Welcome to the forty-first 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

Ted Baker Plc v Axa
A case on the duty to comply with a claims provision where an insurer has (wrongfully) rejected a claim.

CIP Properties v Galliford Try
A case on the interplay between case management and ADR and costs budgets for cases over the cap.

Tchenguiz v Director of the SFO
The Court of Appeal decides whether documents disclosed by the SFO could be used in separate proceedings in Guernsey.

Lorand Shipping v Davof Trading ("Ocean Glory")
A Clyde & Co successful section 68 Arbitration Act 1996 challenge.

Other news
An update on Corporation tax/CGT payable on a Judgment, Award or Settlement Sum.

Ted Baker Plc v Axa

Duty to comply with claims cooperation clause where insurer has denied liability/proving quantum

http://www.bailii.org/ew/cases/EWHC/Comm/2014/3548.html

Weekly Update 19/12 reported the earlier instance decision in this case, in which Eder J held, as a preliminary issue, that the insurance policy in question did cover theft by employees, despite the insured's non-selection of a "Theft by Employees Section" (and so the insurer couldn't reject the claim on that basis). The insured therefore proceeded to bring a claim for business interruption losses. This was an unusual BI claim, because such claims are normally based on a single adverse event, such as a fire or flood or major burglary which is immediately known to the insured and which causes major losses of profit clearly reflected in the insured's accounts. By contrast, here the alleged theft took place more than 500 times over more than 5 years (and spanning some 5 policy years) before discovery in December 2008, and the allegations of loss were not founded on accounts but instead on calculations based on various assumptions. Although the case is fact-specific, some general points of interest arose:

(1) Complying with a Claims Cooperation Clause ("CCC"). The policy contained a claims condition that (inter alia), "in the event of a claim being made", the insured would provide particulars of its claim within 30 days after expiry of the Indemnity Period, and deliver accounts and other "documents proofs information explanation and other evidence as may be reasonably required" by the insurer to investigate the claim. It was also provided that "if the terms of this condition have not been complied with, no claims under this Section shall be payable" (and the term was accepted to be a condition precedent).

The insured argued that no claim could be made here until after discovery of the theft in December 2008, and hence there was no obligation to deliver particulars of the claim before that time. That argument was rejected by the judge. It did not matter that the insured did not discover the thefts until 30 days after the indemnity periods had expired under earlier policies. Particulars had not been sent until 17 February 2009 and so the insured had breached this requirement in respect of all thefts prior to 18 January 2008. However, although the judge accepted that insurers could have "pulled the shutters down" in relation to those thefts, he found that they had not done so on the facts.

Eder J also approved textbook commentary to the effect that "full particulars" means "the best particulars the assured can reasonably give", and (unless the policy states otherwise) further particulars can be supplied later on.

The judge did not decide the "very difficult issue of law which has never properly been considered by an English Court" as to whether an insured must comply with claims conditions if an insurer wrongly rejects a claim (and if that constitutes a repudiation of the insurance policy). Instead, he focused attention on the meaning of what was "reasonably" required?

The judge was prepared to find that the list of various documents required by the insurers had been "reasonably required" "in an abstract sense". However, he went on to hold that "it does not seem to me that this is necessarily so in circumstances where insurers in effect (wrongly) deny liability in principle or even (wrongly) refuse to admit that "employee theft" was an insured peril, as they did in the present case. I should emphasise that I fully accept that, generally speaking, it may be perfectly "reasonable" for insurers to reserve their position pending receipt of further documents/information and that a requirement by insurers that the insured should deliver such documents/ information may be entirely "reasonable" because a review of such documents/information by insurers is necessary in order to decide, for example, whether cover exists or not. In my view, that is a statement of the obvious but it is not this case. I should also make plain that I fully accept as a matter of the general law of contract that a repudiation is a thing "writ in water" and that, unless it is accepted by the innocent party, the latter will generally continue to be bound by the contract and, in particular, continue to be bound to perform that party's continuing obligations under the contract. That is, indeed, trite law. However, here the focus is one of construction of the contract and, in particular, what information may be "reasonably required" by insurers in the particular circumstances of the present case; and unless and until the defendants were prepared to confirm at the very least that "employee theft" was an insured peril, the requirement to deliver the other categories of documents .... was, in my judgment, not "reasonable" having regard, in particular, to the time and expense that would have to be incurred by [the insured] in complying with such requirement".

The judge did, however, find that the insured had breached the claims cooperation clause by failing to provide profit and loss and management accounts from 2005 to 2008, it being common ground that a request for such accounts is routine for commercial claims and hence were "reasonably required". Although certain issues had been "parked" pending agreement on the question of liability, no additional costs would have had to be incurred in order for the insured to send the accounts.

Furthermore, there had not been unequivocal representation from the insurers that the insured was not required to deliver the accounts (and hence no waiver by estoppel). It did not matter that the insured thought or assumed that they did not have to deliver the accounts – that did not result from any agreement by the insurers. Accordingly, the claim failed because a breach of the CCC.

Eder J also said that it was "difficult" to say the insurer had breached its duty of good faith because it ought to have warned the insured that it was committing a breach of a condition precedent. The judge agreed that that the insurer was under no duty positively to warn the insured that it needed to comply with policy terms, and there was also no evidence to support the suggestion that it should be inferred that the insurer's silence was deliberate.

(2) Proving quantum. An insured must establish on a balance of probabilities that a relevant event has been caused by an insured peril. Here, the insured faced difficulty in reaching that burden and proving that thefts had even taken place, and the judge accepted that "there may be different ways of satisfying the legal burden and standard of proof other than by direct evidence". However, here, although certain thefts (below the policy excess) had been proven, there was no evidence that an assumption made by the insured about the employee's thieving activities during the relevant period was correct. Indeed, the employee would most likely have tried to keep the number of incidents of theft to a minimum in order to avoid the risk of detection.

COMMENT: As mentioned above, this case does not resolve the issue of whether an insured must comply with a policy condition even if the insurer has (wrongfully) rejected a claim. In Diab v Regent Insurance (see Weekly Update 16/06) the Privy Council held that a claims provision remained binding even where insurers had told the insured they would not pay the claim (and the case was followed in Lexington v Multinacional (see Weekly Update 22/08)), but there is textbook commentary doubting that approach in non-liability or reinsurance cases (see Colinvaux's Law of Insurance, 9th edn, para 9-018) and Eder J was not strictly bound to follow either Diab or Lexington. Instead, this case focuses on what an insurer can "reasonably" require from the insured following the rejection of a claim, if the policy contains that wording (and even if the clause does not contain that wording, Napier v UNUM Ltd [1996] is authority for the view that the courts will imply a reasonableness test into any requirement for the insured to provide information to the insurer about its claim).

However, it might be said that by focusing the inquiry on the policy wording, the judge did implicitly accept that the insured was still bound to comply with a claims provision even though insurers had rejected the claim (even if he did not expressly say that was his conclusion). It is also noteworthy that the judge linked the issue of "reasonableness" in the policy condition to the insurer's conduct regarding the claim in general: in short, where a claim has not been accepted, an insurer can't reasonably request information which it will be costly or timely to produce (and query how much time and expense will result in a request not being reasonable).

CIP Properties v Galliford Try

Interplay between case management and ADR and costs budgets for cases over the cap

http://www.bailii.org/ew/cases/EWHC/TCC/2014/3546.html

In this case, Coulson J considered whether he should agree to order a stay of the proceedings whilst the parties endeavour to resolve the dispute by mediation. Although he was referring to the attitude of the TCC in particular to such requests, his comments might be of more general interest. He said that although the courts do support mediation and other forms of ADR, "it is usually inappropriate for the court at a CMC to build in some sort of special "window" of three or four months in order that the court proceedings can be put on hold whilst the parties engage in ADR". That is because when setting directions for the trial of a large TCC case, the court will allow a reasonable period between each step in the process to allow parties to engage in ADR. The fixing of the trial date is "one of the critical elements of any CMC in the TCC" and should not be delayed.

The other issue was whether the court had a discretion to order the filing and exchange of costs budgets (pursuant to CPR 3.13) even though the value of the claim (GBP 18 million) was above the mandatory limit for TCC claims (GBP 2 million when the claim was started – and even over the current GBP 10 million limit too).

Coulson J held that the court did have such a discretion. He rejected an argument that the wording of the rules meant that multi-track claims fell outside of the court's discretion. Furthermore, if that was right, this could lead to an abuse of the process, with parties deliberately framing their claims for higher amounts, and the court would then be unable to consider the proposed costs, no matter how disproportionate or inflated they were. Costs budgets are not automatically required where a case is above the limit principally because the higher the value of the claim, the less likely issues of proportionality will be important or relevant.

Finally, the judge also rejected an argument that the defendant here should be obliged to submit a budget dealing with the defence of the claimant's claims and then, separately, with the defence of claims being brought by other parties. That would be unfair and would require the defendant to incur significant cost in providing such a breakdown within its costs budgets.

Tchenguiz v Director of the SFO

Court of Appeal decides whether documents disclosed by the SFO could be used in separate proceedings in Guernsey

http://www.bailii.org/ew/cases/EWCA/Civ/2014/1409.html

Weekly Update 28/14 reported the decision by Eder J to give permission to the claimant to give documents disclosed to it by the SFO to lawyers involved in a pending appeal in separate proceedings in Guernsey (CPR r31.22 provides that a party to whom a document has been disclosed may use that document only "for the purpose of the proceedings in which it is disclosed" except if (amongst other things) the court gives permission). However, in the same case, Eder J refused the claimant permission to rely on the disclosed documents in the Guernsey appeal. The claimant appealed against that decision and the Court of Appeal has now dismissed that appeal.

The Court of Appeal emphasised the rationale for the long-established rule that documents disclosed to a party cannot be used for any collateral purpose (without the consent of the disclosing party or the court): the obligation

to give disclosure is an invasion of a litigant's right to privacy and is justified only by the public interest in ensuring that a court has all the necessary evidence and the rule promotes compliance with the disclosure obligation. Special circumstances are needed to depart from the rule and, furthermore, there is a strong public interest in preserving the integrity of criminal investigations and protecting those who provide information to prosecuting authorities from wider dissemination of that information. The liaison between the SFO and foreign authorities is inherently confidential and, as the judge held, there is a strong public interest in maintaining co-operation between foreign states in the investigation of offences with an overseas dimension.

Lorand Shipping v Davof Trading ("Ocean Glory")

Successful section 68 Arbitration Act 1996 challenge

Clyde & Co (Martin Hall and David Handley) for applicant

This is an example of a successful challenge to an arbitral award under section 68 of the Arbitration Act 1996. The claimant, wishing to avoid potential limitation problems, commenced arbitral proceedings before any third party claims had been brought against it. It therefore wanted the tribunal to "reserve" jurisdiction to hear any future claims which it might want to bring against the defendant. The defendant instead wanted the tribunal to reach a final decision on the merits of the case. Rather than adopting either of those approaches, the tribunal adopted a "half-way house" of refusing to exercise jurisdiction over other claims on the basis that such claims would be brought before a newly-constituted tribunal.

Eder J allowed the challenge to that award, holding that, although the decision might have had some attraction, the parties should have been given an opportunity to put their views on this (it didn't matter whether the tribunal would have adopted a different course, it was sufficient that it "might realistically" have reached a different conclusion). The judge also commented (although he did not have to decide the point) that "a tribunal has no power simply to decline to act". (One further point too: the judge held that the term "interim award" is a misnomer which should be abandoned, and replaced it here with "partial award" instead).

Other news

Corporation tax/CGT payable on a Judgment, Award or Settlement Sum

In Zim Properties v Proctor [1985], it was held that a cause of action is an asset which is taxable if it is turned into cash (by a settlement or judgment/award). Following that case, the Inland Revenue introduced an Extra Statutory Concession D33. This provided that: (a) where a right of action arises because a form of property has been damaged or destroyed, any gain on the disposal of the right of action is calculated as if the compensation derived from the underlying asset (not the cause of action). As a result, only an amount over and above the original value of the property will be taxable (paragraph 9); and (b) in all other cases, where the right of action was in connection with a matter which did not involve a form of property which was an asset for Corporation Tax/CGT purposes, (such as a claim in respect of negligent professional advice), any gain was exempted from Corporation Tax/CGT (paragraph 11).

In January 2014, the Inland Revenue revised paragraph 11. Any damages over GBP 500,000 (whether obtained by settlement, judgment or award) are now likely to be taxable and must be notified to the HMRC (which will exercise its discretion on a case-by-case basis). Some causes of action remain unaffected (e.g. personal injury claims). The Inland Revenue has recently consulted on raising this cap to GBP 1 million (with any amount over that cap automatically becoming chargeable to Corporation Tax/CGT, and the removal of HMRC's discretion as to the applicability of the charge).

As a result, if you are a claimant, you should bear in mind that depending on the amount of a settlement, judgment or award, the HMRC may have to be notified, and you should also ensure that any compensation claimed takes account of the potential tax consequences of a settlement/ judgment/award (ie by seeking the main figure plus the CGT/Corporation tax that may have to be paid on it).

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.