UK: (Re)insurance Weekly Update 11- 2017

Last Updated: 4 April 2017
Article by Nigel Brook

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

AIG v Woodman: The Supreme Court has unanimously allowed the claimant insurers' appeal in interpreting "similar acts in a series of related transactions"

The earlier decisions in this case were reported in Weekly Updates 31/15 and 13/16 (referred to as AIG v OC320301). The case concerns two holiday resorts developed by Midas: one was in Turkey, the other was in Morocco. The developments were financed by private investors.  A trust was established for each development. The developers' solicitors were the trustees and the investors were the beneficiaries. The funds advanced by the investors were initially held by the solicitors in an escrow account and were not to be released to Midas until the value of the assets held by the trust were sufficient to cover the investment to be protected, applying a "cover test" set out in the trust deed. When Midas was wound up the investors brought two claims against the developers' solicitors: one relating to each of the development sites. It was alleged that the solicitors failed properly to apply the "cover test" before releasing funds to the developers, resulting in the funds being released without adequate security. The investors' claims amounted to more than £10 million in total. However, the developers' solicitors' professional indemnity insurance was subject to a limit of indemnity of £3 million in respect of each claim.

The insurers issued proceedings against the solicitors for a declaration that the investors' claims should be treated as one claim on the basis that the claims arose from "similar acts or omissions in a series of related matters or transactions".

At first instance, Teare J. held that although the claims arose out of "similar acts or omissions", they were not part of "a series of related matters or transactions" because they were not dependent on each other. The Court of Appeal rejected this "inter-dependence" test. Instead, it concluded that the matters or transactions in question had to have an "intrinsic relationship" with each other in order to be "related".

The Supreme Court has now allowed the appeal from that decision. It held that the "intrinsic relationship" test was neither necessary nor satisfactory. Lord Toulson, giving the leading judgment said that: "Use of the word "related" implies that there must be some inter-connection between the matters or transactions, or in other words that they must in some way fit together, but the Law Society saw fit, after market negotiation, not to circumscribe the phrase "a series of related matters or transactions" by any particular criterion or set of criteria".

In determining whether the transactions in question could be aggregated, Lord Toulson began by identifying the matters or transactions in question. In doing so, he disagreed with the Court of Appeal's view that the relevant transaction in question was simply "the payment of money out of an escrow account which should not have been paid out of that account". Whilst he accepted that this act gave rise to the claim, he observed that it occurred in the course of a wider transaction which involved an investment in a particular development scheme under a contractual arrangement of which the trust deed and the escrow agreement were part and parcel, being the means designed to provide the investor with security for his investment.

On the basis of the facts as agreed for the purposes of the appeal, Lord Toulson concluded that the transactions entered into by the Turkey investors "were connected in significant ways", as were the transactions entered into by the Morocco investors in that "[t]he members of each group were investing in a common development, for which the monies advanced by them were intended, in combination, to provide the developers with the necessary capital. Notwithstanding individual variations, they were all participants in what was in overall terms a standard scheme. They were co-beneficiaries under a common trust".

Lord Toulson therefore concluded that the claims of each group of investors arose from acts or omissions in a series of related transactions and could be aggregated. However, the Supreme Court was not prepared to aggregate the claim in respect of Peninsular Village and the claim in respect of Marrakech. Although they bore a striking similarity, this was not sufficient to permit aggregation.

As to whether the application of the aggregation clause should be looked at from the perspective of the investors or the solicitors, Lord Toulson concluded that it should not be looked at exclusively from the viewpoint of one party or another. Instead it should be viewed objectively "taking the transactions in the round".

The case will now be remitted either to the Commercial Court to determine in accordance with the Supreme Court judgment, or to the Chancery Division which is due to hear the trial of the underlying claims by the investors against the solicitors.

COMMENT: The Supreme Court has recognised that determining whether transactions are "related" is an acutely fact sensitive exercise and it is therefore unhelpful to be prescriptive as to how the words "a series of related matters or transactions" should be interpreted and aggregation clauses should not be approached with a predisposition towards either a broad or a narrow interpretation. The introduction of the "intrinsic relationship" test was an unwelcome development and created an unnecessary complication in the aggregation analysis. Many will welcome the fact that the Supreme Court has now overturned this. With the "inter-dependency" test introduced by Teare J. also overturned, the position now appears to be much as it was before, in that each case must be looked at on its own facts because there is no single philosophy of aggregation.

Midtown Acquisitions v Essar Global Fund: Whether a foreign consent judgment could be enforced in England

The parties settled their dispute in an agreement, under which the defendant accepted liability and "confessed to judgment". The New York courts then entered a Judgment by Confession (similar to an English consent judgment) and the claimant then sought to enforce that judgment in England. The defendant challenged the English court's jurisdiction.

Teare J has now rejected that challenge. He rejected an argument that a Judgment by Confession is not a judgment under English law. It made no difference that there had been no action between the parties (no action having been required by the New York Court).

Under common law, the foreign judgment must be final in the particular court in which it was announced, in order for it to be enforced here. It will be final even if it is the subject of an appeal, unless a stay of execution has been granted in the foreign country pending the hearing of the appeal. Teare J rejected the argument that where a judgment of a foreign court may be set aside by the very court which gave the judgment, the foreign judgment cannot be enforced in England: "In circumstances where (i) the New York rules of court provide that a judgment by confession is enforceable to the same extent as a judgment in an action, (ii) it is common ground that the New York judgment is enforceable today and (iii) ... the judgment continues to be final and conclusive notwithstanding the motion to vacate, I have concluded that the Claimant has much the better of the argument on this issue, notwithstanding that a motion to vacate ... might result in the judgment being set aside".

Furthermore, the judge held that the New York judgment was a judgment "on the merits".

Thompson v Reeve: Whether court could remedy error regarding withdrawal of a Part 36 offer

The underlying claim here was a personal injury claim arising out of road traffic accident. Following the recent reduction in the discount rate, the claimant sought to withdraw its earlier Part 36 offer. The withdrawal was made by email but it was later accepted by the claimant that it had not served its notice of withdrawal in accordance with CPR r6.20 (service of documents other than the claim form) because the receiving party had not indicated in writing that it was willing to accept service by email. After the defendant accepted the Part 36 offer, the claimant applied to court under CPR r3.10 for an order that the service of the notice of withdrawal should be treated as valid.

The defendant argued that, since part 36 is a self-contained code, CPR r3.10 can't be used in the context of Part 36. That argument was rejected by Master Yoxall, who held that although Part 36 is a self-contained code, "it is not completely freestanding" (and, indeed, the defendant has relied on another rule, CPR r6.20, to submit that service was irregular). The Master held that CPR r3.10 has a wide effect and could be invoked here, where the withdrawal notice was actually received and gave the defendant all the necessary information.

Whyatt v Powell: Court hears argument about whether QOCS regime applied

"Qualified one-way costs shifting" ("QOCS") was introduced for personal injury claims from 1 April 2013. It means that defendants will generally be ordered to pay the costs of successful claimants but, subject to certain exceptions, will not be able to recover their own costs if they win. CPR r44.13 states that QOCS applies "to proceedings which include a claim for damages...for personal injuries".

In this case, the claimants suffered personal injuries when the car they were in was involved in an accident. The driver was uninsured and the claimants claimed against both the driver and the Motor Insurers' Bureau ("the MIB"). The MIB argued that it was not obliged to pay because of an exception where a claimant knew, or ought to have known, that the vehicle was being used without insurance. Much of the case turns on whether, as a matter of fact, the claimants ought to have known that the driver was uninsured. Lewis J concluded that a finding that they ought to have known by the court below should be set aside and the matter re-heard.

An appeal had also been made against the lower court's finding that QOCS did not apply here. In Howe v the MIB (see Weekly Update 14/16), it was held that QOCS did not apply because it is an essential feature of damages that there is a "wrong" and there had been no breach of duty by the MIB. The claimants argued that Howe could be distinguished, on the basis that here a claim was brought against both the driver and the MIB and so included a claim for personal injuries (against the driver). They also argued that in any event, the dishonesty exception for the QOCS regime should not apply where there has been no dishonesty in relation to the personal injury claim itself. The judge agreed that this was an important issue, but declined to reach a conclusion, on the basis that the costs order would in any event now be set aside.

Celtic Bioenergy v Knowles: Judge considers the requirements of section 68(2)(g) of the Arbitration Act 1996 (challenging an award on the basis that it was obtained by fraud)

The claimant sought to challenge an arbitration award on the basis that it had been obtained by fraud (pursuant to section 68(2)(g) of the Arbitration Act 1996). Much of the case turns on its particular facts but two issues considered by the judge are of more general interest:

(1) What evidence is needed to satisfy the requirements of section 68(2)(g)? Jefford J held that, although it is not enough for the court to surmise that there had been fraud, the court can reach a conclusion on all of the evidence available to it. Accordingly, an inference of fraud can be made if the evidence is strong enough. Although there is a higher standard of proof on an allegation of fraud, that does not mean that the standard is different from the balance of probabilities, "but rather that the explanation is more likely to be human error than dishonesty".

(2) Can recklessness amount to fraud within the meaning of section 68(2)(g)? Prior caselaw has established that to satisfy the high threshold of this section, there must be some form of "dishonest, reprehensible or unconscionable conduct" that has contributed in a substantial way to obtaining the award. However, the authorities are unclear whether "reprehensible or unconscionable conduct" is just another way of describing dishonest conduct. The judge noted that if they are synonymous, that tends to suggest that "dishonesty" in this context involves something more than recklessness. She went on to say that: "These comments – and they are no more than that – are more consistent with what I have called the synonymous reading of the different types of conduct. It seems to me, without deciding the point, because it is unnecessary for me to do so, that there may be cases in which recklessness as to whether a statement was true or false might amount to fraud within the meaning of s.68(2)(g) if there is some other element of unconscionable conduct".

Chuku v Chuku: Whether counterclaiming defendant can get a security for costs order against the claimant

Recent cases have focused on whether a claimant can get security for costs against a counterclaiming defendant. In general, an order won't be made unless the counterclaim has "an independent vitality of its own" and the defendant is doing more than simply defending himself. However, this case involved an application by the counterclaiming defendant for a security for costs order against the claimant (for the costs of defending the claim).

Newey J refused to make the order on the basis that the claim and counterclaim raised very much the same issues. The costs that the defendant incurs in defending himself could be regarded as the costs necessary to prosecute his counterclaim too. Furthermore, if the order was made and the claimant failed to provide security, the claim would be struck out but the counterclaim would still fall to be fought out.

(Re)insurance Weekly Update 11- 2017

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Nigel Brook
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