UK: Insurance And (Re)Insurance - 23 April 2013

Last Updated: 29 April 2013
Article by Nigel Brook

Fortress Value Recovery v Blue Skye

Whether third party to a contract could obtain stay of legal proceedings against it and rely on arbitration agreement in the contract

Section 8(1) of the Contracts (Rights of Third Parties) Act 1999 provides, broadly, that where a third party has a right to enforce a term in a contract to which it is not a party, that right will be subject to any obligation imposed by the contract to arbitrate (ie the third party will be obliged to arbitrate any dispute about its entitlement to enforce the right). Section 8(2) provides that if the third party does not fall within section 8(1), it may submit a dispute about enforcement of a right to arbitration (but is not obliged to do so).

The claimants brought proceedings in court and the defendants sought to stay these proceedings, relying on an arbitration agreement contained in a contract to which they were not a party, but the claimants were (the contract referred to the 1999 Act and advised that any rights given to a third party in the contract would be enforceable under the Act. Furthermore, the defendants argued that the contract had provided them with a defence to the claimants’ action).

At first instance, the judge refused to grant a stay on the basis that the defendants were not seeking to enforce a substantive right but instead were seeking to raise a contractual defence (see Weekly Update 20/12). The defendants appealed against that decision. The Court of Appeal has now held as follows:

(1) The judge had been wrong to draw a distinction between a right of action and a contractual defence: “the third party availing himself of the exclusion is the equivalent of his enforcing a term in the contract”.

(2) However, the Court of Appeal accepted that, whereas a third party might choose to rely on a term in the contract (in which case it should be obliged to arbitrate), a third party has no choice if a party to the contract sues it (and the third party then wishes to raise a defence). It was thought to be contrary to the principle that arbitration is consensual to force the third party to have his right to rely on the defence conclusively determined by arbitrators, even if the third party does not consent to such arbitration. Furthermore, such consequences would be so undesirable “that it must be questioned whether they were really intended”. Accordingly, the third parties here could rely on a contractual defence in the court proceedings and were not obliged to arbitrate their entitlement to the defence.

(3) The third parties might have other defences to the claimant’s case which are unconnected to the contract. It would be “odd and unprincipled” if the entire dispute between the claimants and the third parties had to be settled by arbitration when the third party had not agreed to arbitration. On the other hand, the alternative would be the “unsatisfactory prospect of fragmented dispute resolution”.

(4) Nor could section 8(2) of the 1999 Act apply. It is only applicable where the contract gives to the third party a right to arbitrate and that was not the case here.

Accordingly, the third parties were not entitled to a stay of the proceedings.

COMMENT: Insurance policies commonly expressly exclude the operation of the 1999 Act. Where a policy does not contain such an exclusion, though, but does contain a waiver of subrogation clause (which might afford a third party a defence against a subrogated claim brought against it by the insurer), this case confirms that a dispute about the applicability of that defence should be heard in court proceedings (ie as part of the subrogated claim), even if the policy contains an arbitration agreement.

Uren v Corporate Leisure

Whether Part 36 offer made during an appeal also covers a subsequent re-trial/whether genuine attempt to settle

The claimant lost his personal injury claim. He appealed to the Court of Appeal and his appeal was allowed. The action was then remitted for retrial by a different High Court judge. He won 100% of his claim for damages at the re-trial.

While he was appealing to the Court of Appeal, he made a Part 36 offer to the defendants, in which he offered to accept 90% of the damages which he was seeking. That offer was rejected by the defendants. At the end of the re-trial they raised two arguments in relation to the Part 36 offer:

(1) It did not amount to a true offer to settle and was instead designed merely to secure the enhanced costs consequences of Part 36. Foskett J rejected that argument: “10% of a large sum is itself a large sum”.

(2) The offer related to the appeal but did not also cover the subsequent re-trial which was ordered by the Court of Appeal. This argument was also rejected. The reality was that the offer was designed to settle the case, rather than the appeal. Although it is the position that a Part 36 offer made during proceedings will not apply to any appeal proceedings (and so a fresh Part 36 offer must be made for an appeal), the judge thought that the same did not apply to re-trials ordered by the Court of Appeal following an appeal.

However, in the circumstances of the case, the offer had not been beaten. Furthermore, although the defendants had failed properly to engage with the sensible offer made by the claimant, that did not justify the imposition of a costs penalty. The defendants had not been unreasonable in taking the view that the Court of Appeal was unlikely to set aside the decision of a High Court judge which had been reached after a full hearing of evidence.

Murray & Anor v Neil Dowlman Architecture

Revising an approved costs management order

Since October 2011, a costs management pilot scheme has been operating in the TCC. That pilot scheme has now been replaced by the CPR provisions implementing the Jackson/ LASPO reforms (which apply to, inter alia, cases in the Chancery Division and Queens Bench Division as well as certain TCC cases). Although the costs management order in this case was made under the pilot scheme practice direction, it will be of wider interest since the new costs management rules are drafted using similar wording.

After the approval of a costs budget, the defendant’s solicitor pointed out that the claimant’s approved costs budget did not include certain items (namely, a success fee under a CFA and an ATE insurance premium - both of which were recoverable pre-1 April 2013). The claimant then applied for relief from sanctions pursuant to CPR r3.9. Coulson J held as follows:

(1) CPR r3.9 did not obviously apply in this case. There was no sanction as such here - detailed assessment was several months away. The claimant was in reality seeking permission to revise the approved budget.

(2) Referring to Henry v NGN (see Weekly Update 04/13), the judge emphasised the new rigorous approach to be adopted by the courts post 1 April 2013 and that “the courts will generally be less ready than before to grant relief from sanctions for procedural defaults”. A mistake should not normally be capable of being remedied by an increase in the approved budget since “any other approach would make a nonsense of the whole costs management regime”.

(3) However, this case was “very special” and did justify a revision of the costs management order. That was because: (a) the defendant had known throughout about both items (the success fee and the premium) and could not sensibly have thought that liability for those items automatically disappeared just because they were not in the approved budget; and (more importantly) (b) in the form which the claimant should have filled in (it had instead submitted a budget, but this had contained the same information required by the form), there was a box which the claimant could tick in order to exclude certain items (including the success fee and the premium) from the budget. Coulson J did not think it right that the claimant should be penalised “merely because of a failure to tick a box”.

COMMENT: Although this is the second recent case (Henry being the other case) in which the court has allowed a departure from the approved costs budget (albeit whilst emphasising that the courts should generally adopt a strict approach to this issue), this is a very narrow decision. The form in question has now been replaced by a new form - Precedent H - and that form does not contain a tick box. Instead, it excludes various items including success fees and premiums (as well as VAT and court fees). The judge noted that, had the claimant had to complete that form, the mistake which it made would not have arisen.

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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