A summary of recent developments in insurance, reinsurance and litigation law.
THIS WEEK'S CASELAW
Hayward v Zurich: Insurer can set aside settlement on basis of fraud where it had suspicions before it settled
The earlier judgments in this case were reported in Weekly Updates 20/11 and 13/15. To establish the tort of deceit, it must be shown that the defendant dishonestly made a material false representation which was intended to, and did, induce the representee to act to its detriment. The necessity of inducement was of issue in this case.
Insurers had suspected that a personal injury claim brought by an employee against the insured employer was exaggerated but they entered into a settlement agreement with the employee. Several years later, evidence came to light that the employee had been dishonest and the insurers applied to court to recover the sums paid. The trial judge held that the settlement should be repaid, and the insurers only had to show that they had been influenced by the fraud, rather than that they believed it. However, the Court of Appeal overturned that decision, finding that the insurers had not merely disbelieved the claimant's assertions about his injuries, they had also pleaded that they were fraudulent, and so they could not now rescind the settlement agreement when proof of the fraud was obtained.
The Supreme Court has now allowed the appeal from that decision. It has held that, in order to set aside a settlement agreement based on fraudulent misrepresentation, to show the requisite influence by, or reliance on, the misrepresentation, it was not necessary to show that the representee (here, the insurer) had believed that the misrepresentations were true (as Lord Clarke acknowledged, there might be other reasons for settling eg because of a belief that the representation will be believed by a judge). Instead, it sufficed that the fact of the misrepresentations was "a material cause" of the representee entering into the settlement. As Lord Clarke also put it: "Logically, the representee is more likely to settle for a different reason other than the representation, if his reasonable belief is that it is false. One of the extraneous factors in this case, for example, was the fact that the insurers' expert ... had failed to produce, in their view, a report which set out the extent of the misrepresentations with sufficient clarity". As Lord Toulson put it too, the deceitful conduct "was intended to influence the mind of the insurers, not necessarily by causing them to believe him, but by causing them to value his litigation claim more highly than it was worth if the true facts had been disclosed, because the value of a claim for insurers' purposes is that which the court is likely to put on it".
Lord Clarke said that he could not envisage any circumstances where earlier suspicion of exaggeration precluded unravelling the settlement when fraud is subsequently established.
COMMENT: The Court of Appeal's earlier judgment in this case caused practical problems for insurers who raise suspicions of fraud prior to a settlement (and then go on to discover proof of fraud). Although it would have been possible to address this issue by careful drafting of the settlement agreement, we would suggest that the Supreme Court has adopted a practical, common-sense approach to this issue. A comparison might also be drawn between last week's Supreme Court decision in Versloot, in which the Supreme Court restricted the definition of a fraudulent claim, with this decision, which demonstrates that the Supreme Court is nonetheless prepared to adopt a stringent approach towards fraudulent conduct, where found.
Patel v Mizra – Supreme Court sets out new test for illegality defence to civil claims
The claimant and defendant entered into a conspiracy to commit the offence of insider dealing. When the intended transaction did not take place, the defendant failed to repay the money given to him by the claimant. The defendant raised the defence of illegality/ex turpi causa, ie that the claim could not be brought because it involved reliance on the claimant's own illegality (the so-called "reliance principle").
The Supreme Court has now considered the test for this defence and concluded that the reliance principle should no longer be followed, and instead a more flexible approach adopted. The essential rationale of the illegality doctrine is that it would be contrary to the public interest to enforce a claim if it would be harmful to the integrity of the legal system. As Lord Toulson put it: "In assessing whether the public interest would be harmed in that way, it is necessary a) to consider the underlying purpose of the prohibition which has been transgressed and whether that purpose will be enhanced by denial of the claim, b) to consider any other relevant public policy on which the denial of the claim may have an impact and c) to consider whether denial of the claim would be a proportionate response to the illegality, bearing in mind that punishment is a matter for the criminal courts. Within that framework, various factors may be relevant, but it would be a mistake to suggest that the court is free to decide a case in an undisciplined way. The public interest is best served by a principled and transparent assessment of the considerations identified, rather by than the application of a formal approach capable of producing results which may appear arbitrary, unjust or disproportionate".
In reaching this decision, the Supreme Court rejected an argument that this "range of factors" approach would lead to uncertainty. In any event, Lord Toulson countered that considerations of certainty cannot be said to be important to people contemplating unlawful activity.
As a result, it was concluded that a claimant who would otherwise satisfy the requirements for a claim for unjust enrichment should not be debarred from enforcing that claim only because the money which he seeks to recover was paid for an unlawful purpose (and it would be a rare case where such a claim might be regarded as undermining the integrity of the justice system). Accordingly, the claimant was entitled to restitution.
Novus Aviation v Alubaf: Part 36 offers and the impact of the Brexit referendum
In April 2014, the claimant made a Part 36 offer which was expressed to be in pounds (£3.7 million approx.), although its claim was in US dollars. The claimant was awarded USD 5.4 million approx. at trial, which at today's exchange rate is equivalent to £4.1 million approx. Leggatt J noted the sharp fall in sterling after the UK's referendum on 23rd June 2016, which had the effect of significantly reducing the dollar value of the Part 36 offer. The defendant argued that the Part 36 offer had not been beaten because the loss was suffered in US dollars and that the value in dollars when the offer was made was USD 6.3 million and thus substantially more than the judgment sum.
That argument was rejected by the judge. He held that the relevant time for comparing a Part 36 offer and the judgment sum is on the date when the order containing the court's judgment is made: "This conclusion is also logical because, as [the claimant] points out, its Part 36 offer was never withdrawn and remained open for acceptance at any time .... Thus, [the defendant] could in principle have accepted the offer at any stage, if it came to the view that the offer had become sufficiently attractive – for example, because of ... movements in exchange rates, or for any other reason".
However, that did not mean that the value of the Part 36 offer at the time it was made was completely irrelevant: "Its relevance is in considering whether it would be unjust to make orders for interest at an enhanced rate and indemnity costs or to do so for the full period. In making that assessment, the court is required by CPR 36.14(5) to take into account all the circumstances of the case; and it is, in my view, a highly material circumstance that the only reason why [the claimant] has beaten its Part 36 offer is .... that sterling has recently fallen against the dollar".
Here, the claimant would not have beaten its offer if judgment had been entered before 23rd June: it was only "happenstance" that the judgment was not handed down until 30th June and for that reason it would be unjust to grant enhanced costs benefits for the period between the date on which the relevant period expired until judgment.
Vilca v Xstrata: Whether a re-review by another firm should be ordered in light of a mistake re an e-disclosure exercise
The claimants applied for an order that the defendants procure "an appropriate re-review of their disclosure", to be carried out by a lawyer who is independent of the defendants' solicitors.
The judge agreed that the defendants had erred, in good faith, when carrying out their e-disclosure exercise by failing initially to disclose a relevant document (although this was remedied later on). Nor did the judge accept the defendants' excuses for the error: "I do not think there is any real mileage in trying to decide whether it was nonetheless within the range of reasonable responses to the question of whether it was disclosable: the reality is that it was plainly disclosable on the basis that it may materially advance the case of the Claimants and/or may materially adversely affect the Defendants' case. The fact that it was not disclosed, and the nature of the various arguments put forward to justify non-disclosure, does give rise to the question of whether too narrow a view is being taken of the parameters within which standard disclosure is required in this case".
The judge also accepted that he did have the power to order a review by another firm of solicitors or by independent counsel (even though that power has not been exercised by a court before). He noted that it would be "most unusual" to make the order and strong grounds would be needed to justify it. Having regard to the fact the error was corrected quickly and the firm in question was of sufficient "standing" to allow the judge to expect it to consider again how to approach the e-disclosure exercise and to put forward a "sensible formula", the judge declined to make the order at this stage. Instead, the solicitors were required to provide a plan within 14 days: "The Claimants may comment on that proposed plan within 14 days of receiving it if they wish and I will consider whether it meets the need for the kind of review I have mentioned."
Glenluce Fishing v Watermota: Whether claim form should be amended after limitation period if incorrect court fee paid
The claimant applied under CPR r17.4 to amend its claim form after the limitation period had expired. The court can allow such an amendment only if the new claim arises out of the same facts as the claim for which a remedy has already been claimed. Here, the amendment was intended to allow the claimant to increase the value stated on the claim form from almost £70,000 to £162,000.
For limitation purposes, a claim is "brought" when a claim form is delivered to the court office accompanied by a request to issue and the appropriate fee. In Lewis v Ward Hadaway (see Weekly Update 2/16), the correct court fee had been paid but it was held that there had been an abuse of process because the claimants' solicitors had deliberately mis-stated/under-stated the value of the claims in order to pay lower court fees for the issue of a claim form. Summary judgment was granted on the basis that the claims had not been "brought" in time.
The issue in this case was whether a similar situation of paying the incorrect court fee because the original amount claimed was too low (albeit, here there was no abuse of process), should lead the court to refuse to exercise its discretion under CPR r17.4. The judge held that that Lewis (and certain other cases) had been concerned only with whether a claim had been brought within the limitation period and did not "justify a root and branch revision of the approach to be adopted to an application to amend".
Accordingly, in the absence of any prejudice to the defendant if the amendment is allowed (and the existence of significant potential prejudice to the claimant if it is disallowed), the amendment should be allowed. The situation might be different, though, if the underpayment of fees amounted to an abuse of process of the court (like the situation in Lewis).
Haederle v Thomas: Whether committal proceedings can be begun if freezing order has an error
The applicant applied for committal of the respondent after his alleged breach of a freezing order. The order had specified that the respondent must not remove from England any assets located there up to the value of £560,000 or dispose of or deal with assets whether they are in or outside England up to "the same value" (paragraph 4(1)). Paragraph 7(2) of the order provided that if the total unencumbered value of the respondent's English assets did not exceed £560,000, those English assets must not be removed or dealt with and "if the Respondent has other assets outside England and Wales, he may dispose of or deal with those assets outside England and Wales so long as the total unencumbered value of all his assets whether in or outside England and Wales remains above £ ".
No figure was inserted after "£" at the end of paragraph 7(2). Henderson J agreed that someone acquainted with the law and practice relating to the grant of freezing injunctions in the English High Court could be under no doubt that the intended figure was obviously £560,000. However, here, the respondent is not a UK citizen and nor is English his first language. He was also not present at the hearing when the injunction was granted (and did not appoint English solicitors until after the alleged breaches in relation to the non-English assets). Furthermore, the precedent on which the order was based (form F1 annexed to PD25A) does not make it clear that the same amount has to be specified throughout. For all those reasons, and undeserving though the respondent's conduct may seem, he should not find himself at risk of committal proceedings when the order was deficient in this way.
COMMENT: The judgment begs the question whether the same approach would be adopted where the respondent is a UK citizen with English as his first language. The judge did point out, however, that it would have been possible for the applicant to apply under the so-called slip rule (CPR r40.12) and he had little doubt that such an application would have been granted (as would an application to amend the freezing order under CPR r3.1(7)).
Briggs LJ's final report on the Civil Courts Structure Review has been published (see link below). Some noteworthy recommendations include:
1) An Online Court should eventually hear cases with a value of up to £25,000 (but excluding personal injury claims which would otherwise fall within the fast track or multi-track and professional negligence claims);
2) Various options regarding the Divisions of the High Court are mooted, but no change should undermine the identity or international reputation of the Commercial Court, and other specialist courts in the Rolls Building;
3) The value thresholds below which a claim cannot be issued in the High Court should be increased immediately to £250,000, with a view to a second increase to £500,000. They should apply to all types of claim (with no lower limit for personal injuries);
4) The county court should be the single default court for enforcement of the judgments and orders of all the civil courts (but appropriate enforcement issues eg cross-border issues) may be transferred to the High Court and there will need to be special provision for the enforcement of arbitration awards.
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.