UK: (Re)insurance Weekly Update 3 - 2016

Last Updated: 26 January 2016
Article by Nigel Brook

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

This Week's Caselaw

Anzen Ltd v Hermes One: Privy Council considers the effect of a clause which provides that the parties "may" arbitrate

The parties entered into an agreement (governed by English law) which provided that: "If a dispute arises...and the dispute cannot be settled within 20 business days through negotiation, any Party may submit the dispute to binding arbitration" (emphasis added). The clause then went on to specify various issues connected to the arbitration eg venue and language.

Following a dispute, the respondent commenced court proceedings in the BVI. The appellants did not start arbitral proceedings. Instead, they sought a stay of the court proceedings (relying on a statutory provision which is similar to that of section 9 of the Arbitration Act 1996, which provides, broadly, that a party to an arbitration agreement against whom legal proceedings are brought may apply to the court to stay the proceedings). A stay was rejected at first instance and on appeal (on the ground that no arbitration of an identical subject matter had been commenced by the appellant) but the Privy Council has now allowed the appeal.

In reaching its decision, the Privy Council considered 3 possible analyses of the arbitration agreement:

(a) the parties must arbitrate if they wish to pursue the dispute ("analysis I");
(b) one party may commence litigation if it wishes, but the other party has the option of arbitrating if:
it commences an arbitration ("analysis II"); or
(c) it requires the other party to submit to arbitration by making an unequivocal request to that effect and/or applying for a stay ("analysis III").

The Privy Council found many significant pointers against analysis I. Clauses depriving a party of a right to litigate should be clearly worded and there was an obvious linguistic difference between "may" and "shall". The Privy Council rejected the argument, though, that the litigation proceedings had not been properly begun.

If analysis II is adopted, the Board said that it would lead to "evident incongruity", in that the litigation can only be ended by a party actually commencing an arbitration in which the only claim they might be able to make is for a declaration of non-liability in respect of any claim being brought in the litigation. It was said that that would make no commercial sense.

Accordingly, the Privy Council favoured analysis III. The clause contemplated a consensual approach and the view that notice by the appellants triggered a mutual agreement to arbitrate fitted that approach.  As a result, the litigation proceedings had been properly begun but they should now be stayed, once the appellants invoked arbitration. However, the appellants did not have to actually commence arbitration themselves in order to obtain a stay of the litigation. Thus the party which started the litigation will be forced to commence the arbitration (whilst paying the requisite fee) if the other side doesn't and if it wishes to pursue its claim.

In reaching its decision, the Privy Council referred to earlier decisions that a clause which entitles either party to elect arbitration (but provides for litigation otherwise) is a valid arbitration agreement once the option is exercised by starting arbitration. However, the Board has gone further in this case by confirming that merely applying for a stay or invoking arbitration (without actually commencing arbitration) is also enough to make the arbitration agreement binding.

COMMENT: Although analysis III has the result that the party commencing litigation has not done anything wrong, the effective result is that a party wishing to arbitrate can obtain a stay of the litigation proceedings, thus producing the same practical result as for analysis I. This result could be said to make commercial sense, in that the undesirable situation of parallel decisions from a court and a tribunal will be avoided. However, the party which legitimately started litigation here will no doubt be aggrieved that it will now be put to the expense and hassle of starting an arbitration in order to pursue its case. The party which didn't want to litigate waited only a month here before applying for a stay. Had it decided instead to let the litigation continue for some time (perhaps in order to assess its likely chances of success before the court) before finally invoking its option of arbitrating, the scope for potential unfairness would be great (the court having no option to refuse a stay, unless the arbitration agreement is null and void).

Suh v Mace (UK) Ltd: Whether without prejudice privilege could be claimed and, if so, whether it had been waived

The "without prejudice" rule excludes from evidence all negotiations genuinely aimed at settlement. The court must consider the circumstances of the communications from an objective standpoint.

In this case, the appellant allegedly made certain admission during a meeting with the other side's solicitors (which the appellant said was held in order to discuss the case and its progress). At first instance, it was held that the meeting had not been a without prejudice meeting. That finding has now been reversed by the Court of Appeal.

The Court of Appeal held that "a broader view is now authoritatively required" when deciding the nature of discussions which have taken place. Taking into account that it can be harder to determine this question where a litigant in person is involved, Vos LJ went on to state that "I am influenced here by asking what else could it be said the discussions were about?" The appellant had not attended in order to obtain legal advice and "the only sensible purpose for such a meeting must have been to seek some kind of solution to the litigation" for the appellant: "That is what a settlement is, and what both parties here must objectively be regarded as having genuinely been seeking. There is no justification for salami slicing the interviews into parts that were open and parts that were without prejudice. Such an approach would contravene the broad view required by the authorities which I have described". Accordingly, the entire meeting was covered by the privilege.

Nor could it be said that exclusion of the evidence would act as a cloak for impropriety. The appellant had done nothing even arguably dishonest in the course of the meeting and so this was not a case like that mentioned in an earlier decision, where the person seeking to claim the privilege had threatened the other side, during the relevant discussions, that he would give perjured evidence unless the settlement was agreed.

The Court of Appeal went on to find that there had also been no waiver of the privilege.

The test of waiver of without prejudice privilege differs from that for legal professional privilege, in that the waiver must be made by both parties. The Court of Appeal said that this calls for an objective evaluation in the context of the purpose of the without prejudice privilege. Would it be unjust for the appellant to argue that admissions made in the meeting were privileged? The Court of Appeal found that, in the circumstances it would not: "It would hardly protect the privilege and its overarching purpose if the party seeking to overcome it could secure its waiver by forcing the opposing party to respond to an application it was making to the court".

COMMENT: The Court of Appeal's broad view approach seems to lead to the result that, where two disputing parties agree to meet, the onus will fall on the party denying that without prejudice privilege applies to demonstrate that the purpose of that meeting was not to reach some kind of solution. The comment about not dividing the meeting into WP and non-WP parts is also of interest. In Passmore on Privilege, 3rd edn, it is commented that "meetings often switch in and out of the without prejudice mode", but the Court of Appeal seems to be of the view that that an overall view of the nature and purpose of a meeting is generally a better approach.

In the Matter of Rothesay Assurance Ltd: Whether concerns about excess capital levels should prevent approval of a scheme

An application was made to court for approval of an insurance business transfer scheme. A representative policyholder of the transferor raised concerns regarding the effect of the proposed transfer. Although accepting that the policyholders had no right to any particular level of excess assets, he pointed out that their first call on the excess capital (whatever that level might be) would be lost and that the transferor's policyholders would rank equally with the far more numerous existing policyholders of the transferee and so the level of assets per policyholder would be greatly reduced.

Henderson J held that the court should give its approval to the transfer. There was no principled basis for assessing what is the "right" level of excess capital for the transferor to hold. That level is liable to fluctuate and is not set at any specific amount because it exceeded the mandatory regulatory requirements. Instead, the critical question is whether the scheme poses a material risk to the solvency of the transferee and thus the security of the transferring policyholders. The independent expert (and the regulators) had found that the transferee would remain in a strong capital position, both before and after the introduction of Solvency II. The judge said he had no reason to challenge that conclusion.

Crooks v Hendricks Lovell: Assessing whether a Part 36 offer has been beaten where benefits are recoverable

Under a statutory scheme, a defendant to a personal injury claim (broadly) pays reduced damages to the claimant and then refunds "recoverable benefits" to the state ("recoverable benefits" include social security benefits paid in respect of injuries sustained in an accident at work). When making a Part 36 offer, the defendant can therefore choose whether to make the offer "without regard to any liability for recoverable amounts" or state that the offer "is intended to include any deductible amounts".

In this case, the defendant offered £18,500 "net of CRU" (ie net of recoverable benefits due to the Compensation Recovery Unit). After judgment was given (in the sum of £29,550), the recorder adjourned his consideration of costs until after the outcome of a review by the CRU of the certificate of recovery benefits which it had issued prior to judgment. After the revised certificate was issued, it was held that the claimant had failed to beat the defendant's Part 36 offer. The claimant appealed and the Court of Appeal has now held as follows:

  1. This had been a valid Part 36 offer. As it was intended to be made "without regard to any liability for recoverable amounts", the defendant did not have to state the amount of gross compensation which the claimant would receive.
  2. "Net of CRU" meant that the amount of the offer had to be compared with the judgment sum after any corresponding adjustments for recoverable benefit have been made.
  3. The recorder had been correct to wait until the CRU's review before deciding whether the Part 36 offer had been beaten. It is not always necessary to compare the offer with the award made on the day of judgment. Sometimes, as here, the judge cannot decide costs straight away.
  4. The Part 36 offer had been beaten by the claimant. When determining whether or not an offer had been beaten "one had to look at the net sum paid to the claimant, not the gross sum including monies payable to the CRU" (ie not the total amount which the defendant had to pay). Once the sum owed to the CRU had been calculated, the claimant received £22,789 as the amount that was net of recoverable benefit, and so had beaten the offer.

Accordingly, the appeal was allowed.

(Re)insurance Weekly Update 3 - 2016

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