UK: Weekly Update - A Summary Of Recent Developments In Insurance, Reinsurance And Litigation Law - 27/11

Last Updated: 27 July 2011
Article by Nigel Brook


Swindon & Ors v Quinn Insurance Ltd

Whether claim by insured was time-barred/when did the "claim" arise

A third party alleged that the insured had negligently caused a fire which damaged its property. The insured denied liability but notified its public liability insurer. After the third party had written a letter of claim to the insured, the insurer denied liability (on the ground that the insured had breached a policy condition). In due course, a default judgment was entered against the insured and damages were later assessed by the court.

General Condition 16 of the public liability policy provided as follows: "Any dispute between the Insured and the [Insurer] on our liability in respect of a claim...shall be referred within nine months of the dispute arising to an arbitrator...If the dispute has not been referred to arbitration within the aforesaid nine month period, then the claim shall be deemed to have been abandoned and not recoverable thereafter" (emphasis added). It was common ground at first instance that "claim" in General Condition 16 meant the claim by the insured against the insurer (and not a claim by a third party against the insured).

Post Office v Norwich Union [1967] held that until the liability of the insured has been established, and the amount of liability has been ascertained, an insured cannot sue its insurer (for a money claim under the policy). However, the trial judge held that, as an insured can seek a declaration that the insurer is in breach of a policy obligation, in this case a dispute had arisen as soon as the insurer had denied liability. Since that dispute was not referred to arbitration within 9 months, the judge held a claim against the insurer was now time-barred. An appeal was brought and the Court of Appeal has now allowed that appeal.

The Court of Appeal regarded the judge's decision as unfair, since it required the insured to have started arbitration within 9 months of the insurer repudiating liability, even though the insured was denying liability for the fire and its liability to the third party would probably not have been established during the 9-month period. Sir Henry Brooke said that no dispute could have arisen between the insured and the insurer on the insurer's liability unless and until the insured's liability was established. Rix LJ, on the other hand, accepted that it is possible for an insured to sue for a declaration rather than an indemnity but posed the question "have the parties agreed for a 9 month time bar even in a situation where the only dispute which has arisen between the insurer and the insured is the wider dispute about cover under the policy, but where the insured does not as yet have a claim under the policy". He decided that the parties had not agreed that. The clause did not refer to a "potential claim" and he thought that "its talk of "the claim shall have been deemed to have been abandoned"...emphasises to my mind that what the clause is talking about is a claim for an indemnity which an insured is entitled to make against his insurer...In other words, I would regard "claim" in this context as being synonymous with the assertion of a purported cause of action". The insured in this case could not have made a claim under the policy at the time that the insurer repudiated liability. It could only have notified an incident which might give rise to a third party claim.

Reference was made to the case of Walker v Pennine Insurance [1980]. There, Roskill LJ had said that "it seems to me that you can, within the present clause, have a claim by the assured for an indemnity against a potential liability, long in advance of any claim against the assured by a third party being agreed or determined either as to liability or quantum or both". Sir Henry Brook said that Walker (insofar as it might be taken to impugn the authority of Post Office) should not be followed. Rix LJ sought to confine Walker to motor policies only and said that "I am satisfied that in the context of a public liability policy...the essence of a claim under the policy is a request for indemnity on the basis of an established cause of action in respect of a third party claim where liability and quantum have been ascertained".

COMMENT: The Court of Appeal was clearly concerned in this case that the authority of the Post Office case should not be impugned. However, in the Post Office case the insurers had not sought to repudiate liability (they had only argued that the claim under the policy was premature). Given that it is possible for an insured to seek a declaration from the courts that an insurer has wrongfully repudiated liability (and so, for example, require the insurer to meet defence costs even before the insured's liability has been established), it might be argued that the judge at first instance was correct to find that the claim against the insurer had arisen as soon as liability under the policy was repudiated. However, the Court of Appeal was clearly swayed by the argument that it is unfair to require an insured to commence arbitration/litigation against its insurer before it even knows whether it is liable to the third party. Insurers can protect themselves, though, through careful drafting of a dispute resolution clause (for example, by expressly referring to "potential" claims). It remains to be seen whether the insurer will appeal this decision to the Supreme Court.

Barclays Bank v Nylon Capital

Determining the scope of an expert determination clause

The Court of Appeal was required to decide whether it should stay proceedings on the ground that the issue in question fell within the expert determination clause contained in an agreement between the parties. The Court of Appeal held that, although there is no statute governing expert determination (as there is for arbitration), it is clear that "in any case where a dispute arises as to the jurisdiction of an expert, a court is the final decision maker as to whether the expert has jurisdiction, even if a clause purports to confer that jurisdiction on the expert in a manner that is final and binding".

The question arose, though, whether the expert should first determine his own jurisdiction (even if one of the parties is seeking a determination by the courts). The Court of Appeal held as follows:

  1. The approach to an expert determination clause is not the same as that which must now be taken for an arbitration clause. It should generally be presupposed that the parties intended certain types of dispute to be resolved by expert determination and other types by the court (or arbitrators, if applicable).
  2. Although the courts will not generally intervene in a matter which is within the jurisdiction of the expert, the situation is different where the issue is solely one of law relating to the scope of the expert's mandate.
  3. If the parties have chosen a certain procedure, and the dispute falls within the jurisdiction of the expert, then they must be held to it, whatever view might be taken as to the appropriateness of the procedure for the matters submitted to the expert. However, the issue in this case was whether the expert had jurisdiction and not the interpretation of the mandate given to the expert.
  4. In the interests of justice and convenience, the court should determine the issue of the expert's jurisdiction and it was neither just nor convenient to defer that decision until after the expert has determined whether he has jurisdiction. The Court of Appeal concluded that on the facts of this case the expert did not have jurisdiction to decide the issue and so the proceedings were not stayed. Two further points were made by the Master of the Rolls in this case:
    1. He believed that there is a "powerful argument" for saying that (subject to the contract terms) a valuation by an expert (even where the valuation is agreed to be "final and binding") can be challenged in court if it can be shown to have been arrived at on the basis of a mistake of law. There will be no basis for a challenge, though, where the expert has not expressed a view on the issue of law when reaching his valuation.
    2. The parties had asked the court not to give judgment after they reached a settlement. The Master of the Rolls said that the court retains a right to proceed to give judgment where a case has been fully argued (whether at first instance or on appeal). The court will need to weigh up competing factors when deciding whether to give judgment - for example, how far the preparation of any judgment had got by the time of the request, whether the issues in the case are of general interest and the parties' desire for commercial privacy.

PT Theiss v PT KPC & Anor

Application for a stay under section 9 of the Arbitration Act 1996

The parties entered into an agreement which provided for arbitration in the event of a dispute. There was also another agreement ("the CDA") which provided for the nonexclusive jurisdiction of the English courts. Arbitration was commenced and when one of the parties subsequently commenced an action in England, the other party applied for a stay under section 9 of the Arbitration Act 1996. The issue in the case was whether the English proceedings were "in respect of a matter which under the arbitration agreement is to be referred to arbitration". How should that issue be determined? Blair J adopted the approach of the Australian courts in holding that the court should identify the "substance of the controversy" (and not just the particular terms in which the claimant has sought to formulate its claim in court).

The judge also noted that there is no presumption that a jurisdiction or arbitration agreement in contract A, even if expressed in wide language, is intended to capture disputes under contract B (see Dicey & Morris, Conflict of Laws para 12-094). He held that there is nothing unusual about submitting a contractual dispute to arbitration, whilst referring matters relating to security to the jurisdiction of one or more courts. In this case, the CDA, although it did not refer directly to "security", operated as an escrow arrangement: "In my view, the claim in the English action is a claim under the CDA concerned with a procedure whereby the sums in dispute are to be set aside until the dispute is determined. It raises a discrete claim, related to, but distinct from, the underlying dispute arising under the [main agreement] which is the subject of the arbitration". Accordingly, the application for a stay was refused.

Fulham Football Club v Richards & Anor

Arbitrability arguments and the meaning of section 1(b) of the Arbitration Act 1996

At first instance the judge stayed a petition by the appellant under section 9 of the Arbitration Act 1996 (the petition was brought under section 994 of the Companies Act 2006 on the ground that a company's affairs were being conducted in a manner which was unfairly prejudicial to some or all of its members). One of the arguments raised by the appellant was that the relevant arbitration clause should be construed so as to exclude a dispute about unfair prejudice.

Section 1(b) of the 1996 Act provides that "the parties should be free to agree how their disputes are resolved, subject only to such safeguards as are necessary in the public interest". Patten LJ held that this clause merely affirms the right of the parties to determine the method of resolution of their arbitrable disputes and is not concerned with whether the dispute itself is arbitrable. However, Rix LJ said he would "discount the doubts of Patten LJ about the subsection dealing with arbitrability" and that the autonomy of the parties extended to the choice to arbitrate. Longmore LJ held that the test in section 1(b) was demanding and saw no reason to find that disputes about the internal management of a company should in general be prohibited.

It was recognised that the 1996 Act does not indicate the basis for challenging an application for a stay on grounds of arbitrability. The Court of Appeal held that it did not follow from the inability of an arbitrator to make a winding-up order affecting third parties that it should be impossible for members to agree to submit disputes between themselves to arbitration: "It is necessary to consider in relation to the matters in dispute in each case whether they engage third party rights or represent an attempt to delegate to the arbitrators what is a matter of public interest which cannot be determined within the limitations of a private contractual process". There are also a number of situations prescribed by statute where the right of a party to apply to a court is expressly preserved. In such cases it will be possible to defeat an application for a stay under section 9. However, there was no statutory restriction or rule of public policy in this case to prevent the parties agreeing to submit their dispute to arbitration. Accordingly, the appeal was dismissed.

Merchant International v NAK

Whether Ukrainian Supreme Court judgment should be recognised

The claimant obtained a judgment in its favour in the Ukraine in 2006. In April 2010 it sought to enforce the judgment against the defendant in England. However, in April 2011 the Ukrainian Supreme Court granted the defendant's application to cancel the Ukrainian judgment. The issue in this case was therefore whether that Supreme Court judgment should be recognised by the English courts. If it lacked due process, then the claimant could enforce the original Ukrainian judgment (by obtaining an English judgment against the defendant at common law).

Steel J rejected the argument that the case of Yukos v Rosneft [2011] (see Weekly Update 23/11) should be distinguished because it concerned an arbitration award rather than a judgment. He held that it "is well established that a foreign judgment is impeachable on the ground that its recognition would be contrary to public policy". The Ukraine is party to the European Convention on Human Rights. The judge found that the Supreme Court decision breached article 6 of the Convention (right to a fair hearing) because it involved a clear disregard of the principles of legal certainty. In particular, the Supreme Court had allowed the entire case (and more) to be re-opened by reference solely to one issue (and there was no evidence that that issue could not have been raised earlier on).

Steel J rejected an argument, based on the decision in Government of USA v Montgomery No.2 [2004], that the non-recognition of the Supreme Court judgment could only be justified if there had been a "flagrant breach" of Article 6. He found that the breach here was flagrant but, in any event, the requirement for a flagrant breach arose only in the case of a decision of the courts of a non-Convention country.

Milsom & Ors v Ablyazov

Request for restrictions on disclosure pursuant to worldwide freezing order/receivership order

  1. There was no ground for restricting the receivers' use of pre-existing documents (ie documents which have an existence independent of, and prior to, requests addressed by the receivers to the defendant). It is well-established under English law that the privilege against self-incrimination does not extend to pre-existing documents which exist "independent of the will of the suspect" (see R v S [2008]).
  2. Provision of information by the receivers to the bank's solicitors was subject to a condition that the solicitors could not pass that information to the bank itself. Roth J accepted, though, that this did not give the defendant adequate protection since the bank was conducting the contempt proceedings through its solicitors. However, the judge said that the privilege against self-incrimination is not an absolute right and it was sufficient that the bank's solicitors and the bank provide an undertaking that information derived solely from the receivers could not be used against the defendant in the contempt proceedings without the permission of the court.

Meritz Fire & Marine Insurance v Jan De Nul & Anor

Whether insurers liable to pay under a guarantee following transfer by debtor to a third party

Weekly Update 1/11 reported the first instance decision in this case. The trial judge found that an insurer was liable to pay under a guarantee which it had issued to the buyers in order to guarantee the repayment of advance payments made by the buyers to a shipbuilder (HWS), in the event of premature termination of of the shipbuilding contract for certain specified reasons. The shipbuilding contracts were (without the knowledge or consent of the buyers or the insurers) transferred to another company (and then on to a third company). It was found at first instance that, as a result of that transfer, HWS was discharged (under Korean law) from its obligations under the shipbuilding contract. In any event, HWS was dissolved on the same day as the transfer.

At first instance, there was a lot of debate as to how the guarantee issued by the insurer should be categorised. However, the Court of Appeal said that the appeal must be resolved primarily by reference to the words used in the guarantee. It found that the guarantee was intended to be operated against documents (without regard to the underlying contract). It was therefore sufficient that the buyer certify that it had demanded a refund from HWS and that HWS had failed to make the refund. It did not matter that HWS was not liable to make the refund after the transfer (or that it was unable to make the refund because it had been dissolved).

The Court of Appeal therefore rejected the insurer's argument that it had taken on the risk of HWS's defaults and not those of their successors (whose financial integrity or business acumen they would not have previously assessed). The insurer had, on the facts, had the opportunity to object to the transfer but had not taken that opportunity.

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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