UK: (Re)insurance Weekly Update 10- 2016

Last Updated: 18 March 2016
Article by Nigel Brook

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

This week's caselaw:

Gentry v Miller: Court of Appeal considers insurers' application to set aside default judgment where alleged fraud discovered subsequently

The claimant was involved in an accident with the defendant and alleged that the defendant was at fault. The defendant's insurers admitted liability in April 2013 but did not make any further settlement offer, despite hire charges continuing to accrue and being chased by the claimant's solicitors over 5 times. Proceedings were then issued against the defendant alone in July 2013 and default judgment was obtained a month later. A further hearing assessed damages but the insurers were not notified of the hearing before it took place. When they were told about the award, they then instructed solicitors (in November 2013) and an application to set aside the default judgment pursuant to CPR r13.3 was made, and subsequently granted. The claimant appealed against that decision and the insurers then alleged that the claim was fraudulent and that the claimant and defendant had known each other before the accident.

The Court of Appeal has now held as follows:

(1) The judge had been wrong to regard allegations of fraud as providing an exemption from the tests set out in Mitchell (see Weekly Update 43/13) and Denton (see Weekly Update 26/14).

(2) The tests set out in Denton apply to applications under CPR r13.3.

(3) A default judgment cannot be set aside as a matter of course just because an arguable fraud has been alleged, however long after that judgment the application is made.

(4) The delay of two months, including the Christmas period, taken by the insurers to investigate the claim after the solicitors were instructed "may not, in itself, be unreasonable". However, there had been no explanation for the delay in instructing solicitors in the first place, or in commencing the investigation.

(5) The insurers had shown a real prospect of successfully defending the claim (the first part of CPR r13.3). However, the court is entitled (under the second part of CPR r13.3) to take into account whether the application had been made promptly. The Court of Appeal held that after admitting liability in April 2013, the insurers had known it was at risk of proceedings but they had failed to instruct solicitors for a further 7 months. The insurers could also have found out "with reasonable diligence" about the default judgment by the end of September 2013 (and so could then have applied to set it aside). It was held that: "The court cannot ignore that insurers are professional litigants, who can properly be held responsible for any blatant disregard of their own commercial interests".

(6) Applying the tests laid down in Denton, there was no reasonable excuse for the insurers' delay: "The insurer could and should have protected itself when it knew proceedings were being issued by appointing solicitors to accept service on behalf of [the defendant].... It cannot avail an insurer in this position to say it was not a party to the claim at that stage. It was directly affected by it and knew that it had to protect its interests from the moment liability was admitted. It was able at any stage to conduct [the defendant's] defence".

(7) Nor should the order assessing damages be set aside pursuant to CPR r39.3(5). This rule refers to a party who has failed to attend trial for a good reason: "There is an anomaly in the conditions, because they apply to "a party who failed to attend the trial" and the insurer was not such a party. But in a case of this kind, it seems to me that the insurer cannot be regarded as being in a better position than its insured". If the insured failed to protect the insurers' interests (because, it is alleged, he was colluding with the claimant), that is a matter between the insurers and the insured and the insurers will have to pursue what remedies they can by way of a new fraud action.

COMMENT: One point of more general interest in the case is the Court of Appeal's confirmation that a period of two months (including the Christmas period) to investigate a (at the time) low value road traffic accident claim may be reasonable. That is noteworthy because of the potential changes to English law allowing for late payment damages where an insurer has unreasonably delayed paying a claim.  It may be recalled that in Brit UW Ltd v F&B Trenchless Solutions (see Weekly Update 29/15), the judge cited a period of 4-5 months as being a reasonable timeframe to allow investigation of a complex claim under a contractors' combined liability policy (plus a decision on whether to avoid). Those two decisions therefore give some indication of the amount of time which the courts may allow for insurers to investigate a claim, if the Enterprise Bill is passed.

SARPD Oil v Addax Energy: The Court of Appeal considers a security for costs application where there is little financial information regarding the claimant/the costs of Part 20 proceedings/costs budgets

The first instance decision in this case was reported in Weekly Update 31/15. The defendant sought security for costs from the claimant, a company incorporated in the British Virgin Islands. The application was not made pursuant to ground (a) of CPR r25.12 (ie that the claimant is resident out of the EEA), because it could not be shown that there would be an extra burden/cost of enforcing a judgment in the BVI. Instead, the application was brought under ground (c) (ie that the claimant is a company and "there is reason to believe that it will be unable to pay the defendant's costs if ordered to do so").

However, the claimant had given no details of its financial position and the defendant had access to only limited information. As a result, Smith J had concluded that ground (c) had not been established, finding that there was nothing inherently "secretive" about incorporation in the BVI and the claimant was not required to demonstrate that it would have means to pay a costs order. He also criticised a Commercial Court practice of ordering security in this type of situation.

The Court of Appeal has now allowed the appeal from that decision. It held that: "If a company is given every opportunity to show that it can pay a defendant's costs and deliberately refuses to do so there is, in our view, every reason to believe that, if and when it is required to pay a defendant's costs, it will be unable to do so". Although deliberate reticence is not a breach of the rules, the court can and should take account of it as part of the overall picture. The Commercial Court practice was said to be sound and the Court of Appeal upheld it.

The judge's finding regarding the Part 20 defendant's costs was also reversed. If the claimant was to lose, then the defendant would be ordered to pay the costs of the Part 20 defendant (and it is highly likely that the defendant could then recover those costs from the claimant). The Part 20 defendant's costs would therefore be the defendant's costs, and so ought to be covered by any security for costs order in its favour.  The Court of Appeal upheld the judge's finding, though, that the security costs order would cover the defendant's own costs in pursuing the Part 20 proceedings against the third party.

The Court of Appeal also agreed with the judge that he could not depart from the defendant's approved costs budget  when considering how the defendant's costs should be assessed. Strictly speaking, the court cannot approve the costs already incurred before the costs budget was approved. However, the court was entitled to comment on that element of the defendant's costs and, if it felt that the costs already incurred were reasonable and proportionate, it is likely that those incurred costs would be included in any standard assessment of costs at the end of the case. Accordingly, "There was little if any difference between the practical effect of the court's order in relation to incurred costs and its order in relation to estimated costs". The approved costs budget was a "strong guide" to the likely costs order to be made after trial if the defendant wins.

Alan Ramsay Sales v Typhoo Tea: Judge decides whether without prejudice privilege could be claimed

The claimant alleged that the defendant was in repudiatory breach of contract when it sent two emails giving notice to terminate a contract. The defendant countered that the claimant couldn't rely on the emails because they were protected by without prejudice privilege. Although the emails were marked "without prejudice", the claimant argued that they were not protected by the privilege because there was no extant dispute between the parties (and the dispute arose upon receipt of the emails) and they were instead a statement of intention in mandatory terms. Flaux J reviewed the existing case law on WP privilege and held as follows:

(1) The parties can, by contract, extend the usual ambit of the WP rule (but they had not done so in this case).

(2) In deciding if there is a "dispute", a "crucial consideration is whether, in the course of negotiations, the parties contemplated or might reasonably have contemplated litigation if they did not agree" (see Barnetson v Framlington (Weekly Update 22/07)). This doesn't turn on temporal considerations – instead it is necessary to look at the subject matter of the dispute.

(3) The issue of whether there is a dispute has to be determined objectively.

(4) Sometimes public policy considerations override the public policy protecting without prejudice communications. However, the judge concluded that there is no public policy requiring repudiatory conduct to be opened up and to override WP privilege.

On the facts of the case, Flaux J concluded that the emails were protected by WP privilege. The dispute could not be said to have started with the sending of the emails. If viewed in isolation, they could be seen as being somewhat mandatory, but when seen as part of the whole chain of correspondence, they were still part of ongoing negotiations.

Kanev-Lipinski v Lipinski: Freezing orders and the lack of evidence of dissipation

In this case, the judge held that no risk of dissipation had been made out by the claimant. Of particular relevance to that decision was the fact that there was close supervision of the defendant's businesses by lenders, given the highly geared nature of his companies' investments (although the judge hadn't been taken to the banking documentation, she said that this was an "obvious truth"). Furthermore, the companies' accounts were regularly checked by the lenders and accountants. It was also relevant that the companies' lending had been secured by a personal guarantee from the defendant. His lawyers had argued that he would not act to destroy his business and make himself bankrupt.

A further significant factor was that the defendant had had over 3 years to dissipate assets had he chosen to do so.

COMMENT: The judgment did not cite the decision of Enercon v Enercon (see Weekly Update 12/12), but in that case too it was held that, as that the defendant was audited annually by Deloitte and had "substantial and ongoing relationships with its banks", those factors counted against a finding of a risk of dissipation (and in that case there had also been delay in applying for an order).

Europa Plus v Anthracite Investments: Judge summarises principles of interpreting contracts and commercial common sense/defined terms

In this case, Popplewell J usefully summarised the principles regarding applying commercial common sense when interpreting a contract. He said as follows:

(1) Reliance on commercial common sense and surrounding circumstances should not be invoked to undervalue the importance of the language of the contract;

(2) The less clear words are, the more ready the court can properly be to depart from their natural meaning. However, the court should not search for "drafting infelicities".

(3) Commercial common sense is not to be invoked retrospectively. Just because a contract has worked out very badly for one of the parties, that is not a reason to depart from the natural language.

(4) The court can't take into account a fact or circumstance which was known by only one of the parties.

(5) Where a defined term is used, the court will often start with the defined meaning, but not always: "It is a common experience that defined terms are not always used consistently by contractual draftsmen throughout a commercial contract". Even without inconsistency, "it does not follow that effect must always be given to the defined meaning. If, as is well known, parties sometimes use defined terms inappropriately, it follows that they may have done so only once, in the provision which is being interpreted".

It may be that, by testing against the commercial consequences and the background facts, the court may conclude that the parties did not intend the defined term to bear the defined meaning. It was said that this was no less so where the contract has been drafted by lawyers.

Accordingly, the judge concluded that prior observations by judges that the court should only fail to give effect to the use of a defined term if absurdity is established were not consistent with the reasoning of the Supreme Court in Rainy Sky v Kookmin (see Weekly Update 39/11).

Magellan Spirit v Vitol: Undisclosed principal test and delay in applying for an anti-suit injunction

The claimant applied for an anti-suit injunction to restrain the defendant from pursuing proceedings in Nigeria, on the basis that it had agreed to refer disputes to the English courts. The relevant agreement was entered into by a Bermudian company which was part of the same group to which the defendant belonged. It was argued that the Bermudian company had entered into the agreement as the agent of the defendant. Although nothing in the agreement itself suggested an agency agreement, the claimant alleged that the defendant was an undisclosed principal.

The undisclosed principal doctrine is well established and provides that a principal who was at the time of contracting undisclosed can sue or be sued on the contract of his agent. The Privy Council has held that, in entering the contract, the agent must intend to act on the principal's behalf (see Siu Yin Kwan v Eastern Insurance [1994]).

Of issue in this case was whether that test of intention is subjective (given that the representative of the Bermudian company gave evidence that he intended to sign on behalf of his company as principal and not agent). Leggatt J held that it was not subjective and that it would give rise to "wholly unacceptable uncertainty" if the doctrine could be invoked even though the supposed agent had not communicated his private intention to the supposed principal: "The question whether an undisclosed agency relationship was created must depend in principle, as I see it, not on the state of mind of the supposed agent at the time of contracting, but on whether the supposed agent had communicated to the supposed principal an intention to contract on its behalf".

The judge concluded, on the evidence, that the doctrine did not apply here.

He also considered whether the application for an anti-suit injunction would have failed anyway because of the claimant's delay in bringing the application. He held that it would have. Although the claimant could not be criticised for not taking action before being served with the Nigerian proceedings (where no meaningful pre-action correspondence had taken place), prompt action was required once served. A decision to contest jurisdiction in Nigeria did not justify delaying an application to the English courts for an anti-suit injunction. Furthermore, "the fact that the delay in applying for an injunction was the result of a deliberate tactical decision to first wait and see if more information might emerge which would bolster the claimant's case is no reason to discount the delay or belittle its significance". In addition, steps had been taken and costs incurred by the claimant in the Nigerian proceedings eg it had filed a defence on the merits, such that it would not be inappropriate for the English courts to intervene.

COMMENT: This case continues a trend of recent caselaw to refuse anti-suit injunctions where there has been delay. For example, in the recent case of Essar Shipping v Bank of China (see Weekly Update 42/15), an injunction was refused because of the applicant's delay even though there had been no detrimental reliance on the delay.

(Re)insurance Weekly Update 10- 2016

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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