UK: Insurance And Reinsurance Weekly Update - 29 July 2014

Last Updated: 1 August 2014
Article by Nigel Brook

Welcome to the twenty-eighth 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

  • Starlight Shipping v Allianz Marine
    A Clyde & Co case in which the Court of Appeal interpreted settlement agreements and an insurance policy following commencement of proceedings overseas.
  • Greenwich Millennium Village v Essex Services
    A Clyde & Co case on the causation test where there are two concurrent independent causes and an indemnity agreement where the indemnitee is negligent.
  • Bache & Ors v Zurich Insurance Plc
    A case on whether an insurer was liable to repay purchasers' deposits following dissolution of the developer and policy interpretation.
  • Greenwich Inc v Dowling & Ors
    A case where a freezing injunction was discharged because the applicant had failed to draw a change in the standard form order to the court's attention.
  • Tchenguiz & Anor v Director of the SFO
    A judge decides whether disclosed documents could be used to see if they might be relevant to separate proceedings.
  • Hart & Anor v Burbidge & Anor
    The Court of Appeal considers Denton and applications to extend time to file an appellant's notice.
  • FHR European Ventures v Cedar Capital
    The Supreme Court decides whether the recipient of a bribe holds it on trust for his principal.

Starlight Shipping v Allianz Marine

Court of Appeal interprets settlement agreements and insurance policy following commencement of proceedings overseas

Clyde & Co (Mike Roderick, Angela Haylett and Sophie Shiffman) for respondents

This case has been previously reported in Weekly Updates 46/11, 46/12 and 40/13. The insured's claim for damages when its insurers refused to pay failed in English court proceedings. The parties then entered into two settlement agreements which provided for English law and jurisdiction and contained an indemnity agreement, whereby the insured agreed to indemnify the insurers against any claim brought by the insured's companies. Three years after the settlement, the insured commenced proceedings in Greece against the insurers, seeking compensation for loss of hire and loss of opportunity. The insurers commenced proceedings in England alleging a breach of the settlement agreements and/or exclusive jurisdiction clauses in the policy and settlement agreements. The judge granted summary judgment against the insured. The insured appealed and the Supreme Court eventually held that the English proceedings did not have to be stayed under Regulation 44/2001. The Court of Appeal therefore considered the rest of the insured's appeal in this case.

It was held that although there was a slight mismatch between the settlement provision and the indemnity provision in the settlement agreements, it was obviously the parties' intention that the two clauses "should march together". Also, fine distinctions between words like "under" or "in relation to" in arbitration agreements should no longer be made since the House of Lords decision in Fiona Trust v Privalov (see Weekly Update 40/07) and "Jurisdiction clauses are very similar to arbitration clauses (and, of course, appear in the Settlement Agreements with which this court is concerned); settlement clauses are analogous to both arbitration and jurisdiction clauses and should likewise be given a sensible commercial meaning". The parties had clearly intended a full and final settlement of all claims in relation to the insured's loss.

The claims brought in Greece therefore fell within the exclusive jurisdiction clauses contained both in the settlement agreements and the original policy. The fact that the claims being brought in Greece would not have been permissible under English law was "nothing to the point".

Given the breaches of the exclusive jurisdiction clauses, the Court of Appeal held that the judge at first instance had been correct to award damages (to be assessed), irrespective of whether the insured succeeds in its claim in Greece. Nor was it too early to invoke the indemnity agreement: insurers have already incurred and are continuing to incur considerable expense as a result of the proceedings which have been wrongly brought in Greece.

Greenwich Millennium Village v Essex Services

Causation test where there are two concurrent independent causes and indemnity agreement where indemnitee is negligent

Clyde & Co (Victor Rae-Reeves, Sarah Hargrave and Lucinda Sainsbury) for appellant

The first instance decision in this case was reported in Weekly Update 39/13. A contractor sought to claim under an indemnity agreement with its sub-contractor following a flood at the property. The flood had occurred because the surge arrestor had not operated properly. That in turn was caused by two separate failures: a valve had been closed when it should have been opened, but even if it had have been open, the flood would still have happened because of a fault with a different valve (i.e. either one of those wholly independent events on its own would have prevented the arrestor from working). The Court of Appeal held as follows:

  1. The contractor could recover against the sub-contractor even though the contractor was itself at fault (for failing to detect the sub-contractor's defects). In Canada Steamship Lines v The King [1952], the Privy Council held that an idemnitee could not usually recover under an indemnity agreement (in the absence of express wording) where it had itself been negligent. However, the Court of Appeal held that the Canada Steamship principle is a rule of construction and not a rule of law and is based on the presumed intention of the parties and the commercial context of the particular contract being considered: "In the case of a construction contract a failure by the indemnitee to spot defects perpetrated by its contractor or sub-contractor should not ordinarily defeat the operation of an indemnity clause, even if that clause fails expressly to encompass damage caused by the negligence of the indemnitee".
  2. The Court of Appeal also did not overturn the decision at first instance that the "but for" test for causation was not appropriate here (since that test would have resulted in neither cause having been found to have given rise to the loss on the facts). Instead, the judge had been correct to find that there had been "two equally efficacious causes of the flooding". At first instance, the judge had also drawn a distinction between cases where there are two concurrent independent causes (as was the case here) and those where there are two co-operating clauses (i.e. two causes give rise to a loss but each, on its own, would not have done so).

Bache & Ors v Zurich Insurance Plc

Whether insurer liable to repay purchasers' deposits following dissolution of developer/policy interpretation

The claimants purchased flats being built by a developer and paid a 10% deposit. The developer took out a policy with the defendant for the benefit of the claimants. The introduction to the policy explained that "the policy protects you if your developer goes into liquidation...against the loss of contract exchange deposit". Section 1 of the policy provided that "we will pay where, due to the developer's bankruptcy, liquidation or fraud, the developer fails to complete the construction of the new home..." (emphasis added).

When construction work stopped, the claimants wrote to the developer in 2010 purporting to accept the developer's failure to complete the construction as a repudiation of their agreement and seeking the return of their deposits. The developer was placed in administration in 2011 and dissolved in 2013 (with any deposits being returned). The insurers initially denied liability on the ground that the developer was not in liquidation, but that defence was subsequently dropped because the insurer accepted that dissolution would fall within the scope of "liquidation". However, the insurers also sought to argue that there was no cover because the loss of the deposits had been triggered by the rescission of the contract between the claimants and the developer, and not the "liquidation". As a result, at the time of its "liquidation", the developer had no longer been under any obligation to complete the development.

Akenhead J rejected the insurer's interpretation of the policy. The words "fails to complete" did not necessarily imply a subsisting obligation on the part of the developer to complete. The judge held that "A failure to do something can and often simply means an omission to do something or simply not doing that thing. It does not necessarily imply some legal, statutory or contractual duty". Taking into account the commercial purpose of the policy, it made no sense to treat these claimants differently from other purchasers who had not treated the non-completion as repudiatory and had instead simply waited until the developer's dissolution: "in my judgment, this is a distinction without at least a commercial difference...there is no obvious or logical reason why there should be a distinction between the two types of purchaser".

The judge concluded that section 1 is only engaged on bankruptcy, liquidation (including dissolution) or fraud but insolvency "is not in itself an event which engages the policy". There was cover here because the developer's insolvency was the reason it had failed to complete the development.

COMMENT: The judge here was clearly swayed by the commercial purpose behind the policy when reaching his decision and the reason why the development was not completed. There would have appeared to have been some force in the argument that the term "fails to complete" pre-supposes some subsisting duty to complete the works, but the argument might have been seen as a technical one on the facts of the case where, the judge found, insolvency was at the root of the non-completion of the works. However if, for example, the developer had failed to complete the development for a reason unconnected to its impending insolvency (e.g. delay by sub-contractors) and was then subsequently placed in insolvency, it would seem that there would be no cover under the policy in such circumstances.

Greenwich Inc v Dowling & Ors

Freezing injunction discharged because applicant failed to draw change in standard form order to court's attention/solicitors' duties

In Finurba Corporate Finance v Sipp [2011], the Court of Appeal held that "It is very important that advocates applying for freezing orders ex parte draw to the court's attention any departures from the standard form, and ensure that the fact that the court's attention was drawn to each such departure is recorded in the note of the hearing. If that is not done, it is only proper for the court at a subsequent hearing to take that omission into account as a factor against continuing the injunction, or, in an egregious case, as a reason for not continuing the injunction" (the injunction was discharged in that case). This case is a further example of a freezing order being discharged because of a failure to make full and frank disclosure to the court.

The standard form order had been altered in four respects (the applicants apparently having used their own standard form). Smith J said that both counsel and their instructing solicitors were at fault for failing to draw the changes from the standard form order to the court's attention: "If the solicitors prepare the order they will also have a liability if they do not appreciate that their order departs from a standard form or if they know that the order departs from a standard form and they permit Counsel to make the application without drawing to the judge's attention the non-standard provisions".

The judge also described the "interims procedure" which operates in the Chancery Division and emphasised that this procedure, which allows a large number of applications to be dealt with in one go, does not allow judges much reading-in time and hence judges are "very dependent on what the advocates tell them... Without that confidence in being able to rely on counsel, the interim system would simply collapse as there would not be enough time to accommodate the large number of applications that are brought before the judge".

Tchenguiz & Anor v Director of the SFO

Whether disclosed documents could be used to see if they might be relevant to separate proceedings

CPR r31.22 provides that a party to whom a document has been disclosed may use that document only "for the purpose of the proceedings in which it is disclosed" except if (amongst other things) the court gives permission. In Weekly Update 16/14 we reported that the claimant had been given permission under CPR r31.22 to send documents disclosed to it by the defendant to independent counsel who could then advise whether any criminal offences had been committed. In this case, the claimant applied for permission to instruct a review team to ascertain whether the disclosed documents might also be used in a pending appeal in separate proceedings in Guernsey.

Eder J granted permission. He held that the crucial point was that the proposed course of action did not, at this stage, involve the use of the disclosed documents in the Guernsey proceedings. It merely involved the claimant obtaining legal advice with a view to, if appropriate, making a further application in these proceedings pursuant to CPR r31.22. To refuse permission would be to deny the claimant the chance of making that further application and that would be unfair and amounted to a "special circumstance" in favour of granting permission.

The existence of a separate procedure under the Evidence (Proceedings in Other Jurisdictions) Act 1975 which allows the Guernsey courts to seek the assistance of the English courts in obtaining documentary evidence within England was a highly relevant consideration but in this case, that procedure could not be followed unless and until the proposed course of action was carried out.

The judge ordered the claimant to pay the defendant's reasonable costs in complying with the order (although the defendant could apply to set aside the order if it subsequently transpires that significant costs are likely to be incurred).

Hart & Anor v Burbidge & Anor

Court of Appeal considers Denton and applications to extend time to file an appellant's notice

This is the first Court of Appeal decision since Denton v TH White (see Weekly Update 26/14) to consider an application for relief from sanctions. The appellants filed their appellants' notices six weeks late and the respondents applied to set aside the grant by the Court of Appeal of permission to appeal. Reference was made to the earlier Court of Appeal decision in Sayers v Clarke Walker [2002] and dictum that the court must have regard to the criteria asset out in CPR r3.9 when considering such an extension (on the basis that if the court is unwilling to grant relief from failure to comply through an extension of time, the consequence will be that the order of the lower court will stand and cannot be appealed): "Even though this may not be a sanction expressly "imposed" by the rule, the consequence will be exactly the same as if it had been, and it would be far better for courts to follow the check-list contained in CPR 3.9 on this occasion, too".

In this case, the Court of Appeal held that it would not be appropriate, in the absence of full argument on the point, to decide whether the new approach to relief from sanctions set out in Denton is properly to be regarded as relevant to an extension of time in these circumstances. However, the desire to discourage satellite litigation of all kinds was noted and it was also held that the delay here had been justified because the order being appealed had been complex.

FHR European Ventures v Cedar Capital

Supreme Court decides whether recipient of a bribe holds it on trust for his principal

The issue in this case was whether a bribe received by an agent is held on trust for the principal (i.e. the principal has a proprietary claim) or whether the principal merely has a claim for equitable compensation (in an amount equal to the value of the bribe), in which case the claim is not proprietary. This is of practical significance because: 1) a proprietary claim would give the principal priority over the agent's unsecured creditors in an insolvency situation, and 2) the principal will be able to trace and follow the bribe in equity if he has a proprietary claim. The Supreme Court unanimously held that for reasons of practicality and principle (and because the courts were said to have taken a "wrong turn" following earlier caselaw which was consistently in favour of the trust argument), a bribe accepted by an agent is held on trust for his principal.

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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