UK: (Re)insurance Weekly Update 9- 2016

Last Updated: 14 March 2016
Article by Nigel Brook

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

This week's caselaw:

Cox v Ministry of Justice; Mohamud v WM Morrison Supermarkets: Supreme Court reviews the principle of vicarious liability in two complementary judgments

Lord Phillips stated in Various Claimants v Catholic Child Welfare (see Weekly Update 42/12) that "the law of vicarious liability is on the move". In these two complementary judgments, the Supreme Court has taken the opportunity "to take stock of where it has got to so far". Vicarious liability requires (1) the necessary relationship between the defendant and the wrongdoer, and (2) the necessary connection between that relationship and the wrongdoer's conduct. Both issues arose in these appeals.

(1) What relationship is needed?

In Cox v Ministry of Justice, it was held that the Ministry of Justice was vicariously liable for the negligence of a prisoner who injured the claimant employee (see Weekly Update 08/14). The Supreme Court referred to Lord Phillips' judgment in Catholic Child Welfare in which he laid down five criteria for establishing a relationship which is "akin to that between an employer and employee", and which therefore can give rise to vicarious liability. The Supreme Court has now held that those five factors are not all equally significant. The first factor was whether the employer is more likely to have the means to compensate the victim than the employee and is insured against that liability. The Supreme Court held that that factor is unlikely to have independent significance: "As for insurance, employers insure themselves because they are liable: they are not liable because they have insured themselves. On the other hand, given the infinite variety of circumstances in which the question of vicarious liability might arise, it cannot be ruled out that there might be circumstances in which the absence or unavailability of insurance, or other means of meeting a potential liability, might be a relevant consideration". Nor was the fifth factor (that the tortfeasor was under the control of the defendant) of independent significance now.

The three remaining factors listed by Lord Phillips were inter-related: (1) the tort will have been committed as a result of activity being taken by the tortfeasor on behalf of the defendant, (2) the tortfeasor's activity is likely to be part of the business activity of the defendant, and (3) the defendant, by employing the tortfeasor to carry on the activity, will have created the risk of the tort committed by the tortfeasor.

The Supreme Court has now held that these factors are not confined to some special category of cases, such as sexual abuse cases. There is no need for the defendant to be carrying on activities of a commercial nature: "It is sufficient that there is a defendant which is carrying on activities in the furtherance of its own interests. The individual for whose conduct it may be vicariously liable must carry on activities assigned to him by the defendant as an integral part of its operation and for its benefit. The defendant must, by assigning those activities to him, have created a risk of his committing the tort".

The Supreme Court recognised that a wide range of circumstances might satisfy these requirements. It also found the requisite relationship on the facts of this case.

(2) What connection is needed between the relationship and the conduct?

In Mohamud v WM Morrison Supermarkets, the Court of Appeal had held that there was no vicarious liability where a petrol station employee had seriously injured a customer in an unprovoked attack which took place on the employer's premises (see Weekly Update 07/14). The appellant sought to argue that the "close connection" test developed by the courts should be replaced with a broader test of "representative capacity". In other words, rather than asking if the wrongful conduct is so closely connected with acts which the employee was authorised to do that it may be fairly and properly regarded as done in the ordinary course of its business (or the employee's employment), it was argued that the test should be whether a reasonable observer would consider the employee to be acting in the capacity of a representative of the employer at the time of committing the tort. That argument was rejected by the Supreme Court.

It held that the court should consider two matters:

(a) What functions or "field of activities" have been entrusted by the employer to the employee (and this question should be addressed broadly); and

(b) Was there a sufficient connection between the position in which he was employed and his wrongful conduct to make it right for the employer to be held liable for reasons of social justice. Prior caselaw has found this connection where an employee has used or misused the position entrusted to him in a way which injured the victim.

Applying those tests to the facts of the case, the Supreme Court held that the employer was vicariously liable. It was the employee's job to attend to customers and their inquiries. Even though he performed that job in an inexcusable manner, it was still within "the field of activities" assigned to him. The attack resulted from an "unbroken sequence of events" – the employee had followed up the initial encounter at the counter by following the victim to his car, where he then attacked him. That was said to be a "seamless episode": "I do not consider that it is right to regard him as having metaphorically taken off his uniform the moment he stepped from behind the counter". Furthermore, he had told the victim to never return to the petrol station: "This was not something personal between them; it was an order to keep away from his employer's giving such an order he was purporting to act upon his employer's business". It made no difference what the employee's motive was (or that his supervisor had tried to stop him at one stage).

The Supreme Court also criticised the test set out in Salmond, Law of Torts, namely, whether the wrongful act was an unauthorised mode of doing some act authorised by the employer: "even with stretching, it was not universally satisfactory".

COMMENT: Prior caselaw has usually held that there was vicarious liability where the employee's job involved some obligation to keep order and involved potential confrontation with a customer. Although the Supreme Court said that it was not altering the previously applied test, its application of that test to the facts of this case is arguably more generous than in many previous cases. It adopted a broad approach to whether the assault was committed in the course of the employee's employment. In relation to a similar case involving an attack by an employee at a petrol station, Warren v Henlys [1948], where no finding of vicarious liability was made, Lord Toulson commented that: "if the attendant had punched the customer because he believed, rightly or wrongly, that the customer was leaving without payment, I would regard such conduct as occurring within the course of his employment" (but as the victim had been attacked later on, when he returned with a police officer to make a complaint, the relationship had changed from customer and employee to complainant and the subject of the complaint).

As for the decision in Cox, the Supreme Court has also arguably widened the scope of cases which will fall within the test of a necessary relationship by emphasising that there needn't be any business activity being carried on by the defendant, just activities which "further its own interests".

W Ltd v M SDN BHD: Conflict of interest: apparent bias of arbitrator, arbitrator's law firm acting for affiliated company of defendant. 2014 IBA Guidelines 'Non-Waivable Red List' criticised by English High Court judge as having "weaknesses".

Clyde & Co (David Leckie, Tom Roberts, Rona MacRae) for claimant

In a judgment dated 2 March 2016, dismissing an appeal under section 68(2) of the Arbitration Act, an English High Court judge has ruled that the 2014 IBA Guidelines on conflict of interest have "weaknesses" and are not "correct".   The decision has already caused controversy in international arbitration circles. 

Knowles J ruled that there was no apparent bias in circumstances where the sole arbitrator appointed by the LCIA, Mr David Haigh QC, was a partner in the Canadian law firm Burnet, Duckworth & Palmer LLP (BDP) which, during the course of the arbitration in question, provided "substantial"  legal services to an affiliated company of the Defendant and derived "substantial remuneration" from the instructions.  Mr Haigh QC stated that he had no knowledge of this clear conflict of interest during the course of the arbitration, despite the "substantial publicity" surrounding the Burnett, Duckworth and Palmer instruction and the involvement of 2 senior BDP partners, including the Managing Partner of the firm, on the Board and/or as shareholders of the Canadian company which was acquired by the affiliate of the Defendant.

The conflict of interest was only discovered shortly after the Final Award and, according to Mr Haigh, his firm had failed to identify and bring to his attention the conflict during searches carried out prior to his appointment by the LCIA and on an ongoing basis during the course of the arbitration.

It was accepted by Knowles J that the conflict fell squarely within paragraph 1.4 of the IBA Non-Waivable Red List which applies to situations where "the arbitrator or his or her firm regularly advises the party, or an affiliate of the party, and the arbitrator or his or her firm derives significant financial income therefrom".  This necessarily raises justifiable doubts as to the arbitrator's impartiality or independence and is "non-waivable". However the judge concluded that the IBA rules are flawed and in any event do not bind the Court and are not a statement of English law.  Applying the English common law test of apparent bias, the judge ruled that a fair minded and informed observer would not conclude that there was a real possibility that the arbitrator was biased.

COMMENT: This decision is in sharp contrast to the recent decision (Cour de Cassation, Civ. 1, 16 December 2015, N°D14-26.279) of the French Cour de Cassation (Supreme Court) which ruled that the sole arbitrator's failure to disclose his firm's role in a transaction involving the parent company of one of the parties to the arbitration was "such as to reasonably cause a doubt regarding the independence and impartiality of the arbitrator". The court held that the arbitral tribunal was improperly constituted and therefore that the partial award was unenforceable. 

Conflicts of interest in arbitration represents one of the most controversial and pressing topics in modern arbitration practice, both in England and internationally. The IBA Guidelines represent the most widely accepted toolkit available when seeking to navigate this difficult issue.  Although the judgment recognises the importance of the IBA Guidelines, Knowles J casts into doubt the application and scope of the IBA Guidelines under English law.  In a field where calls for increased transparency are becoming louder, it remains to be seen what the ramifications of this judgment will be. One thing is certain: the Court of Appeal will not be resolving the issue in this case, as permission to appeal was refused by Knowles J on the basis that, although he accepts that the application of the IBA Guidelines is an important issue, it is, he considers, one for the IBA to resolve and is not a matter for the Court of Appeal.  

Secretary of State for Health v Servier Laboratories: Judge decides whether to order enhanced disclosure

CPR r31.5 provides that at the first, or any subsequent, case management conference, the court will decide which disclosure order to make (from a menu of different orders, including standard disclosure). CPR r31.5(7) provides for disclosure of "any documents which it is reasonable to suppose may contain information which enables that party to advance its own case or to damage that of any other party, or which leads to an enquiry which has either of those consequences". This "enhanced disclosure" differs from, and is wider than, standard disclosure because of the inclusion of documents "which it is reasonable to suppose may contain information" which may lead to a "train of enquiry" (ie the so-called Peruvian Guano test).

In this case, Henderson J refused to make such an order, saying that it would be premature to do so. If there are gaps in the defendant's disclosure exercise, the first step should be to "make appropriately focused requests to [the defendants'] solicitors, and only if satisfactory responses are not forthcoming would any question of enhanced disclosure arise. Considerations of cost and proportionality are always of paramount importance in the context of disclosure, and as matters now stand it is far from clear to me that it will really be necessary to go beyond the standard disclosure which I have ordered".

He also cited, with approval, the judgment of Gloster J in Berezovsky v Abramovich [2010], in which an order for enhanced disclosure was also refused. She had held that an order for enhanced disclosure should be focused on an identifiable category of document, linked to specific issues. That is because it is an onerous burden on a disclosing party to have to decide if the train of enquiry test has been met in relation to each document. She too found that it would be better to apply for enhanced disclosure (if necessary) only after standard disclosure has taken place.

Vilca v Xstrata: Judge decides various disclosure issues

Various issues regarding disclosure arose in this case. One issue was whether the defendants could exclude from their review all documents which had given rise to a "unique hit" (where a document is identified as the result of a keyword search by responding only to one search term rather than more than one, a "unique hit" is said to have occurred). It was explained that 25 terms which had generated unique hits within the 21,000 document set had been shown to have required no documents to be disclosed. A further 4 terms had resulted in less than 1% of documents reviewed needing to be disclosed.

It was estimated that this approach would reduce the documents to be reviewed from 21,000 to 13,000. Although the claimants agreed the exclusion of the 25 terms, they did not want to exclude the other 4. This was on the basis that just one document within the disclosable documents might reveal something of significance.

Foskett J agreed with the claimants, holding that: "It is difficult, in my view, to justify a simple percentage or other mathematical analysis to this kind of exercise. Where arguably seriously culpable behaviour has taken place, it is unlikely that it will be revealed in a significant number of documents".

The judge refused, though, to widen the list of custodians to include secretaries: "I acknowledge the possibility that a secretary or PA may have created a document at the instance of the person for whom she was working, but it would be highly surprising if that document, or at least its existence, would not be revealed in the searches to be made of the communications of those for whom they were working".

The judge also agreed that the trial date would have to be vacated to allow disclosure to be completed and for a fair trial to take place. He stressed that he had been reluctant to do so, though, not just because of the interests of the parties to this case, but also the interests of other parties who would have wished to have their case heard on the same trial date.

ORB ARL v Fiddler: The test for a Norwich Pharmacal order/intended use of the information

A Norwich Pharmacal Order ("NPO") is traditionally described as a common law right which requires a respondent who is "mixed-up" in wrong doing (whether innocently or not), so as to facilitate that wrongdoing, to provide "full information" on the alleged wrongful act. As was made clear by Lord Woolf CJ in Ashworth Hospital Authority  v MGN Limited (2002), an applicant must identify the purposes for which the information will be used if an order is made. Popplewell J noted in this case that: "This is important, because only if he does so can the Court consider whether it is to be used for a legitimate purpose; and because if disclosure is ordered, the permitted use is limited to the stated intended use which has been scrutinised and sanctioned by the Court. Such identification should be made by way of evidence, not submission". What was said to be required was, at the very least, a clear statement on affidavit of the applicants' intentions as to the use to which the disclosure would be put. There was no such statement here and the judge concluded that that was fatal to the application for the NPO.

Furthermore, the judge concluded on the evidence that the applicants would use the disclosed information to discredit the defendant to the main proceedings, thus giving them a litigation advantage and forcing the defendant into a settlement. That was not a legitimate purpose for seeking the NPO: "Such a collateral purpose is not one which engages the policy justification for the jurisdiction, which is "the strong public interest in allowing an applicant to vindicate his legal rights" in respect of the wrongdoing with which the respondent has become mixed up". 

(Re)insurance Weekly Update 9- 2016

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Nigel Brook
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