UK: Weekly Update - A Summary Of Recent Developments In Insurance, Reinsurance And Litigation Law - 08/11

Last Updated: 7 March 2011
Article by Nigel Brook

This Week's Caselaw

Argo v Liberty

Breach of warranty, waiver and affirmation/damages for misrepresentation

A vessel was purchased for scrap and was to be towed as a dead ship from the US Gulf to India. Insurance was purchased for the journey. After the vessel sank, cover was declined and litigation commenced in the US. After the insurer won in the US courts, a new claim was brought against the insurer in England. In the course of the English proceedings, the insurer raised two new defences (in addition to the defences already raised in the US proceedings) - namely, breach of a warranty in the policy that "warranted no release, waivers or "hold harmless" given to tug or towers" and also that it was entitled to avoid because of misrepresentations. Mackie J held as follows:

  1. There had been a breach of the hold harmless warranty. He rejected an argument by the insured that the warranty should be subject to an implied condition that it is not to apply where the insured accepts contracts limiting the liability of a tug in accordance with standard practice. The insurer could not be taken to know about the standard form or to have agreed to subject the express wording of the warranty to the terms of that standard form.
  2. However, the insurer had, on the facts, waived by estoppel its right to rely on the breach of warranty. Although the insurer had reserved the right to rely on additional points to those pleaded in the US proceedings, that had only been subject to new information coming to light. Here, the insurer had been aware of all the defences which it could raise at the time of the US proceedings. By not raising the hold harmless warranty defence in the 7 years between the US and the English proceedings, it had represented by conduct to the insured that it would not rely on this defence. Reliance had been placed on that representation and it would be unfair to allow the insurer to go back on that representation now.
  3. The insurer had also elected to affirm the policy and so could not avoid for misrepresentation or non-disclosure. Here, the insurer was refusing to pay by relying on rights under the policy. Nor did it assist the insurer to argue that its US lawyers had not considered the issue of avoidance: "Liberty might not have applied its mind directly to the avoidance issue but the test is objective". Although the failure to return the premium was said to not be determinative, it was nonetheless a "powerful factor", especially where the premium was high and so "there would be a reason, other than clerical inefficiency, for insurers to retain it". It was also accepted that silence has to be significant to amount to an election - but here there had been almost seven years of silence.
  4. The insurer claimed that it was entitled to damages for misrepresentation if it was no longer entitled to avoid. Mackie J accepted that HIH v Chase Manhattan [2001] establishes that a claim for damages for misrepresentation based on section 2(1) of the Misrepresentation Act 1967 could be made in the context of a contract of insurance. The claim for damages was not, therefore, "bad law". However, he suggested that the Court of Appeal should decide whether such damages are available where the right to avoid has been lost. Nevertheless, he stated that: "I will decide only that on the facts known to me about this case the claim for damages which may in theory be open to Liberty will not be available where the right to avoid has been lost by avoidance. If it is not just for Liberty to be able to avoid it is not just for it to be able to receive damages equivalent to the benefit it would have received from avoidance".

Melinda Holdings v Hellenic Mutual

Whether claimant entitled to cover under war risk policy/sue and labour clauses

The claimant's vessel was arrested by the Port Suez Court in Egypt in 2008. The defendant insurer accepted that the vessel was a constructive total loss and that prima facie there was an insured cause of loss (capture, seizure, arrest, restraint or detainment) under the war risk policy. However, the insurer sought to rely on two exclusions in the policy:

  1. Exclusion of claims arising out of "ordinary judicial process". In this case, the arrest was a purported executory arrest in respect of a judgment debt owed by two defendants, Fonderance and Seama to the Port Said Court in respect of unpaid court fees. Burton J accepted that there was no connection between Fonderance and Seama and the vessel or the claimant and therefore the arrest of the vessel had not been justified. The Court had not been "acting bona fide as an independent judicial body. There was effectively extortion by the State under a veneer of court process. The Port Suez Court, through its judicial and quasi-judicial powers, was acting piratically: just the risk that is intended to be covered by this insurance".
  2. Breach of the sue and labour clause. Burton J rejected this argument too. Philips LJ in State of Netherlands v Youell [1998] made it clear that the Marine Insurance Act 1906 requires breach of the sue and labour duty to be the proximate cause of loss before an insured will forfeit his cover. He said that this also applied to contractual sue and labour clauses which replicate the statutory duty. However, the position is less clear where the contractual clause is in different terms. In this case, the sue and labour clause provided that: "In the event that an Owner commits any breach of this obligation, the Directors may reject any claim by the Owner against the Association arising out of the occurrence or reduce the sum payable by the Association in respect thereof by such amount as they may determine". Colman J in The Grecia Express [2002], when considering this type of clause, held that "its construction is at large and does not need to be identical to that of similar words in the statute, unless there is some compelling reason for the meanings to coincide". Burton J said that it was "at least strongly arguable" that the discretion referred to in the clause replaced the proximate cause test. However, he was not required to decide the issue since there had been no breach of the clause.

The sue and labour clause extended the duty to the owners' "agents" and Burton J (although, again, he did not need to decide the point), was unpersuaded by an argument that "agents" did not include lawyers but instead meant only the Master and crew. In any event, the judge held that there could be no criticism of the conduct of the lawyers (or the claimant) in this case.

R v Forsyth

Supreme Court rules on appeal against allowing indictment for breaching Iraqi sanctions

The appellants are currently awaiting trial on three counts of an indictment. They sought to quash one indictment which charges them with "making funds available to Iraq, contrary to articles 3(a) and 11(4) of the Iraq (United Nations Sanctions) Order 2000 and section 1 of the United Nations Act 1946". They argue that the 2000 Order was ultra vires of section 1 of the 1946 Act. In essence, their argument was that such an Order cannot be made under the 1946 Act unless made "at or about the same time" as the Security Council Resolution which it is implementing is itself made. In this case, some 10 years elapsed between the relevant resolution and the Order.

The Supreme Court rejected this argument. There was no good reason to "look behind the enactment of the 1946 Act, and a real risk of breaching parliamentary privilege if one does. As already stated, it is not suggested here that the 2000 Order overrides anyone's fundamental human rights or is otherwise ultra vires the order-making power conferred by the 1946 Act....Obviously it was envisaged that the order-making power would ordinarily need to be exercised speedily. But that is a far cry from saying that it was Parliament's clear intention to confine it to urgent use". After reviewing the history of Iraqi sanctions, the Supreme Court concluded that Security Council resolutions are not one-off measures requiring immediate implementation by member states. Situations can develop in the course of their subsequent enforcement which call for further measures to be taken, sometimes with considerable urgency, to meet emerging problems and the court should not stultify the power conferred by the 1946 Act "by confining its exercise within an artificially restricted time-frame".

CMCS v Taylor

Application for wasted costs order/duties of solicitors in relation to disclosure

The winning defendant to an action applied for a wasted costs order against the claimant's solicitors. It was alleged that they had breached their duty to supervise the redaction of certain documents which were disclosed by their client and that, had they not breached this duty, they would have come off the record, thus forcing the claimant to abandon his claim at an earlier stage.

Briggs J agreed that it is a solicitor's duty to supervise the entire disclosure process, including the redaction of disclosable documents. He agreed with the authors Mathhews and Malek that "where the solicitor knows that his client has concealed relevant documents with a view to their not being disclosed, the solicitor must not act so as to suggest that full disclosure has been or will be given, and this may lead to his ceasing to act". Redaction can be carried out on 4 grounds: (1) the redacted material is irrelevant; (2) the redacted material is privileged; (3) a party has a duty to withhold inspection of the redacted part; and (4) the party giving disclosure asserts that it would be disproportionate for him to have to do so. In this case, the claimant sought to rely on the third ground (namely, Swiss law obligations of confidence).

Briggs J accepted that the solicitors had breached their duties in "failing to supervise the redaction of that document without either making a full disclosure of the circumstances to [the defendant], or ceasing to act". However, he went on to find that the defendant had not been misled by the inadequacy of the disclosure: "The reality is, in my judgment, that the redactions ....cried out for challenge".

Bayat Telephone Systems & Ors v Cecil & Ors

Whether judge erred in allowing extension of time to serve the claim form

The defendants appealed against an order granting the claimants an extension of time to serve the claim form. The delay in service had been caused by the difficulties which the claimants had faced in funding the proceedings in England (having spent a large amount in pursuing earlier proceedings in the US). The claimants applied for an extension before the expiry of the 4 months deadline for service and this was granted. However, the Court of Appeal has now allowed the defendants' appeal from that decision. Burnton LJ held that it "was not for the Claimants unilaterally to decide to postpone service of their claim form. They should have served it in the period of its initial validity, and, if they were not in a financial position to proceed immediately with the claim, they should have issued an application seeking a stay, or an extension of the time for procedural steps to be taken". Although it might not have been viable for the claimants to take proceedings to trial without the benefit of a CFA or ATE insurance, they could still have commenced and served proceedings before funding had been finalised. Rix LJ added that it is only if a good reason can be shown to extend the time for service that the "balance of hardship" test could arise.

Although not necessary to decide the point, the Court of Appeal also held that there had been no good reason for the judge to grant permission to serve by alternative means. In addition to service of a defendant in London, the judge had also allowed service out of the jurisdiction on the defendant by post to various addresses in the US and Afghanistan and by email. However, the Court of Appeal noted that service out of the jurisdiction "is an exercise of sovereignty within a foreign state" and so "service on a party to the Hague Convention by an alternative method under CPR 6.15 should be regarded as exceptional, to be permitted in special circumstances only". Where a defendant is not resident in a country which is party to the Hague Convention (and so the court can allow service as permitted by CPR r 6.40 by any method permitted by the law of that country), an order for service by alternative means cannot be justified on the ground that the claimant wishes to avoid the delay inherent in that method.

Acre 1127 Ltd v De Montfort

Court of Appeal decision on whether claimant had beaten its Part 36 offer

In this case, the claimant made a Part 36 offer which it beat (but only marginally) in financial terms. There was reference in this case to Carver v BAA Plc [2009], in which the Court of Appeal held that a strict monetary comparison is not the sole governing criterion when deciding whether a judgment was "more advantageous" than a defendant's offer. There has been much criticism lately of Carver (see, for example, Jackson LJ's final report on Civil Litigation Costs, which recommended the reversal of the case). However, it is interesting to note that there was no criticism of Carver in this case by the Court of Appeal. Instead, a distinction was drawn on the facts. Here, there was a claimant offer and the situation with defendants' offers was said to not be analogous. Furthermore, the claimant's offer had been met with no response and so it had "had no option but to continue in order to recover anything". It was not relevant whether or not the defendant had been reasonable in declining to engage with the offer - the rule required only that the court looked at the advantage to the claimant.

Lansdowne House v Liberty Syndicate

Costs consequences of failure to produce an adequate Scott Schedule

Scott Schedules are widely used in construction disputes which are heard in the TCC. They set out a claimant's individual claims in a spreadsheet, especially where there are numerous alleged defects. This case demonstrates the risk of failing to draft an adequate Scott Schedule. The claimant was ordered to produce a Scott Schedule but it failed to identify the sum claimed for the repair of any particular defect. Certain global costs were attributed to almost every defect. Attempts to improve the spreadsheet failed. Edwards- Stuart J noted that "the problems with the Scott Schedule have arisen because the Claimant chose to prepare the Scott Schedule without the input of professional advice from someone familiar with the use and preparation of Scott Schedules in construction litigation". Although a claimant may choose to present his case as he wishes, "that does not absolve a claimant from presenting its case in a manner that enables each defendant to know what case it has to meet and what sums are being claimed against it". The claimant was therefore ordered to pay all the defendants' costs in dealing with the revisions to the schedule after the first hearing to consider the schedule.

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.

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Nigel Brook
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