UK: Welcome To The Twenty-Third Edition Of Clyde & Co’s (Re)Insurance And Litigation Caselaw Weekly Updates For 2011

Last Updated: 30 June 2011
Article by Nigel Brook

This Week's Caselaw

Beazley v Travelers

Whether insured was liable to brokers under a Deed of Indemnity and whether claim covered under PI policy/effect of subjectivities

Clyde & Co for claimants

Weekly Update 07/08 reported the decision in Standard Life v Oak Dedicated, in which it was held that a broker (Aon) had been negligent in failing to ensure that a policy (for the period 1998-2001) met its client's needs. Aon sought to claim against Travelers under a Deed of Indemnity. Under the Deed, Travelers had agreed to indemnify Aon for losses arising out of any event occurring before the completion of the sale by Travelers to Aon of the Minet Group of broking companies in 1997. Aon argued, in essence, that since the wording (for which it was held negligent in Standard Life) had first been inserted in 1995 when the Minet Group was the broker (and had continued to be used in subsequent years up to 1998), it was entitled to an indemnity for Minet's alleged negligence under the Deed. This argument was rejected by Clarke J. He held that liability arose "solely from and was attributable to Aon's negligence". The deed indemnified against liability "arising out of " events and this required a degree of causal connection (this was not, in the context of the deed, a proximate cause test but a "relatively strong degree of causal connection" was still required. The prior broker's "blind spot" was without causative effect until the 1998 renewal date. It was Aon's negligence (and Aon's alone) which resulted in the 1998-2001 policy not meeting the client's needs. Furthermore, earlier failures did not constitute "a continuing series of related events" as required in the Deed.

Although not required to do so, Clarke J also found that Travelers (even if it had have been held liable to Aon under the Deed) would not have been entitled to claim under its own PI cover (which had been provided by the claimants in this action). That was because the policy covered liability for claims made against Minet for breaches committed by a Minet company or employee. An argument by Travelers that the literal meaning of the words should not be permitted to prevail in order to defeat the purpose of the cover did not succeed either. The Deed and the PI policy were intended to "fit together": "Under the Deed Travelers is not liable to indemnify Aon in respect of its liabilities to Standard Life and is not insured for that purpose".

Of general interest in this decision, though, are Clarke J's comments regarding the effect of subjectivities imposed on the slip when cover was being sought for Standard Life in 1998 (and therefore whether Standard Life was in any event uninsured by the time the Deed expired). Traditionally, the courts have construed subjectivities as pre-conditions to any binding contract coming into existence. In this case, scratches were made subject to (a) reinsurance; (b) satisfactory proposal form; and (c) Y2K questionnaire. Clarke J described these as "classic qualifications of acceptance", indicating that the underwriters would not go on risk until they were met (and information had to be accurate when the proposal form/Y2K questionnaire were signed).

The judge rejected an argument that these subjectivities were routine or administrative and hence not qualifications of acceptance. However, he did accept that in theory certain subjectivities "by virtue of their content or the form of wording used or otherwise" could be treated as "administrative requirements, or stipulations that are required to be satisfied during the course of the insurance as a condition of continued coverage". Furthermore, the scratches here did not evidence or create either conditional contracts or "held covered" insurance.

Scullion v Bank of Scotland

Surveyors' negligence case and duty to buy-to-let purchaser (of possible interest to PI insurers)

The first instance decision in this case was reported in Weekly Update 12/10. The case involved a claim for negligence brought by the purchaser of a flat in a buy-to-let transaction against the surveyors, who had been instructed by the mortgage lender. At first instance, the judge held that the surveyors did owe a duty of care to the purchaser. The surveyors appealed and the Court of Appeal held as follows:

(1) The judge had been entitled to conclude, on the facts, that the purchaser had relied on the valuation when deciding to proceed with the purchase of the flat.

(2) Did the surveyor appreciate (or ought he have appreciated) that the valuation would be relied on by the purchaser? There is prior caselaw to support the view that a surveyor, instructed by a potential mortgagee, can owe a duty of care to a prospective mortgagor-purchaser. Generally, though, no duty is owed to commercial developers, or those buying more expensive domestic properties, as they are expected to obtain their own surveys. In this case the purchase was of a single flat for approximately £350,000. Nevertheless, the Court of Appeal found that the fact that the underlying transaction was a buy-to-let, rather than a purchase for owner-occupation, had a number of "repercussions". People who buy to let lower or middle range value properties were "as a class, likely to be richer and more commercially astute than people who buy to occupy. People who buy to let can therefore be regarded as more likely to obtain, and more able to afford, an independent valuation or survey". Furthermore, there was no evidence that those buying to let rely, to the same degree as those buying to live in a property, on valuations provided to mortgagees (rather than getting their own surveys).

A buy-to-let purchaser is also at least just as interested in a property's rental value as he is in its capital value. The surveyor was entitled to expect the purchaser to obtain his own advice on that (and, in so doing, to get advice from his own surveyor as to the capital value). For all these reasons, there was "no inherent likelihood that a purchaser, buying the Flat for the purpose of letting it out, would rely on a valuation provided to the mortgagee".

(3) Since the Court of Appeal allowed the appeal, it was unnecessary to consider whether the judge had correctly assessed damages. However, Lord Neuberger MR did give his (obiter) view on this point. The judge had assessed the purchaser's damages as being the difference between the outgoings he incurred and the income which he received during his ownership of the flat.

Lord Hoffmann in SAAMCo v York Montague [1997] advised that damages should be limited "to the consequences of the [relevant] information being inaccurate." So, for example, in this case, the flat would have taken some time to let anyway, so there would have been a period during which outgoings would not have been covered in any event. Although some of the delay in renting out was "no doubt due to the initial seeking of an unrealistic level of rent, which is plainly attributable to [the surveyor's] negligent rental valuation", not all of the period of delay should be taken into account when assessing damages.

Soutzos v Asombang & Ors

Enforcement of cross-undertaking and measure of damages

The claimant obtained a freezing injunction against the two defendants which prevented them from dealing with certain properties. When his claim was eventually dismissed, the defendants sought to enforce the cross-undertaking in damages which the claimant had given when applying for the freezing injunction. In essence, it was argued that, had it not been for the freezing injunction, a certain bank would have made loans of £3.5m to one of the defendants and her company. Those loans would have allowed the company to buy expensive machinery which was crucial to its plans. The loss of the loans was said to have "strangled" the fledgling business.

It was common ground between the parties that the defendants must prove that the alleged losses would not have occurred "but for" the injunction. There was no need to show that the injunction was the sole cause of loss. However, Newey J held that he should have regard to whether the company would have failed anyway later in the year (in order to avoid putting the defendants in a better position than they would have been in had the injunction never been granted). In the context of freezing injunctions, the judge also held that the defendants had to prove their loss "without any particular allowance being made in their favour".

It was fatal to the defendants case that they were unable to prove, on the facts, that the bank would have made the loans but for the injunction. That was enough to decide the case, but the judge also considered the application of the ex turpi causa principle in this case. The claimant alleged that one of the defendants (to the knowledge of the other defendant) had made fraudulent misrepresentations to the bank (the judge held that, if it applied, the ex turpi causa principle would preclude a claim by both of the defendants).

In the case of Lilly Icos [2009], Arnold J held that "the court will not award compensation under a cross-undertaking for the loss sustained by an unlawful business or where the beneficiary of the cross-undertaking has to rely to a substantial extent upon his own illegality in order to establish the loss". In this case, Newey J held that, as the bank would only have lent the money (if the injunction had not been made) because of the fraudulent misrepresentations, the ex turpi causa principle was clearly applicable.

Yukos Capital v OJSC Roseneft

Issue estoppel and act of state/non-justiciability

The claimant sought to enforce four arbitration awards. These awards were set aside by the Russian Arbitrazh courts. Subsequently, the Dutch courts held that the Russian judgment should not be recognised because it was "the result of a partial and dependent judicial process". The defendant (which is wholly owned and controlled by the Russian government) refused to satisfy the awards and two preliminary issues arose in this case:

(1) Was the defendant issue estopped by the Dutch judgment from denying that the Russian judgment was the result of a partial and dependent judicial process? Hamblen J reviewed the applicable caselaw and held that, on the facts, the defendant was estopped. The defendant had sought to argue the need for caution. Hamblen J said: "Where differences in procedure make these issues difficult to determine then the Court needs to exercise caution. However, if these matters are clear then the need for caution does not arise".

(2) Act of State/non-justiciability - could the English court determine for itself whether the Russian judgment was the result of a partial and dependent judicial process? Under the Act of State principle, an English court will not adjudicate on the act of a foreign government within its territory. Hamblen J held that he was bound by the Court of Appeal decision in Berezovsky v Abramovich [2011] that "the act of state doctrine only applies to challenges to the validity of the act of state relied upon." He went on: "So, if a foreign state has expropriated property within its jurisdiction, the English court must (ordinarily) accept that title has passed – whatever the motivation for, or legality of, the foreign act. However, if the validity of the act of the foreign state is not an issue that has to be determined then the act of state principle is not engaged".

An alternative argument raised by the defendant was that the the judicial abstention principle applied. Hamblen J held that this was likely to cover "disputes involving sovereign authority which can only be resolved on a state to state level", for example sensitive issues of diplomacy and controversial issues of international law. Finally, the political embarrassment principle (also raised by the defendant) would usually require a certificate or indication to that effect from the Foreign and Commonwealth issue.

Hamblen J concluded that the English court was competent to determine whether the Russian judgment was the result of a partial and dependent judicial process. However, he made it clear that he was reaching no conclusion as to the merits of the allegations made by the claimant.

JSC BTA Bank v Ablyazov

Application for committal of defendant for contempt

The claimant sought the committal of the defendant for contempt of court. The application notice cited some 35 allegations of contempt for breach of a freezing order. Teare J held, noting that the application was intended to bring pressure on the defendant to comply with the order, that an application limited to 3 allegations would work just as well as one with a higher number.

There was also some debate as to whether the claimant had a duty of disclosure in the context of the contempt allegations. Teare J held that it did and that it ought to disclose any document which damages its case or assists the defendant. The claimant's solicitor was therefore required to swear (within 7 days) an affidavit stating that it does not have any such document to disclose.

The claimant also sought to reserve for future determination those allegations of contempt which are not heard before trial. The defendant argued that that would conflict with observations made in Villiers v Villiers [1994] and would be an abuse of process. Teare J declined to declare that any future attempt by the claimant to bring further allegations of contempt would be an abuse of process: "whether that would be an abuse would depend upon the circumstances then prevailing and I cannot know what they will be". However, he preserved the defendant's right to seek a strike out of any further allegations.

Culkin v Wirral Independent Appeals Panel

Whether order breached indemnity principle/absence of client care letter

The claimant was ordered to pay the defendant's costs. He argued that this infringed the indemnity rule because a third party had earlier on agreed to pay the defendant's costs of the proceedings. Lord Phillips observed in Thornley v Lang [2003] that: "subject to any statutory exceptions, an award of costs can only be made in order to indemnify a litigant against legal costs and expenses that he has paid, or become liable to pay". However, the courts have rejected arguments that this principle is infringed where, for example, insurers instruct solicitors to act for their assured. They have found that the litigant has an independent obligation (albeit one that is unlikely to be enforced) to pay the fees of the solicitor who is acting for him.

In Thornley, the claimant had received a client care letter informing him of his liability to pay legal costs. In this case, no client care letter was sent. However, Slade J held that this "does not affect the liability of the recipient of the services of a solicitor to pay for them if he has acquiesced in the instruction of the solicitors on his behalf by a third party".

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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