UK: (Re)insurance Weekly Update 41- 2017

Last Updated: 4 December 2017
Article by Nigel Brook
Most Read Contributor in UK, November 2018

Premier Motorauctions v PWC LLP: Court of Appeal orders security for costs where ATE insurance policy did not contain an anti-avoidance provision

The first instance decision in this case was reported in Weekly Update 38/16. The defendants applied for a security for costs order on the basis 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" (CPR r25.13(2)(c)). The defendants had acted for the claimants before the claimants were placed into administration (and subsequently compulsory liquidation). After the claim form was issued, the claimant took out ATE insurance cover. The issue in this case was whether the security for costs order should be made in light of the ATE insurance cover.

At first instance, the judge held that the existence of an ATE policy should be taken into account when asking whether there is reason to believe that the claimant will be unable to pay an adverse costs order (ie the threshold jurisdictional question), rather than only after a security for costs order has been made (and it is necessary to decide whether the policy is as good as cash or a bank guarantee). On the appeal, the Court of Appeal did not disagree with that approach and held that "an appropriately framed ATE insurance policy can in theory be an answer to an application for security".

The judge had then refused to find that there was reason to believe that the ATE policy in question would not respond, and in particular, that the insurers would avoid for non-disclosure or misrepresentation. That was despite the underlying case involving doubts about the credibility of the claimant's managing director. The Court of Appeal has now allowed the appeal from that finding.

It held that "Of course it does not follow that insurers would avoid but the difficulty is that neither the defendants nor the court has any information with which to judge the likelihood of such avoidance. One knows that ATE insurers do seek to avoid their policies if they consider it right to do so". Disbelief of the managing director by a judge could provide grounds for the insurers to avoid.

A key point taken into account by the Court of Appeal was that the policy did not contain any anti-avoidance provisions. It was also unimpressed by the claimant's failure to procure a deed of indemnity from the insurers, which would have confirmed that insurers were giving up their right to avoid. Reference was also made to the recent case of Holyoake v Candy (see Weekly Update 8/17) in which, on a different point, it was concluded that even an ATE policy which provided for avoidance only in cases of fraud was not suitable to stand as fortification for a cross-undertaking in damages.

Accordingly, there was jurisdiction to order security for costs and the Court of Appeal ordered security of £4 million to be provided.

COMMENT: The lack of an anti-avoidance provision in an ATE insurance policy will not necessarily be fatal when the court is considering whether the claimant would be able to pay the defendant's costs, if, for example, it is genuinely very unlikely that the insurers would avoid. However, this case demonstrates that that is an issue which the court will need to spend some time considering. The Court of Appeal recognised that it is "inevitable" that a security for costs application could therefore be blown up into a large interlocutory hearing involving great expenditure of both money and time.

SCF Tankers (formerly Fiona Trust) v Privalov: Court of Appeal holds that judge did not err in assessing damages where a freezing injunction should not have been granted

The first instance decision in this case was reported in Weekly Update 31/16. The substantive claims brought by the claimant against the defendant failed (on the whole), despite the defendant having been found to have acted dishonestly. The claimant had obtained freezing orders against the defendant and he sought enforcement of the usual undertaking in damages which had been provided by the claimant. The main issue in the proceedings was whether the defendant was entitled to damages on the basis that he would have used the frozen funds to build new ships which would have resulted in a profit. Males J held that, adopting a liberal approach to the assessment of the defendant's damages, the defendant was entitled to damages of USD 60 million plus USD 11 million interest (the freezing order having been in place for just 19 days). The Court of Appeal has now dismissed the appeal from that decision.

It has held that the judge had not erred in finding that the defendant had been unable to enter into new contracts to build ships which had resulted in loss which was not too remote. The judge had also been entitled to find that the failure of the defendant to apply to the court for the release of all or part of the frozen funds had not broken the chain of causation, and nor had it been an unreasonable failure to mitigate its loss.

The Court of Appeal acknowledged that if a court decides to enforce a cross-undertaking, a "but for" test of causation is applied. The judge had also been entitled to deal with the question of causation in a common-sense way. The Court of Appeal rejected an argument that the onus had been on the defendant to show that an application to release funds would have failed. It had been prohibited from using the funds and the position taken by the claimant was that it would have resisted any application to remove that prohibition. Furthermore, "The force of his observation that an improperly obtained freezing order is likely to cause significant loss to a businessman has more force where the freezing order departs from the usual form of words for such an order and precludes the person subject to the order from using monies in what is in the ordinary course of his or her business".

The judge had also been entitled to find that the defendant would have faced a "practical dilemma" in attempting to get a quote from the Korean shipyards on the basis that they would like to conclude some shipbuilding contracts, but would need to make an application to the court in order to find out whether they were allowed to do so, whilst at the same time needing some concrete proposal in hand for the court to assess before applying to the court for permission.

Koza Ltd v Akcil: Court rules that payments to a PR firm are within the ordinary course of business

The claimant in this case had given an undertaking to "not dispose of, deal with or diminish the value of any funds belonging to it or held to its order other than in the ordinary course of business". Thus, although not a freezing order, the wording of the undertaking closely mirrored the wording used in the standard form freezing order. One of the issues in the case was whether the claimant would be allowed to pay up to £30,000 per month to a firm of PR consultants as part of the "ordinary course of business".

The judge held that it would not necessarily be improper to incur expense in defending or promoting the reputation of a director of the claimant: "Conversely, if this class of expenditure is allowed, that does not permit [the claimant] to spend monies otherwise than for the benefit of the company and in the ordinary and proper course of business. [The claimant] will need to take care not to breach the Undertaking by paying for PR services that do not fall within it, especially as the company's prime decision maker is [the director] and human nature being what it is that may enhance the risk of confusion between his interests and those of the company".

Lewington v The Motor Insurers' Bureau: Court rules that arbitrator erred in finding dumper truck was not a "motor vehicle" under the Road Traffic Act 1988

The claimant was injured when she swerved to avoid an unlit dumper truck which was travelling on the A-road ahead of her. The dumper truck had been stolen from a quarry and the driver was never found. She sought to claim against the Motor Insurers' Bureau ("the MIB"). The MIB argued that the dumper truck was not a "motor vehicle" for the purpose of the Road Traffic Act 1988 (which includes the MIB provisions relevant to this case). Section 185 of the Act defines a "motor vehicle" as "a mechanically propelled vehicle intended or adapted for use on roads". However, the relevant EC Directive defines a "vehicle" as meaning "any motor vehicle intended for travel on land and propelled by mechanical power". In an arbitration between the claimant and the MIB, the arbitrator held that the dumper truck was not a motor vehicle and did not require motor insurance. In so doing, he had focused on the difference between "road" and "land" and had found that "A reasonable person would not have contemplated the use of the earth mover on a road unless that use had been unlawful".

Bryan J has now allowed the appeal from that decision. The correct legal test is whether some general use on the roads was contemplated as one of the uses for the vehicle. The arbitrator had erred in law and applying the facts to the correct test, the judge said that "I consider that when contemplating the use of an earth mover on roads, a reasonable person would contemplate what thieves and criminals might do and might use the item to do, such as take it from a quarry and drive it, as part of a theft, on public roads". Furthermore, the arbitrator should have applied Marleasing principles to make the definition in section 185 more compatible with the Directive, given the common purpose of the Road Traffic Act and the Directive.

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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