UK: (Re)Insurance Weekly Update 38 - 2015

Last Updated: 2 November 2015
Article by Nigel Brook

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

This week's caselaw:

JSC BTA Bank v Ablyazov

Supreme Court holds that a loan amounts to an "asset" within the meaning of a standard freezing order

The first instance and Court of Appeal decisions in this case were reported in Weekly Updates 24/12 and 29/13 respectively.

The claimant obtained a freezing order against the defendant preventing him (in the usual way) from disposing of, or dealing with, any of his "assets". The respondent entered into four loan agreements, each giving him the right to borrow up to £10million, which the defendant then used to pay legal costs and living expenses (in excess of the "reasonable" amount for legal expenses and £10,000 per week for living expenses allowed by the freezing order).

At first instance, it was held that an "asset" should be construed in the way it would be understood to a businessman, not a lawyer, and did not include a right to borrow. The Court of Appeal upheld that decision, finding that the terms of the order had not made the right to borrow an asset. The Supreme Court has now allowed the appeal from that decision.

The Supreme Court unanimously held as follows:

  1. When construing a freezing order, the court must look at what it says and not what ought to have been ordered. The Court of Appeal had held that certain legal principles govern the courts' approach to freezing order, one of which is flexibility. However, the Supreme Court held that the flexibility principle has no role in the construction of a freezing order. The Supreme Court agreed with the Court of Appeal that freezing orders should be construed strictly. It also found that the order should be construed in its context (including its historical context).
  2. The courts, together with textbook commentary, have long supported the view that a freezing order does not prevent a respondent from borrowing money. Even though the right to borrow money is, "in ordinary legal parlance", an asset, that is not how the matter has been approached previously. Although the Supreme Court could overturn those earlier decisions, it did not find it was appropriate to do so: "Clarity is important and so is certainty in the context of penal orders".
  3. However, the order had contained the following wording: "For the purpose of this Order, the respondent's assets include any asset which it has power, directly or indirectly, to dispose of, or deal with as if it was its own. The respondent is to be regarded as having such power if a third party holds or controls the assets in accordance with its direct or indirect instructions". This wording appears as paragraph 6 of the standard form freezing order annexed to PD25A.

It was held that the Court of Appeal had been wrong to take into account that the power to deal with the loan monies was subject to the lender's consent. The respondent could use the loan proceeds as it wished and could direct payment to a third party. Accordingly, the loan proceeds fell within the meaning of "asset" in paragraph 6: "The whole focus...of the paragraph is the respondent's power to deal with the lender's assets as if they were his own".

COMMENT: The Supreme Court decision in effect overturns prior caselaw on the point, even though the rationale for those earlier decisions has been allowed to stand. By concentrating on a different part of the standard freezing order, the Supreme Court's decision will prevent defendants borrowing large sums to pay out to third parties before defaulting on the loans and thus possibly enabling lenders to obtain judgment against the defendant's assets before the claimant's claim can be established (and so in effect making the claimant "judgment proof"). That, of course, is on the proviso that the freezing order actually made contains the wording in paragraph 6. But this decision means that the standard wording would have to be amended to exclude loan proceeds, as opposed to an amendment to include borrowing as an asset (as was previously the case). The decision could be significant for respondents, since borrowing includes not just loans but also, for example, payments by credit card and payments from an overdrawn account (where the overdraft facility has not been exhausted).

Metropolitan Housing v Taylor

The test for dishonesty in a freezing order application

Clyde & Co (Katherine Gregory) for second and third defendants

This case concerned an application to discharge a freezing order. In order to obtain a freezing order, an applicant must show "a good arguable case" on the merits. The parties differed on whether this test was the same as, or higher than, the test for summary judgment/strike out. Warren J approved textbook commentary to the effect that the test is not rigid and well-defined, but instead must be left to the judgment of the court. The judge also cited earlier authority that "a stronger case must be shown than would justify relief of a less stringent kind". Because, once the threshold of an arguable case has been reached, the court must still look at all other relevant factors, the judge was required to examine the evidence in detail.

In this case, the risk of dissipation depended largely on inferences to be drawn from allegedly dishonest conduct. The judge held that: "the test of good arguable case for the purposes of the applicable tests for the grant of a freezing order does not require there to be good arguable case of dishonesty. However, where alleged dishonesty is relied on as part of the case in support of a risk of dissipation, it is important to consider whether a good arguable case of dishonesty is established in relation to the conduct relied on. If a good arguable case of dishonesty is not established, that conduct is not relevant to the argument that there is risk of dissipation".

On the facts of the case, the applicant was unable to show a good arguable case of dishonesty in all but two instances, which involved relatively small amounts of money. Since no clear fraud had been established in relation to those amounts, a real risk of dissipation could not be proven.

Bloomberg v Malling Pre-Cast

Whether a Part 20 defendant had contracted out of a contribution claim with the claimant

Clyde & Co (Patrick Perry, Alexandra Saj, Christine Gordon) for third defendant

The defendant engineers to an action issued Part 20 proceedings against a contractor, seeking a contribution. The contractor had given the claimant tenant a warranty which provided, in relevant part, that "no proceedings shall be commenced against the contractor after the expiry of 12 years from the date of issue of the last written statement by the client that practical completion of the Project has been achieved". The contractor applied to have the Part 20 proceedings against it struck out and one of the issues in this case was whether "no proceedings shall be commenced against the contractor" meant proceedings by the claimant tenant only or could also include the contribution proceedings being brought by the defendant engineers.

The contractor argued that the purpose behind the provision was to ensure that no proceedings could be brought against it after a particular time. That argument was rejected by the judge who said that the clear meaning of the words "no proceedings" used in the warranty between the claimant and the contractor was that no proceedings could be brought by the claimant. No wider interpretation could be adopted. Accordingly, the defendant engineers could not be said to have no reasonable prospect of succeeding in their contribution claim. The judge also noted that, if the contractor's argument had been right, parties could effectively "contract out" of contribution claims even though the third parties were not a party to the agreement.

Section 1(3) of the Civil Liability (Contribution) Act 1978 provides that: "A person shall be liable to make contribution ....notwithstanding that he has ceased to be liable in respect of the damage in question since the time when the damage occurred, unless he ceased to be liable by virtue of the expiry of a period of limitation or prescription which extinguished the right on which the claim against him in respect of the damage was based".

Fraser J approved earlier caselaw to the effect that where liability has ceased (as opposed to never having existed in the first place), contribution is no longer available if the underlying legal right has been extinguished . However, contribution is still available where (as here) the legal right (of the claimant) cannot be enforced (because of a time bar defence) but has not been extinguished either. (There are, however, certain exceptional situations where the expiry of a limitation period does extinguish the legal right too eg a party cannot bring an action in conversion as the owner's right to the goods if the limitation period has expired).

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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