be witness or experts’ oral testimonies. Everything is in writing and the trial consists in the lawyer doing a mix of opening and closing statement before the court. Also, commercial courts and employment courts are composed of lay judges in the lower courts. It is only at appellate level that the case is heard by career judges. The way factual and legal arguments are presented should therefore be adjusted in such cases depending on whether you are before the lower court or the Court of Appeal.
Given France’s role in the European Union and the international community, how does EU law and international law influence your dispute resolution practice? Can you share an instance where international or EU law played a critical role in a case?
EU law greatly influences French law and French case law. When it comes to litigation, the use of the procedural technique whereby a party asks French courts to ask questions to the European Union Court of Justice for guidance in how to interpret EU regulation has very much developed. This helps ensuring that there is a harmonised application of EU law throughout the EU territory.
However, EU law can also be at the origin of issues. Indeed, EU law allows member states to adjust EU law when it is deemed necessary for national reasons. This can lead to situations where a company is treated in a different way in different member states while EU law is supposed to provide legal predictability on the risks encountered by a business operator. For example, Regulation (EU) 2017/2394 of 12 December 2017 on cooperation between national authorities responsible for the enforcement of consumer protection laws provides in Article 9 that the regulators of the member states shall have the power ‘to remove content or to restrict access to an online interface’. In other words, member states should ensure that it is possible to ban a website from their jurisdiction if they believe that its content presents a risk. French law includes such a power in the Consumer Code (Article L. 521-3-1). However, this article grants such power to the French regulator (the DGCCRF – Directorate General for Consumer Affairs, Competition and Fraud Prevention), without any prior authorisation to be obtained by a court. In other words, the DGCCRF can take measures that would infringe freedoms without any possibility to first debate such a measure before a court, in the scope of an adversarial process. France is, to my knowledge, the only member state which has decided to directly grant this power to its regulator while other member states have granted this power to their courts. If an internet operator does not know this, it can be negatively surprised by a decision that it did not see coming, with major consequences to its business.
There is also an international influence on French litigation. These past years, I have observed an increasing number of plaintiffs who decide to first file their claim in the US while the correct forum would rather be France (eg, the plaintiff is French, damage occurred in France, the alleged fault/negligence happened in France). The result is that the US judge will rule that the case should be transferred to the French courts, adding however that some conditions should be met. Such conditions can be that the defendant agrees not to raise any statute of limitations’ defence or that it will provide the necessary documents needed for the case to be heard by the French judge. The plaintiff’s counsel will then try to have the French courts implement the US ‘discovery’. Obviously, our position is that French Civil Procedure Law should apply to the request to have documents provided by the defendant and we have obtained judgments agreeing with this. However, this creates new types of debates before French courts due to the international nature of the case that the plaintiffs introduce by seizing a foreign court first.
How do you balance zealous advocacy for your clients with the ethical standards and professional responsibilities required by the French legal system? Could you discuss a time when this balance was particularly challenging?
I am a true believer that you can be a fierce litigator and a decent opponent at the same time. Complying with ethics should never be questioned and it does not have to. In France, you must ensure notably that the adversarial process is respected. Courtesy is also key, and I believe in allowing an opposing counsel to explain himself or herself in case there is an issue. For instance, I came across a case where we had a doubt as to whether opposing counsel really informed his/her client of all the developments in a case. Contacting him/her ahead of taking any step is the minimum we can do as colleagues in my view.
The principle of independence is also an important principle applying to French lawyers. When you work in product liability litigation, you can sometimes end up being asked to represent both the manufacturer and its insurance. This could lead to a conflict of interest at some point. It is of tantamount importance to highlight to the client that this can happen and to always be vigilant throughout the handling of the case not to face any conflict, should you be representing both. I believe that it is the same issue that firms can face when a third-party litigation funder is involved. This is not yet standard in France but the same precautions will have to be discussed when the time comes.
France’s economy is significantly globalised. How do you handle cross-border disputes, and what complexities arise from these cases? Please share an example of a cross-border dispute you managed and the outcome.
As mentioned above, when you represent a manufacturer in the scope of allegations that a product would not be compliant, the dispute quickly becomes a cross-border dispute. It is important to consider which jurisdictions offer collective redress mechanisms such as opt-out class actions. Indeed, based on experience, class actions are quickly launched in such jurisdictions (in the EU, you have Portugal and The Netherlands, under specific circumstances). This is important as class certification and document disclosure debates will shape the types of civil liability claims that could be launched in other jurisdictions.
You also need to identify which jurisdiction would consider that the non-compliance leads to criminal proceedings (for instance, misleading commercial practices, greenwashing or planned obsolescence are criminal offences in France). This is important as in the scope of criminal proceedings, the authorities or judges in charge of investigating the issue generally have important powers, such as seizing documents, hearing witnesses/employees, conducting dawn raids. It is also important because in some jurisdictions, when a company believes that a criminal offence may have occurred, it should come forward to the authorities.
You should also take into account that any statement may lead to an interpretation of an admission of liability in a jurisdiction, while having to warn consumers should there be a safety concern.
We therefore always advise to draw up a list of jurisdictions where the product is most sold and involve either in-house legal teams or outside counsel in such jurisdictions early in the definition of the global strategy, even if the case is starting in France only, at first.
How do cultural and linguistic factors play a role in your dispute resolution practice, especially when dealing with international clients or parties? Can you provide an example of how you navigated such considerations in a dispute?
The oldest French piece of legislation is the 1539 Villers-Cotterêts Order imposing the use of French language as the official language in France. One of the many consequences is that all documents filed with French courts should be in French. Therefore, if you have documents that are in a foreign language that you wish to file as exhibits, you must translate those documents into French. France has tried to modernise itself in the wake of Brexit and the creating of a specific international commercial chamber at the Paris Court of Appeal. In this chamber, evidence can be provided in English as the judges in this chamber speak English. A witness or expert could also testify in English. Will this lead to other chambers to agree to documents in English? I do not believe so for the moment, but we can hope that this will happen in the future, especially if all parties involved understand English.
Another specificity of the French legal culture is that, based on experience, it is always better, in product liability cases, to have a French laboratory or French expert involved in the proceedings alongside any foreign laboratory or expert, even if the latter would be more knowledgeable on a specific technical issue. Indeed, the French regulator and the French experts appointed by a court will feel more comfortable taking into account the position of a French laboratory or French private expert than a foreign one, thinking that a foreign one could apply different sets of standards or rules or work differently than they would. This also ensures that the client’s position is well-understood as the English language is not always fully commanded by French regulators and court-appointed experts.
A final cultural consideration related to something that often comes up in commercial and civil litigation is the fact that rules around questioning French employees are strict, as well as rules around looking into their emails or documents. When launching an internal investigation, it is therefore important to first ensure that French law and also EU law, such as the General Data Protection Regulation (GDPR) are complied with.
With the marked increase in group litigation and rapid development of the litigation funding industry, the Competition Appeal Tribunal is consistently seeing novel claims. New theories of dominance are appearing, with what actually constitutes a dominant position widening. And the type of claim presented to the tribunal is expanding, with an increasing number of ESG claims filed.
In recent years, court proceedings in Poland have been taking increasingly longer. The natural answer to this is arbitration, but unfortunately, in business reality even arbitration turns out to be too long for the parties. Probably for this reason we observe seeking for dispute avoidance by incorporating different kinds of dispute-resolving mechanisms into contracts. Does it have a chance of working?
The above-described trend applies in particular to the expert determination clauses. The mechanism is simple: if a dispute between the parties pertaining to a particular non-legal issue arises, the parties will appoint an independent expert to determine who is right. We observe that the number of such clauses in commercial contracts has increased significantly in recent years.
A similar idea lies behind the dispute adjudication board (DAB) mechanism known from FIDIC model contracts. DAB was designed to resolve all disputes arising between the parties during execution of a contract. The common understanding was that DAB should be preferably composed of engineers who – if needed – have an expert knowledge essential to resolve the dispute between the parties. Formerly, it had been a common practice in Poland for the DAB part of FIDIC Clause 20 to be crossed out from FIDIC contracts. The pioneers of the exclusion of the DABs mechanism from FIDIC contracts were public sector investors. Private entrepreneurs have followed in their footsteps, as due to the ongoing dynamic development of public infrastructure projects in Poland public sector investors represent a massive share of the largest construction contracts in Poland and are shaping market trends for construction projects. Now, there’s an ongoing discussion about reintroducing DABs into construction contracts based on FIDIC model contracts. The discussion is being fuelled by the hope that this will speed up the resolution of disputes, which are an integral part of almost every major construction project.
However, while the use of expert determination clauses and FIDIC’s DAB is long established in Anglo-Saxon legal cultures, such mechanisms may not be effective in the Polish context. Common-law contractual clauses on expert determination or DAB directly transposed into Polish law may prove to be lex imperfecta. Breaching these clauses and skipping or bypassing the expert determination/DAB mechanism may not trigger any significant sanctions, rendering these provisions toothless.
FIDIC models are widely used around the world, which creates the assumption that they operate in exactly the same way. However, different FIDIC-based contracts are governed by different national laws and the courts of different countries assess the validity, meaning and effect of the provision of such FIDIC-based contracts, including the DABs mechanism, in the context of different legal frameworks. This also applies to other expert determination mechanisms, which appear to be international standards, but nevertheless may function quite differently from one jurisdiction to another.
In many jurisdictions, if a contract provides for expert determination/DAB, the use of this mechanism is mandatory. If a party tries to bypass this mechanism and refer an issue that was to be determined by an expert directly to arbitration or a court, such an attempt will be doomed to failure; the arbitral tribunal or court will simply reject such a claim as premature.
This is not the case in the Polish jurisdiction. Polish courts and arbitral tribunals generally do not consider that skipping an expert determination mechanism is a reason to reject a claim without considering the merits of the case. Instead, depending on the circumstances of the particular case, they either determine the issue that the expert was supposed to have determined themselves, or they order the parties to carry out expert determination, suspending the proceedings until the parties comply with this order, or they find that, in the absence of an expert determination, the claim is unfounded and decide on the merits of the case by dismissing the claim.
In the case of DABs in FIDIC contracts, Polish courts most often find that referring a dispute to the DAB is in fact not mandatory and that either party may refer the dispute directly to court or arbitration. They derive such a conclusion from the constitutional right to a court and oftentimes also from FIDIC sub-clause 20.8, which states that a dispute may be referred directly to arbitration when ‘there is no DAB in place, whether by reason of the expiry of the DAB’s appointment or otherwise’. The Polish courts recognise that the ‘otherwise’ could mean a situation where the parties fail to appoint a DAB or to request an appointing entity to do it, so no DAB is appointed. This was the approach taken, for example, by the Court of Appeal in Gdańsk in its judgment of 28 November 2013, case No. I ACa 550/13, and subsequently confirmed by the Supreme Court in its judgment of 19 March 2015, case No. IV CSK 443/14.
Whether or not skipping the dispute avoidance mechanism blocks the possibility of taking the dispute directly to arbitration or court, it still remains a breach of contract. Polish law does, of course, provide for sanctions for breach of contract, but these tend to be ill-suited to a breach involving bypassing expert determination/DAB mechanism. The primary sanction for breach of contract is liability for damages. While the occurrence of damage is an indispensable element allowing application for sanction and being awarded damages, in the context of the expert determination/DAB mechanism, bypassing such mechanism and referring the dispute directly to arbitration or court, it may be challenging to identify whether and what damage it inflicts on the other party.
The highlighted difficulties with the effective application of the expert determination/DAB mechanism in Polish contracts might be – to some extent – mitigated. However, in order to do so and to provide entrepreneurs with an effective, fast-track dispute resolution scheme, expert determination/DAB clauses must be carefully drafted, taking into account the nuances and peculiarities of the Polish legal framework and case law.
Like most other legal practices, arbitration and litigation are sensitive to trends. Arbitration even more so, due to its flexibility and dispositive nature compared to the many times rigid and robust procedural codes that – for better or for worse – tend to bar more creative approaches from the courts or counsel.
In recent years, bifurcation of disputes has become trendy in Swedish litigation as well as Swedish domestic and international arbitration. Many times, it is presented as a cost-efficient way to resolve the dispute or as a means to refine and streamline the case in order to put focus on the relevant issues. Although it is easy to be caught in the flow, old apprehensions as well as recent experiences, justify that the matter of bifurcation be addressed with due caution and diligence.
One dispute, two cases – declaratory reliefs and orders
A claimant can achieve a form of bifurcation by first bringing an action with a request that the court declare that there is a legal relationship, eg, an obligation to deliver or pay, and then, if the first request is successful, request that the court order the respondent to perform. In this manner, issues relating to the existence of an obligation as such will generally be addressed in the first case and issues relating to the quantification of the obligation will be addressed in the second case. Through this approach, the dispute will be divided into two separate proceedings before two differently composed courts or arbitral tribunals (assuming that the same arbitrators are not engaged).
Under the Code on Judicial Procedure, a request for declaratory relief is only allowed if it concerns uncertainty about a legal relationship, eg, an obligation to pay a debt, that is to the claimant’s detriment. Fulfilling these criteria is essentially a matter of designing an appropriate request for relief, which can be quite challenging at times.
In addition, a request for declaratory relief requires that the court find that the action is suitable. This assessment involves a balancing of the respondent’s interest in not having to endure two proceedings and the claimant’s interest in receiving a declaration before spending resources on the matter of quantification. In general, the probability that a decision in the declaratory case is followed by additional proceedings, the respondent’s interest in being able to produce an adequate defence and the extent to which the action is intended to mitigate the claimant’s detriment, are decisive for the assessment. If, for example, in a damages dispute, the claimant requests a declaration about liability, but not causality, the action may very well be dismissed. The judgment would only cover a small portion of the entire dispute, not cure the uncertainty about the legal relationship to any greater extent and most likely be followed by a second set of proceedings. With that said, the Swedish courts’ threshold for allowing declaratory reliefs is lower than what the law implies.
The Code on Judicial Procedure is not applicable in arbitration and the Swedish Arbitration Act is silent on the criteria of declaratory reliefs. Hence, an arbitral tribunal will have a wide discretion also to decide questions about the appropriateness of allowing declaratory reliefs. Another important difference is that an arbitral tribunal can make declarations about the existence or non-existence of facts, not only legal relationships. However, the starting point is that an arbitral tribunal shall not, upon the respondent’s objection, allow a request for declaratory relief unless it is suitable, which largely depends on a similar test as to the balancing of the parties’ respective interests.
It may seem tempting to a claimant to divide a dispute into two separate sets of proceedings. The usual rationale is that the claimant is quite sure about the subject of liability, eg, a breach of contract, but uncertain if and to what extent it has actually suffered a loss and how such loss will be quantified. Therefore, the claimant seeks a declaration hoping to reach a settlement once a judgment or award has been rendered in its favour. Through this method, the claimant may hope to save time and resources by not having to fully assess and prove the quantification.
It is important to note that in a damages case, a declaratory judgment or award that does not address the matter of causality is of very low value to the claimant. Such a judgment or award will not only allow the respondent to object against the amount of the loss, but also to the issue of whether the ground for the damages, eg, the breach of contract, has actually led to a compensable loss. Conversely, if the requested declaration is very wide and encompasses every aspect of the dispute except the quantification of loss, the claimant may be faced with an objection that the relief is not suitable. The grounds would be that it is not proportional to burden the respondent with two sets of proceedings when the claimant can request an order without significant additional costs. Accordingly, a claimant who contemplates bringing an action for declaratory relief needs to consider thoroughly the scope of the proceedings.
Furthermore, if the respondent is a sophisticated counterparty, it will seldom accept a settlement following a declaratory judgment or award unless the respondent itself has thoroughly analysed the extent of the liability. Thus, the argument that the claimant can save time and resources by not having to fully assess and prove quantification is, many times, moot.
Another risk with dividing a dispute into two separate proceedings is that the duration of the first dispute and the time between the first and the second dispute can be very long. This risk is oftentimes overlooked. At least in court litigation, an appeal could add several years to the proceedings. Persons and counsel who were involved in the first case may no longer be available when the second case begins. This will, of course, increase the time and resources required in relation to the second dispute, but can also cause that the quality of evidence of importance for both disputes may be lower in the second dispute. For new persons working with the case, the judgment or award from the first dispute will be the first and main source of information. If the judgment or award is very brief, ambiguous or sweeping, it may cause the second dispute to take another form than foreseen during the first dispute. This may add unwelcome surprises, usually to the claimant’s detriment.
One case, two judgments or awards – Separate judgments and awards
Another form of bifurcation is the splitting of one case into two or several judgments or awards. In Sweden, a separate judgment or award can either concern a separate claim, or the existence or non-existence of one or more facts which are of immediate importance to the outcome of the case, eg, that a contractual provision shall be interpreted in a specific manner, that an obligation exists, or that a claim has been subjected to a statute of limitation. The latter type of separate judgment or award can also concern how a specific issue, mainly relating to the application of law, shall be decided in connection with the adjudication of the case. By nature, a separate judgment or award does not conclude the case. Even if the court or tribunal finds that a fact of immediate importance to the requested relief is not at hand, the court or tribunal would still need to render a final judgment or award. The basic objective of separate judgments and awards is improving the procedural economy. The reasoning is that by addressing a preliminary issue that will affect the case, costs can be avoided if the result of the assessment is that the action cannot be granted.
Particularly in arbitration, separate awards concerning matters that primarily relate to the application of law have gained popularity in recent years. The theme for such awards is usually that a contractual provision relevant to the dispute should be interpreted in a specific manner or that a specific valuation method should be used when assessing a loss or a claim. Such awards differ quite significantly from the separate awards that concern the existence of non-existence of dispositive facts. The objective is not procedural economy in the sense that the award may lead to a situation where the remainder of the case can be easily adjudicated, but rather to streamline the case and direct the parties to address issues in a specific manner. A separate motive is that parties may be more inclined to settle a case on quantum if they have been provided with the right tools – in the form of the tribunal’s assessment – to do so. Although this can bring benefits from a procedural economy perspective, it is also a form of substantive procedural guidance.
Just as with dividing a dispute into two cases using declaratory relief, there are certain risks with separate awards, some of which are oftentimes overlooked. A separate judgment can be appealed under certain circumstances and a separate award can be challenged. Depending on the circumstances, an appeal or challenge can add further time to the proceedings. Through such actions, the potential procedural economic benefits of the separate judgment or award are usually lost.
If a separate award concerns the interpretation of an agreement or the application of law, there is a risk that the parties adjust their positions due to the award. If such adjustments have the effect that the separate award is no longer relevant, the intended procedural economic benefits are lost. In such situations, the proceedings have arguably become more expensive through the rendering of the separate award. Adjusted positions after a separate award can also put an arbitral tribunal in a difficult position. What should the tribunal do if the adjustments seem caused by a misinterpretation of the award? This may give rise to complicated issues relating to the permitted scope of the tribunal’s substantive procedural guidance. In addition, if the parties adopt new positions based on a misinterpretation of a separate award, there is risk that the parties perceive that the dispositive part of the final award deviates from the dispositive part of the separate award, which typically constitute grounds for a successful challenge of the final award.
Similar issues are subject to resolved and pending challenge proceedings before the Swedish courts. Without going into details of those particular cases, it is noteworthy that separate awards concerning the application of law or contract tend to have a profound impact on the course of the proceedings in larger arbitrations. The awards simply tend to adjust the direction of the parties’ argumentation, with no real effect as to the number of arguments that are made or the amount of evidence that is adduced. From this perspective, the argument that a separate award would be beneficial from a procedural economic perspective is more or less a fiction.
Is it at all worth it?
Bifurcation can have benefits. A claimant may have an interest in establishing that its counterparty is liable for a breach of contract at a stage when it has not yet suffered loss, eg, if the claim would otherwise be subjected to limitation. In such cases, it can be necessary to allow a bifurcation of a damages dispute through the use of a declaratory award. However, in light of the procedural economic risks, the approach should rightly be regarded as a resort rather than an opportunity. Similarly, a separate judgment or award can be a good tool if the case hinges on a threshold issue that is clearly separated from the other issues, for example a jurisdictional objection based on arguments and evidence separate from the case on the merits. However, many times the issues to be determined separately are entangled, eg, liability and quantum, and depend on the same arguments and evidence. The risk for entanglement will not only mean that the benefits from a procedural economy perspective will be lost, but also that the precise scope or theme for the separate award will have to be very carefully determined. If the scope and theme are not thoroughly considered and determined, the separate award may have devastating effects on the procedural economy and, even worse, affect the parties’ ability to plead their cases effectively. An unclear theme may lead to issues of interpretation and uncertainties that can affect how the cases are pleaded both before and after the separate judgment or award.
Accordingly, even though the promises of efficient and economic procedures may seem tempting, there is every reason to be cautious when the subject of bifurcation is brought up. If the matter is brought up by the court or the tribunal, the parties should remember that they most likely know more about the issue in dispute – depending on the stage of the proceedings – and assist the court or tribunal in its assessment by pointing out risks. If the matter is brought up by a party, the court or tribunal should be very mindful and make sure that the theme of the contemplated separate judgment or award does not risk leading to further disputes.
M&A transactions entail significant transaction costs, such as fees for investment bankers, legal or tax advisers, due diligence costs and project management expenses. In practice, the question of whether transaction costs should be borne by the target company or its shareholders is regularly a contentious issue. This question gains significance if the acquirer is a holding company without any operational income. In such cases, any transaction costs borne by the acquirer are not tax-effective, given that these expenses cannot be offset against taxable income. The answer to the question of who ultimately bears the transaction costs – the shareholder(s) or the target company – is thus not only relevant concerning Swiss tax and criminal tax law, but can also have a real financial impact.
Case-by-case assessment necessary
From a Swiss tax law perspective, the relevant criterion for determining whether transaction costs can be borne by a target company is whether such costs are incurred primarily in the interest of the shareholder or primarily in the interest of the target company. If transaction costs are primarily in the interest of the shareholder, such costs must be borne by the shareholder. Conversely, if the costs are primarily in the interest of the target company, they may be recharged to the target company and are corporate income tax deductible at that level. Transaction costs are in the interest of the target company and may thus be qualified as commercially justified if these costs have a sufficient connection with the company’s business operations or are directly related to its profit-making activities.
As a further point of reference, the OECD Transfer Pricing Guidelines can be consulted to determine whether transaction costs may be borne by the target company, ie, whether such costs are (i) not for shareholder activities, (ii) confer a benefit to the target company, and (iii) are not duplicative.
With this in mind, let us now examine different types of transaction costs incurred during the sale of a company, including vendor and purchaser due diligence (legal and tax), costs for support during contract negotiations and the preparation of a shareholders’ agreement.
Vendor due diligence costs, depending on the specifics of the case, could be partially recharged to the target company. For instance, if existing contracts are reviewed and renewed as part of the due diligence process, or if the target company catches up on corporate housekeeping activities during this time, such costs may be borne by the target company to the extent they serve its interest. In contrast, purchaser due diligence costs are generally in the interest of the purchaser and, therefore, should not be borne by the target company. Similarly, costs incurred in connection with contract negotiations should not be recharged to the target company, given that a favourable shareholders’ agreement or sale and purchase agreement primarily benefits the shareholders involved, rather than the target company itself.
Undesirable tax consequences for target…
A target company bearing transaction costs that are not in its interest may trigger serious tax consequences and even criminal tax consequences not only for the target and its shareholder(s) but potentially also for its advisers.
A target company bearing transaction costs for the benefit of its shareholders is deemed to make a constructive dividend for Swiss tax purposes. The respective transaction costs are thus not corporate income tax deductible at the level of the target company and subject to the 35% Swiss dividend withholding tax.
… shareholder(s)…
For Swiss resident shareholders, the constructive dividend resulting from an incorrect allocation of transaction costs to the target company is subject to income or corporate income tax. Qualifying corporate shareholders may however benefit from an (conceptually full) exemption under the Swiss participation relief regime.
Furthermore, dividend withholding tax consequences are to be expected. As mentioned above, a constructive dividend is subject to the 35% Swiss dividend withholding tax. Under Swiss withholding tax law, the company making a (constructive) dividend, is required to transfer the incidence of the withholding tax to the recipient of a dividend. Accordingly, the target company has a statutory indemnity claim against the respective recipient of a constructive dividend for payment of the Swiss withholding tax. After paying Swiss withholding tax, the shareholder may be entitled to a full or partial refund of the withholding tax, provided certain requirements as set-out in the Swiss Withholding Tax Act or an applicable double taxation treaty are met.
… and criminal tax law consequences
The accounting of transaction costs that are not commercially justified at the level of the target company may also lead to criminal tax consequences for all involved parties. If the target company has not taken a clear filing position in its corporate income tax return, criminal tax proceedings may be initiated against it and potentially its corporate bodies as well. The typical sanction is a fine, the amount of which can range from a third to three times the amount of corporate income tax evaded, depending on the culpability of the company and its officials.
Constructive dividends may also trigger withholding tax penalties, usually in the form of fines. Under the applicable sanctions regime, only individuals instigating the constructive dividend (typically board members) and not the target company itself are subject to punishment. Practice shows that Swiss authorities tend to be more and more strict in the application of criminal consequences in this respect.
Advisers, such as lawyers, may face criminal tax law consequences as well. They should under no circumstances allow themselves to be persuaded to invoice the company for services provided to the shareholder. If they invoice the target company for services rendered to the shareholder, they may be considered complicit in tax evasion.
Conclusion
The allocation of transaction costs in M&A transactions is a complex issue, which may give rise to significant Swiss tax and criminal tax implications if not correctly handled. It is therefore not surprising that this topic is often discussed between tax administrations and tax advisers and may result in tax litigation. Careful planning and the timely involvement of experts are thus recommended.
