UK: Insurance And Reinsurance Weekly Update - 24 June 2014

Last Updated: 4 July 2014
Article by Nigel Brook

Welcome to the twenty-third edition of Clyde & Co's (Re)insurance and litigation caselaw weekly updates for 2014.

A summary of recent developments in insurance, reinsurance and litigation law.

This week's caselaw

  • Insurance Contract Law Reform
    An update on the Law Commissions' insurance contract law reform.
  • Americhem Europe v Rakem
    A case on whether a costs budget can be signed by a senior costs draftsman.
  • Gordon v Fraser
    The court allows relief from sanctions where a witness statement/summary was not served on time.
  • A Ltd v B Ltd
    A case on whether the arbitral appeal process had been "exhausted" prior to a challenge under section 67 or 68 of the Arbitration Act 1996.
  • Martrade Shipping v United Enterprises
    A decision on whether the Late Payment of Commercial Debts Act 1998 automatically applies if the parties agree English law and arbitration.

Insurance Contract Law Reform

The Law Commissions have published a draft bill which they believe is "settled", save for two clauses which remain controversial. These are the clauses which (1) provide that where a policy term (e.g. a warranty or a condition precedent) is designed to reduce the risk of a particular type of loss (or the risk of loss at a particular time or in a particular place) a breach will only entitle the insurer to refuse claims for losses falling within those categories; and (2) provide that it will be an implied term of an insurance contract that insurers will pay sums due within a reasonable time and late payment will attract damages from the insurer.

The Law Commissions are still hoping that the bill will follow the uncontroversial Law Commission Bills route. However, HM Treasury, which would be the sponsoring department, first wishes to consult on whether the draft bill (either with or without the two clauses mentioned above) has a broad consensus of support in order to follow that procedure. This consultation (which will end on Wednesday 2 July) differs from the Law Commissions' earlier consultation on the draft bill, which was concerned only with the question of whether the bill accurately reflected the Law Commissions' policy objectives (as set out in their earlier consultation papers). The Law Commissions are aware that this Parliamentary session is short (ending on 30 March 2015) and this new approach heightens the possibility that the two clauses mentioned above will be omitted from the final bill in order to ensure that the rest of the bill stands a chance of becoming law prior to the next election. If so, not only will the (arguably) most controversial aspect (for insurers) of the draft bill – late payment damages- be dropped in its entirety, but the reforms to warranties will be significantly watered down (leaving only the abolition of basis of the contract clauses and allowing the possibility of a breach of warranty being remedied (and the insurer coming back on cover), where that is possible).

The latest draft bill can be viewed here:

Americhem Europe v Rakem

Whether costs budget can be signed by a senior costs draftsman

PD 3E provides that a costs budget must be verified by a statement of truth signed by a "senior legal representative of the party". In this case, it was claimed that the budget was a nullity because it was signed by a senior costs draftsman (who is not a solicitor).

Stuart-Smith J held that the draftsman was not a "senior legal representative" for the purpose of PD 3E. Although the practice direction does not define a "senior legal representative", it was held that where (as is the case with PD 3E) a practice direction states that it supplements a particular rule of the CPR, regard can be had to the CPR to ensure consistency. CPR r2.3(1) defines a "legal representative" as (inter alia), an authorised person who "has been instructed to act for a party in relation to the proceedings". The judge concluded that "viewed overall, the CPR 2.3(1) definition of "legal representative" seems to me to connote someone who is representing in a legal capacity, which is not what is being done by a Costs Draftsman whose only involvement consists in preparing a costs budget and who does not give any form of legal advice or legally based representation".

Even if that was wrong, the costs draftsman in this case could not be descried as "senior" because, out of the three people listed in the form, he was the least senior, at least by reference to his charging rate. Furthermore, the practice direction requires "the certifier to be in a position independently to assess the weight of the case in terms of legal, factual and documentary complexity" and here, the draftsman knew nothing about the underlying case.

However, the judge refused to find that the budget was a nullity because of this "irregularity". It could not be said that the defendant had failed to provide any budget at all. Even if that was not the case and relief from sanctions was required, the judge would have granted such relief because the breach was trivial. The defendant was ordered to remedy the irregularity and to pay the party who brought this to the court's attention GBP 50.

Gordon v Fraser

Court allows relief from sanctions where witness statement/summary was not served on time

The defendant applied on the first day of trial to call a witness, despite having failed to serve a witness statement or witness summary in time. The application was therefore an application for relief from sanctions pursuant to CPR r3.9, and so the Mitchell principles applied. Although the judge accepted that the breach was not trivial and that no good reason for the breach had been established, he did grant relief. His reasons were as follows:

  1. While not trivial, the breach was probably inadvertent and "not high up on the scale of seriousness", and the defendant had otherwise complied with the rules.
  2. This was not a case where the defendant had failed to serve any evidence at all (with the effect that the case can no longer be tried on its merits). Here, the default related to some but not all of the defendant's evidence and "if there is to be a trial, its basic aim will be to decide correctly what the rights of the parties are. The exclusion of relevant evidence puts that at risk and so imperils the integrity of the judicial process". Furthermore, the judge was aware that the evidence existed and would be affected by that knowledge, even though if it could not be tested.
  3. The breach of the rules here was apparently the fault of the defendant's solicitors (who probably failed to appreciate that CPR r32.9 has the effect of making the time specified for the exchange of witness statements automatically apply to witness summaries too (witness summaries being required where a party is unable to obtain a witness statement in time)). Thus, the refusal of relief might well have led to a negligence claim against the solicitors, involving eventually significant additional use of the court's resources.

Although Davis LJ in Chartwell (see Weekly Update 15/14) acknowledged that satellite litigation might be an inevitable consequence of the new, stricter approach of the courts, that was said to be a reference to the "limited kind of "satellite litigation" constituted by contested applications for relief from sanctions" and was not a reference to "more substantial forms of satellite litigation", such as fresh actions and claims against solicitors: "Sometimes, these may render the refusal of the application seriously counterproductive as regards the efficient conduct of litigation and the waste of court's resources". The judge suggested that a better option, where a solicitor is the cause of a breach of the rules, would be to make a wasted costs order but to let the action proceed.

The judge concluded that "principally because of the sheer undesirability of the court deciding whether the very serious allegations made in this action were true without hearing readily available and probably important evidence, which could be heard without disrupting the trial", he should grant permission for the defendant to call the relevant witness.

COMMENT: This decision, which contributes to an apparent growing trend amongst first instance judges to seek to somewhat lessen the impact of the Mitchell approach, will also provide some comfort to professional indemnity insurers concerned that the new approach will lead to an increase in claims against solicitors where claims are lost because of a procedural default by a solicitor. The judge recognised that a negligence case against a defaulting solicitor requires courts to decide not only if there has been negligence but also what loss has been caused and this will "in turn depend on what the outcome of the original action would have been, which is sometimes not easy to decide". He opined that the undesirability of this must have been one of the reasons why the issue of whether a breach was caused by "the party or his legal representatives" was included as one of the matters to be taken into consideration when deciding whether to grant relief from sanctions under the old CPR r3.9 (and which can still be taken into consideration, according to the Mitchell and Chartwell cases).

A Ltd v B Ltd

Whether arbitral appeal process had been "exhausted" prior to a challenge under section 67 or 68 of the Arbitration Act 1996

Section 70(2) of the Arbitration Act 1996 provides that no application or appeal under sections 67-69 of the Act can be brought unless the applicant/appellant has first "exhausted" any available arbitral process of appeal or review, or any available recourse under section 57 (correction of award). In this case, the claimant had contested the jurisdiction of the arbitral tribunal (having denied it had entered into the relevant arbitration agreement) but had taken some part in the arbitral proceedings. Smith J held that "section 70 governs all challenges under section 67" (i.e. challenges on the basis that the tribunal lacked jurisdiction): "when a party takes part in arbitral proceedings while challenging the jurisdiction ... he thereby vests powers in the arbitral or other institution or person who would have had powers in relation to the matter if he had entered into an applicable arbitration agreement".

The issue was then whether the claimant here had "exhausted" the process that was available (this was a two-tier arbitration case, whereby the chosen institution allowed a right of appeal to an appeal committee). The claimant had sent a notice of appeal but had thereafter failed to pay the application fee and the institution dismissed the appeal and subsequently refused the claimant's application to extend time to pay.

It was accepted by the parties that a party cannot "exhaust" an appeal process if no appeal is brought at all (and the judge said the situation would be the same if an appeal is brought by a party who is merely going through the motions and has no true intention of having the merits of his case considered). The judge added that "what matters is that the process is fully spent, not how it became spent".

On the facts of the case, the claimant had not exhausted the appeal process simply by giving notice of appeal and nor was the process necessarily exhausted when the appeal was dismissed because of its failure to pay on time. The judge held that "It might well have been [exhausted] if it was simply impossible for them to provide the required deposit at any time, and there was no point in them seeking an extension. But here there was point in them applying for an extension, and in my judgment the process was exhausted only when the application was refused. This illustrates that the test whether an arbitral process is exhausted is flexible".

COMMENT: This appears to be the first case to consider the definition of "exhausted" in section 70(2) of the Act. Although Professor Merkin in the textbook Arbitration Act, 1996 has observed that an arbitral process of appeal or review "is only likely to be relevant to commodities arbitrations", this case will have a wider impact because almost all arbitrations (including those conducted under the auspices of eg UNCITRAL, the LCIA and the ICC) allow for the correction of clerical or similar errors.

Martrade Shipping v United Enterprises

Whether the Late Payment of Commercial Debts Act 1998 automatically applies if the parties agree English law and arbitration

The parties entered into a contract which provided for London arbitration and English law. Following a dispute about an unpaid debt, a tribunal awarded interest on the principal amount of 12.75% under the Late Payment of Commercial Debts (Interest) Act 1998. Section 12(1) of that Act provides that "This Act does not have effect in relation to a contract governed by a law of a part of the United Kingdom by choice of the parties if (a) there is no significant connection between the contract and that part of the United Kingdom; and (b) but for that choice, the applicable law would be a foreign law." The issue in this case was whether the arbitrators had been correct to find that the inclusion of a London arbitration clause was capable of amounting, in itself, to a "significant connection" between the contract and England.

Popplewell J noted that the choice of English law alone is not sufficient to establish a "significant connection". There are two possible explanations for this: (1) there must be something else which justifies the extension of a deterrent penal provision rooted in domestic policy to an international transaction; and (2) subjecting parties to a penal rate of interest on debts might be a discouragement to international parties who would otherwise choose English law to govern their contracts. He suggested various factors which might provide a "significant connection":

  • The place of the performance of the obligations under the contract is in England
  • One or more of the parties is English
  • The parties are carrying on some relevant part of their business in England
  • The economic consequences of a delay in payment of debts may be felt in the UK

On the other hand, a London arbitration or English jurisdiction clause cannot be a relevant connecting factor, since that "does not connect the substantive transaction itself to England. Choice of law considerations must be ignored for the purposes of s.12(1)(a), because the section will only be engaged in the first place where there has been a choice of English law. A London arbitration clause, once shorn of its significance as ancillary to the choice of law, has no relevance or significance to the substantive rights and obligations of the parties. Choice of forum governs procedural rights and remedies, not the substantive obligations which would arise under an implied term by virtue of the operation of the 1998 Act".

On the facts of the case, he found no significant connection for the purposes of the Act.

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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