Welcome to the twenty-fifth edition of Clyde & Co's (Re)insurance and litigation caselaw weekly updates for 2014
A summary of recent developments in insurance, reinsurance and litigation law.
This week's caselaw
- The Federal Mogul Asbestos Personal Injury Trust v
Federal-Mogul & Ors
A case on whether a non-reinsured can get a declaration of liability against a reinsurer and whether a reinsurer had acted in "businesslike manner". - Tokio Marine v Novae
Court decides whether a retrocessionaire is bound to follow a settlement following an argument that the reinsured had not acted in a businesslike manner. - Emirates Trading Agency v Prime Minerals
A Clyde & Co case in which the court held that an agreement to negotiate in good faith within a limited period is enforceable. - American Leisure Group v Garrard & Ors
A case on service of a claim form and the meaning of "last known address".
The Federal Mogul Asbestos Personal Injury Trust v Federal- Mogul & Ors
Whether a non-reinsured can get a declaration of liability against a reinsurer/whether reinsurer had acted in "businesslike manner"
http://www.bailii.org/ew/cases/EWHC/Comm/2014/2002.html
T&N, an English company which was a major producer and distributor of asbestos in the 20th century, entered into a liability policy with its captive insurer. The liability policy provided that "the Policyholder [ie T&N] shall have full, exclusive and absolute authority, discretion and control, which shall be exercised in a businesslike manner in the spirit of good faith and fair dealing". On an "Insolvency Event" (which did subsequently take place) this authority, discretion and control, and the requirement to act in a businesslike etc manner, passed to the insurer. The insurer then transferred all its rights and powers under the liability policy to its reinsurers under a reinsurance contract.
The claimant is a trust (set up when T&N started Chapter 11 proceedings in the US) which assumed liability for all asbestos personal injury claims against T&N and which is, in effect, authorised to bring claims against the captive insurer on behalf of a very large number of personal injury claimants in the US. The trust established a mechanism for valuing these asbestos claims and argued that the value which it gave to the claims was considerably lower than a likely settlement or award should litigation be brought in the US tort system. It sought various declarations against the reinsurers to the effect that if the reinsurers used a different method to handle claims, that would cause the reinsured to breach its duty to T&N to act in a businesslike manner. Eder J held as follows:
- Although the law on granting declaratory relief has "moved on" in the last 20 years, and this relief is discretionary (so not subject to rigid rules), it is not appropriate (save in exceptional circumstances) to grant this relief to a third party where the parties to the relevant contract (here, the reinsurance contract) are not themselves in dispute. To hold otherwise would be to open up potentially "remarkable consequences" which would allow third parties to intervene in the contractual relations of others by way of declaration. Nor did the terms of a power of attorney granted by T&N to the trust make any difference.
- The judge held that even if he was wrong on that point, he
would not have granted relief in this case anyway. The terms of the
reinsurance contract required the reinsurers to exercise
"authority, discretion and control" in a businesslike
manner and in good faith. Eder J agreed that this was only a
"very loose constraint", excluding only courses of
conduct which no similar reinsurer could take. The concept of good
faith and fair dealing required reinsurers only to act
"honestly and conscionably vis-a-vis the other parties to the
contracts" (see Yam Seng v International Trade
[2013]). However, it could not be said that the court cannot
intervene at all in the exercise of the reinsurers' contractual
rights.
Here, the judge concluded that the reinsurers were not acting in an unbusinesslike manner by requiring the trust to pursue any claims in the US tort system: "there is no monopoly of what may be "business-like"". The court could not at this stage know how many claims might eventually be brought in the US if the reinsurers' approach was followed and whether the reinsurers' strategy would end up costing more in the long run. If it could be shown that it would "inevitably" cost more, the judge conceded that there might be an argument that the reinsurers were being "unbusinesslike", but that was not the case here. Furthermore, if the reinsurers' decision to contest claims was ultimately shown to have unreasonably increased claims handling and defence costs, such costs would have to borne by the reinsurers themselves. - A further issue in the case concerned the definition of "payment in fact" (the liability policy being a "pay to be paid" policy). Here, certain payments made by T&N to the Trust were set-off against a debt owed to T&N by the Trust and, separately, a "pre-payment" was made by the Trust to T&N pursuant to this debt, in order to enable T&N to satisfy its liability to third party claimants. Eder J held that in both situations, there had been a payment of fact by T&N and, furthermore, these payments were "in cash" rather than "in kind": "I would only say that the reference to a payment "as cash" cannot be taken literally as meaning only payment in money bills or other legal tender: cf The Chikuma [1981] 1 Lloyd's Rep 371, 375-376 in the context of similar words in the shipping context". The set-off and pre-payment achieved the result of payment and counter-payment, as if physical transfers had taken place.
COMMENT: There has been little English caselaw to date on the duties of a reinsurer under a Claims Control Clause. However, in Gan v Tai Ping [2001] the Court of Appeal held that there was no implied term that reinsurers' approval of a settlement should not be withheld unreasonably. The only limitation to be implied into the clause was that the right to withhold approval should be exercised in good faith, after consideration of the facts giving rise to the particular claim (and not by reference to extraneous matters) and should not be exercised arbitrarily.
Should a clause contain an express obligation to act in businesslike manner, though, this case will be a useful indication of what constraints that requirement will place on a reinsurer. This case supports the argument that a party is acting in a businesslike fashion even if its decisions may end up increasing costs in the long run (provided, possibly, that that is not an inevitable outcome of the reinsurers' strategy) and "best practice" has not been followed. Furthermore, if the reinsurance contract provides that the reinsurer should have "regard to" the interests of the reinsured (or anyone else), he can choose to attach no weight at all to those interests, provided he is not thereby acting irrationally.
Tokio Marine v Novae
Whether a retrocessionaire bound to follow a settlement on basis the reinsured had not acted in a business-like manner
http://www.bailii.org/ew/cases/EWHC/Comm/2014/2105.html
The background to this case was set out in Weekly Update 40/13. The claimant is a reinsurer seeking recovery from its retrocessionaire (the defendant). The retrocession contained an unqualified follow the settlements clause. It was established in the case of ICA v Scor [1985] that such a clause is subject to two provisos: (1) that the claim falls within the scope of the reinsurance contract as a matter of law; and (2) that the reinsured has acted honestly and "taken all proper and businesslike steps in making the settlement". The earlier decision (now on appeal to the Court of Appeal) dealt with the standard required to prove the first proviso. This case dealt with the second proviso and the retrocessionaire's argument that the reinsured had not taken all proper and business like steps and hence it was not bound to follow its settlement. The claimant applied for summary judgment on the basis that the retrocessionaire's defence had no real prospect of success.
The retrocessionaire argued, in essence, that the reinsured had not considered the wording of the direct policy when reaching its settlement with the insured and it ought to have taken legal advice from local lawyers. It argued that it was no defence to argue that the retrocessionaire ought to show that a better settlement would have been achieved had the reinsured taken the steps which the retrocessionaire wanted it to take. The claimant argued that the proviso mentioned above is intended to protect reinsurers against prejudicial settlements and if the final settlement figure was a good one, it cannot be said that there has been anything improper or unbusinesslike.
Field J held that there was no prospect of success in arguing that the reinsured had failed to act in a businesslike manner, even though it had not fully investigated the issue of aggregation under the local policy. The reinsured had been entitled to conclude that there was nothing further to be gained from such an investigation because the settlement figure was "undoubtedly a good settlement" (and GBP 10-20 million less than the projected final adjustment figure produced by the reinsured's loss adjusters).
Accordingly, summary judgment was granted and if the retrocessionaire's appeal to the Court of Appeal fails, it will be bound to follow the reinsured's settlement.
Emirates Trading Agency v Prime Minerals
Court holds that an agreement to negotiate in good faith within a limited period is enforceable
http://www.bailii.org/ew/cases/EWHC/Comm/2014/2104.html
Clyde & Co for claimant
The dispute resolution clause in the agreement entered into between the parties contained the following wording (in relevant part): "In case of any dispute....the Parties shall first seek to resolve the dispute...by friendly discussion... If no solution can be arrived at in between the Parties for a continuous period of 4 (four) weeks, then the non-defaulting party can invoke the arbitration clause and refer the disputes to arbitration".
The parties did have a dispute, arbitration was commenced and the claimant applied to court for an order under section 67 of the Arbitration Act 1996 that the tribunal lacked jurisdiction to determine the claim because the condition precedent set out in the clause above (i.e. a requirement to engage in time limited negotiations) had not been fulfilled and hence arbitration could not take place.
There is prior caselaw to the effect that an agreement to negotiate is unenforceable, on the basis that it lacks certainty (see Walford v Miles [1992]). A further reason advanced for this stance is that an obligation to negotiate is inherently inconsistent with the position of a negotiating party (e.g. a negotiating party should be able to threaten to withdraw from negotiations in the hope that better terms are offered by the other side).
Teare J reviewed this prior caselaw but concluded, (relying on Australian caselaw), that prior caselaw can be distinguished from this case because of the time-limited nature of the provision here. He held that:
- The provision here was complete, in the sense that no essential term was lacking.
- An obligation to seek to resolve disputes by friendly discussions must import an obligation to seek to do so in good faith.
- A time limited obligation to seek to resolve a dispute in good faith should be enforceable.
- An agreement to seek to resolve a dispute by discussion or negotiation does not prevent the parties considering their wider commercial interests. They were not limited "by faithfulness and fidelity to the existing bargain". The matters which can be raised in such discussions are "unlimited".
- An argument that a party has not acted in good faith is not too uncertain. It may be difficult to establish, but an example would include a party refusing to negotiate at all. Teare J said that: "good faith connoted both honesty and the observance of reasonable commercial standards of fair dealing. Where a party clearly fails to honour such standards of conduct judges and commercial arbitrators will have no particular difficulty in recognising and identifying such failures".
Teare J went on to distinguish this case from the Court of Appeal decision in Sulamerica v Enesa Engenharis (see Weekly Update 17/12, where a mediation clause was held to be unenforceable because it failed to define the parties' rights and obligations with sufficient certainty), on the following basis: "Since the obligation in that case was to seek to have the dispute resolved amicably through mediation rather than by friendly discussions in good faith I have considered whether this is a material distinction given that mediation is merely a supervised form of discussion or negotiation with a view to resolving a dispute. However, I consider that it is a material distinction because in the absence of a named mediator or an agreed process whereby a mediator could be appointed the agreement was incomplete. An agreement to seek to resolve a dispute by friendly discussions in good faith is not incomplete".
He went on to find that the condition precedent had been met here. He did not believe it was necessary to show that the friendly discussions lasted for four continuous weeks, but even if this was necessary, that condition had been met: "Although no meetings lasted for four continuous weeks, the discussions can fairly be regarded as doing so".
COMMENT: Although this case is noteworthy as a departure from the general principle that an agreement to negotiate is unenforceable, Teare J's belief that "wider commercial interests" can be taken into account when assessing if the negotiations have been conducted in good faith might, in practice, weaken the impact of his decision.
Examples of bad faith were given in the Australian case referred to in the judgment: "A party, for instance, may well not be entitled to threaten a future breach of contract in order to bargain for a lower settlement sum than it genuinely recognises as due. That would not, in all likelihood, reflect a fidelity to the bargain. A party would not be entitled to pretend to negotiate, having decided not to settle what is recognised to be a good claim, in order to drive the other party into an expensive arbitration that it believes the other party cannot afford. If a party recognises, without qualification, that a claim or some material part of it is due, fidelity to the bargain may well require its payment. That, however, is only to say that a party should perform what it knows, without qualification, to be its obligations under a contract. Nothing ... prevents a party, not under such a clear appreciation of its position, from vindicating its position by self-interested discussion as long as it is proceeding by reference to an honest and genuine assessment of its rights and obligations".
However, that view was expressly rejected by Teare J: "The scope of the negotiations contemplated by Alsopp P. appears to me to be unrealistically narrow. He states that the negotiations will be "anchored" in the parties' assessment of their rights and obligations under their contract. ... But amicable resolution of a commercial dispute (whether by the parties themselves or by mediation, that is, discussions led, encouraged or facilitated by a mediator) typically involves consideration, not only of the contractual rights and obligations which parties have assumed, but also of the parties' wider commercial interests."
Although Teare J did come up with one example of potential lack of good faith (ie a blank refusal to negotiate at all), that might prove problematic in practice. For example, what if the refusing party wishes to force an arbitration in the belief that the other side could not afford to pursue that more expensive route? Would that be a valid commercial reason and hence justify a finding of good faith?
There was also no discussion in the case as to what the position would be should a limitation period be about to expire before the end of the period specified for negotiations. It is unclear whether a party would be able to commence arbitration and then seek a stay whilst negotiations take place.
American Leisure Group v Garrard & Ors
Service of a claim form and the meaning of "last known address"
http://www.bailii.org/ew/cases/EWHC/Ch/2014/2101.html
One of the issues in this case was whether the claimant had served the claim form at the defendant's "last known address" (unless personal service was effected, the correct place for service of the claim form on the defendant, as an individual, was his "usual or last known residence": CPR 6.9(2)). Although CPR 6.9(3) requires a claimant who has reason to believe that a defendant's last known residence is not an address at which he any longer resides to take reasonable steps to ascertain his current residence, the claimant submitted that this provision did not apply in the present case because the claimant did not have reason to believe that the relevant address had ceased to be the defendant's residence.
Richards J pointed out that as the claimant had put an alternative address in the claim form, that indicated that there had been doubt or concern as to where the defendant should be served. In addition to this, "simple enquiries made by a solicitor on his computer, such as a search on the Companies House website or on one of the easily accessible commercial websites for tracking addresses, would immediately have disclosed the current residential address of the first defendant in London".
The judge said that these two factors together meant that the claimant had not taken all reasonable steps to comply with the service provisions (this had to be shown here because the extension was being sought after the relevant time limit had expired) and so was not entitled to an extension of time.
COMMENT: The fact that the judge regarded both factors, when taken together, as establishing that the claimant had not been entitled to assert the address where the claim form was served was the "last known address" begs the question whether each factor on its own would have allowed him to reach the same conclusion. There has been some debate in earlier caselaw as to what steps a claimant should take in order to establish if an address is a "last known address". For example, in In Broadside Colours & Chemicals, Re (see Weekly Update 07/12) the judge held that the applicant was entitled to rely on a search carried out at Companies House which had revealed the address of a director (albeit, supplied more than 6 years earlier). The applicant had no reason to believe that the director was no longer at that address and so did not need to carry out any further enquiries. That decision was not discussed in this case, but it lends support to the view that only if there is evidence that a claimant did suspect the given address was not the last known address will further enquiries by necessitated.
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.
