De Beers Wins London Court Case – Judge Also Finds That Soc Ombudsman Erred
March 02, 07The Court has spoken. The Honorable Mr. Justice Henderson in the London High Court has dismissed all allegations made by
The Court was very decisive and clear. Says Justice Henderson: “In my judgment the application capping mechanism is in principle a perfectly reasonable method of matching supply with demand for DTC to have adopted.” The judge found that the use of these mechanisms was fully in accordance with the SoC documentation and contractual obligations. He also believes the DTC has a wide scope to introduce tools and mechanisms that advance the SoC objectives, even if not specifically provided for in the SoC documentation.
In their wildest dreams,
A few months ago, we had warned that if the DTC were to lose this case, a precedent would have been set, since it would imply that the entry levels of all Sightholders were illegally established. Many more lawsuits could possibly be based on such judgments. The odds appeared squarely against the DTC; its very own Ombudsman had already issued a verdict that the use of the "capping mechanism" had been in violation of the SoC documentation and, indeed, represented a breach of contract. By allowing the case to proceed, assuming that a settlement might have been possible (and that is, of course, only an assumption), the DTC engaged in a classic exercise of brinkmanship. The company took a (calculated?) risk. It wanted a judicial review of its allocation system – and was prepared to take a chance.
But the risk paid off. In a 36-page verdict, Justice Henderson displayed a thorough understanding of the 16 stages of the DTC’s assessment and allocations model. He also showed a thorough understanding of the objectives of the SoC Policy Statement, and he delivered a first judicial review of SoC’s rough distribution model. The DTC was found to have acted fully within the terms of its contract with the Sightholders.
The DTC itself responded to the verdict with restraint. In a short statement, the DTC says to be “pleased that the Court has rejected all of the allegations made against it. The judgment is clear-cut and definitive as to the integrity of the allocations process, the DTC's decision-making, and the SoC strategy. Furthermore, we are gratified that SoC has, once again, withstood rigorous scrutiny in the context of the allegations made - and dismissed - by the Court.”
In an attempt to be reconciliatory to its client
We had written in a previous article that a ruling against
Though the Ombudsman was not on trial here, the judge did devote a whole section in his judgment to the Ombudsman’s decision, politely saying, “I must confess that I find … part of the Ombudsman's reasoning difficult to follow, and I must respectfully say that I disagree with his conclusion.”
Before looking at some of these points in more detail, it must be said that this victory for De Beers has enormous consequences: the judge has actually found that De Beers should be allowed – and is allowed under the contract with Sightholders – to interpret some clauses in quite a broad manner. The judgment is widening, rather than narrowing, the range of maneuverability of the DTC under the contract.
Judge Allows Wider Decision-Making Discretion to DTC
Much, if not most, of the trial focused on Paragraph 2.4 of the DTC Policy Statement that states: “Subject to current market conditions, DTC will use reasonable endeavors to meet applications for those boxes placed by Sightholders at each Sight taking into account: (a) the requirements of DTC's other Sightholders; (b) the Sightholder's level of satisfaction of the Sightholder Criteria as compared with that achieved by other Sightholders, (c) the Sightholder Considerations, and (d) the aggregate value and nature of goods requested by the Sightholder and indicated by the DTC as those it intends to make available for inspection.”
Narrowing down the case to its essence, the judge says that
“Subject to these relatively wide constraints, DTC has complete discretion as to the method of meeting applications which it chooses to adopt, and Sightholders are not entitled to complain merely because they think that a different or better system might have been chosen. I would add that the degree of latitude given to DTC is hardly surprising, bearing in mind that the new SoC system was put forward by DTC, and that it replaced a previous system where allocations were made at DTC’s discretion based on their assessment of commercial considerations.”
That is quite intriguing reasoning. It implies that the DTC had carefully crafted wording to give itself maximum latitude, while the market (and probably the Ombudsman as well) assumed that the purpose of the agreement, as agreed by the European Commission (EC), was to be a precise and restrictive as possible. It may well be that court is giving the DTC greater space for discretion than the EC intended, and that the Ombudsman has, indeed, correctly interpreted the original intent of the SoC documents.
The judge’s approach is almost of a holistic nature, and he views individual provisions in the context of what SoC is all about. Says the judge: “It is also relevant that paragraph 2.4 is contained in a document headed ‘Policy Statement’, which begins with a statement of the objectives which it is intended to reflect. Those objectives are ‘to encourage long-term growth in the retail market and the sustainable increase of rough diamond demand’. The introduction to the Policy Statement goes on to say that 'these objectives can only be attained if the industry meets the requirements and expectations of consumers’. Thus, there is a clear statement of the purpose that the Policy Statement is intended to promote, and the detailed provisions which follow should, if possible, be construed in a way that gives effect to that purpose. The focus of the stated purpose is on the future rather than the past, and on the long-term encouragement of consumer-led demand in the retail market.”
Why was that reference needed? That became evident when the judge says that “demand for rough diamonds by Sightholders normally exceeded supply, and sometimes did so by very large margins. It was therefore impossible for DTC to meet the majority of applications in full, and some machinery for matching supply and demand had to be found. One way of doing this is by placing a cap on applications. There is no express reference to the capping of applications in paragraph 2.4 of the Policy Statement, and at an early stage in this litigation it appeared that
This seems to me to reflect both the essence and magnitude of the DTC’s victory: the judge not only agreed to the introduction of the “external factor” in the decision-making process in SoC, and believed it was o.k. to introduce a "capping mechanism" element. But he also clearly implied that whatever mechanism is not specifically prohibited is clearly allowed at the DTC’s option.
“In circumstances where demand exceeds supply, there has to be some machinery for cutting down applications, and prima facie any reasonable machinery for that purpose will satisfy the criterion [the measures other Sightholders requirements]. The choice between possible methods of achieving that end is for DTC alone, and as I have already pointed out paragraph 2.4 affords DTC a good deal of latitude. I agree …that the limits on what DTC may choose to do are set by considerations of reasonableness.”
The Initial "Capping Mechanism"
Was it also proper in July 2003, when SoC first was launched? The judge considered that question separately as part of the transition between the previous (so called discretionary) Sight system, where decisions were made by a DTC-allocation committee, and the computer-allocation model based on SoC criteria.
Says the judge: “In my judgment such a [capping] procedure cannot possibly be characterized as unreasonable, and still less as so unreasonable that it fell outside the range of options reasonably open to DTC. The obvious starting point for the new system was the status quo, if only to avoid disruption and to provide Sightholders with a reasonable expectation of continuity in their supplies. The object of SoC was to provide a new system for the future which would operate in a transparent way and by reference to objective criteria. The object was not to remedy possible past injustices. In my judgment clear and specific contractual language would have been needed in order to make it clear that DTC was obliged to start SoC with a fresh assessment of the requirements of Sightholders completely uninfluenced by their previous purchasing history.” In the absence of such clear prohibition, the use of historical data was thus allowed.
[As a footnote, one might add that, apparently, the SOC will abandon the capping mechanism for the next contract period. Whether it is because of the Jayam action or because the DTC concluded it wasn’t necessary is something we may never know.]
Reliance on Ombudsman Mechanism under Cloud
Today is the morning after the verdict. A most unusual situation has now arisen. The SoC documentation designates the Ombudsman as the vehicle for dispute resolution between clients and the DTC. The possibility that the DTC would refuse to accept an Ombudsman’s finding was never really envisaged – certainly not by the EC.
The judgment comes as a shock to Madhu Mehta and his family.
In the meantime, in a new DTC-EC agreement, the Ombudsman’s powers have been widened. In a most complicated manner, the Ombudsman will filter Sightholder applications before they are forwarded to the DTC.
We have raised serious doubts about an Ombudsman being both part of the executive part of the allocation system and also part of the judiciary. If problems arise because the Ombudsman’s filter doesn't work correctly, how can an applicant then proceed and file a complaint with the Ombudsman? It doesn’t make sense – and it isn’t proper governance. But that is not the focus of this article.
I wonder what the Ombudsman should do after first seeing that the DTC repeatedly ignores his recommendations and then hearing that a London High Court has declared him simply wrong. Maybe it is time for Mr. Gleeson to render his resignation because his role may have made him, in fact, irrelevant? The DTC can accept his findings at will and ignore those it doesn’t like, taking a chance in court.
In the aftermath of the court case, I cannot see any Sightholder still wanting to use the good offices of the Ombudsman to resolve differences with the DTC.
The judgment is very detailed and very thorough. It is hard to fault the judge on his understanding of SoC – he knows the system. It seems that he never considered properly, or at all, the “legislative history”, if I may use this term in this context, of SoC. It was negotiated with the EC, the latter demanded changes, the EC never intended it to be as broad as the Judge seems to think it should be. The Judge clearly understands SoC; but, reading his 36-page judgment over and over again, he fails to understand “where it all came from”. I think that this is also the reason for his difference of opinion with the Ombudsman; Mr. Gleeson knows exactly what the EC’s intentions were behind each paragraph in the SoC documents.
We assume that
It is not for me to determine whether there are merits for an appeal. In the last High Court hearing of this case, in response to a question by the judge, both sides said they would appeal a judgment against them. So merits may not even be an issue here.
At this point, the DTC has all reasons to be jubilant. Its restraint in its initial reaction is commendable. What it means to the industry is too early to tell – it all depends on how the DTC is going to use the added leeway the court has given it.
And the Ombudsman? Maybe it is time for Mr. Gleeson to speak up and face the industry – to tell his side of the story and to restore the confidence in his office and recommendations, which have been so deeply bruised by the High Court. If the Ombudsman will lose his standing in the industry – the new tasks entrusted to him by De Beers will merely be viewed as an added bureaucratic nuisance rather than as providing meaningful extra protection ensuring the integrity of the allocation system.
Have a nice weekend.