UK: Insurance And Reinsurance - 20th November 2012

Last Updated: 28 November 2012
Article by Nigel Brook

Welcome to the forty-first edition of Clyde & Co's (Re)insurance and litigation caselaw weekly updates for 2012.

These updates are aimed at keeping you up to speed and informed of the latest developments in caselaw relevant to your practice.

This week's caselaw

Genesis Housing Association v Liberty Syndicate
Court considers "basis of the contract" clauses in insurance proposal forms and the test for belief.

Wah & Anor v Grant Thornton & Ors
A decision on whether a "chief executive clause" amounted to a valid arbitration agreement.

Ansari v Knowles & Ors
Court decides whether a settlement released a joint tortfeasor as well.

Dunhill v Burgin
A case on whether a settlement should be set aside after the lack of capacity of the claimant was discovered.

A H Baldwin & Ors v Sheikh Al-Thani
Court decides whether a case for a freezing injunction in aid of foreign proceedings had been made out.

Genesis Housing Association v Liberty Syndicate

Basis of the contract clauses in insurance proposal forms and the test for belief

http://www.bailii.org/ew/cases/EWHC/TCC/2012/3105.html

If a prospective policyholder signs a statement on a proposal form stating that the answers given form the "basis of the contract", this has the effect of converting all the answers into warranties. In this case, when completing a proposal form for a policy covering a building contract, the name of the building contractor was mistakenly put as "TT Construction" rather than "TT Bedford". The proposal form contained the following clause: "I/we declare that to the best of my/our knowledge and belief, the information I/we have given is correct and complete..this proposal and the statements made therein shall form the basis of the contract between me/us and the insurer". Following a review of prior caselaw, Akenhead J concluded as follows:

  1. "Basis of the contract" clauses are enforceable. An insurance contract will be void or unenforceable if the proposal form contains such a clause and the contents of the form are untrue. The basis of the contract clause can be modified either in the policy or in any other documents such as the quotation or certificate of insurance.
  2. Prior caselaw suggests that where a statement is said to be true "to the best knowledge or belief" of the representor, reference can be be made to the honesty of a representor in the case of an individual. However, Akenhead J said that: "in determining particularly whether a corporate organisation making a declaration as to various statements being true to the best of its knowledge and belief is wrongful, the Court must determine what it corporately is likely to have known when it made the declaration. There does not have to be dishonesty as such on the part of the organisation but, if that organisation actually knows that something said to be true on the declaration is in fact wrong, then it is making a statement which is not true to the best of its knowledge or belief".

In this case, the error on the proposal form had been entirely innocent but the individuals signing the proposal form on behalf of their company would have known that it was wrong, had they thought about it. They "knew and must have known" the correct name for the builder. Thus the insured had breached the basis of contract clause and so was in breach of warranty.

COMMENT: Basis of the contract clauses have been the subject of some academic criticism and (in relation to consumer insurance contracts) are to be outlawed when the Consumer Insurance (Disclosure and Representations) Act 2012 becomes law next year. The Law Commissions have also mooted the abolition of basis of the contract clauses in business insurance (although insurers will still be able to contract out). However, this case makes it clear that the courts are still willing to enforce such clauses in a non-consumer context.

The judge's comments regarding belief and the corporate insured are also of interest. Section 20(5) of the Marine Insurance Act 1906 provides that a representation as to a matter of "expectation or belief" is true if it is made in good faith. In the case of Economides v Commercial Union [1998], the court rejected the insurers' argument that there should be an implied representation of fact that the insured had reasonable grounds for his belief - an insurer could only avoid if the insured had wilfully closed his eyes to the truth, or made a "blind guess". Akenhead J has drawn a distinction between Economides and the case of a corporate insured - the test for the latter is not one of honesty but rather actual (and possibly even objective) knowledge (although he does not discuss this in detail, nor who in the organisation must have the relevant knowledge). This appears to be the first time that the courts have suggested a different test for corporate insureds in relation to representations of belief. However, it might be argued that the statement as to the identity of the builder could be categorised as one of fact rather than belief, notwithstanding the clause at the end of the proposal form.

Wah & Anor v Grant Thornton & Ors

Whether "chief executive clause" amounted to a valid arbitration agreement

http://www.bailii.org/ew/cases/EWHC/Ch/2012/3198.html

The members of an international group of accountancy firms entered into an agreement which provided that any dispute in the first instance should be referred to the Chief Executive in an attempt to settle that dispute. If the Chief Executive could not resolve the dispute, it should be referred to a Panel. Until the Panel determines that it cannot resolve the dispute (or until one month after the referral to the Panel) "no party may commence any arbitration in accordance with this Agreement".

Hildyard J reviewed prior caselaw and extracted the following guidelines:

  1. Agreements to agree or to negotiate in good faith are unenforceable.
  2. However, when a provision is just part of a concluded and otherwise legally enforceable contract, the court will strain to find a construction which gives it effect. Each case will be considered on its own terms.
  3. The test is whether the obligations imposed in the clause are sufficiently clear and certain to be given legal effect. If there is a positive obligation to attempt to settle a dispute prior to a referral to arbitration, it must be sufficiently certain that there is a commitment to commence a process and that there are steps which each party must take to put the process in place.

In this case, the judge held that the relevant clause was "too equivocal in terms of the process required and too nebulous in terms of the content of the parties' respective obligations to be given legal effect as an enforceable condition precedent to arbitration". In particular, there was no guidance as to the quality or nature of the attempts to be made to resolve the dispute.

The provision that "no party may commence any arbitration" until certain other steps had been taken was intended to "reinforce the provisions of the preceding sub-sections but also to provide an end date after which any restriction on the right to commence arbitration procedures in accordance with the [agreement] lapses". If the conciliation process failed for whatever reason (including because no Panel was established or no referral was made to it), the parties were still entitled to refer the dispute to arbitration, provided that the requisite time period set out in the clause had elapsed.

Ansari v Knowles & Ors

Whether settlement released joint tortfeasor as well

http://www.bailii.org/ew/cases/EWHC/QB/2012/3137.html

The claimant settled against one defendant and the issue was whether that settlement also released the other joint tortfeasor defendants. The defendants sought to argue that there is a "rule" to the effect that the release of one joint tortfeasor in a settlement operates to release all the other tortfeasors as well. Eady J noted that there has been considerable criticism of this "supposed rule" and that judges have devised ways of escaping the rigours of its application. Furthermore, "If it is helpful to speak at all of such a "rule" as still subsisting, it is nevertheless necessary to recognise that any rigidity it once had has been so eroded by judicial interpretation that it is probably better simply to take into account the policy considerations underlying it (such as the desirability of finality) when construing the individual settlement agreement before the court. It should not be allowed to override what would otherwise be the common sense interpretation of the particular factual matrix."

He held that the "rule" did not apply in this case. The claimant had deliberately left the other defendants out of the settlement negotiations and the settlement covered a cause of action which had nothing to do with those defendants.

Although a claimant should not be able to obtain a double recovery, where a settlement is reached with a tortfeasor for only part of a claim, it may be possible to recover the balance from any other tortfeasor. It will depend on the particular circumstances of the case though. A further principle to be taken into account is the desirability of avoiding successive claims (although that did not apply here because only one action had been brought against the defendants, who were said to be jointly and severally liable).

Dunhill v Burgin

Whether settlement should be set aside after lack of capacity of one side discovered

http://www.bailii.org/ew/cases/EWHC/QB/2012/3163.html

The claimant suffered personal injuries following a road traffic accident and settled with the defendant's insurers shortly before trial. The Civil Procedure Rules provide that where a claim is made by a party who lacks capacity, no settlement of that claim will be valid without the approval of the court. In this case, the claimant was not known to lack capacity at the time of the settlement. However, it was subsequently alleged that at the time of the settlement, she had been a patient within the meaning of the Mental Health Act 1983.

Bean J noted that when a claim is issued in the civil courts, the Civil Procedure Rules are impliedly incorporated into any settlement between the parties and take precedence over the general law of contract. He held that CPR r21 applies to invalidate a consent judgment involving a protected party reached without the involvement of a litigation friend and the approval of the court, even where the individual's lack of capacity was unknown to anyone acting for either party at the time of the settlement.

The judge recognised that this was a harsh decision for the insurers who had reasonably thought that the case had been settled following the settlement (which took place several years ago). However, he also recognised the public interest in protecting vulnerable people. Although the claimant here was represented, and so might have an alternative remedy against her lawyers, the decision in this case applied equally to unrepresented parties (of whom there are likely to be more in the future). He concluded that: "It is not difficult to imagine the case of a claimant who is capable of signing and posting an acceptance form sent by a loss adjuster, but who (unknown to the defendant or the loss adjuster) is incapable of managing his affairs. It would be disturbing if the "compromise" reached by such a person could not be reopened".

COMMENT: As the judge recognised, this is a hard decision for insurers. Although the presence of a mental health advocate on the day of the trial might have alerted insurers to a potential issue, in other cases it may be difficult for them to investigate the capacity of a claimant prior to concluding a settlement with him/her.

A H Baldwin & Ors v Sheikh Al-Thani

Whether a case for a freezing injunction in aid of foreign proceedings had been made out

The claimants sought a worldwide freezing injunction against the defendant, a wealthy individual whose main family residence is in Qatar but who spends a significant amount of time in London (and has assets here), in order to support ongoing proceedings in the US. The defendant sought to argue that there was no credible risk of dissipation of assets because this was in essence a simple "debt" claim with no evidence of any fraud, and because he had considerable assets both within and outside the jurisdiction.

Haddon-Cave J held that there was a real risk of dissipation, though, because: (1) the defendant had absolutely no defence to the claim; (2) his explanations for non-payment were unsatisfactory: "not a cent has been paid (despite his professed wealth)"; and (3) his recent behaviour of leaving a large trail of outstanding debts owing to a succession of auction houses was "discreditable, dishonourable and disturbing". The judge added that "although I do not base my decision on this point, I should mention that I see no reason, in principle, why the creation of a spiral of debt around a limited pool of assets cannot amount to dissipation in certain circumstances", especially where there has been conduct outside the ordinary course of business. In addition, there had been previous allegations of fraud against the defendant which should not be ignored.

There was also no reason to hold that it would be inexpedient to order the freezing injunction. There had been some dispute as to whether the US court had jurisdiction to grant a worldwide freezing injunction but the judge held that this dispute was "somewhat sterile" because of the obvious expediency of the the English court granting the order. He shared the view of Morritt LJ in Refco v Eastern Trading [1999] that it made no difference whether the foreign court has jurisdiction but is unable to exercise that jurisdiction or has no jurisdiction at all.

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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