RES-electricity: navigate the regulatory labyrinth

Eastern Europe | 01 March 2010

The 14 jurisdictions of Central, eastern and south-eastern Europe (CEE and SEE), where Wolf Theiss concentrates its energies, are equally divided between seven members of the EU (Austria, Bulgaria, Czech Republic, Hungary, Romania, Slovakia and Slovenia), and seven members of the Energy Community, established by the Energy Community Treaty in October 2005 (Albania, Bosnia and Herzegovina, Croatia, Kosovo, Macedonia, Serbia and Ukraine). Despite the different memberships, there is a strong interplay between these two communities (the EU and the Energy Community) regarding energy issues, particularly renewable energy.

Renewable Energy in the EU

The EU has made the promotion of renewable energy sources (RES) and the production of electricity from these sources a high priority since 1997, with the publication of the European Commission’s White Paper on ‘Energy for the Future: Renewable Sources of Energy’. The Paper set out an EC strategy and an action plan to double the share of renewable energy from 6% to 12% in terms of gross inland production by 2010. In line with this strategy, the EU adopted:

  • the RES-Electricity Directive 2001 (the 2001 Directive) on the promotion of electricity from RES in the internal electricity market;
  • the Directive on Combined Heat and Power; and
  • the Directive on Liquid Biofuels 2003/30/EC (the 2003 Directive).

The 2001 Directive required member states to take appropriate steps to encourage greater consumption of RES-electricity in conformity with the national indicative targets specified in the annex to the 2001 Directive, but did not put forward a harmonised EU-wide support system. The member states were called on to set national targets for the next ten years, taking into account the reference values in the annex of the 2001 Directive, which are set with a view to reaching a 21% indicative share of RES-electricity in all EU electricity consumption by 2010.

In addition to these national targets, the 2001 Directive called for:

  • the establishment of mutually recognised guarantees of origin for RES-electricity;
  • a reduction of the regulatory and non-regulatory barriers to the increase of RES-electricity production; and
  • the guaranteed transmission and distribution of RES-electricity.

The key change and impetus came with the introduction of mandatory targets for each EU member state by the Renewable Energy Directive 2009/28/EU (the 2009 Directive) on the promotion of the use of RES. The mandatory national targets, which relate to the share of renewable energy (electricity, heating and cooling, and transport) in gross final consumption of energy, are consistent with a target of at least a 20% share of RES in the EU’s gross final consumption in 2020. The 2009 Directive further obliges member states to ensure that at least 10% of the final consumption of energy in transport is derived from RES by 2020.

As with the 2001 Directive, the 2009 Directive does not prescribe an EU-wide support system. Instead, it allows the member states to apply support schemes or measures of co-operation provided for in the 2009 Directive (eg arrangements for statistical transfers of specified amounts of renewable energy, joint projects between member states, joint projects between one or more member states and third countries, and joint support schemes).

National Renewable Energy Action Plans

By 30 June 2010, member states must adopt and notify the Commission of its National Renewable Energy Action Plan (NREAP). The Commission will then evaluate the NREAPs and assess the adequacy of the measures envisaged by the member states for the compliance with the indicative trajectory and the mandatory target for 2020.

Although the 30 June 2010 deadline is still just over two months away, the forecast documents recently submitted by the member states to the Commission provide some indication as to the strategies that they intend to adopt.

As the mandatory national targets are defined in terms of the percentage of renewable energy in gross final consumption of energy, many member states have indicated actions to increase efficiency in their strategy, which would reduce energy consumption.

In its forecast notification, Austria indicated that it can achieve its 2020 target (34% of renewable energy in gross final consumption of energy) through RES in the country itself and, therefore, did not expect to resort to the measures of co-operation provided for in the 2009 Directive.

The Czech Republic adopted the same approach in relation to its 2020 target of a 13% share of renewable energy in gross final consumption of energy. Slovenia expects to be able to achieve its 25% share of renewable energy in gross final consumption of energy by 2020 as compared to 16% in 2005, but has not yet detailed how.

Bulgaria, whose 2020 target is to achieve a 16% share for renewable energy in gross final consumption of energy as compared to 9.4% in 2005, expects to resort to the following renewable energy sources:

  • hydro power (31%);
  • biomass (36%); and
  • a marginal role for wind power (7.5%), tidal energy and sea wave energy.

In its notification forecast, Bulgaria also mentions the potential to participate in joint projects with Romania to develop hydro power plants on the Danube (two plants of 800MW each are mentioned), as well as to explore and evaluate the potential of energy production in the Black Sea.

To achieve its 2020 target of a 13% share for renewable energy in gross final consumption of energy as compared to 4.3% in 2005, Hungary plans to:

‘Increase even more dynamically the use of biomass in the agricultural sector by developing and supporting intensively the production of energy crops.’

Romania is obliged to achieve a 2020 target of 24% share for renewable energy in gross final consumption of energy as compared to 17.8% in 2005. To reach this, it plans to make significant efforts to reach higher levels of efficiency in using biomass (including firewood) and also to develop other renewable sources (including wind power).

Slovakia, which has to increase the proportion of renewable energy in final energy consumption from 6.7% in 2005 to 14% in 2020, expects biomass (mainly), geothermal energy and solar energy to replace fossil fuels in the production of heat. It expects a smaller growth in the use of RES for electricity production.

Italy is one of the rare member states to expressly anticipate in its country forecast the need to import RES-electricity from neighbouring countries, such as Albania, Croatia and Serbia.

Renewable Energy in the Energy Community

One of the principal activities of the Energy Community is the implementation by the members of the acquis communautaire for renewables. This acquis communautaire must be adapted to both the institutional framework of the Energy Community and the specific situation of each member. To date, the acquis communautaire for renewables comprises only the 2001 Directive and the 2003 Directive on the promotion of the use of biofuels and other renewable fuels for transport.

As required pursuant to the Energy Community Treaty, each member state has provided the Commission with its plan to implement the acquis communautaire for renewables.

The 2009 Directive specifically envisages that the measures of co-operation provided between member states will become applicable to the contracting parties of the Energy Community if these countries, by virtue of a decision taken under the Energy Community Treaty, become bound by the 2009 Directive. To date, no such decision has been taken but the Energy Community has set up a Renewable Energy Task Force to define the steps for implementation of the 2009 Directive.

Regulatory Framework for RES-Electricity: the Labyrinth

Subject to these directives emanating from the EU and the Energy Community, each of the 14 countries covered by Wolf Theiss is relatively free as to how to implement them in its national law, which gives rise to a very wide variety of regulatory frameworks for RES-electricity in the region. In some cases, the regulatory hurdles and uncertainties deter investors and developers interested in exploring renewable energy opportunities in CEE and SEE.

In most jurisdictions where there is a promotion scheme for RES-electricity, this takes the form of a mandatory off-take of the electricity at incentivised feed-in tariffs. Some of the applicable feed-in tariffs compare favourably with the feed-in tariffs applicable in other parts of Europe.

For example, in the Czech Republic, RES-electricity producers from solar photovoltaic plants benefit from a tariff ranging between €465 per MWh (when the installed capacity is above 30kW) and €469 per MWh (when the installed capacity is below 30kW). According to the current interpretation of the Czech Energy Regulatory Office (the ERO), the producer is entitled to this tariff for 20 years from when the installation starts to operate, subject to annual indexation reflecting the price index of industrial products.

The promotion scheme in the Czech Republic is relatively unique as the feed-in tariffs, determined each year by the ERO, can only be decreased by a maximum of 5% year-on-year. However, a legislative bill is currently being discussed in the Czech Parliament that would remove this protection of RES-electricity installations where the return of the investment is achieved within less than 11 years. This amendment would make it possible for the ERO to decrease the feed-in tariffs for installations coming into operation in 2011 and beyond by more than 5% every year. The ERO estimates that for solar photovoltaic power plants the feed-in tariffs will drop by 30% in 2011.

In Slovakia, the same types of RES-electricity producers may enjoy a feed-in tariff of €425.12 per MWh for installations with more than 100kW capacity, or €430.72 per MWh for installations with less than 100kW capacity. This tariff is applicable, without revision or indexation, for 15 years from the year the installation was put into operation.

In Romania, there is a green certificate regime, including an obligation on electricity suppliers to purchase a certain number of green certificates, depending on the quantity of electricity supplied to final customers, sanctioned by a penalty of €70 for each green certificate in shortfall. The green certificates are traded on two markets:

  1. a centralised market; and
  2. a bilateral contracts market, where there is a floor of €27 and a cap of €55.

These amounts are subject to annual indexation in accordance with the consumer price index.

As a good reminder of the variety of regulatory frameworks applicable in CEE and SEE, in some jurisdictions there is simply no promotion scheme in place for RES-electricity, for example, Albania (except for small hydro power plants), and Bosnia and Herzegovina (except in Republika Srpska, one of the two entities within the state itself).

Permitting procedures: Applicants beware!

In terms of planning procedures, which relate to land use or physical planning, most of the jurisdictions start with an optional zoning process, but this is mandatory in Albania, Bulgaria and Croatia. The planning process then follows on with the issue of a building or construction and an operation or use permit.

The jurisdictions usually provide national significance thresholds above which an Environmental Impact Assessment (EIA) is mandatory. This tends to be true for significant wind power and hydro power installations. For smaller projects, the competent authority screens individual projects to determine whether an EIA is necessary and the scope of such an EIA.

Project developers should be particularly attentive to the level of authority that would be competent for issuing the relevant permit. For example, in Austria, which is a federal state, the local municipality issues the building permits, but it is up to the federal province to apply the laws regarding EIAs.

Regarding the permitting process under the special law applicable to energy or natural resources, some form of energy permit or licence issued by the energy or electricity regulator is generally sufficient. When required, a concession may relate either to the right to generate electricity (eg in Albania) or the right to exploit natural resources (eg in Bosnia and Herzegovina, Macedonia and Slovenia). A public tender process is usually relevant for the issue of concessions, but this can be applicable for even the granting of a licence, such as the tender process currently ongoing in Hungary for licences to construct wind farms, as well as the terms of the support scheme that the wind farms would be entitled to (including feed-in tariff, duration of support scheme and quantity of electricity subject to promotion schemes).

There is one unique feature applicable in Croatia for renewable energy generally and in Macedonia for wind power that is worth highlighting. In these jurisdictions even the exploration of RES-electricity opportunities is subject to a licence issued by the relevant ministry or the regulatory authority.

Grid connection

The treatment of the issues relating to connection of RES-electricity installations to the electricity transmission or distribution network varies from one jurisdiction to another. Most jurisdictions provide for RES-electricity to have priority access to the electricity grid, but there is no detailed provision regarding the right of this priority.

There is also a wide variety in terms of the rules governing liability and responsibility for grid connection and capacity upgrades, improvements or expansion of the grid, necessitated by the RES-electricity installation. The rules regarding the sharing of these costs are particularly unclear in some jurisdictions.

Very few jurisdictions make special allowances or tolerances in the application of balancing charges to intermittent forms of generation, such as wind power and solar power.

In Slovakia, there is a scheme for the assumption of deviations from schedules submitted for installations with less than 4MW instead of installed capacity. Similarly, Hungary has a relatively wide tolerance allowing deviations of +/- 50%.

Guide to Generating Electricity from RES in CEE and SEE

Equipped with the solid experience of working with project developers, investors, financiers, and, most importantly, national and local authorities to get projects completed in the region, the teams at Wolf Theiss’ offices and its associated law firms have joined forces to produce the Wolf Theiss Guide to Generating Electricity from Renewable Sources in Central, Eastern and South-eastern Europe.

This new book, which was launched in March 2010, is intended as a practical guide to the principal regulatory features of RES-electricity projects in 14 jurisdictions covered by Wolf Theiss. The first part of the Guide presents an executive summary of the regulatory framework applicable in each of the 14 jurisdictions. The second chapter contains an outline of the main forces driving the development of RES-electricity in CEE and SEE.

The regulatory framework applicable in each jurisdiction is described in more detail in the 14 country chapters. To facilitate the reference to the relevant sections, all the country chapters follow a uniform structure, and cover the permitting process (building permits, environmental permits, and concessions or energy permits), RES-electricity promotion schemes, financial incentives, grid connection issues and carbon credits.

As highlighted in this article, in some jurisdictions of the CEE and SEE regions the regulatory framework regarding these aspects of RES-electricity generation is either non-existent or lacks legal certainty, which may deter potential developers or investors. However, with many of the RES-electricity opportunities still untapped and sometimes even unexplored, major energy companies and other project developers continue to show interest in the region.

Over the past few months, the teams at Wolf Theiss have advised on numerous RES-electricity generation projects throughout the region, such as:

  • wind farms in Austria, Hungary and Romania;
  • solar photovoltaic projects in the Czech Republic and Bulgaria; and
  • hydro power plants in the Balkans.

As for the future development of the regulatory framework, it is sometimes easy to forget that the countries covered either acceded to the EU only recently, or are now in the process of acceding or seeking accession. In these jurisdictions, Wolf Theiss is engaged in a constructive working relationship with the regional, national and local authorities, and is confident that the regulatory framework for RES-electricity projects will evolve in the right direction.

Changes to British citizenship following the Borders, Citizenship and Immigration Act 2009

Human resources | 01 March 2010

The Borders, Citizenship and Immigration Act (BCIA) 2009 received Royal Assent last year. BCIA 2009 makes changes to border functions and several miscellaneous immigration matters. However, the most significant change it introduces affects how foreign nationals may acquire British citizenship in the UK. This article seeks to highlight these changes in some detail.


An article on the proposed changes to our current British citizenship and nationality laws would not be complete without considering the broader context in which BCIA 2009 was passed. In 2005 the government proposed sweeping changes to the UK’s immigration system. This began with the introduction of the Points-Based System (PBS) in 2008, radically changing the ways in which migrants are able to enter and work in the UK, the idea being that only those deemed fit to contribute to the UK should be allowed to enter.

Parallel to this new system for economic migration, the government made a myriad of other changes aimed at policing the new system and strengthening UK borders. Changes over the past two years include:

  • bringing together the Border and Immigration Agency, UKvisas and HM Revenue & Customs in a unified UK Border Agency (UKBA), creating a single border force and police-like powers for frontline staff;
  • introducing a biometric data requirement for those applying for a UK visa;
  • counting foreign nationals in and out of the country;
  • expanding the UK’s detention capacity, implementing powers to automatically deport serious offenders;
  • introducing compulsory indentity cards for foreign nationals who wish to remain in the UK; and
  • introducing large on-the-spot fines for employers who do not make the right checks.

As part of the government’s programme for reform, it came as no surprise that it would consider reforming the path to British citizenship.

Case for change

The government set out its proposals for change in the Green Paper ‘The Path to Citizenship: Next Steps in Reforming the Immigration System’. The Paper highlights the reasons for the changes and it is clear that there is an underlying agenda for social, as well as immigration, reform.

The central principle is that, alongside strengthening the rights of citizenship, citizenship must be earned. Anyone who wishes to remain in the UK in the long term must be willing to ‘speak our language, obey the law and contribute to the community’.

Current legislation

At present, migrants are entitled to apply for indefinite leave-to-remain (ILR) once they have completed a period of five years in the UK in a category leading to settlement (or two years if applying on the basis of a marriage or partnership to a British national, or someone with ILR).

To naturalise as a British citizen, migrants must have spent a minimum of five continuous years in the UK (three in the case of spouses or civil partners) and have held ILR for a minimum of one of those years. Migrants must also satisfy the current residency requirements, which require applicants to not have spent more than 450 days (270 days for spouses or civil partners) outside the UK in the five years preceding the application and not more than 90 days in the 12 months preceding the application.

New Regime

Qualifying and contributions

From July 2011, migrants will need to take the following steps to qualify for British citizenship:

  • temporary residence for five years;
  • probationary citizenship (for one to five years); and
  • permanent residence or British citizenship.

Migrants will also need to demonstrate a far more significant contribution to the UK before being able to obtain British citizenship. The requirements for progression will include:

  1. English language skills;
  2. paying tax and becoming self-sufficient;
  3. obeying the law; and
  4. joining in with the British way of life by demonstrating active citizenship. (See the box below for the notion of active citizenship.)

Until secondary legislation is passed and the UKBA publishes further guidance, it is not clear how the government plans to implement the scheme. Accordingly, all migrants who become eligible to apply for British citizenship are advised to do so before the new regime is rolled out in July 2011.

Three routes

Under the new regime there will be three key routes to citizenship (although, in practice, several other immigration categories will also continue to qualify):

  1. economic/work route – for highly skilled and skilled workers who are in the UK under Tiers 1 and 2 of the PBS;
  2. family – for family members of existing British citizens and permanent residents; and
  3. protection – for refugees and migrants who have been given humanitarian protection.

Regardless of which category a migrant falls into, they must pass through the same three stages to obtain British citizenship, specifically: temporary residence, probationary citizenship and, finally, British citizenship or permanent residence.

Other categories

While the government sets out the three key routes to citizenship, it is important to note that several other routes to citizenship will continue to exist. Those who are discharged from HM Forces with four years of completed service, victims of domestic violence who were admitted as a partner of a British citizen or permanent resident, and bereaved partners who were admitted as a partner of a British citizen or permanent resident and whose sponsor has died during the two-year probationary period will all be able to progress directly to permanent residence without passing through a stage of probationary citizenship. In addition, European Economic Area nationals with permanent residence, nationals with a qualifying Common Travel Area (CTA) entitlement, those with Commonwealth right of abode and those with UK ancestry will all be able to qualify for British citizenship.

Active citizenship

Migrants at the probationary citizenship stage will only be eligible to qualify for British citizenship after one year (and permanent residence after three years) if they demonstrate an active contribution to society. Those migrants who do not take part in active citizenship will be required to wait a further three years to qualify for British citizenship and a further five years for permanent residency.

The notion of active citizenship is yet to be clarified in any detail and further guidance is expected from the Home Office. It is anticipated that migrants will need to complete 50 hours of voluntary service, which may include initiatives such as volunteer work within a recognised charity or community body, along with activities that will:

  • advance education or health;
  • advance social and community welfare;
  • advance heritage, arts, culture or sport;
  • benefit the natural environment;
  • benefit children, young people, elderly people, disabled people or other vulnerable groups; and/or
  • involve mentoring or befriending.

Stage 1: temporary residence

Once a migrant has obtained valid leave to enter and remain in the UK in a category leading to settlement, they will automatically be deemed as temporary residents. For migrants to progress onto the second stage (probationary citizenship), they must demonstrate that they:

  • obey the law;
  • pass an English language skills test and knowledge of life in the UK assessment;
  • meet the residency requirements (spend five years in the UK under the work or the protection route, two years under the family route), without more than 90 days a year absence in a single year (this differs from the current residency requirements for British citizenship applicants, since under current rules the 450 days absence can be spread across the five-year period randomly);
  • contribute to the economy (ie through demonstrating that they have paid taxes); and
  • meet the ongoing requirements, specific to their route.

With respect to the work route, migrants will have to show that they have been in ‘continuous employment’ since the grant of their previous leave. Under the family route migrants would have to show that they can support themselves or be supported by their sponsor and that their relationship with their sponsor is still subsisting.

Stage 2: Probationary Citizenship

Probationary citizenship is set to be the equivalent of the existing ILR route. A key difference, however, is that unlike ILR it will not entitle migrants to the same benefits that ILR currently offers (such as drawing on public funds and having access to benefits) until migrants become either British citizens or permanent residents.

To progress to the final stage, migrants will have to spend between one and five years as a probationary citizen. (After this point migrants would be expected to move to the third stage or leave the UK.) The length of time a migrant spends in this category will depend on whether they wish to:

  1. apply for British citizenship or permanent residence; and
  2. whether they wish to participate in active citizenship.

The government’s intentions where social cohesion and integration are concerned can be found at the crux of this new concept of active sponsorship, the idea being that those who actively contribute to society should be able to attain citizenship faster than those who do not. Thus, a person who completes the maximum required period of activities could potentially apply for citizenship after one year or wait three years should they not be inclined to do so.

Migrants who wish to become permanent residents, either by desire or because they are unable to become British citizens due to dual nationality restrictions, must spend a minimum of three years as a probationary citizen to qualify. Migrants who have obtained permanent residency may remain in the UK indefinitely and will be able to switch into the British citizenship category should they wish to do so.

Before progressing to the final stage, probationary citizens will also need to demonstrate that they have:

  • obeyed the law during their probationary citizenship (migrants who receive custodial sentences will be stopped from progressing on the path to citizenship and those convicted of minor offences must wait until their conviction is spent);
  • met the residency requirements;
  • continued to be self-sufficient, with no access to benefits;
  • continued to meet the additional requirements specific to their route; and
  • satisfied the notion of active citizenship if this is claimed.

While the decision to create a probationary citizenship stage may be a good way to ensure integration in and contribution to the UK, it may also arguably be seen as discouraging, rather than encouraging, integration (the label ‘probationary citizen’ infers second-class citizenship).

Stage 3: British Citizenship or permanent residence

Migrants who become British citizens or permanent residents will have full entitlement to the rights and benefits currently enjoyed by individuals in these categories.

The government recognised that some migrants may be unable to apply for British citizenship due to restrictions on dual nationality. The permanent residence category has been created to give these nationals the freedom to retain another citizenship, and enjoy the benefits and rights that British citizenship offers (and which they will have earned) without relinquishing their original citizenship. However, to qualify for permanent residence, migrants will have to spend a longer period (minimum three years) at the probationary citizenship stage. The government’s view is that:

‘It is right that those who feel that they cannot become British but instead choose to become permanent residents should have to complete a longer period as a probationary citizen.’

Transitional Arrangements

There will be a transitional period for migrants who already have ILR when the new regime is introduced. Such individuals will automatically be permanent residents and they will not need to pay or apply for this to occur. Furthermore, they will be eligible to apply for British citizenship under the current rules during the first two years after earned citizenship is introduced (ie until July 2013). Similarly, any migrant whose application for ILR has been submitted to the UKBA before July 2011 and is subsequently given ILR will be eligible to apply for citizenship under the current rules until July 2013.


Until secondary legislation and corresponding guidance from the UKBA is issued, it is uncertain whether the government’s proposed path to citizenship will negatively affect migrants. The notion of active citizenship may not necessarily be welcome to all, and asking this of migrants who have already contributed to the UK socially and economically as a means to obtain citizenship at a faster rate may be difficult in practice. All migrants who become eligible to apply for British citizenship are therefore advised to do so before July 2011, to ensure that they will not be caught by the tough new rules.

Jackson review: cost of litigation investigated

Dispute resolution | 01 March 2010

Nathan Peacey (left) and Davina Watson (right) discuss Jackson LJ’s findings and his suggestions for reform to control costs, changing the civil litigation landscape to promote access to justice through new management procedures

IN 2008 AMID MOUNTING CONCERN among the judiciary at spiralling litigation costs, the Master of the Rolls commissioned Jackson LJ to undertake a root and branch review of the principles governing costs, as well as case management procedures.

On 14 January 2010 Jackson LJ published his report, ‘Civil Litigation Costs Review’ (the Review). It included some far-reaching and radical proposals that Jackson LJ claims will, if implemented, represent a ‘coherent package of interlocking reforms, designed to control costs and promote access to justice’.

The Review is notable for the range and scope of the enquiry, and also for the innovative solutions that are proposed. Access to justice comes at a price but the recommendations aim to impose a limit on that cost, and the limit will be proportionate and predictable. Judging by the reaction of some claimant personal injury lawyers, claims management companies and after the event (ATE) insurers, the changes could prove dramatic.

Our view is that the proposals will certainly control costs. However, they may or may not promote access to justice. More fundamentally, they have the potential to radically alter the approach that commerce takes to resolving disputes.


he proposals have three broad themes:

  1. changes to the way civil litigation is funded;
  2. adjustment of the rules on calculation and recovery of legal costs; and
  3. procedural improvements designed to simplify the legal process.

The key elements and the impact of each theme are highlighted below.

FUNDING CLAIMS Success fees and ATE insurance premiums should not be recoverable if success fees in conditional fee agreements (CFAs) and ATE insurance premiums are no longer recoverable from the losing party, it would effectively end the culture of ‘no win, no fee, no costs’. The intention is to restore a claimant’s financial incentive to keep costs under control. The effect of this will be to significantly reduce costs for serial defendants and/or their insurers.

It remains to be seen whether this will result in lower insurance premiums. We suspect not, particularly in the fi eld of personal injury and clinical negligence claims, where insurers will point to the soft market, the proposed 10% increase in general damages and the impact of one-way costs shifting (OWCS) (see next column).

Contingency fees should be permitted

Under this type of agreement, the lawyer would only get paid if the claim is successful, normally receiving a percentage of the settlement sum or damages award. Claimants would still recover base costs from the losing opponent to offset against the contingency fee.

Third-party funding (TPF) should continue to be available as a funding option.

Legal expenses insurance should be more widely promoted This is the equivalent of health insurance for legal expenses. This funding option is currently under-utilised. The Review suggests that it could be of particular benefi t to small- and medium-sized enterprises (SMEs). Many, including some before the event (BTE) insurers, question whether the UK BTE insurance industry has the capacity to off er suitable cover at an aff ordable price. It almost certainly does not have the capacity for big businesses. If BTE cannot plug the ATE gap for SMEs either, this could be bad news for SMEs faced with fi nancial muscle-fl exing by big businesses in David versus Goliath disputes.


Costs shifting

In certain cases, such as in personal injury litigation, a qualified OWCS rule should be introduced to preserve access to justice. If the claimant is unsuccessful, they would not be made to pay the legal costs of the defendant (as long as they have behaved reasonably). However, if the claimant wins, the defendant will still have to pay the costs of the claimant. Jackson LJ wants this to be extended to judicial review and defamation proceedings, which is a suggestion that will be resisted by many.

Controlling Legal Costs

The Review comments that fees paid by lawyers to ‘claims management companies’, in return for being referred cases, have ‘grossly distorted the costs of personal injury litigation’. Few disagree although many question whether a ban on the fees could be enforced.

An unintended impact will be to further restrict the BTE market as most insurers currently rely heavily on referral fees to subsidise premiums.

Hourly charge rate under scrutiny The report concludes that the guideline hourly rates (GHR) are too high. A new costs council will attempt to restore the balance between lawyers and litigants. This is likely to result in lower GHR and probably diff erent rates for diff erent categories of claim. This will reduce inter partes costs awards. Solicitor and own client costs remain a matter for commercial negotiation.

Imposing proportionality on costs

Jackson LJ’s mantra could be said to be ‘proportionality, proportionality, proportionality’. He is particularly scathing of instances where, at the end of a case, the costs have exceeded the monetary value of the claim to the parties involved. Jackson LJ proposes repealing the ‘necessary’ test introduced by Home Office v Lownds [2002].

For example if it costs £500,000 in fees to resolve a £100,000 dispute, you are likely to be out of pocket even if you win, as you will not get all your costs back. This will encourage a more thoughtful approach to whether a claim should be brought, even a particularly meritorious one. It should lead to more alternative dispute resolution (ADR).

Fixed costs in fast-track litigation

A matrix of fi xed costs should be introduced right across the fast track (the track is currently restricted to claims under £25,000). In the short term, the introduction of fi xed costs would be confi ned to personal injury and housing claims. This will bring costs certainty and proportionality. Fixed costs may encourage some claimants, as exposure on costs is capped, but may deter others where costs recovery is capped at a level far below the costs likely to be incurred.


There are several changes to procedure that are proposed, which if eff ectively implemented will make for a better litigation landscape. These include:

  • the abolition of the general pre-action protocol;
  • the introduction of costs management conferences;
  • controlling costs through case management;
  • restoring clarity to Part 36 off ers to settle (reversing the ruling in Carver v BAA plc [2008]);
  • the endorsement of ADR; and
  • Mercantile and Commercial Courts will introduce streamlined procedures for claims up to £100,000.

Will costs be reduced>

A new concept emerges from the Review that suggests that fair access to justice applies to defendants and claimants alike. A clear theme running through the Review is that defendants should not be unduly penalised for defending issues that they legitimately contest but happen to lose.

The Review concludes that the recovery of success fees and ATE premiums from losing opponents has imposed an excessive fi nancial burden on the government, the NHS, insurers that underwrite much of the UK’s tort law compensatory system and on defendants of libel actions. Costs will most certainly be reduced in personal injury litigation. The fact that losing defendants will not have to pay success fees on claimants’ costs or ATE insurance premiums will have a signifi cant impact. Similarly, the overall level of base costs will be reduced for the majority of personal injury claims that fall within the fast-track limit because of the implementation of a fi xed-fee regime. The likely reduction in GHR and the approach to proportionality also means that multi-track cases will cost less. The eff ect of this will be off set to a degree by the increase in general damages and the introduction of OWCS, which will mean that successful defendants will not recover their costs in successful cases.

Equally, a proposal that if a claimant’s Part 36 off er is bettered by the claimant at trial they will get a 10% uplift in damages will (in the minority of cases that go to trial) mean an increase in claims costs. Some insurers may prefer to ‘over settle’ to avoid this risk. In non-personal injury routine litigation the benefi ts are even greater for defendants because the increase in general damages will rarely have any signifi cant impact. Furthermore, in successful cases, the defendant will be able to recover fi xed costs from the unsuccessful claimant. In high-value disputes the removal of ATE and success fee recoverability will also have a signifi cant impact. The defendant in an important case faced with a £1.25m costs bill under the current system could fi nd that reduced to £500,000 when a £250,000 ATE premium is removed and a 100% success fee on £500,000 base costs is removed. Whether costs for in-house counsel will alter in relation to their own lawyers will of course continue to be a matter for commercial negotiation and further wrestling with the hourly rate conundrum. Jackson LJ’s suggestion of a menu of options for disclosure in larger commercial cases whereby there is greater focus on the issues, rather than a simple and standard blanket disclosure, does have the potential to reduce costs. However, it could also increase satellite costs around arguments over what should and should not be in a disclosure.

On balance there is clear scope both at the level of low-value routine litigation and in complex high-value cases for inter partes costs liabilities to be reduced.

Impact on funding

Commercial clients will still be able to instruct lawyers on a CFA basis. However, any agreed success fee will be payable by the client and will not be recoverable from the opponent. Similarly you can still cap liability for opponent’s costs by purchasing ATE cover. Again this will be irrecoverable. There will be a greater cost when bringing a claim that will need to be factored into the cost-benefit analysis.

Some commentators suggest ATE premiums will increase prohibitively as a result of the loss of turnover for insurers from premiums in routine personal injury cases. We are not convinced. Competition based on premium levels will increase as litigants now have a fi nancial interest in the level of the premium. Moreover, not all ATE providers currently rely on the personal injury market for turnover so their model will not be affected.

The irrecoverability of ATE premiums may impact on TPF. Will investors’ appetites be diminished given the proposal to make their liability for opponents’ costs unlimited? Some third-party funders argue it will, as investors seek less risky environments. Again, we are not convinced. For example, potential liability for third-party costs can still be hedged by purchase of ATE cover. The funded party will either pay the premium or, alternatively, the third-party funder will take the risk of an adverse costs order or pay the premium in return for a greater share of the damages recovered to refl ect the increased risk being taken. In other words it simply alters the cost-benefi t analysis and that will feed into the commercial negotiations between the claimant and the funder as to the return on investment. In marginal cases this shift in the risk equation may mean that cases are not pursued as they would have been in the past, but overall, the legitimacy given to this method of funding by Jackson LJ will outweigh that.

Will in-house counsel have the appetite for contingent fee funding? Will lawyers? Maybe the more imaginative ones will. The traditional arguments around conflicts of interest will deter some but this has, by and large, been managed in CFA-funded cases and can be controlled under contingency fees. Contingency fees do shift the point of perceived confl ict. The argument is that under a CFA the lawyer is best served by a case continuing for as long as possible to ensure that a success fee uplift is applied to as large a base costs bill as possible. Under a contingency fee arrangement the lawyer gets a greater return on their investment by resolving a dispute earlier. Concerns about under-settlement can be reduced, for example by the use of independent counsel for second opinions and by having stepped contingency fees (the higher the value of settlement, the greater the percentage take for the lawyer).

It will be worth watching to see how diff erent organisations wrestle with the confl icting concerns given that they present a gilt-edged opportunity to address the age-old hourly rate conundrum. It will also be interesting to see whether lawyers step in to fi ll a gap between traditional funding and the TPF market by using contingency fee arrangements. More radical fi rms may even consider seeking external fi nancing to compete with third-party funders.

Behavioural Change

Will we see an increase in disputes? There may actually be a slight decrease in personal injury cases. Some lawyers will continue to charge clients success fees that will come from damages. This may deter some claimants who have now taken ‘no win, no fee, no costs’ to be the norm. However, larger claimant firms will take cases on a straight ‘no win, no fee’ basis and will streamline their processes to make acceptable profits within the confines of the costs recovery that they will make under the fixed-costs regime. Freed of paying referral fees of up to £850 a case, this may be easier than it might first appear. OWCS may encourage ‘have-a-go’ litigants in person, which may offset any reduction in claims brought by lawyers.

If we are right that BTE will not fi ll a gap, as Jackson LJ hopes, then there may be a reduction in low-value commercial disputes. SMEs may be deterred by the exposure to adverse costs when bringing a fast-track dispute (absent from the protection of self-insured ATE premiums). There will, however, be some comfort as inter partes costs will be fi xed, bringing a degree of certainty to the cost-benefi t analysis. The challenge will be to extend this certainty to their own solicitor costs.

Commercial clients bringing high-value disputes will have a range of new options, to which we fi nd the response impossible to predict. This is largely because there is already a vastly diff ering appetite for getting involved in disputes and for how they are funded.

What is clear is that previously enlightened in-house counsel are considering the cultural shifts that the Review accelerates by seeking greater costs certainty and risk sharing with their lawyers. This involves discussions about fi xed fees, CFAs, contingency models, and hedging though ATE and TPF, all of which are now available in the right circumstances.

Significant increases in mediations and other forms of ADR are not expected in high-value disputes. Although mediation is given greater encouragement by Jackson LJ it is not made mandatory and his comments are aimed at the personal injury market, where it has traditionally been resisted, and at SMEs who are less aware of its advantages than sophisticated in-house counsel.

2) Responding to a claim

Will commerce and/or insurers fight more low-value cases, and be encouraged to flex financial muscle by the fact that the claimant can only recover fixed costs and there are no success fee, or ATEs to factor into the cost-benefit analysis?

This is doubtful. There will be little or no costs recovery so there would be few benefi ts, unless there is a signifi cant point principle, or it concerns brand protection or reputation. If a claimant is uninsured, what the value of the costs order in any event? However, in-house counsel or risk teams may fi nd it useful to revisit claims philosophies to test whether the approach to classes of personal injury claims or consumer claims are aff ected by the altered cost-benefi t analysis. For example there may be classes or values of claim that are not routinely fought because the additional liabilities make it prohibitive. There may now be an appetite to fi ght cases knowing that no additional liabilities are recoverable to test the opponent’s resolve or send a signal to the other claimants.

In terms of larger cases, the approach is not likely to be signifi cantly altered except in those cases where defendants have historically been pressurised into settlements they might not otherwise make by the prospect of large success fees and ATE liabilities altering the cost-benefi t analysis.

3) Lawyers

Fixed fees will drive efficiencies and these will eventually translate up to those conducting high-value cases.

Lawyers will need to face the cultural challenge of whether they feel comfortable off ering contingency fees, which will no doubt bring much wringing of hands and soul searching. We are looking forward to the creative arguments that will be put forward by lawyers seeking to preserve the status quo !


Our initial analysis is that the winners will be:

  • defendants generally;
  • liability insurers;
  • BTE insurers;
  • the state, ie NHS and local authorities;
  • mediators;
  • large businesses; and
  • the media.

The losers will be:

  • ATE insurers;
  • claimant personal injury lawyers;
  • costs negotiators;
  • claims managers;
  • trade unions;
  • the Bar; and
  • SMEs as claimants.


All very interesting, but is it going to happen?

Many changes will require primary legislation (for example reversing recoverability of additional liabilities and allowing contingency fees). Others can be implemented relatively quickly by amendments to the Civil Procedure Rules and pre-action protocols, for example the fi xed fee. The election will delay the detailed consideration required but may be a catalyst for manifesto promises (the Conservative Party will, for example, be encouraged by the political capital made from saving the NHS millions of pounds, while enjoying kicking the unions below the belt when they cut off their referral fee income). Someone may then mention the irrecoverable VAT and insurance premium tax paid by insurers on claimant’s costs and ATE premiums, which will force politicians into an uncomfortable cost-benefi t analysis of their own.

The current mood is that the proposals are sound and should be implemented in due course. For commercial enterprises, Jackson LJ’s pragmatic approach, one that increases the range of funding options and imposes controls on legal costs, is likely to bring about good results.

Cultural change will be required, whether that be in relation to how low-value disputes are approached or in relation to contingency fees. The time lag in implementing these reforms should be used to prepare for the changing landscape.

Look before you leap: anti-corruption due diligence in M&A

Crime, fraud and licensing | 01 March 2010

It is a well-established practice that companies carry out merger and acquisition (M&A) due diligence using a suite of questions and documentary information requests aimed at establishing legal, financial and reputational risks. However, as enforcement trends in corruption are a relatively recent phenomenon, proper and thorough anti-corruption due diligence is often overlooked. [Continue Reading]

Asset confiscation: the ultimate penalty?

Crime, fraud and licensing | 01 March 2010

As an increasing number of criminal offences are now covered by the confiscation regime, Caroline Lee (left) and James Moss (right) look at how the legislation has been used and provide guidance for in-house lawyers who may face the consequences

Many jurisdictions have legislation that permits regulators to confiscate assets obtained by those convicted as a result of their criminal conduct. Since being introduced in England and Wales in the late 1980s, the confiscation regime has expanded to cover a wider range of criminal offences. This tool has been given to a large number of prosecutors, who have used it with vigour.

Corporations and their legal advisers must therefore be alive to the implications of the regime because it can be used as a form of corporate ‘capital punishment’ by ordering firms to pay large sums of money, forcing them into insolvency. This is a stark contrast to the level of fines traditionally handed down by the British courts. Company directors facing prosecution should also be aware that default on payment of a confiscation order can lead to lengthy terms of imprisonment.

The current regime is set out in the Proceeds of Crime Act (POCA) 2002, a lengthy and tortuous act of parliament that came into force in March 2003. It is judicially recognised as draconian and is drafted so as to severely limit any judicial discretion that might mitigate its effects.

To complicate matters further, for offences wholly or partly committed before March 2003 one of two other regimes may apply. The consequences of falling within the earlier regimes are significant, and must be considered by defendants and their advisers as an important strand of any strategy for dealing with a potential prosecution.

This article seeks to explain and highlight some of the complexities of the law as it applies today, together with its effect and possible use by prosecutors.

Confiscation of assets

The confiscation of assets obtained as a result of criminal conduct is, in principle, a reasonable and proportionate response by the state to acquisitive crime. Prosecutors were first given the power to confiscate assets in the 1980s. The legislation was designed to deprive drug barons and career criminals of the proceeds of their unlawful conduct. However, over the following 20 years the regime has expanded beyond recognition. In 2009 a new tranche of regulators were given powers to confiscate the assets of convicted defendants. The list now includes:

  • Counter Fraud and Security Management Service of the NHS;
  • Department for Business, Innovation and Skills (BIS);
  • Department for Work and Pensions (the DWP);
  • Environment Agency;
  • Financial Services Authority (FSA);
  • Gambling Commission;
  • Gangmasters Licensing Authority;
  • Local authorities in England and Wales;
  • Medicines and Healthcare products Regulatory Agency;
  • Office of Fair Trading (OFT);
  • Revenue and Customs Prosecutions Office;
  • Royal Mail;
  • Rural Payments Agency;
  • Serious Fraud Office (SFO);
  • Transport for London; and
  • Vehicle and Operator Services Agency.Where a confiscation order is made by the court, the prosecuting agency can receive up to 50% of the amount obtained. In times of economic recession, and when impending budget cuts are affecting government departments and agencies, it is easy to see why asset recovery is being increasingly utilised by prosecutors.

    The Times reported in October 2009 that the Home Office had set a yearly £250m asset seizure target for 2010, rising to £1bn per annum thereafter. If this were not incentive enough for prosecutors, it was also reported that many officers received personal performance bonuses for hitting asset recovery targets.

    Confiscation orders have been made following prosecutions by the SFO, the OFT, the Department for Business, Enterprise and Regulatory Reform (now BIS), local authority trading standards, the DWP and the Environment Agency. Since November 2007 the Environment Agency and partners are said to have confiscated more than £1.5m from environmental polluters. Given the financial incentives, no doubt it is only a matter of time before others seek to exercise their powers.

    Three regimes

    Confiscation proceedings are governed by three different regimes, depending on the dates of the criminal conduct involved.

    Regime 1: Criminal Justice Act 1988 (the 1988 Act)

    For offences that took place wholly or partly prior to 1 November 1995, regime 1 will apply. Here, a Crown Court judge can only make a confiscation order if the prosecution lodges a formal request. Once a request has been made the judge has the discretion to:

    a)decide whether or not to make the order; and

    b)decide the amount payable, ‘as they see fit’.

    under regime 1

    In September 2009 the SFO obtained a confiscation order under regime 1 in the sum of £1.1m against Mabey & Johnson for corruption and breach of economic sanctions. The total value of the contracts said to have been obtained as a result of bribery was £60m. If the case had been decided under either of the other two regimes, a starting figure for any order would have been £60m.

    Regime 2: the 1988 Act, as amended by Proceeds of Crime Act 1995

    For offences committed after November 1995 the confiscation regime is far more draconian:

    • The court must conduct a confiscation enquiry if the prosecutor requests it. It may also do so of its own volition.
    • The court has no discretion in determining the amount to be confiscated and the calculation of benefit is arithmetically determined by statute.
    • The lifestyle provisions put property held or obtained by the defendant in the six years prior to proceedings at risk of confiscation. The lifestyle provisions are widest under regime 3.
    Regime 3: POCA 2002

    Confiscation under POCA 2002 is a five-step process:

    1. The court must conduct a confiscation enquiry if the prosecutor requests it or the court can proceed of its own volition.
    2. The judge must decide whether the defendant has a criminal lifestyle (see description on p5).
    3. The judge must then determine whether the defendant has benefited from criminal conduct. If the defendant has a criminal lifestyle this triggers a historical enquiry into the defendant’s general criminal conduct. If the defendant does not have a criminal lifestyle the judge considers the benefit from the offences that the defendant has been convicted of.
    4. The judge determines the gross value of benefit from the defendant’s criminal conduct. If there is a criminal lifestyle then the judge must apply the relevant assumptions. The burden of disproving an assumption is on the defendant.
    5. The judge must make a confiscation order in the sum of the benefit unless the defendant can prove that the value of all their existing assets (the ‘available amount’) is less, in which case the court will make an order in that amount.
    6. A period of imprisonment in default of payment will be imposed.

    Draconian effect of POCA 2002

    Confiscation involves a forensic assessment of the benefit obtained from the offences committed by a company and its ‘realisable assets’, ie the means at its disposal to pay the order. Once proceedings are set in motion there is little discretion involved:

    ‘The making of an order is mandatory and its amount is arithmetically determined but cannot be moderated by judicial discretion.

    It also follows that, not infrequently, and perhaps even ordinarily, the amount of money confiscated will exceed the profit made by the criminal from their offence.’ (Shabir v R [2009])

    POCA 2002 is draconian, setting out strict rules regarding how the amount of the order is to be calculated. This is an arithmetic exercise without discretion, even where the amount confiscated is far greater than any actual gain (see ‘Under POCA 2002’, on p6).

    POCA 2002 is intended to deprive defendants of the benefit they have gained from criminal conduct, whether or not this benefit has been retained. The benefit is calculated as the total value of the property or advantage obtained, not net profit (see the case example below).

    recent fsa action

    In December the Financial Services Authority (FSA) completed its second criminal prosecution for insider dealing. The trial resulted in two individuals, Matthew and Neel Uberoi, receiving custodial sentences. The FSA also sought a confiscation order under the Proceeds of Crime Act (POCA) 2002.

    Matthew Uberoi was an intern at a corporate broking firm, working on takeovers and other price-sensitive deals. On several occasions he passed inside information to his father, Neel Uberoi. Neel Uberoi then purchased shares in the relevant companies, making £110,000 profit.

    Neel Uberoi received a two-year custodial sentence and Matthew Uberoi received one year. Neel Uberoi’s net profit totalled approximately £110,000. Testar J held that the benefit was the full worth of the shares purchased, £288,050.05.

    Criminal lifestyle

    Under POCA 2002 the court is required to make lifestyle assumptions where the defendant is deemed to have a criminal lifestyle. These can be applied:

    1. where a defendant’s conduct forms part of a course of criminal activity (ie continues for a six-month period, involves a conviction for three or more offences, or two previous relevant offences); or
    2. where there is a conviction for certain specified offences, the most relevant being money laundering (this can be charged where money or assets obtained from criminal conduct are transferred or used in some way by the defendant).

    It is relatively easy for a defendant to come within these provisions. Many confiscation matters are currently dealt with as lifestyle cases. Once a defendant has been deemed to have a criminal lifestyle the court is required to make four assumptions. These are:

    1. any property transferred to the defendant at any time after the relevant date (six years before the start of criminal proceedings, which is generally taken as the date of charge) was obtained as a result of criminal conduct;
    2. any property held by the defendant at any time after their conviction was obtained as a result of criminal conduct;
    3. any expenditure incurred at any time after the relevant date was met from property obtained from criminal conduct; and
    4. any property obtained by the defendant was received free of any other interest.

    The implications of such a finding can be severe (see ‘Case of X: part 1’, on p6).

    Case example

    In R v Neuberg [2007] EWCA Crim 1994 Clive Neuberg had traded under a prohibited name contrary to the Insolvency Act 1986. The benefit of his criminal conduct was determined as the gross turnover of the company for the relevant period, not the net profit.

    Tainted gifts

    Tainted gifts are another extremely problematic issue. The realisable amount includes the value of any property held to be a tainted gift, defined as any transfer at undervalue after the date the offences commenced. Where assets are transferred to third parties at an undervalue and are subsequently dissipated, they are still classed as a tainted gift. The defendant is then ordered to pay the equivalent amount, even if the asset is worthless or has vanished (an example is shown in the box below).

    tainted gifts

    In 2009 Y, a former civil servant, was convicted of fraud offences occurring in 2005 leading to confiscation proceedings.

    In 2006 Y sold their house to their daughter for £300,000.

    A valuation obtained by the prosecution showed the market price in 2006 was £350,000. Accordingly the house was held to have been sold at an undervalue and was therefore a tainted gift.

    A valuation of the house in 2009 showed that the house had fallen in value to £250,000. Nevertheless, the confiscation order of Y was increased by £50,000 because the gift was valued at the time it was given.

    What if the defendant cannot pay?

    Enforcement of confiscation orders is equally harsh. There is a sliding scale of imprisonment in default of payment linked to the amount of the order. This starts at seven days for amounts under £200, rising to ten years for amounts exceeding £1m. Any period in default:

    • is distinct from the sentence for the substantive offence;
    • can far exceed the original sentence; and
    • would be served consecutively.

    While a defendant only serves half of the default period, the provisions for early release from normal custodial sentences do not apply (see ‘Case of X: part 2’, on p6).

    On release from serving a default sentence the debt is not extinguished. It remains indefinitely, with 8% interest accruing from the date when the order fails to be paid. While a defaulter cannot be sent to custody again for failing to pay the original amount they can, in principle, be sent back to prison for failing to pay the interest.

    Directors and companies

    Confiscation orders are regularly made against company directors.

    In August 2009 the Environment Agency obtained a confiscation order of £234,393 against two directors of a waste management company following prosecution for controlled waste offences. Each received a conditional discharge for two years for the substantive offence and three years custody in default. The company was given no separate penalty but was ordered to pay full prosecution costs.

    The courts have also confirmed that confiscation is equally applicable to corporate defendants.

    In 2006 London Boroughs of Brent and Harrow Trading Standards (Brent and Harrow) convicted Alami International Ltd for offences in relation to the sale of counterfeit goods. The company was fined £24,000 and was ordered to pay £23,500 in costs for eight offences under the Trade Marks Act 1994.

    Working with the London branch of the Regional Assets Recovery Team, Brent and Harrow obtained a confiscation order of £400,000 under POCA 2002.

    Under POCA 2002

    If there are four defendants to an offence of fraudulently obtaining a loan of £100,000, the court must hold that each has benefited in the sum of £100,000. Each defendant would, subject to their available assets, be ordered to pay £100,000. The state could therefore recover £400,000.

    case of x

    Part 1

    Defendant X is an international businessperson and director of several companies. X was convicted of laundering £190,000 in 2010. X was automatically assumed to have a criminal lifestyle.

    X was charged in 2006. The court therefore considered all money and property passing through their hands since 2000 to be from criminal conduct. The benefit figure was calculated at approximately £11m.

    Because of the criminal lifestyle assumption, X had to prove that the £11m passed through the accounts legitimately by providing a detailed explanation of every entry over £1,000 in every personal and company bank account used during that ten-year period.

    X was able to prove that £10m passed through the accounts legitimately. Criminal benefit was therefore determined to be around £1m. The £190,000 that X laundered therefore resulted in a confiscation order of £1m because it could not be proven that the additional money was obtained legitimately.

    Part 2

    X was sentenced to four years in custody for the offence of money laundering. This led to an early release with an electronic tag after less than two years.

    Because X was ordered to pay £1m in confiscation, they were liable to face a default sentence of up to ten years. In fact, following submissions, X was given a default sentence of five years. If X defaults on payment they will be liable to serve two and a half more years, a period greater than that already served for the substantive offence.

    Case of x

    Part 1Defendant X is an international businessperson and director of several companies. X was convicted of laundering £190,000 in 2010. X was automatically assumed to have a criminal lifestyle.

    X was charged in 2006. The court therefore considered all money and property passing through their hands since 2000 to be from criminal conduct. The benefit figure was calculated at approximately £11m.

    Because of the criminal lifestyle assumption, X had to prove that the £11m passed through the accounts legitimately by providing a detailed explanation of every entry over £1,000 in every personal and company bank account used during that ten-year period.

    X was able to prove that £10m passed through the accounts legitimately. Criminal benefit was therefore determined to be around £1m. The £190,000 that X laundered therefore resulted in a confiscation order of £1m because it could not be proven that the additional money was obtained legitimately.

    Part 2X was sentenced to four years in custody for the offence of money laundering. This led to an early release with an electronic tag after less than two years.

    Because X was ordered to pay £1m in confiscation, they were liable to face a default sentence of up to ten years. In fact, following submissions, X was given a default sentence of five years. If X defaults on payment they will be liable to serve two and a half more years, a period greater than that already served for the substantive offence.

    Can a confiscation order be limited by agreement with the prosecutor?

    Where a corporate defendant is facing prosecution for any offence that has produced a financial benefit, advisers must assume that the relevant prosecutor will seek a confiscation order. Before accepting any corporate liability, it is important to consider the impact of the relevant regime. While there may be some room for manoeuvre to control the effects of the confiscation regime – on the basis of the charges laid, the agreed facts and any financial statements put before the court – the fact that the quantum of benefit and realisable assets are agreed between the prosecutor and a potential corporate defendant will not and cannot, in itself, bind a Crown Court judge in confiscation proceedings.

    The judge is positively obliged to investigate any agreement between the prosecution and defence as to the appropriate quantum of any confiscation order, and to reject it if it is not in accordance with the statutory scheme.

    For most corporate advisers it will be counterintuitive to admit misconduct over a prolonged duration. However, when it comes to confiscation this could be advantageous as offences dealt with under the earliest of the three regimes would have the benefit of judicial discretion.


    This is an extremely complex and constantly evolving area of law. As can be seen in the examples of this article, the potential consequences for both individuals and companies can be serious. In worst-case scenarios long periods of custody for individuals and extremely large financial penalties can result from the confiscation regime.

    All indications point towards the increasing use of confiscation powers by a larger number of regulatory bodies. Once confiscation proceedings are set in motion the courts have very limited powers to stop them and limited discretion to alter the ultimate outcome. It is therefore a worrying development that agencies that may have little or no experience of bringing confiscation proceedings are now empowered to do so.

    The key point for any individual or company potentially facing a prosecution where a confiscation order may be made is to seek specialist advice at an early stage.

    Very important strategic decisions must be taken under advice. When deciding whether to plead to any offence, the impact on confiscation must be considered. For advisers negotiating any basis of plea, the facts on which a conviction is based must be carefully agreed.

    Confiscation and prosecutorial policy: SFO

    The lack of discretion under POCA 2002 may also hamper the efforts of prosecutors to meaningfully engage with corporates. The SFO’s director, Richard Alderman, is trying to encourage companies to self-report past wrongdoings for overseas corruption.

    Self-reporting corruption is all well and good for those companies who manage to negotiate a Civil Recovery Order, such as Balfour Beatty and AMEC. The advantage here is that the settlement is largely in the hands of the SFO, the corporate defendant and its advisers. There is no conviction or complex confiscation proceedings to contend with. This is not so with criminal settlements if the fact pattern means that either of the later two regimes apply.

    If the practice of self-reporting and plea discussions is to be supported and encouraged by corporates and their advisers, the challenge of finding a pragmatic approach to the issue of confiscation must be met.

Access all areas: how safe is your commercially sensitive environmental information?

Projects, energy and natural resources | 01 March 2010

Access to environmental information often creates conflict between the rights of citizens to understand the environment in which they live and the legitimate confidential interests of businesses that provide services to public bodies. The Environmental Information Regulations (EIR) 2004 came into force over five years ago, but there are still frequent skirmishes in the courts over the scope of access to commercially sensitive documents, and the public (and non-governmental organisations in particular) are becoming increasingly creative in their efforts to obtain this information. Two recent examples are Veolia ES Nottinghamshire Ltd v Nottinghamshire County Council & ors [2009] and Office of Communications (Ofcom) v The Information Commissioner [2010], both of which have reshaped the contours of this area of law. Uncertainty exists in both the operation of the individual legislative routes to accessing information and in the interaction between them, which is of concern to the large number of commercial enterprises that do business with the public sector.

[Continue Reading]

Competition law developments in CEE and SEE countries

Eastern Europe | 01 March 2010

Last year saw an increase in legislative activities concerning competition law in several central and eastern European (CEE) and south-east European (SEE) countries. The non-EU member countries in the region continue to harmonise their competition law regimes with international standards applicable in most jurisdictions in the EU. This should facilitate the competition law assessment for undertakings active in numerous jurisdictions across Europe. [Continue Reading]

Tax and social policy

Corporate and commercial | 01 March 2010

The world of tax is quite interesting at the moment – to me, at least – because it brings into sharp focus the way that tax is used as an instrument of policy and what role it is playing in the field of social policy. It is hardly news that the state of public finances in most western economies is, to be charitable, delicate. No doubt the finances will be redressed, to an extent, by cuts in spending. However, it is equally clear that some of the improvement will have to come from an increase in public revenues. [Continue Reading]

Remoteness of damage: Supershield brings commercial background to the fore

Corporate and commercial | 01 March 2010

Supershield Ltd v Siemens Building Technologies FE Ltd [2010] takes us back to the nuts and bolts of contract law – to the question of remoteness of damage.

A type of loss resulting from a breach of contract cannot be recovered if it is too remote. The law in this area has become unsettled in recent years, but the Court of Appeal’s new judgment helps clarify when a type of loss will be considered too remote to be recovered.

The commercial background of the contract has, as a result of Supershield, taken on greater significance in this area of the law.

Facts of Supershield

Supershield gave rise to an interesting and apparently unprecedented point on the remoteness of damage. The defendant (D), a subcontractor of the claimant (C) in the construction of an office building, breached its contract with C.

D had to install a ball float valve and lever arm (such as you might find in a domestic toilet cistern) so that the water storage tank of a sprinkler system would be refilled whenever the water level dropped. After D had installed the ball float valve and lever arm, the nut and bolt connection between them failed, and the bolt fell out. The judge at first instance found that D had not screwed the nut sufficiently tight. After the bolt fell out, the valve was left open so that water flowed into the tank, but the valve did not close as the tank filled up. The tank overflowed.

The design for the office building had incorporated several protection measures to ensure that an overflowing tank would not cause any damage. The tank room had built in drains that were designed to remove any leaking water and an alarm system to warn of any overflow.

As it was, the drains became blocked and the alarm system was not being monitored. Water flooded from the tank room into the office building basement and caused substantial damage to electrical equipment.

Multiple protection measures all fail

This was, apparently, an unprecedented point. D argued that the parties could not have foreseen that overflowing water would cause damage, as they would not have anticipated the drain being blocked and the alarm being unmonitored. The building was designed specially to avoid such damage. Did the unexpected failure of multiple protection mechanisms make the resulting damage too remote to be recovered?

To resolve this question, the Court of Appeal reviewed the law on the remoteness of damage. This has, in recent years, become rather uncertain as a result of the House of Lords judgment in Transfield Shipping Inc v Mercator Shipping Inc [2008]. But the Court of Appeal has now helped to clarify the law.

A loss reasonably contemplated or in the natural course of things?

The classic case of Hadley & anor v Baxendale & ors [1854] remains the starting point when considering whether a type of damage is too remote to be recovered.

Damages were held to be recoverable according to a two-limbed test:

  1. when the damages may be fairly and reasonably considered to arise naturally, ie according to the natural course of things; or
  2. when the damages may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.

On the facts, the defendant carriers had not been informed that late delivery of the crankshaft they were transporting would delay the operation of the mill and, as far as they were aware, the owner might have had another crankshaft. Therefore the mill owner could not recover the lost profits as this type of loss was too remote.

Applied to the facts of Supershield, it could be argued, on the one hand, that flooding would naturally be expected to result from the faulty installation of the tank valve. On the other hand, the overflowing water might have been expected to flow away down the drains or to have been prevented after activation of the alarms.

A sufficiently likely loss?

In C Czarnikow Ltd v Koufos (The Heron II)[1967], the House of Lords developed and restated the rule in Hadley. Whether a type of loss was recoverable depended on the likelihood, or the degree of foreseeability, that the type of loss would occur as a result of a breach.

Although no single formulation of the rule was agreed, the crucial question according to Lord Reid was:

Applied to the facts of Supershield, the question could be constructed as follows: did the multiple protection measures in place make the flooding sufficiently unlikely for this kind of damage to be too remote?

An assumed responsibility?

The House of Lords in Transfield brought significant uncertainty to this area of the law. In Transfield, ship owners had chartered out their ship and it was due to be redelivered to them by 2 May 2004. They also agreed a new hire to a new charterer at a lucrative rate, with the vessel to be delivered to the charterer by 8 May 2004 at the latest. The vessel was delayed and it was not redelivered to the owners by the earlier charterers until 11 May 2004. The new charterer still agreed to take the vessel, but only at a much reduced rate. Due to an unexpectedly volatile market, the difference between the lucrative rate and the much reduced rate was very large.

The majority of their Lordships introduced a novel dimension into their judgments in suggesting that losses would only be recoverable if the party who had breached the contract could be reasonably assumed to have undertaken responsibility for that kind of loss. Lord Hoffmann, in particular, emphasised that the extent of a party’s liability depended on the construction of the contract as a whole in its commercial setting. On this basis, the Lords held that the loss of the very lucrative charter rate, which was the central issue in the dispute, was too remote, as, even if it was perfectly foreseeable, the earlier charterer could not reasonably be seen as having undertaken responsibility for the whole period of the new charter.

Could this approach hold the key to the question in Supershield? Had D assumed responsibility for the losses caused by the overflowing water?

A loss within the scope of the contractual duty?

The Court of Appeal in Supershield reasoned that the very purpose of installing the ball float valve had been to control the flow of water and so D had undertaken responsibility for the consequences of the water overflowing. It would have been strange for the extra protection measures put in place to have diminished D’s responsibility, as the whole point of protection measures was for them to act as a backup, rather than to reduce the importance of the water not overflowing in the first place.

The losses caused by the overflow of water were within the scope of D’s contractual duty to C. As such, the losses would not have been too remote for C to recover, even if the parties could not have predicted them.

The Court of Appeal held that the rule in Hadley, as rationalised and restated in The Heron II, remains the ‘standard approach’, but that the reasonable expectations or intentions of the parties may cause the court to depart from this rule.

The Court held that ‘if, on the proper analysis of the contract against its commercial background, the loss was within the scope of the [contractual] duty’ the loss will not be too remote to be recovered, even if loss of that kind ‘would not have occurred in ordinary circumstances’.


The House of Lords in Chartbrook Ltd v Persimmon Homes Ltd & ors [2009] and the Supreme Court in Sigma Finance Corporation, Re [2009] have recently emphasised the importance of interpreting contracts against their commercial contexts.

The Court of Appeal in Supershield has now also cemented the reasonable intentions of the parties against the commercial background as a key element of the law of remoteness of damage. The scope of the contractual duty and the contractual assumption of responsibility will now always have to be considered when determining what type of loss can be recovered. It will be interesting to see how this area continues to develop in light of Transfield, as the law is still very unsettled.

Final key point

For practitioners, when drafting contracts, the Supershield judgment is a further reason to allocate responsibility for the consequences of breach clearly and in a way that signposts the underlying commercial rationale.

Supreme Court clarifies scope of regulatory discretion on environmental reviews

Canada | 01 March 2010

In a unanimous decision released on 21 January 2010, the Supreme Court of Canada clarified the discretion of a federal responsible authority (RA) to make decisions regarding the scoping of projects for purposes of the federal environmental assessment (EA) process. In MiningWatch Canada v Canada (Fisheries and Oceans) [2010], the court overturned a Federal Court of Appeal decision that granted RAs discretion to scope a project to determine the type of EA process or ‘track’ that will apply. The track determines the level of the intensity of the EA review.

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