UK: (Re)Insurance Weekly Update 27 - 2015

Last Updated: 28 July 2015
Article by Nigel Brook

Welcome to the twenty-seventh edition of Clyde & Co's (Re)insurance and litigation caselaw weekly updates for 2015

This week's caselaw:

Coventry v Lawrence

Supreme Court holds that recoverability of success fees and ATE premiums does not breach the ECHR

http://www.bailii.org/uk/cases/UKSC/2015/50.html

When the claimants won in the Supreme Court, Lord Neuberger expressed concern at the level of costs incurred in this case. The claimants' costs amounted to more than Ł1m, including a success fee and ATE premium.  The Defendants (who were individuals rather than a corporate entity) argued that the requirement to pay the success fee and ATE premium was inconsistent with their rights under the European Convention on Human Rights ("ECHR") – specifically Article 6, the right to a fair trial.  In particular, the provisions of the Access to Justice Act 1999 ("the Act") - which meant that such costs were required to be paid if they were reasonable (but not necessarily proportionate) – were, in the Defendants' view, manifestly unfair.

The costs hearing was relisted to allow the Court to hear from interested parties, including the Government. By a majority of 5–2, the Supreme Court has now held that the Act's costs regime is compatible with the ECHR. Whilst acknowledging that there were flaws inherent in the regime (which has now been superseded by the Legal Aid, Sentencing and Punishment of Offenders Act 2012 ("LASPO")), Lords Neuberger and Dyson (delivering the leading judgment) found that the regime was a proportionate, rational and coherent method of achieving a legitimate aim; namely widening access to justice, such that it was not incompatible with Article 6.

Clarke LJ and Baroness Hale gave strong dissenting judgment, though, asserting that the regime was disproportionate and discriminatory because it imposed liabilities, far beyond the bounds of what may be reasonable or proportionate, on defendants who happened to have been opposed by CFA/ATE-funded litigants.

COMMENT: The judgment will no doubt be welcomed by the Government, as the ruling means that a prospective flood of compensation claims from unsuccessful litigants who have paid out ATE premiums over the years will now no longer be forthcoming. Indeed, the potential sums at stake (some commentators estimated that recoveries could run into billions) had the Supreme Court found the Act to be incompatible with the ECHR may lead to the suggestion that this decision is a matter of public policy.

Salt v Stratstone Specialist

Court of Appeal considers the Misrepresentation Act 1967 and damages in lieu of rescission/avoidance

http://www.bailii.org/ew/cases/EWCA/Civ/2015/745.html

Section 2(2) of the Misrepresentation Act 1967 provides that, where a person has been induced to enter into a contract because of a negligent/innocent misrepresentation, "and he would be entitled, by reason of the misrepresentation, to rescind the contract, then, if it is claimed, in any proceedings arising out of the contract, that the contract ought to be or has been rescinded the court or arbitrator may declare the contract subsisting and award damages in lieu of rescission, if of the opinion that it would be equitable to do so..."

At first instance in this case, it was held that rescission was not possible, but that decision was reversed by Harris HHJ. If it was correct to say that rescission was impossible, though, would damages still be available under section 2(2)? That is an issue which has been discussed in various cases and on which there is conflicting prior authority. However, the point has not yet been decided by the Court of Appeal.

In this case, the Court of Appeal unanimously concluded that "the words "in lieu of rescission" must, in my view, carry with them the implication that rescission is available (or was available at the time the contract was rescinded). If it is not (or was not available in law) because e.g. the contract has been affirmed, third party rights have intervened, an excessive time has elapsed or restitution has become impossible, rescission is not available and damages cannot be said to be awarded "in lieu of rescission"". Accordingly, the discretion to award damages under section 2(2) is not available if restitution is no longer possible. On the facts here, though, rescission was still possible (and lapse of time on its own cannot be a bar to rescission).

COMMENT: Although not conclusively decided by the courts yet, it seems to be the case that the Misrepresentation Act 1967 applies to insurance contracts, although there is caselaw suggesting that section 2(2) does not apply to commercial contracts of insurance (on the basis that if a right to avoid exists, that remedy should not be denied by the courts). Even if section 2(2) does apply to insurance policies, it is unclear how the Insurance Act 2015 will impact on this issue when it comes into force. The 2015 Act will abolish any rule of law permitting a party to an insurance contract to avoid the contract on the ground of breach of the duty of utmost good faith (although insurers can still avoid in certain circumstances under the 2015 Act). Where avoidance is not available though (eg because a negligent misrepresentation was made by the insurer to the insured), it is arguable that, following this case, the discretion to award damages under section 2(2) instead will not arise (although possibly a separate claim in equity could be brought by the insured).

Watsons (Proposed Claimants): Justification for without notice application/need to issue a claim form

http://www.bailii.org/ew/cases/EWHC/QB/2015/2078.html

In the recent case of Lachaux v Independent Print (see Weekly Update 24/15), Nicol J queried whether there had been the necessary "extreme urgency" to justify a without notice application and said that in any event, it was not clear why informal notification had not been given to the defendants' solicitors. In this case, heard by another Queen's Bench judge, reference was made to the practice of issuing applications ex parte and before issue of a claim form "as if this were the normal way of proceeding". Edis J continued: "It is not. The default position is that interim remedies are granted within existing proceedings. The default position is that they are granted after notice has been given to the person against whom they are sought and after service of the claim form on that person. Those default positions can (and very often are) be varied where good cause is shown, but each variation needs to be justified and considered separately. Where, as here, the claimant comes without having issued proceedings, without serving proceedings, and without giving notice to the other party or parties there is a series of issues to be addressed before any order at all can be made:-

i) Why has no claim form been issued? Is it appropriate to consider granting an order on an undertaking to issue and serve proceedings forthwith? Is there sufficient urgency to justify this course, and what is the likelihood that a claim form will come into existence in such a form that it can lawfully be issued within that time frame?

ii) If the application is entertained before issue, why is it being pursued without notice? There must be a substantial justification for that before the application will be heard, still less granted".

Accordingly, practitioners should bear these considerations in mind when making an ex parte application before issue of a claim form.

Peak Hotels v Tarek Investments

Test for taking funds out of court following cross-undertaking as to damages

http://www.bailii.org/ew/cases/EWHC/Ch/2015/1997.html

The claimant sought and obtained various interim injunctions against the defendants. It was required to provide a cross-undertaking as to damages and this was fortified by the payment into court of USD 10 million. The claimant subsequently applied for a payment out of court of USD 9 million from this amount. It was argued that there was no evidence to suggest the defendant would be caused any loss as a result of the injunctions and that the defendant wished to oppose the payment out in order to cut off a source of funding for the claimant's action.

Barling J therefore considered the appropriate test for the application. Prior caselaw has indicated the need for the claimant to demonstrate "some significant change of circumstances" which it could not have known about when the payment in or undertaking was given. The claimant had also referred to commentary in the White Book that "laxer principles" may apply where the order (as it did here) contains an express "liberty to apply". However, the judge held that the use of that phrase did not advance matters significantly, and the claimant had been right to describe that as a "small point".

On the facts, the judge concluded that there had not been a material change of circumstances to justify the claimant withdrawing part of the fortification which it had undertaken to provide. Nor was it relevant that the cross-undertaking might not be called upon (or not be called upon for the full amount paid into court). Although the claimant had expressed a wish to use the money paid in to fund the cost of the proceedings, it had not argued that tying up the funds created any hardship for it or stifled its claim. Accordingly, the application was refused.

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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