A summary of recent developments in insurance, reinsurance and litigation law.
This Week's Caselaw
Fiona Trust v Privalov: Judge explains approach to assessing damages where a freezing injunction should not have been granted
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. The claimant argued that the funds would not have been used in that way and that, in any event, if they had, that might have resulted in a loss.
Males J noted that damages in this context should be assessed by reference to ordinary contractual principles (although some flexibility may be required). There is no need to show that the freezing order was the sole cause of the loss, but it must be an effective cause. The courts have recognised that, because a freezing order can ruin a thriving business, such orders are one of the law's "nuclear weapons". As a result a "realistic approach" will be taken to a submission that a defendant should have approached the claimant or made an application to the court for a variation of a freezing order. The judge rejected an argument that such strategies would have worked in this case.
He went on to comment that: "I consider that a liberal assessment of the defendants' damages should be adopted.... It does not mean that a defendant should be treated generously in the sense of being awarded damages which it has not suffered. It does mean, however, that the court must recognise that the assessment of damages suffered as a result of a freezing order will often be inherently imprecise, for example because the defendant cannot say precisely what it would have done with its funds but for the freezing order; that this problem has been created by the claimant's obtaining of an injunction to which it was not entitled; that in the light of these factors .. over eager scrutiny of a defendant's evidence and minute criticism of its methodology ... will not be appropriate; and that it is not an answer for a claimant to say that damages cannot be awarded because the defendant's business venture was to some extent speculative and might have resulted in a loss. Thus the defendant is not absolved from proving its damages, but these factors must be borne in mind in determining whether it has succeeded in doing so".
Accordingly, damages can be awarded for loss of profit, even if a claimant might have made a loss. The court must just be satisfied to a sufficient standard (which may be the balance of probabilities, or sometimes merely that there was a real and substantial chance), that the transaction would have been profitable.
On the facts of the case, there was no doubt that the defendant could have made a profit of USD 95 million, had the new vessels been sold at the relevant time (even though there was also a possibility that he would not have sold at that time). He was entitled to damages in that amount, minus amounts actually earned on the funds frozen in the solicitors' account.
The judge noted that it might seem odd that a defendant who had been found to have been dishonest in at least some of his business dealings should be entitled to damages running into tens of millions of dollars. However, "even serious and well-founded criticisms of a defendant's character do not mean that claimants can be less scrupulous in complying with their duties when applying for a freezing order. Nor do they provide a reason not to enforce an undertaking."
Taylor v Van Dutch Marine: Freezing orders and carrying out ordinary transactions
In this case, the defendants were found to be in contempt of court for failing to comply with a disclosure order (and further order), and were sentenced to six months' imprisonment. One issue which arose in the case was the defendants alleged inability to attend the contempt hearing, or to repay the claimant, because of a freezing order which the claimant had obtained. That argument was rejected by Warren J. A freezing order allows a party to continue to carry out transactions which are in the ordinary course of business. The judge noted that if the defendants have been unable to effect ordinary business transactions because of the reaction of third parties, such as banks, to the freezing order, it would have been open to them to request confirmation from the claimant that such transactions are not prohibited. However, there had been no such request in this case.
Allen Tod Architecture v Capita Property: Disclosure of first expert's preliminary report ordered by the court where party changed experts
The claimant obtained permission to adduce expert evidence by reference to discipline, rather than naming a particular expert. However, the order also required the claimant to apply for permission to call expert evidence orally at trial.
The claimant instructed an expert, who prepared a final report, but then sought to change experts (it said for practical reasons, rather than because it was dissatisfied with the expert's opinion (ie that this was not a case of "expert shopping")). The claimant agreed to provide copies of its instructions and the first expert's final report to the defendant. However, it objected to providing the first expert's preliminary report and other documents in which the expert had provided his views, and the defendant sought an order from the court for disclosure of these documents.
The judge referred to the recent decision of Coyne v Morgan (see Weekly Update 19/16), and confirmed that the court's power to exercise its discretion to impose terms when given permission to a party to adduce expert evidence arises irrespective of the occurrence of any "expert shopping". However, strong evidence of expert shopping will usually be required before other forms of document than a report by the expert (eg attendance notes by instructing solicitors of discussions with the expert) are ordered to be disclosed.
Earlier caselaw has confirmed that a party may be required to waive privilege in the first expert's report in order to obtain permission to rely on a substitute expert and the judge confirmed that the same principle applies to any earlier draft or provisional report or other relevant document produced by the first expert.
On the facts of the case, the judge held that it was reasonable to require disclosure of the first expert's preliminary report here. Even though this was either not a case of expert shopping or, if it was, this was only to a "faint degree", the court still had a discretion to order disclosure of material produced by the first expert in which he/she expressed his opinion, as a condition for allowing reliance on a new expert.
Howmet v Economy Devices: Court of Appeal considers negligence claim against manufacturer and constructive knowledge of the claimant
The owners of a factory sought to bring a claim for damages against the manufacturer of a device which, they claim, caused a fire at the factory. The claim failed at first instance, in part because the judge attributed to the claimant the knowledge of its relatively junior employees that the device had been defective. The Court of Appeal has now unanimously dismissed the appeal from that decision, although for differing reasons.
Jackson LJ concluded that the employees' knowledge should be attributed to the claimant in this case (on the basis that they had been entrusted by the directors to ensure the safety of the relevant equipment). He also referred to a comment by Lord Bridge in D&F Estates v Church Commissioners for England , which he said placed a restriction on a manufacturer's liability to the end user, where a hidden defect is discovered by the end user before any damage is caused (however, Lady Arden interpreted that comment as referring only to economic loss and not damage to property). Jackson LJ said that if he was wrong on the attribution point, then he would have held that the claimant "knew" about the defect before the fire (because of the knowledge of the junior employees), and so the claim would fail on that basis too. In reaching this conclusion, he approved a principle identified by Baker J in Taylor v Rover  (even though this case pre-dated the Supreme Court decision in Bilta v Nazir on attribution), that "If one person in the corporate hierarchy ... becomes aware of a dangerous situation in the workplace which in breach of duty he fails to report up the line, in subsequent litigation the company cannot rely upon the ignorance of its more senior managers. This may be a matter of constructive knowledge rather than attribution. I do not suggest that the principles of constructive knowledge can always be used to bypass the question of attribution. But those principles are of obvious relevance in a situation where junior management become aware that there is a source of danger within the workplace".
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