Foreign Corrupt Practices Act -- Probes may hit D&O insurers

Frederic Bourke Jr. was convicted in July by a federal jury in Manhattan of violating the Foreign Corrupt Practices Act ("FCPA"), among other charges, in connection with an alleged scheme to bribe Azerbaijan government officials, and highlights an emerging area of concern for directors and officers liability insurers and policyholders.

The FCPA prohibits paying foreign government officials to obtain or retain business. Mr. Bourke did not pay bribes himself. But he invested $5.7 million with a Czech expatriate, Viktor Kozeny, whom he knew—or should have known—planned to bribe Azerbaijani government officials, jurors found.

The FCPA bars attempted bribes, even if unsuccessful, and jurors found that Mr. Bourke must have known Mr. Kozeny's intentions. Mr. Kozeny was sometimes called the "Pirate of Prague" for allegedly stealing investor money as part of a similar scheme in the Czech Republic, and two witnesses said Mr. Bourke knew of the bribes.

The case is part of a pronounced effort by the federal government in recent years to enforce the 1977 statute more aggressively. The Securities and Exchange Commission has established a dedicated FCPA enforcement unit, and the Justice Department says it is investigating at least 120 companies on five continents.

According to attorneys who track these actions, the number of SEC and DOJ enforcement actions has increased 500% between 2004 and 2009. This is why the FCPA could become a significant exposure for D&O liability underwriters.

Fines and disgorgement penalties paid in connection with SEC or DOJ probes likely would be excluded from coverage under most D&O liability policies, legal observers agree. But defense costs for such cases likely would be covered by D&O liability policies. Those costs often can be significant and sometimes blow through D&O liability limits.

In addition, professionals involved with D&O say FCPA violations make follow-on litigation—a securities fraud or derivative suit—more likely. In addition to its bribery prohibition, the FCPA also requires companies to maintain adequate internal accounting controls and accurate and transparent records. Violations of this "books and records" provision of the FCPA often provide a foundation for suits alleging that directors and officers breached their fiduciary duty.

Only 31% of companies report having a "comprehensive" FCPA compliance program, according to a September survey by Deloitte Financial Advisory Services L.L.P.

It is expected D&O underwriters will increase their attention and inquiries into a company's practices in foreign countries with an eye toward FCPA exposure. However, history in our industry tells us that until they have losses, they will ignore the possible risks.

For UK Hotels -- A duty to reduce carbon emissions

(This article first appeared in Hotel Report.)

In April 2010, a new regime designed to improve energy efficiency and reduce the amount of carbon dioxide emitted by businesses will be implemented in the United Kingdom. As well as the large hotel chains, this will also affect owners of unbranded hotels that exceed the relevant electricity usage thresholds and all owners of branded hotels.

To be known as the Carbon Reduction Commitment (CRC) scheme, it is a mandatory scheme and will apply to organizations whether in the public or private sector who have at least one electricity meter settled on the half hourly market and whose annual UK electricity usage exceeded 6,000 MWh which represents an annual electricity bill of roughly $985 million at current rates.

What is the CRC scheme?

Under the CRC scheme, participating organizations must purchase "allowances" sold by the government for each ton of carbon dioxide that they emit.  The initial price will be nearly$20 per ton. So there is a direct incentive for these organizations to reduce their emissions and therefore their energy bills.

Additionally, the better a participating organization performs at reducing its emissions, the higher its ranking in the annual performance league table that the Government plans to publish showing the comparative performance of all participants. Government proceeds from selling allowances will be handed back to those organizations that feature most highly in the league tables.

What constitutes an 'organization'?

Group organizations will be treated as a single entity under the CRC scheme and all members of that group will be required to participate. There are two main groupings that constitute 'organizations':

• Corporate groups, i.e. all parent companies and subsidiaries, including subsidiaries of foreign parent companies; and
  
• Franchise groups, which include not only the franchisor's corporate group, but also all franchisees of the franchisor.
  

It is important to note that there are significant financial penalties for non-compliance and liability for compliance with the CRC scheme will be joint and several and attach to all entities within the CRC organization.

The implication for the hotel industry

The implications depend on whether the hotel in question is leased, managed or franchised. Whilst a managed hotel is distinguished from a franchised hotel in the hotel industry, any managed hotel that is operated under the manager's brand will be treated as part of a franchise for the purposes of the CRC scheme.

Leased hotels

Under a standard lease, a hotel operator as tenant is likely to be the counterparty to the energy contract in place as opposed to the owner as landlord.  Under the CRC regime as currently envisioned, CRC liability for energy use will attach to the hotel operator itself if it is a single entity or where the hotel operating company is part of a group, all of the companies in the group (subject to certain exceptions) which together will constitute the CRC Organization.

In the less common situation where the landlord is the energy contract counterparty (perhaps where the hotel is part of a larger mixed-use building), then the CRC liability will reside with the landlord. The commercial lease arrangement between the landlord and the tenant will determine whether the landlord can recover the cost of the allowances through the service charge and/or whether the tenant is entitled to share in any rebates – the CRC regime does not govern this private matter.

Franchised or branded managed hotels

The definition of a franchisee is where the franchisee "presents or equips [the hotel] premises to a standard or specification which results in that premises having an internal appearance which is substantially uniform with premises belonging to other franchisees of that franchisor or of the franchisor itself." This means that:

The owner of a branded hotel is associated with the operator under the CRC scheme.

The operator's corporate group will be aggregated with all its franchisees' hotels for the purposes of determining the 'CRC Organization'.

The parent of the operator's group (or the UK group company nominated by the parent) will need to purchase allowances for the whole CRC Organization.

The management agreement will need to determine whether the operator can recover the cost of purchasing allowances as an operating expense and, if so, how rebates given back to the CRC Organization will be re-credited to individual owners.

Unbranded managed hotels

Normally the owner will have the liability to purchase allowances, if it is large enough to qualify. However, if the manager has a single contract for electricity under a group-purchasing scheme for all hotels managed by it, and it pays the bill with a re-charge to owners, then the manager may become responsible for purchasing the allowances. If the manager contracts with the electricity provider, but merely as agent for the owner, then that contract will be considered to be the owner's and the owner will be responsible for purchasing allowances.

Next steps for owners and operators

Hotel operators, who may be aware of the need to measure their own electricity usage in owned and leased hotels and their head offices, may need to ensure that they are in a position to measure usage of all UK hotels operated under one of their brands, whether on a managed or franchised basis. On the basis that no management agreements expressly deal with this issue, operators should ensure that they agree a protocol with their owners as to how the system will operate in terms of re-charging for allowances and re-crediting of rebates.

Owners of branded hotels should challenge their operators/franchisors to explain what they intend to do to minimize the cost of the scheme by maximizing emissions reductions and therefore the rebates available under the scheme.

There will also be implications for investors, purchasers and developers of hotels who, together with owners and operators, will need to seek advice on how the CRC scheme will affect their involvement in the sector.

Professional Negligence Claims in UK

UK courts have increasingly been finding that professional negligence claims will become time-barred 6 years after the date of advice, regardless of whether the claim is made in contract or tort.

The Court of Appeal has now confirmed this trend and has expressly recognized that the limitation periods in tort and contract ought broadly to be the same where a claim is essentially contractual in nature.

A professional's relationship with his or her client is usually contractual in nature.  However, professional negligence claims tend to be made both in contract and in tort.  Often this is done because the limitation period allowed for claims in negligence is perceived to be more generous than for those in contract.

For claims in contract, limitation will run from the date the contract is breached by the provision of negligent advice.  However, limitation for claims in tort will not begin to run until the claimant first suffers damage as a consequence of the negligent advice.  Claimants often use this to their advantage by asserting that they did not suffer damage until long after they received negligent advice, effectively allowing them more time to bring a claim.

Yet the clear weight of case law, to which the Court of Appeal's recent decision can now be added, shows that claimants very rarely succeed with this argument.

Indeed, the Court of Appeal emphasized that in cases of negligent advice the person relying on the advice will usually have entered into a transaction of some kind which has turned out to be flawed in some way.  The fact that the flawed transaction has been entered into will usually be damage from the claimant's point of view, meaning that the limitation period in tort begins to run at that point not at some later date when a more tangible loss manifests itself.

Of course, a remaining potential advantage of negligence claims in tort is that the claimant can benefit from an alternative 3-year limitation period running from the date they first acquired knowledge of their potential claim.  However, the case law on this issue is also relatively strict on claimants and only allows them 3 years to investigate whether they might have a claim against a professional rather than allowing them 3 years to issue a claim once they have confirmed the existence of such a claim. 

Accordingly, professionals and their insurers can increasingly expect to avoid claims for advice given more than 6 years ago and claimants who delay in issuing their claims run a real risk of being time-barred.

Guest Post: European D&O Market Primed for Robust Growth

New laws put corporate directors at risk, sparking demand for protection.

Directors of European companies are more likely than ever to be sued by disgruntled shareholders, according to a new report from Advisen Ltd. As a result, directors and officers liability (D&O) insurance is one of the fastest growing insurance products in Europe, and sales will continue to increase at a brisk pace in the coming years.

Accounting scandals and corporate governance shortfalls have led to new laws across Europe requiring greater transparency and heightened shareholder protections. Additionally, legal systems have been reformed to give shareholders unprecedented access to the courts. These governance and legal reforms expose directors to greater liability, and lawsuits naming companies and their directors have increased throughout Europe. Some recent suits have settled for hundreds of millions of Euros.

"The United States is still the world's preferred venue for litigating shareholder lawsuits, but more and more suits are being brought in European courts," said John Molka III, the author of the report. "Increasingly, directors of European companies are demanding insurance protection. The US D&O market has shrunk during the recession, but premium volume is up sharply in Europe."

Securities regulators across Europe have stepped up enforcement activities in recent years, further exposing corporate directors to liability. Regulators across the globe are sharing information and coordinating investigations, putting additional pressure on multinational corporations. Investigations and other enforcement activities not only are costly for companies, they also can spark shareholder suits.

"Underwriters clearly are concerned about the heightened exposure to claims, but at the same time the threat of regulatory investigations and shareholder suits is creating unprecedented demand for D&O insurance," observed Dave Bradford, executive vice president of Advisen. "Most of the largest European companies now buy coverage, and a growing number of mid-size firms are recognizing that they too are potential litigation targets. We expect to see double-digit growth in D&O premium volumes in the coming years, driven by both rate increases and a windfall of new companies seeking to purchase D&O insurance."

Advisen's 20-page report, European D&O Insurance Market to Benefit from Governance and Legal Reforms, tracks the latest developments in legislation, regulation and litigation reform across Europe, and shows how the rapidly shifting management liability landscape is transforming the D&O market. It offers management liability brokers and underwriters a unique pan-European perspective on the D&O market, while presenting actionable information on a country-by-country basis for marketing, sales, product development and strategic planning purposes. The report is essential reading for risk managers of any company with European operations to understand the emerging liability picture and how the rapidly escalating risks faced by their firms' directors and officers vary by country.

European D&O Insurance Market to Benefit from Governance and Legal Reforms can be purchased for $499 at The Advisen Corner, http://corner.advisen.com/reports_topical_european_do.html.

From European Court -- Period of Sickness Occurring During Holiday

(This information was provided to me by the solicitor firm CMS Cameron McKenna LLP in London.)

The European Court of Justice ("ECJ") has held in Pereda v Madrid Movilidad, that employees who are sick during scheduled annual leave should be permitted to reallocate their holidays, even into the next holiday year.

In 2007, Mr Pereda was injured and he requested his employer to allocate a new period of paid annual leave on the ground that he had been on sick leave during the period of annual leave originally allocated to him. His employer rejected the request. The ECJ ruled that his period of sick leave should not have counted towards his holiday time on the basis that employees are entitled to a minimum period of 4 weeks paid annual leave under the Working Time Directive ("WTD"). The ECJ emphasized the right of employees to a period of actual rest for relaxation and leisure during annual leave, as opposed to sick leave during which an employee is recovering.

This decision is a new interpretation of the WTD; following the ECJ and the House of Lords' recent rulings on the Stringer case that holiday continues to accrue during sick leave. The House of Lords decision in Stringer means that a worker is entitled to take paid annual leave even though they are not at work due to extended sick leave.  The question of what would happen if sickness coincided with scheduled leave was not addressed in the Stringer case. Although unlikely to be welcomed by employers, the ECJ's ruling in Pereda has helpful addressed this void however it remains unclear whether employees will be able to claim retrospectively.

As a result of the decision on Pereda, employers should be prepared to manage attempts by workers to exploit the ECJ's decision. A worker could effectively increase their entitlement to annual leave by alleging that they were sick whilst on holiday. Strict requirements on supporting medical evidence should be enforced to avoid abuse.

The judgment is immediately effective for public sector employers but private sector workers may not be able to benefit from this decision until the Government amends the Working Time Regulations.  Most employers therefore have time to consider their policies and perhaps even implement changes before the law changes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Sentences of up to 10 years for Insurers or Brokers breaching Export Control Order

The International Traffic in Arm Regulations ("ITAR") should be well understood by those who operate in the United States. However, if you operate in the UK, you need to also be cognizant of the Export Control Order.

The Export Control Order 2008 is intended to restrict the international movement of arms or other military goods, and penalties for breaching these trade controls can be severe and include an unlimited fine as well as a prison sentence of up to 10 years. Insurers and brokers are caught by the Order if they are involved in insuring, or arranging insurance, in relation to actions prohibited under the terms of the Order.

The Export Control Order is enforced by H.M. Customs & Excise and came into effect on 6th April 2009. Insurance companies and brokers will be expected to comply with the Order, and must have structures in place to ensure that the Order is not being breached. Breaches of the Order can result in criminal penalties being imposed on individual underwriters and brokers as well as their employers, including imprisonment for up to 10 years or unlimited fines.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Chinese Drywall and Product Liability in China

Recent article from Associated Press (Click here) discusses the issue of Chinese manufacturers ignoring the suits brought against them in the U.S. courts for the products that allege a flood of defective Chinese drywall was sent into the United States after a string of hurricanes in 2004 and 2005. The material is known to decay, creating corrosive chemicals and fumes.

This should not be a shock to anyone who has any dealings with commercial insurance placements in global markets. According to Axco Insurance Information Services Ltd in London, their report on the Product Liability market in China is as follows:

According to official figures from the China Insurance Regulatory Commission ("CIRC"), product liability premiums were around $142.84 million in 2006.

Because of low profit margins and low legal awareness, product liability insurance is rarely purchased in China. Most business is represented by export liability policies, but these are only purchased at the insistence of overseas buyers and normally have indemnity limits of less than $5 million. According to research by Chubb in 2006, only 4% of Chinese exports are insured, the vast majority of overseas buyers apparently accepting the fact that manufacturers' margins are too thin to include an allowance for product liability insurance. There is also the technical difficulty that export liability policies are subject to Chinese law, which means that in some cases US court judgments might not be enforceable against Chinese exporters or their insurers.

The variable quality of Chinese manufactures has been highlighted over the last 12 months by a series of product recalls in the US. Harmful chemicals have been found in toothpaste, seafood and pet food, whilst toys have been found to present toxicity and choking hazards. These problems have led to state-sponsored improvements in risk management rather than increased take-up of product liability or product recall insurance.

Because of lack of experience, reinsurance capacity and overseas claims handling facilities, domestic insurers take second place to the foreign branches in the export liability market. Leading product liability insurers include AIG, Chubb, Huatai (supported by ACE) and Allianz.

Product Liability Legislation

The Product Quantity and Quality Law, effective from 1 September 1993, made sellers and manufacturers strictly liable for injuries resulting from defective products. The law does not apply to unprocessed goods such as fish and defines a defect as "unreasonable danger existing in a product or a product not in conformity with the applicable health and safety standards of the state". Sellers are entitled to recover from manufacturers. Manufacturers can rely on a "state of the art" defence.

The Consumer Rights Protection Law, effective from 1 January 1994, allows a plaintiff to claim against the owner of an exhibition hall or leased premises if the exhibitor or tenant from whom the defective product was purchased cannot be traced. If a consumer is injured as a result of inaccurate advertising, damages can be claimed from the advertising agency if the latter cannot supply the name of the advertiser. Punitive damages are available if the plaintiff can establish fraud.

The concept of product liability is in its infancy in China, unlike the U.S., UK and other countries where the laws and history are more mature. I have to believe that the plaintiff attorneys understood this risk when they took on this action in the courts, and now their need to chase the money around the globe was a worst case scenario for them.

Too often commercial businesses in the U.S. assume that everyone in this global economy are subject to many of the same rules, and therefore insure their risks in similar fashion. There is nothing further from the truth, and this is why it is critical for any business with exposures to overseas risks should have advisors, including their insurance broker, who understand the markets in which they have these exposures.

ECJ Rules on Period of Sickness Occurring During Holiday

The European Court of Justice ("ECJ") has recently held in Pereda v Madrid Movilidad, that employees who are sick during scheduled annual leave should be permitted to reallocate their holidays, even into the next holiday year.

In 2007, Mr. Pereda was injured and he requested his employer to allocate a new period of paid annual leave on the ground that he had been on sick leave during the period of annual leave originally allocated to him. His employer rejected the request. The ECJ ruled that his period of sick leave should not have counted towards his holiday time on the basis that employees are entitled to a minimum period of 4 weeks paid annual leave under the Working Time Directive ("WTD"). The ECJ emphasized the right of employees to a period of actual rest for relaxation and leisure during annual leave, as opposed to sick leave during which an employee is recovering.

This decision is a new interpretation of the WTD; following the ECJ and the House of Lords' recent rulings on the Stringer case that holiday continues to accrue during sick leave. The House of Lords decision in Stringer means that a worker is entitled to take paid annual leave even though they are not at work due to extended sick leave.  The question of what would happen if sickness coincided with scheduled leave was not addressed in the Stringer case. Although unlikely to be welcomed by employers, the ECJ's ruling in Pereda has helpful addressed this void however it remains unclear whether  employees will be able to claim retrospectively.

As a result of the decision on Pereda, employers should be prepared to manage attempts by workers to exploit the ECJ's decision. A worker could effectively increase their entitlement to annual leave by alleging that they were sick whilst on holiday. Strict requirements on supporting medical evidence should be enforced to avoid abuse.

The judgment is immediately effective for public sector employers but private sector workers may not be able to benefit from this decision until the Government amends the Working Time Regulations. Most employers therefore have time to consider their policies and perhaps even implement changes before the law changes.

UK Solicitors’ claims arising out of pension schemes

Pensions is a highly technical and regulated area where trustees and employers are increasingly relying on solicitors (aka attorneys in U.S.) to advise. As a result of poor investment terms and improving mortality rates, defined benefit schemes are, across the board, in deficit. In the recession, where many companies are becoming insolvent, leaving schemes in deficit and without an employer to make good the shortfall, trustees are more inclined to scrutinize the advice they have received to assess whether this has exposed the scheme.

Areas where solicitors may be exposed to claims include:

1. Drafting scheme documents and amendments to schemes – this remains the principal area of exposure for solicitors;
   
2. Conflicts of interest where solicitors act both for the employer of a pension scheme and the trustees; and
   
3. Failure to give or to qualify advice.
   

Solicitors need to analyze areas of potential exposure, and consider the steps that can be taken with a good insurance broker to reduce the risk of claims.

Employment Liability Insurance - Taking precautions in UK

In the U.S., where employment practices liability insurance ("EPL") originated, claims of this type can typically turn into multi-million dollar lawsuits. While the UK legal system differs vastly from the U.S. - not enabling costly class actions, punitive damages, or juries typically more sympathetic to the claimant to adjudicate - meaning compensation is oftentimes far lower, litigation is undoubtedly on the rise.

According to figures from the Tribunals Service (Click here to learn more about this Ministries of Justice agency) published earlier this year, the number of employment tribunal claims rose sharply to 189,303 for the period of April 2007 to March 2008, an increase of 43% on the 2006/2007 figures.

Despite this, firms that are purchasing EPL, which covers discrimination, harassment and other similar employer-employee disputes, has been relatively low in the UK. For instance, it has been reported by a leading insurance broker that just 17% of the top 100 UK law firms have EPL, compared to 75% of U.S. practices.

Companies which sell EPL in the UK as both a standalone product and as part of its directors' and officers' ("D&O") offering, say that - while the U.S. is more litigious than the UK - England, Northern Ireland, Scotland and Wales are a "long way ahead of many parts of Europe", and that there is an increase in compensation awareness, predicting that interest in EPL will build over the next decade. It has also been reported that the European Union influence will also have an effect because of its focus on protecting consumer rights. The EU is currently consulting on the possibility of bringing class actions, which while they won't be the same as in the U.S., will still provide a vehicle to claim for those that may not singularly do so.

Ignoring obligations

It has long been the case that some firms have a reputation for ignoring their obligations under employment law, and believing that their staff will not take them on in employment tribunals and court, thus choosing to fail to put this type of insurance in place to cover them. There are many reasons for this. Cost is a factor, particularly in the case of larger firms, but also, historically there has not been a range of products in this area on the market - although this is now starting to change. With potential compensation for successful discrimination claims now unlimited, the cost of the premium may be a small price to pay for peace of mind.

The U.S. has seen much higher levels of compensation paid out in discrimination cases, and this may be why a higher percentage of firms in the U.S. have insurance. However, UK employees in all sectors are now more aware of their employment rights than they were 10 years ago and there is no longer the stigma attached to pursuing claims before employment tribunals. The number of discrimination laws in UK is increasing and, therefore, employers are becoming increasingly vulnerable. In a recession, more people become unemployed and, therefore, the prosecution rate for unfair dismissal is bound to increase. Even if the claim is without foundation.

Currently, it is the larger commercial companies (more than 25 employees), rather than the smaller businesses (less than 25 employees), that take out EPL. The theory behind this is mainly because they will have systems in place, an HR department and the right kind of guidance. The company would be UK domiciled, not U.S.

Right fit for all?

Some question whether EPL is the right fit for all firms because the U.S. legal system differs vastly from the UK in a couple of crucial areas - the ability in the U.S. to launch class actions and punitive damages - both of which can lead to multi-million dollar claims. In the UK, compensation is much lower, therefore, while a number of companies buy standalone EPL policies, most of the mid-market companies interested in the product tend to buy an extension to their D&O policy. In a recession, exposure for EPL increases, however, perversely, this is the time where companies are struggling to find the money for extra cover. Most that buy EPL will not cancel it but there are not many buying it for the first time.

Some believe that EPL is not striking the right cord in the UK market. There are reportedly a number of reasons for this. Namely, it was a U.S. product designed for that market, and, in the employment sphere, while U.S. workers have few rights compared to the UK and Europe, they are more prepared to exercise the rights they do have. Also, in the U.S., the cases are determined by jury, not a judge, this is a bigger risk for the U.S. firms.

Given the current economic circumstances and certainty that claims will rise, it is believed this is a market crying out for a good quality EPL policy that is cost effective.

Tougher antitrust penalties for company directors considered in U.K.

The Office of Fair Trading ("OFT") has announced (here) that it is considering widening its use of competition disqualification orders ("CDO").

Directors of all companies should take note of this proposed tougher stance.  At present (and as set out in the OFT's 2003 Guidance) company directors are in practice only likely to face disqualification for breach of competition law if they are found to have personal responsibility for their companies' contravention of the competition rules. 

The OFT wants to change this.  Note that no changes in the law are required for the OFT to pursue directors with increased rigor.  The court's powers already exist.  The OFT is simply looking at ways of enhancing company and board competition compliance and explaining how it intends to go about this.

CDOs were introduced by the Enterprise Act 2002, to incentivize compliance with antitrust law by providing sanctions for the individuals responsible.  On the application of the OFT or a sector regulator the court can disqualify a company director from acting as a director for up to 15 years if that director's company has breached competition law (for example by price fixing or other cartel offenses), and the court considers the director unfit to be involved in the management of a company as a result.  It is also possible for a director to give an undertaking to similar effect to prevent his having to appear in court and have an order made against him.

The OFT thinks that the way in which it has used its powers to seek CDOs so far has not had the desired deterrent effect.  It believes that research which it commissioned in 2007 indicates that greater use of CDOs is called for.

The OFT therefore proposes a new approach to maximize the deterrent effect of CDOs.  In particular, the OFT would be likely to seek a disqualification order where a director "ought to have known of" or "should have taken steps to prevent" a breach of antitrust law, even if he or she was not personally involved in the breach.  

The OFT is also considering extending its discretion to apply for disqualification orders to cases where a company has benefited from the lower levels of leniency.  At present the OFT will not apply for the disqualification of a current director of a company which has benefited from any form of leniency, on the basis that to do so might inhibit applications for leniency. The OFT still wants to encourage the early offering of information on cartels, so would not seek disqualification orders against first whistle-blowers or in other cases where a company has qualified for the highest levels of leniency.

The OFT could even in exceptional circumstances seek disqualification orders where no breach of competition law has been proven or where no financial penalty has been imposed.

The OFT asks for comments on its proposals by 20 November 2009.

If any were needed, this certainly provides an extra incentive for directors to get to grips with their companies' antitrust compliance activities.

Piracy in Northern Seas: A New Trend?

From Business Week Online

These are unpleasant days for the worldwide shipping trade. The global recession and tighter credit markets have sent the Baltic Dry Index, a measure of worldwide shipping prices for dry cargo, plummeting more than 430% from its May 2008 record, to a current level of 2,704. And U.S. ports are expected to see 17% less imported container traffic volume in the second half of 2009 compared with the prior year, according to IHS Global Insight's Port Tracker. Through June, acts of piracy had more than doubled from the same period last year -- and pirates may no longer be confining their traditional zones to East Africa and the South China Sea, based on the experience of the Arctic Sea, the Russian freight vessel allegedly hijacked last month en route to Algeria.

There has been no shortage of intrigue surrounding the disappearance and subsequent retaking of the ship, which had a crew of 15 Russians, and was seized, along with eight hijackers, on Aug. 17 by the Russian Navy hundreds of miles off the coast of Senegal, the Associated Press reported. From piracy to a super-secret state cargo, mutinies, and even an Al Qaeda terror plot, theories abounded on the ship's mysterious experience during what was to be a routine journey. The answer appears to be a much more mundane hijacking and ransom demand. On Aug. 3 the hijackers threatened to sink the boat unless they were paid $1.5 million, CNN Europe reported, quoting a security official with the ship's insurer, Renaissance Insurance Group of Moscow.

The Arctic Sea, operated by the Finnish company Oy Solchart Management under a Maltese flag, left port in Finland on July 23 with a load of timber headed for Algeria. The next day the ship reported to Swedish authorities that masked, armed men boarded the vessel from a speedboat, and over the next 12 hours interrogated and beat crew members, smashed communications equipment, then left. Despite the alleged hijacking, Swedish authorities did not send a ship to check on the Arctic Sea, a fact that raises alarms and questions for Andrew Linington, a spokesman and 25-year veteran at Nautilus International, a London-based seafarers' union. "It's going through the world's busiest waterway, and nobody thinks to send out a naval vessel to see if it's O.K.," says Linington.

On July 28 the boat radioed Britain's Maritime & Coastguard Agency -- a communication protocol -- before heading south down the English Channel. Roughly 400 boats pass through the waterway each day, and there was nothing unusual about the 320-foot vessel's communication, agency spokeswoman Maggie Hill said.

The Arctic Sea was transporting an estimated $1.8 million worth of timber to the Algerian port of Bejaia and had been due to deliver the shipment on Aug. 4. Despite reports that the cargo belonged solely to Stora Enso, the Helsinki-based paper and package maker, company officials say that was not the case. "Out of the 6,700 cubic meters of wood on the ship, only 200 cubic meters are ours," Stora Enso

spokesman Lauri Peltola says. The cargo, he says, is a mix of lumber from UPM Timber, a Finnish competitor, and other lumber providers in the area. Ships and cargo are typically paired by brokers, and boats tend to be loaded up as fully as possible to save costs and increase efficiency.

Circumstances Still Murky

Africa has seen a significant increase in piracy off its eastern coast and in the Gulf of Aden, a high-traffic area that feeds the Red Sea and Suez Canal. In the first six months of 2009, 240 ships worldwide reported being attacked, up from 114 during the same period in 2008, according to the London-based International Maritime Bureau [IMB]. The Arctic Sea's alleged hijacking, however, happened a few thousand miles northwest, in the Baltic Sea. "I've certainly never heard of a ship being hijacked before in these waters," says Paul Gunton, managing editor of Fairplay 24, a London-based Web site that covers international shipping news.

At an Aug. 14 press conference, as the hunt for the ship was in full swing, the European Commission said that the Arctic Sea's experience had "nothing in common with traditional acts of piracy or armed robbery at sea," according to Reuters. Still, while the European hijackers may not have fit the mold of the now-common Somalian pirates, they certainly had the skills to commandeer a large vessel, says Nick Davis, chief executive of the Merchant Maritime Warfare Center, a London- and Yemen-based security firm.

Davis is skeptical that all the facts of the case will be uncovered in light of the complex international politics and diplomatic sensitivities already emerging. Despite the arrest of Estonian and Latvian citizens, Russia has not given either country information on the case, Bloomberg reported on Aug. 18. Swedish, Maltese, and Finnish authorities plan a joint formal inquiry to investigate the incident, which they called "aggravated extortion and hijacking," according to a press release on the Finnish National Bureau of Investigation Web site.

International Networks Face Tests From U.S. Courts – Third in a Series

This is the third in a series of posts that discuss the challenges now facing certain professional global networks. Specifically, we looked at an accountant's network, and two (2) cases that have affected how they operate now. Today, I conclude this series by discussing what all of this means to professional networks operating globally.

 

What lies ahead for International networks

There is nothing exceptional about many of the arrangements that were regarded in these two cases as constituting sufficient evidence to allow the "agency" claim to proceed to trial by jury. Networks will rightly object that, if the umbrella entities were to be shorn of all such functions, their ability to promote and safeguard the network brand in the interest of all members would be severely limited. Nevertheless, Parmalat suggests that claimants will be given added encouragement if an umbrella entity, rather than an external party, acts as arbiter between member firms, or gives the appearance of influencing the course or outcome of a member firm's engagement.

Of course, the umbrella entities faced a much higher evidential threshold on the motions which resulted in these two judgments than they would at trial. There they will be able to present evidence of member firms' autonomy and raise other matters which sit uneasily with the agency theory (such as the retention of profit by member firms). The ultimate evaluation of these factors will, however, now lie with the jury in those cases.

The real prize for U.S. claimants is the deep pocket of any member firm that might be attacked through the umbrella entity. It is to be expected that networks will have long sought to protect their members from the risk of being required to indemnify umbrella entities against potential vicarious liabilities. While member firms have recognized the risk of claims alleging their direct control over other firms, the claim against the U.S. firm in Parmalat demonstrates that member firms might also face claims in U.S. litigation involving (in effect) allegations of indirect control exercised through their alleged control of umbrella entities. The liability of the member firm in question is then wholly dependent on the issue of the umbrella entity's own vicarious liability. Pending the final outcome of the claims in Banco Espirito Santo and Parmalat, a member firm that is particularly influential within a network organization should be aware of the danger arising from any activity that might be capable of being presented as consistent with an allegation of control over the umbrella entity (for example through the actions of partners or executives who sit on the board of that entity). Firms may also wish to consider whether their insurance policies provide appropriate protection against claims based on their indirect control of other firms through umbrella entities.

The Banco Espirito Santo and Parmalat cases serve as a reminder that international networks, and leading member firms, continue to face vicarious liability risk in the U.S.. For so long as that remains the case, the current fashion for international integration may be unlikely to lead to true global partnerships or common ownership across the members of each of the large accounting networks. Networks will undoubtedly monitor future developments in order to gauge whether the effect of recent integrations has been to increase the opportunities for claimants to select the U.S. as a forum for litigation, and to balance this against any commercial advantage to be gained from establishing closer legal relationships between member firms in a highly globalised business environment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

International Networks Face Tests From U.S. Courts – Second in Series

(In this second installment in the three-part series, we will review two (2) cases in the U.S. Courts that have shaped the discussion on how accountants' global networks work.)

The Banco Espirito Santo case

In spring last year, in Banco Espirito Santo International Ltd v BDO International BV, the Florida Court of Appeal (Third District) overturned a judgment in favor of BDO International which had been made following a successful motion at the trial of claims in tort and contract against it and its U.S. member firm. The trial judge had found that the plaintiffs had failed to present sufficient evidence to succeed in their agency claim. However, the appellate court decided that, when seen in the light most favorable to the plaintiffs (the relevant test for the application being made), the evidence was capable of establishing the three requirements of an agency relationship so as to support a verdict in favor of the plaintiffs:

1. acknowledgment by the principal that the agent will act on its behalf;
   
2. acceptance by the agent of the undertaking; and
   
3. control by the principal over the actions of the agent.
   

The necessary evidence was chiefly located by the Florida Court of Appeal in the following:

• The objects of business set out in the Articles of Association of BDO International, which included the control and management of partnerships in the international association;
  
• The testimony of BDO International's secretary that it "co-ordinated and monitored" the member firms;
  
• The Member Firm Agreement ("MFA") signed by the U.S. firm. This stipulated that BDO International owned the intellectual property in the technical manuals containing the auditing standards and procedures which the U.S. firm was required to follow and the software it had to use, under the terms of the MFA, in all of its audits (therefore, including the audit that was the subject of the claim). The court also considered that the terms of the MFA "imposed operating directives and restrictions that extend far beyond those utilized in mere licensing agreements" (for example, requiring firms to assist in product development) and bore similarities to operations manuals distributed to mere franchisees; and
  
• BDO International annual reports referred to the quality control exercised over member firms.
  

The Parmalat decision

On 27 January 2009, a New York court refused a motion for summary judgment made by Deloitte Touche Tohmatsu ("DTT"), its U.S. member firm ("Deloitte U.S.") and the individual who was CEO of both entities, in defense of the class action by investors in Re Parmalat Securities Litigation which alleges violations of U.S. securities legislation. The Parmalat plaintiffs allege that DTT is liable for the acts of its supposed agent Deloitte Italy in auditing Parmalat, and that DTT is the alter ego of Deloitte U.S. and that the CEO is liable under the securities laws as a "control person". A strike-out motion (directed at the adequacy of the pleaded case) in respect of the allegation of agency was dismissed by the same court in June 2005.

The summary judgment motion argued that DTT was merely a secondary actor and, as such, not liable for Exchange Act violations in light of the Supreme Court decision in Stoneridge Investment Partners LC v Scientific-Atlanta Inc. The court rejected the contention that Stoneridge provides a defense for parties sued under U.S. securities legislation for the acts of their agents. The court also held that summary judgment could not be ordered here because agency was capable of being established by various pieces of evidence including:

1. the objects set out in DTT's Articles;
   
2. DTT's role in setting audit methodologies and stipulating software to be used;
   
3. the provision made in member agreements for DTT to review compliance with quality standards;
   
4. DTT's control over the acceptance of engagements including referrals from other members;
   
5. the use of DTT legal staff by member firms; and
   
6. the authority conferred on DTT's CEO role, by a practice manual, to arbitrate disputes between member firms, and the role played by DTT in arbitrating such a dispute over the content of an audit opinion in respect of a Parmalat entity. In the court's view, this suggested that DTT had the power to impose its will on a firm's professional judgment
   

The court repeated its strike-out decision concerning s20(a) of the Securities Exchange Act that DTT could be held liable for parties under its control, irrespective of whether it exercised specific control over them in respect of the particular engagement.

Deloitte U.S. and the CEO were also unable to persuade the court to dismiss the Parmalat claim for lack of evidence. The court found that there was sufficient potential evidence of Deloitte U.S. control over DTT, on the basis that its executives (including the CEO) occupy key positions at DTT, it contributes a significant portion of funding for DTT, and that there was evidence of influence over DTT's decision making.

In the third and last installment of this series, we will discuss what these cases mean, and the impact they have had on theses professional global networks going forward.

International Networks Face Tests From U.S. Courts – First of Series

(In this first of a series, we will discuss the background of how some global networks of professionals operate. In this series, we will specifically review the global network of an accountant firm.)

 

Two U.S. court decisions within the last 18 months have demonstrated the perils for international networks when member practices are sued in the U.S.. These decisions coincide with a period in which closer links are being forged within some of the largest networks.

 

Background

Traditionally, most large accountancy networks have operated as relatively loose associations of national firms, with membership regulated by a non-trading "umbrella" entity which does not own any interest in the member firms. In order to protect and enhance the international brand, the umbrella entity is typically given power to lay down professional standards to be followed throughout the network, and may undertake activities such as quality review, training, arranging staff transfers and client data sharing.

Since June 2006, two of the Big 4 networks have each announced their own plans for much closer legal relationships between some or all of the European member firms within each network. In each case, rather than creating an international legal partnership to take the place of the national firms, the new arrangements involve the establishment of a new LLP as a non-trading holding entity for the national firms which are to be trading subsidiaries.

These new structures exhibit two features that merit comment here:

1. Although under common ownership for the first time, the national firms will continue to trade separately from each other.
   
2. The geographical range of these new arrangements is regional rather than worldwide.
   

The majority of accountancy networks have not followed this example, although some have indicated that there will be closer relationships between firms at a regional level. Clearly, developments such as these are driven by commercial factors, but issues concerning legal risk are an important part of the background to these changes.

A risk that is particularly associated with network structures is that a member firm may become exposed to allegations that it is vicariously liable for the acts and omissions of other member firms. Although claimants have very rarely seen fit to chance their arm before a judge in an English court on such matters, the decisions of courts in the United States have provided some of the strongest indications of the legal risks involved in closer worldwide integration of firms within accountancy networks. While that much is predictable, the outcome of U.S. litigation in this field is proving to be less so. Over the last decade, U.S. claimants have often failed in their attempts to construct a case against a "deep pocket" member firm such as the U.S. firm, where that case is entirely founded either upon that firm's actual relationship (through the network) with the principal defendant firm, or on the representations made about that relationship.

Claimants have had more success in persuading U.S. courts of the viability of their cases against umbrella organizations. They typically advance their case on one or more of the following theories of liability (which have also featured in the claims attempting to fix member firms with liability for the faults of other members):

• the "alter ego" theory, in which it is argued that the international umbrella entity is so dominated by a member firm that it primarily transacted the member firm's business rather than its own affairs;
  
• the "agency" theory, in which it is argued that the member firm is acting on behalf of the international entity and is under its control;
  
• the "partnership" theory, in which it is argued that there is a single business carried out by the member firm and the international entity together. Alternatively, it may be argued that the international entity is in effect bound by a representation made by the member firm that they are in partnership, which the claimant had relied on when engaging the services in question.
  

Umbrella entities have been relatively successful in dismissing alter ego and partnership claims. However, in the last 12 months U.S. courts have made two decisions which have highlighted the dangers presented by agency allegations. In both cases, the substantive allegations of agency are now to undergo trial by jury.

In the next installment of the series, we will discuss two (2) major cases that have impacted the global accountants' network.

Brazilian Insurance Companies Prepare to Face Market Challenges

The Brazilian insurance market continues to be the largest in Latin America followed by Mexico, Argentina and Colombia. Despite its low participation in GDP, a time of regulatory transition and deterioration in the macroeconomic environment in the short term, it still presents significant potential for greater development once a consistent recovery in economic growth is observed, according to the Fitch Ratings report published.

The 'bancassurance' process has predominated in the market, as well as the strong presence of large national financial conglomerates, with a relevant participation of the main foreign insurance and reinsurance groups active in Brazil. The growth of the Brazilian market has been favored by greater economic stability and the increase in corporate and personal incomes, which has altered the consumption and savings habits of the population.

Fitch analysts observed that advances in the regulatory framework have been cautious. In their opinion, the effective breakup of the IRB-Brasil Resseguros (IRB) monopoly in the reinsurance market in 2008 is expected to bring progressive benefits and modernization to the industry over the medium and long term. Fitch believes that sector performance will continue to be affected by the slower resumption of local economic growth, due to deterioration of the investment environment and the economy, and the impact of the global financial crisis. In addition, the effects of smaller financial gains due to the return of the declining interest rate cycle are expected to negatively affect the earnings generated by insurers, even though they have maintained high ROA and ROE, around 3% and 20% at the end of 2008, respectively.

To mitigate these effects, the main Brazilian insurers have accelerated their search for greater operational efficiency, reorganizing their main processes and supplier cost controls, as well as streamlining their underwriting models. This has led to better and lower combined and operating margins, with the average of the 10 largest insurance companies having reached 96% and 84% in 2008.

Fitch also expects competition to intensify in some segments going forward, including those that are more relevant, such as pension funds, further pressuring the insurers' generation of earnings.

D&O Insurance In Germany - The New Legislation Arrives

Unlike in many jurisdictions, directors' and officers' liability insurance is not compulsory under German law. Nevertheless, D&O coverage is expected as a matter of good practice, as set out in the German "Corporate Governance Kodex" ("the Code"). Furthermore, the Code has for some time recommended that listed companies agree in their D&O policies upon an "adequate" deductible to be borne personally by the directors protected by the policy. By imposing a personal interest on the part of the directors concerned, it was sought to motivate them to avoid claims arising, although the question of what constituted an "adequate" deductible has remained vague.

In practice, many German companies have circumvented the requirements altogether, relying upon a standard form of derogation from the Code in their annual filings, with a statement that a deductible "would not improve the consciousness of responsibility" of their directors, or otherwise motivate them to avoid damage arising.

The position has now changed for directors of German stock corporations. Following a period of debate in the Bundestag (Parliament of Germany), the new Act on the Adequacy of Managerial Salaries (Gesetz zur Angemessenheit der Vorstandsvergutung - VorstAG) was passed on 18 June 2009. The new provisions will come into force immediately following ratification by the federal house, the Bundesrat, and subsequent publication in the German Federal Law Gazette (Bundesgesetzblatt).

The Act amends section 93 II 3 of the German Stock Corporation Act (Aktiengesetz - AktG), and requires that listed companies purchasing D&O insurance for their executives must impose a personal deductible to be borne by the directors equivalent to at least 10% of the relevant loss, up to an annual maximum figure calculated by reference to the fixed remuneration of the director from time to time. Practical guidance is to be found in the accompanying Reasons (Begrundung, BT-Drs 16/13433) issued by the legislator, which states that the required personal deductible shall consist of at least 10% of each loss, subject to an absolute annual cap which must be set at not less than one and a half times the annual fixed remuneration of the director. The aggregate cap is to be reviewed annually to reflect movements in the fixed element of the director's remuneration.

The requirements are to be applicable to all stock corporations, whether in fact listed or privately owned, although, under Germany's two tier system of corporate governance for such companies, only members of the board of directors (Vorstandsmitglied) are affected, and not supervisory board members (Aufsichtsratsmitglied).

The provisions will apply with immediate effect to all newly concluded D&O insurance contracts, while those already in existence are to be amended with effect from 1 July 2010 at the latest. There is a transitional exception in the case of those companies already obliged under an existing service contract to provide D&O insurance cover to the director without deductible. In those cases, the policy terms may remain unchanged until the appointment of the director, and the underlying service agreement, expire. The statutory maximum appointment term of a board member is five years.

Interestingly, the legislation does not prohibit directors from insuring their deductible exposure separately, leading to speculation that the reforms will simply give birth to a new line of business in the form of D&O deductible insurance. While responsibility for the premiums for such a product would have to be borne privately by the directors, there is nothing to prevent them seeking a commensurate uplift in their remuneration to cover the outlay. Furthermore, any obligation to disclose such an arrangement in corporate filings would require an amendment to the Code as it stands.

At the same time, the new Act on the Adequacy of Managerial Salaries also brings about an amendment to section 87 I AktG, which will now oblige the supervisory board members to ensure that the total remuneration of members of the board of directors is a suitable reflection of their tasks and performance, and of the performance of the relevant company. It requires that the usual ("ublich") remuneration of a director is not to be exceeded without specific reasons. Furthermore, in the case of listed stock corporations, the directors' remuneration has to be consistent with the sustained ("nachhaltig") development of the company, and the performance elements of directors' remuneration are to be assessed on the basis of several years, up to the entire term of appointment. Short-term performance measures are no longer acceptable. The new provisions also stipulate that the responsibilities of the supervisory board with respect to directors' remuneration may not be delegated to the general meeting.

The new remuneration and D&O provisions expressly do not apply to a private Limited Liability Company (GmbH).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Lloyd's Report Suggests Global Businesses Worry About Wrong Risks

(This post was written by colleague Robert O'Connor, London editor with A.M. Best. He can contacted via eMail at Robert.OConnor@ambest.com)

Business executives around the world may be more worried about risks that don't pose a threat to them than those that do, according to Lloyd's.

High among the concerns of businesses are external risks such as lost orders and foreign exchange movements, Lloyd's said in a report. Lower on the list are such internal issues as corporate liability and damaged reputations.

The report, "Risk Priorities and Preparedness," was released jointly with the Economist Intelligence Unit. Lloyd's described it as one of the largest surveys ever conducted on risk. It sought the views of 570 board level-executives around the world on 20 risks. Broad risk categories included the environment and health, business and strategy, natural hazards and political risk, crime and security.

"Since late 2007, the contraction of credit in financial markets and the subsequent economic downturn has had a dramatic impact on corporate confidence," the report said. "Across the full range of regions and industries, companies are postponing investment, cutting costs and retrenching into core markets."

Business executives should be aware of the actual risks they face, Lloyd's Chairman Peter Levene said. "While good risk management will help to minimize internal factors, they should recognize that they need to extend their thinking outwards to their suppliers, customers and other stakeholders to ascertain how their behavior will resonate with the company itself," Levene said in a statement.

Levene recalled last year's Lloyds 360 Risk Insight report, which he said warned of the international spread of "a U.S.-style compensation culture."

He said businesses should not ignore such long-term perils as climate change. The current report "will form the basis" of a new interactive global risk map that will be released next year, according to Lloyd's.

The document pointed to what it said is the growing role within organizations of risks managers. The importance of someone who can keep a companys reaction to risk sensible and accurate is essential," Levene said. "Risk is not a dirty word . We just need to understand it to manage it properly.

Businesses in China and Southeast Asia are likely to place particular emphasis on environmental and health risks, the report said. Political risk and crime were given more priority in the Middle East, North Africa and Latin America.

Lloyd's has a current Best's Financial Strength Rating of A (Excellent).

Directors’ Conflicts Of Interest - Getting It Wrong Can Cost Millions

The Companies Act in the United Kingdom has codified the duties directors owe to a company, one of which is to avoid situations where the director has or can have a direct or indirect interest which conflicts or may conflict with the company's interest. Directors are obliged to declare their interest in any transactions or arrangements with the company and failure to comply with these duties can cost directors dearly. The Courts have recently ordered a director guilty of a serious conflict of interest to repay over £2 million to the Company.

In this case, the two parties were equal owners of Palmier plc and were directors of the business which imported women's clothing. Director A also owned another company which acted as agent for Palmier organizing and paying for shipping of goods to Palmier and being paid a commission for its services (the "Agent"). Palmier found itself in financial difficulties and following negotiations with a large creditor agreed to use funds it expected to receive as the result of a Value Added Tax ("VAT") rebate amounting to approximately £1.6m to pay the sums due. On the day the VAT rebate arrived in Palmier's account it was immediately transferred to another account and the company then went into liquidation. Director B brought an action under Section 212 of the Insolvency Act 1986 against Director A on the grounds that he had misapplied company money and breached his duties to the company.

It was argued that Director A had breached his duties to Palmier by causing the VAT rebate to be transferred from the company's account to the Agent's account and it was also argued that Director A had secretly paid excessive commissions to the Agent for his own benefit.

The court ruled against Director A finding that he had been guilty of a conflict of interest and had acted dishonestly. The Judge declared that Director A was well aware that his duties as a director of Palmier and of the Agent placed him in a conflicting position and that he had fixed commission rates for the Agent which had not been properly declared to Palmier resulting it suffering significant losses. In addition, it was found that he had instructed the transfer of the rebate payment to the Agent and that the transfer was not made for purposes connected with Palmier's business. In essence he was attempting to "milk" Palmier to look after his other business interests and concealing from Palmier his true relationship with the Agent and the profits the Agent had been making.

On that basis Director A was ordered to have the Agent repay £927,000 in relation to overpayment of commission and to ensure that the sum of £1.6 million the VAT rebate was also restored.

This case should emphasize to directors the need to make sure they are open and transparent in all of their dealings with their Company and that any potential conflicts have been properly notified to the board and approved prior to any action being taken.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Directors and Officers Liability insurance develops in India

Directors and Officers liability insurance (D&O) has become the fastest evolving and most dynamic insurance policy in India. Though the policy was drafted by Lloyds Insurers in the 1930s for an American company, its importance was virtually unknown in Asia and particularly in India for a long time. Only in the last two decades, when overseas investments started flowing into the country, had this product become quite visible and corporations took note of it.

Pharmaceuticals, airlines, IT software and banking were the most crisis prone sectors in the last four years. D&O policy does not belong to a company, even though the insurance is generally bought by the company for the benefit of directors and officers. It is a personal policy belonging to each and every director and officer of the corporation and its subsidiaries.

In commercial crime, internal fraud is on the rise in every country, which is a common development when economic conditions are poor. An increasing problem is the white collar crime involving enormous cost for a company. Company directors believe that absence of any reported fraudulent activity means there is no fraud within and fail to consider the indirect and incidental costs. The most common problem is misappropriation of assets through fraudulent disbursements.

Of crime losses seen by insurers, about 80 per cent came from employee theft and the balance mostly from premises and forgery coverage. The Commercial Crime policy offers a more comprehensive coverage than the traditional fidelity guarantee policy and covered loss caused by unidentifiable employees and loss caused by an employee acting in collusion with a third party.

First charges brought under the UK’s Corporate Manslaughter and Corporate Homicide Act 2007

This story has been reported in many news sources, and should be of particular interest to those companies with operations in United Kingdom. The first ever charge of corporate manslaughter brought under the Corporate Manslaughter and Corporate Homicide Act 2007 (the 2007 Act) was due to be heard yesterday in Stroud Magistrates Court. The case got off to a bit of a false start, however, as no pleas were entered and the case was referred to Bristol Crown Court. The preliminary hearing was due to begin on Tuesday 23 June where the court will set the timetable for the case. The judge will direct the date on which the prosecution case is to be served, when the defense statement is to be served and when the Plea and Case Management hearing will take place.

Cotswold Geotechnical Holdings Limited is the company being prosecuted, in relation to the death of one of their employees, Mr Alexander Wright. Mr Wright died on 5 September 2008 while taking soil samples from inside a pit which had been excavated as part of a site survey. The sides of the pit collapsed, crushing him to death. Mr Peter Eaton, a director of the company, has been also charged with the common law offence of gross negligence manslaughter, and with a breach of Section 37 of the Health and Safety at Work Act 1974 (HWSA). Aside from the corporate offence, the company has also been charged with a failure to discharge its general duties under section 2 of the HWSA, which requires employers to ensure, so far as is reasonably practicable, the health, safety and welfare at work of employees.

As the first ever prosecution for corporate manslaughter, this will undoubtedly be a landmark case. The company being prosecuted in this instance is however a small, family company where the directors are closely involved with the day-to-day running of the organization. It is therefore doubtful that this case will provide much in the way of significant insight or understanding on how fines under the 2007 Act will be applied to larger corporations. The reputational damage associated with a conviction for corporate manslaughter is arguably the greatest deterrent to companies, and perhaps the most important aspect of this case will be whether, if convicted, the company is made subject to the "publicity order" provided for in the 2007 Act. A publicity order will require a company to advertise their conviction and the penalty imposed. Of course, with or without a publicity order, there will almost always be a great deal of publicity surrounding any conviction for corporate manslaughter, as can be seen from the press coverage to date of the case against Cotswold Geotechnical Holdings.

Arbitration In Australia - Winds Of Change Or Merely A Breeze?

This article is courtesy of Mr. Ron Salter and he can be contacted as follows:

DLA Phillips Fox

140 William Street

Melbourne Victoria 3000 AUSTRALIA

Tel: +61 39274 5000

Fax: +61 39274 5111

E-mail: clare.buttner@dlaphillipsfox.com

Website: www.dlaphillipsfox.com

Phillips Fox has changed its name to DLA Phillips Fox because the firm entered into an exclusive alliance with DLA Piper, one of the largest legal services organisations in the world. We will retain our offices in every major commercial centre in Australia and New Zealand, with no operational change to your relationship with the firm. DLA Phillips Fox can now take your business one step further - by connecting you to a global network of legal experience, talent and knowledge.

 

For the better part of a century - or perhaps even longer - arbitration has been the preferred method of dispute resolution in the maritime industry. Just as the concept of 'look and sniff' arbitration developed for commodity quality disputes, arbitration was presumably seen as the ideal means of dispute resolution, involving arbitrators appointed from within the industry seeking to resolve disputes expeditiously and inexpensively without the need for legal intervention.

In this article we look at the current state of affairs for arbitration and the debate surrounding legislative reform.

The changing face of arbitration

In a paper delivered at a Chartered Institute of Arbitrators International Dispute Resolution Conference in Kuala Lumpur last year, and published in (2009) 75 Arbitration 231, Bruce Harris, a leading maritime arbitrator, reflected upon his years of experience in maritime arbitration in London. Harris stated: '45 years ago, most arbitrations were conducted by the parties themselves, their brokers or agents, but not by lawyers. Each would appoint an arbitrator. The claimant would send its nominee a short letter setting out its claim accompanied by the documents it relied on.

The claimant's appointed arbitrator would send that on to his counterpart who, in turn, would pass it to the respondent asking for comments by way of defence and any documents the respondent relied on, and those would then be sent back via the arbitrators to the claimant who would have a right of reply; and the arbitrators would then proceed to their award.

In this very quick and simple (and cheap) procedure there were no, or at least very few, requests for further information and no real question of any type of discovery. Procedural questions were happily ignored, as very often were the subtleties of legal argument. Whilst the arbitrators were bound to apply English law as best they could, they normally reached a commercially sensible decision which, happily, would usually be in line with the law.

In the absence of something going seriously wrong, no one would challenge the arbitrators or their proceedings; and there would be no question of arbitrators' conclusions being reviewed by the judiciary unless one party thought there was a real question of law involved and asked the arbitrators to state their award in the form of what was called a "special case" for the opinion of the court.

This meant that the arbitrators did not generally need any legal expertise either to run these informal proceedings or to reach their conclusions. If they found themselves in difficulty on the law, they would often consult a solicitor or appoint a lawyer as third arbitrator or umpire.'

Of course, as Bruce Harris himself pointed out in his paper, much has changed in the 45 years since he commenced his involvement with maritime arbitration. In particular, he observed that today's cases were often far more complicated, both on the facts and on the law than they had been in times gone by, and that conduct of arbitration had became far more elaborate and legalistic. Nevertheless, it is fair to say that arbitration remains the dispute resolution mechanism of choice in the maritime industry, particularly for disputes arising under charter parties and contracts of affreightment, for disputes arising under ship building contracts, and for salvage disputes.

A need for legislative reform?

In Australia, with its federal system of government, separate arbitration regimes exist in parallel for international arbitration and domestic arbitration. While the states and territories are concerned with domestic arbitration, the Commonwealth Government has a constitutional responsibility for international arbitration.

The relevant Commonwealth legislation is the International Arbitration Act 1974 (Act). As a result of a cooperative effort in the early 1980s, the states and territories each operate under legislation which is fairly uniform, but not entirely so.

The Standing Committee of Attorneys-General (SCAG), which involves state and territory Attorneys-General and the New Zealand Minister of Justice, has been discussing changes to the uniform state and territory legislation for quite some time without moving forward. However, with increased agitation for change emerging from a number of sources, not least Chief Justice Spigelman of the New South Wales Supreme Court, SCAG, at its last meeting in April 2009, agreed to the preparation of new uniform commercial arbitration legislation based on the UNCITRAL Model Law on International Commercial Arbitration, 'supplemented by any additional provisions as are necessary or appropriate for the domestic scheme'. The stated aim of the draft model Bill is to give effect to the overriding purpose of commercial arbitration, which is to provide a method of finally resolving disputes that is quicker, cheaper, and less formal than litigation.

A little earlier, in November 2008, the Commonwealth Attorney-General, the Honourable Robert McClelland announced a review of the Act, and his department published a discussion paper. The paper invited the making of submissions by interested parties, and despite the fact that a relatively short time frame was given for those submissions, some 24 separate submissions were made. Each of those submissions has been taken into account, and the process for the drafting of new legislation has been put into place. The last news we have had is that the Attorney-General's department is hoping to have the legislation ready for the spring session of Parliament.

The November 2008 discussion paper posed eight major questions and also invited other observations. Many of the questions posed received either unanimous or near unanimous responses, but two particular issues, which might be described as territorial disputes, brought a considerable divergence of opinion. One of these issues was whether the Act should allow for the appointment of an arbitral institution to perform a number of the functions set out in the UNCITRAL Model Law, and the other was whether the Federal Court of Australia should have exclusive jurisdiction in matters concerning international arbitration. The latter issue, in particular, provoked a wide divergence of views, with the state and territory Chief Justices pressing strongly for the retention of the jurisdiction of their respective courts.

For the Australian arbitration practitioner, and participants in the maritime industry involved with arbitration, the outcome of the various discussions and debates will be of interest. Whatever side of the argument a particular interest group supports, it is apparent that the common thread binding reform of the domestic and international regimes is one of improving both the substance and the perception of arbitration as a dispute resolution means.

However, it remains to be seen whether the reforms will occur soon, or whether we will be left waiting for several years for any action. The likelihood is that the winds of change will blow through the international arbitration regime while a gentle zephyr will waft through the domestic arbitration regime for a number of years.

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.

Australia Climate Change and D&O Implications

(Note:    I have been away from this post for a few months attempting to develop a more robust site with information from around the world. To date, the primary information available has been with the assistance of colleagues and partners in United Kingdom and EU countries. For the most part, many of my Clients have the bulk of their exposures in that part of the world, therefore, my focus is greater. Recently though, I have been able to develop greater issues-related information from other countries. I hope to continue to develop this broad base of information on risk for you.)

 

The legislation in Australia for the Carbon Pollution Reduction Scheme highlights the need to consider carefully the scope of D&O insurance policies.

The Bills introduced into Australian Parliament to implement the Carbon Pollution Reduction Scheme will impact directly a large number of entities and their directors and officers. There will also be a broad, indirect impact when emissions trading starts. The CPRS Bills draw attention to key areas of D&O insurance policies.

Liability of executive officers and insurance for pecuniary penalties Under Part 20 of the Carbon Pollution Reduction Scheme Bill 2009, 'an executive officer will contravene a civil penalty provision if they are involved in a contravention by their company'. This makes executive officers personally liable for misconduct of the company if they have been reckless or negligent. The result may be significant pecuniary penalties imposed on the executive officer.

The Consequential Amendments Bill also extends the liability regime under the National Greenhouse and Energy Reporting Act 2007. Part 4 of the NGER Act will no longer be limited to liability of chief executive officers. It will, like the CPRS Bill, soon apply to a director, the chief executive officer, the chief financial officer and the secretary of a company. This would appear to include non-executive directors.

Traditionally insurers in the Australian D&O market have excluded liability for fines and penalties under D&O policies. Recently however there has been a move by some insurers to provide cover for civil penalties in some circumstances. It may be against public policy to cover officers for civil penalties where there has been a willful or deliberate breach of duty. On the other hand, vital cover may be available for officers who have only been negligent. It is recommended that companies and their directors may wish to consider whether their D&O policy provides cover for pecuniary penalties and whether that cover will extend to potential liability under the CPRS and NGER Act.

The new regulator and insurance for investigation costs

The Australian Climate Change Regulatory Authority Bill 2009 establishes the Australian Climate Change Regulatory Authority, which will be responsible for administering the CPRS, the Renewable Energy Target and the National Greenhouse and Energy Reporting System. Since climate change is one of the Federal Government's key priorities, it may well become a powerful regulator.

When ASIC launches an investigation, the company and its directors can incur significant costs. The market for D&O insurance covering investigation costs has grown in recent years. Some policies will now cover directors for their costs in responding to an ASIC notice or attending an examination by ASIC, even if they have not been accused of any wrongful act. A more extensive policy may even provide cover when no formal notice has been served but the director is nevertheless required by the regulator to co-operate in some manner. When the Climate Change Authority exercises its powers, directors may need to look to their insurer to cover investigation costs.

Liability linked to the company and insurance for outside directorships and JVs

In its current form the CPRS Bill allows for transfer of liabilities and the nomination of a joint venture company to be the responsible entity. It is possible that a company may be liable for the control of a facility by an entity which is not a member of the company's group. An executive officer can be personally liable for their company's contravention of a civil penalty provision in the CPRS. That liability is linked to the company and not the operating entity.

The Government is continuing to consult with key stakeholders about controlling corporation liability and mechanisms to transfer that liability within corporate groups. For directors who hold outside directorships and responsibility in relation to unincorporated joint ventures, however, it may be time to consider carefully the scope of their D&O policy as it applies to these issues. Some policies do not provide cover for outside directorships unless specifically requested. Others may automatically cover directors nominated to the boards of other companies but may exclude joint ventures.

Pollution exclusions

Finally, many insurance policies contain an exclusion relating to liability arising from the release, discharge or escape of pollutants. These are generally broadly worded exclusions. They could go so far as to impact cover which may otherwise have been available for liability under the CPRS.

Directors may wish to have frank discussions with their insurer about cover in relation to the CPRS. At a minimum, directors may want to consider a D&O policy which provides cover for "pollution defense costs". They may also consider seeking that cover without a sub-limit of liability. A more extensive policy may even cover shareholder claims arising from pollution issues.

Conclusion

Subject to their passage through Parliament, the Bills establishing the CPRS will herald a new era in corporate responsibility. It is yet another reminder of the importance of considering D&O insurance in the context of the company's broad risk management framework.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Arbitration clauses and anti-suit injunctions

This topic is important to those of you with policies in UK and EU. It was provided by CMS Cameron McKenna LLP in London, and contains important guidance on this clause within insurance contracts. The entire article follows:

An English court will, in appropriate cases, grant an anti-suit injunction in favour of arbitration to preclude a party from pursuing litigation in another jurisdiction, provided that the matter is not governed by EU Regulation 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (and the Lugano Convention as well) (the "EU Regulation"). Where a dispute is governed by an arbitration clause which identifies the seat of the arbitration that court has exclusive supervisory jurisdiction over the arbitration. As such, any challenge to any award of the arbitration must be brought in that court alone, and an English court will, provided the EU Regulation does not apply, order that the party must not continue proceedings in another court. 

In a recent case, claimants sought an anti-suit injunction in this situation. The claimants had benefited from a favourable costs award made by an arbitral tribunal. The defendant challenged the costs award in the Indian courts. The claimants brought proceedings to enforce the award in England. They also sought to restrain the defendant from continuing with the Indian proceedings through an anti-suit injunction.

The court's judgment can be summarised as follows.

1. The underlying claim concerned alleged breaches of a shareholder agreement. The agreement contained an arbitration clause whereby all disputes were to be referred to arbitration in accordance with ICC Rules. The governing law of the agreement was Indian law.
 
2. The Arbitration Act 1996 states that the seat of the arbitration means the juridicial seat of the arbitration to be designated by the parties or the tribunal or other institution if so authorised by the parties. If there is no such choice, it is to be determined having regard to the agreement of the parties and all the relevant circumstances.

3. The seat of the arbitration designates the court which has jurisdiction to supervise the arbitration, including the enforcement of awards.

4. Seat is not the same as venue - the two places may be different.    

5. In this case, however, the fact that arbitration clause stated that the venue of the arbitration was to be London and that it would be conducted in English was used by the court to reach the conclusion that the parties had identified London as the seat of arbitration.

6. The ECJ had decided in the West Tankers decision that anti-suit injunctions were not permitted under the EU Regulation and that this applied to proceedings regarding the enforceability of an arbitration clause (for our law now on that decision, please click here). In this case, it was conceded that the EU Regulation did not apply. Therefore they did not preclude the court from granting the anti-suit injunction.

7. The court was unable to reach a decision on the injunction itself because there were some questions of fact on which evidence was required (for example whether or not the claimant had in fact already submitted to the Indian court).

The decision shows, amongst other things, that the English court is still willing in matters outside the scope of the EU Regulation to grant anti-suit injunctions in appropriate cases. One such case is where the other party is seeking to circumvent an agreed arbitration clause through a court other than the court of the seat of the arbitration.

Further reading: Shashoua & Others v Sharma [2009] EWHC 957 (Comm)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. There are a number of qualified firms with experience of advising firms on governance and risk management arrangements, as well as representing both organizations and individuals involved in FSA investigations and enforcement. You should seek their counsel on specific issues.