March 13, 2017

(Re)insurance Weekly Update 09- 2017

A summary of recent developments in insurance, reinsurance and litigation law.

This Week's Caselaw

Denso Manufacturing v Great Lakes Reinsurance: Judge considers whether terms are conditions precedent and whether they have been breached

A company insured under an After the Event insurance policy ("the insured") pursued litigation against a third party, the claimant in this action. The bulk of the claims were dismissed but the insured won on one claim. However, it was ordered to pay the claimant's costs from the date of the expiry of the claimant's Part 36 offer (which the insured had rejected). The Part 36 offer was only notified to the ATE insurer (the defendant to this action) after it had been rejected.

After the insured went into liquidation, the claimant sought to recover the amount of the costs order in its favour from the ATE insurer under the Third Parties (Rights against Insurers) Act 1930. The insurer argued that it had no liability to indemnify the claimant because the insured had breached various conditions precedent in the policy. Various issues fell to be considered by the judge, Cockerill QC, including the following:

(1) Where the relevant clauses in the policy really conditions precedent?

The policy contained the following clause: "Due Observance: The due observance of and compliance with the terms provisions and conditions of the Policy in so far as they relate to anything to be done or complied with by the Insured … shall be conditions precedent to any liability of the Insurer to make any payment hereunder. In addition the Insured … is required to cooperate with Us and give Us the information We require at any stage in the case" (Clause 7).

The judge held that recent caselaw has indicated that "the hostility to conditions precedent manifested in Re Bradley has been somewhat moderated over the years".  She also held that there was ample authority that general clauses such as Clause 7 could create conditions precedent.

Nor was there any doubt that claims cooperation conditions and conditions requiring the provision of information were capable of being conditions precedent, especially here, where there would be little incentive otherwise for the insured to cooperate once a case was lost: "The policy cannot work without the input of the insured because the insurer is not a party to the litigation, and is entirely reliant on the insured cooperating with it and giving it information. Once the litigation is over there are still important steps to be taken in minimising the quantum of recovery, which the assured may feel little incentive to do once the case is lost without such firm requirements. This is not a case like Bradley where the commercial purpose of making the clauses conditions precedent is non-existent (in that case the wages book was simply used for premium calculation); here the commercial purpose of the conditions is obvious".

Nor were the issues of subjective knowledge considered in the recent case of Maccaferri  v Zurich (see Weekly Updates 02/17 and 23/15) relevant here: the conditions precedent here related to a liability which had already arisen, they did not relate to whether there was liability in the first place.

(2) Had there been a breach of the policy's conditions precedent?

The judge held that there had been no breach of the requirement to provide information under Clause 7 on the facts, because no request for information had ever been made by the insurer. However, there had been breaches of other conditions precedent which required the provision of "all" bills or communications. This did not require a prior request from the insurer and also was not limited to only material items (although the withheld information had, in any event, been material).

The conditions precedent required the information to be passed on "without delay". The judge said that: "This is a form of wording which would denote passing on within days or at most well under a month (14 days used to be considered an acceptable turnaround time for business correspondence, but even this may be regarded as unacceptably slow in the modern world). Quite where one draws the line is not of any moment as regards this item, as I consider that it would certainly be drawn earlier than two months".  A further breach took place following a delay of 20 days during August, notwithstanding normal holiday periods during this time. (However, any delay caused by sending to the insurer's old address - the insurer having moved address and the solicitors for the insured's liquidators being unaware of this - was said to be the fault of the insurer).

Accordingly, the insurer was discharged from liability because of these breaches of conditions precedent.

Although not required to decide these issues, the judge commented on further arguments raised by the insurer, including:

(1) Whether the insured had breached a condition precedent to pay premium. This in turn depended on whether premium had ever become payable because the proceedings were "partially successful". The judge held that they were. However, an ATE premium is not payable before the period of cover and the process of quantification can be complex. Here, it was held that there had been no breach of the condition precedent on the facts. Furthermore, it was held that the payment of premium was not a condition precedent here since no express language was used and no time limit was given for payment of the premium.  Furthermore, there is no rule that premium is payable at any point . Failure to pay on a due date will only be a repudiatory breach if time is (expressly or impliedly) stipulated to be of the essence or where the insured has been guilty of unreasonable delay and the insurer has given notice requiring payment within a reasonable time. Those conditions were not met here.

(2) A side issue was when the claimant's rights to payment accrued under the policy. The claimant argued that any breaches of conditions precedent would be irrelevant if they occurred after the claimant's rights had accrued. Here, the order to pay the claimant's costs was made on 5th September 2014, but the default costs certificate was only made a year later. Prior caselaw has found that no obligation arises on the part of the insurer until the liability of the insured to a third party is established and quantified. The judge held that it was therefore not enough for the costs order to determine that there was some liability to pay and so the right to payment under the policy did not accrue until the default costs certificate was issued.

(3) A further issue was whether the insurer would have been entitled to set off any liability owed to the claimant against the insured's liability to pay the premium. The 2010 Act specifically provides that there will be a right of set-off in these circumstances, but there was no such provision in the 1930 Act and there has been caselaw debate as to whether not only the insured's rights, but also its liabilities, are transferred to the third party under the 1930 Act. Although not required to decide the point, the judge said she preferred the argument that the insured's liabilities are not transferred to the third party. She relied on the Supreme Court's decision in IEG v Zurich (see Weekly Update 18/15), in which it was opined that legal set-off is "probably" precluded under the 1930 Act, and the insurer here had not pleaded that it would be inequitable to not set off premium.

COMMENT: The last point above is an interesting one, even though it did not form part of the ratio of the case, because there is conflicting textbook commentary on the availability of legal set-off under the 1930 Act. The judge's comments regarding the Re Bradley case are also noteworthy, although she adopted the same approach as the judge in that case (and subsequent cases) by examining each condition in a list of conditions precedent, notwithstanding clause 7 in the policy, in order to ascertain whether it was capable of being a condition precedent in its own right.

Ittihadieh v 5-11 Cheyne Gardens: Court of Appeal issues guidance on subject access requests under the Data Protection Act

The Court of Appeal considered various issues regarding a subject access request ("SAR") under the Data Protection Act 1998 ("the Act") in this judgment. Some noteworthy points are as follows:

(1) Data is "personal data" if it "relates to" a living individual and the individual is identifiable from that data. So personal data includes someone's name and contact details. Lewison LJ added that "In addition to the categories of data which I have thus far considered, it seems to me that a person's whereabouts on a particular day or at a particular time may also amount to that person's personal data. Those data may be highly relevant, for example in calculating sick pay or holiday pay, or in the investigation of crime". Furthermore, information is not disqualified from being "personal data" merely because it has been supplied to the data controller by the data subject.

(2) Payment of a fee is not a pre-condition to making a valid SAR: "The only pre-condition, then, is that the data controller must have "received … a request in writing." As a matter of ordinary English, at least in this context, a "request" is a communication which asks someone to do something. In this context, "writing" includes electronic transmission… So a SAR may be made by e-mail or even via social media sites such as Facebook or Twitter". A request can be made informally, but it must make it clear that the recipient is being called upon to comply with his duty under section 7 of the DPA as a data controller.

(3) The purpose of the right of access to personal data is to allow the data subject to check the accuracy of the data and to see that they are being processed lawfully. However, it is not a valid objection that a collateral purpose may be to obtain documents for the purposes of litigation: "First, the target of a SAR is not documents; it is information… Second, in principle the mere fact that a person has collateral purposes will not invalidate a SAR, or relieve the data controller from his obligations in relation to it, if that person also wishes to achieve one or more of the purposes of the Directive… Third, there is now a considerable body of domestic case law which recognises that it is no objection to a SAR that it is made in connection with actual or contemplated litigation…Fourth, section 27 (5) of the DPA provides that apart from exemptions contained in the DPA itself, the subject information provisions prevail over any other enactment or rule of law. Fifth, there is a sufficient safety net in the form of the EU doctrine of "abuse of rights"". See further below re the court's discretion, though.

(4) The data controller is not obliged under section 7(1)(b) of the DPA to supply personal data. It must instead provide a description of the persona data (eg the controller may say that it has processed the data subject's name and address). The obligation under section 7(1)(c) of the DPA is to supply information but not the documents themselves.  Conversely, the mere supply of copy documents may not be enough (because, for example, it may not be apparent to whom the personal data have been disclosed).

(5) The Court of Appeal recognised that the DPA has an underlying assumption that personal data can be sufficiently retrieved and made ready for disclosure to the data subject at the touch of a few buttons: "Experience shows that this assumption is fundamentally unsound". However, the EU legislature did not intend to impose excessive burdens on data controllers. A search need only be reasonable and proportionate and need not leave no stone unturned.

(6) Finally, the Court of Appeal disagreed with the obiter comment in Durant v FSA [2003] that the court's discretion to order the data controller to comply with a SAR is "general and untrammelled". Various factors may be taken into account by the court, including:

(a)whether there is a more appropriate route to obtain the information, such as disclosure in legal proceedings;

(b) whether there is a legitimate reason for the request;

(c) whether the collateral purpose of assisting in litigation would be an abuse of rights (eg litigation is being pursued merely to impose a burden on the data controller, or is procedurally abusive (because the litigation has failed before));

(d) whether the real quest is for documents, rather than personal data; and

(e) whether the data subject has already received the data (or documents), other than under a previous SAR.

Phoenix Group v Cochrane: Whether assets paid to solicitors to meet their fees should be frozen

In June 2016, a freezing order was granted over an individual's assets. That individual claimed that one of the assets frozen by the order had been transferred by her (prior to the freezing order) to LCL. When the asset was subsequently sold, LCL transferred £2 million to its solicitors in September 2016. The solicitors received the funds into their general client account and intended to use them to settle their outstanding invoiced fees. The claimant obtained a freezing order over the £2 million and the solicitors sought to discharge that order. Popplewell J has now held as follows:

(1) The claimant had been wrong to assert that whenever a defendant who is subject to a freezing order transfers assets to a third party in breach of the order, the court has jurisdiction to freeze the assets in the hands of the third party. If the recipient is innocent (as was the case here), then the Chabra jurisdiction is the only basis for freezing assets in support of the claim against the defendant.

(20 Nor did the court have jurisdiction to restrain the solicitors from engaging in threatened conduct which would breach the freezing order against the defendant. Here, the transfer was not merely threatened, but had taken place: "I cannot see any basis on which an innocent transferee of a non-proprietary asset can properly be restrained from disposing of the product of a completed transfer if the Chabra criteria are not fulfilled. The property is that of the transferee to deal with as he sees fit". The money had become the solicitors' money as soon as it was received by the solicitors. Whilst in the general client account, it was not held on behalf of the client, but was instead the firm's money awaiting onward transmission.

(2) However, the claimant was able to invoke the Chabra jurisdiction as a basis for relief here. Under that jurisdiction, the court may freeze assets in the hands of a third party against whom no substantive claim is made where there is good reason to believe that those assets will be or can be made available to satisfy a judgment which the claimant may obtain against the defendant against whom he is advancing his substantive cause of action.

The circumstances in which the money came to be paid to the solicitors had been "opaque" and it was a triable issue whether the asset had been transferred to LCL and whether LCL had any entitlement to the proceeds of sale. Accordingly, "there is on any view a good arguable case that [the solicitors were] not entitled to receive [the £2 million] from the true owner for the stated purpose". The transfer could therefore be reversed so as to make the money part of the pool of assets which would be amenable to execution of a judgment against the defendant.

(3) Although the Chabra jurisdiction was not pleaded when the claimant first obtained the freezing order against the solicitors, the evidential basis for the Chabra jurisdiction was the same as that originally put before the courts and so this failure did not justify discharging the freezing order. Nor did the judge exercise his discretion to discharge the jurisdiction because the claimant had failed to progress the proceedings expeditiously: the claimant had mistakenly believed that the court would automatically transfer the case to the Commercial Court and had not realised it had to arrange this.

Accordingly, the freezing order was continued.

Astor Management v Atalaya: Whether there is a general principle that a futile action needn't be performed/the requirement for reasonable endeavours

In this (non-insurance) contractual dispute, Leggatt J considered whether there is a "principle of futility" in law, i.e. a principle that if the fulfilment of a pre-condition to the accrual of a contractual right becomes futile or unnecessary, the courts do not insist on it. Reliance was placed on the Court of Appeal's decision in Barrett v Davies [1966], in which an insured failed to give notice to his insurers (as required under the policy), but the insurers were nevertheless informed by the police. Lord Denning MR said that "the law never compels a person to do that which is useless and unnecessary". However, other cases have held that the insurer can rely on the breach of a condition precedent even if it suffers no prejudice.

In this case, Leggatt J held that there is no "principle of futility" and that Lord Denning's comment was only obiter dicta: "There is, in my opinion, no principle of law or even interpretive presumption which enables a contractual precondition to the accrual of a right or obligation to be disapplied just because complying with it is considered by the court to serve no useful purpose".

A further issue in this case was that the contract required the defendants to use "reasonable endeavours" to obtain an agreement with a third party. The defendants argued that this requirement was only enforceable if its object was sufficiently clear and there were sufficient objective criteria by which to evaluate the reasonableness of the endeavours. The judge rejected those arguments: "The role of the court in a commercial dispute is to give legal effect to what the parties have agreed, not to throw its hands in the air and refuse to do so because the parties have not made its task easy. To hold that a clause is too uncertain to be enforceable is a last resort". Furthermore, "Far from being "exceptional", I would say that it should almost always be possible to give sensible content to an undertaking to use reasonable endeavours (or "all reasonable endeavours" or "best endeavours") to enter into an agreement with a third party", since it is clear when an agreement had been made. It is then a question of fact whether reasonable endeavours have been made: "Where the parties have adopted a test of "reasonableness", .. it seems to me that they are deliberately inviting the court to make a value judgment which sets a limit to their freedom of action".

COMMENT: The issue about whether it matters whether someone other than the insured gives notice under the policy was considered in Thermonex v Axa (see Weekly Update 30/12), where the policy required the insured to give immediate notification. It was held that only the insured could give notice, and notification by a third party would not suffice. This is an issue which normally matters where an insured has become insolvent and so can no longer notify insurers itself. However, this has become less of a problem following the coming into force on 1st August 2016 of the Third Parties (Rights against Insurers) Act 2010, since it specifically provides that if an act by a third party fulfils a policy condition, it is to be treated as if done by the insured (section 9(2).

Sony v WPMC: Non-party costs orders against the controllers of a company

Section 51 of the Senior Courts Act 1981 gives the court a discretion, in exceptional circumstances, to order a non-party to pay the costs of the winning party where the litigant cannot pay. Usually, such orders are made where the non-party funds the litigation and controls, or will benefit from, it. In this case, though, the basis for seeking the order was that the non-party controlled the impecunious litigant (eg a director or a liquidator of the party). The issue in dispute was whether the court has jurisdiction in such cases to make a non-party costs order or, if to does, should only exercise that jurisdiction where there was a divergence between the interests of the controller and the interests of the company.

Arnold J concluded that "the court should be slow to make an order against the controller unless the controller has caused the company to bring or defend the claim in order to promote his own economic interests, as distinct from the interests of other shareholders and creditors of the company; but it is not necessary for the applicant to show that there is a divergence between his interests and those of the other stakeholders".

He also held that an order would more readily be made where the controller causes the company to bring a claim (rather than defend one). Impropriety need not be demonstrated and the non-party should be warned about a possible costs order against him as early as possible. It may also be sufficient to show a causal link with the non-recovery of costs by the applicant (rather than with the incurring of the costs).

Attheraces v Ladbrokes: Court rejects an application for pre-action disclosure

The applicants applied for pre-action disclosure under CPR r31.16. It was common ground that the requirement that the respondents would be parties to proceedings if they were issued was met where at least one of the respondents was likely to be a party. Nor was it essential to clearly specify the documents being sought (although it was, of course, important to do this). If the judge had been minded to grant the application, he would have allowed the applicants to "go back to the drawing board" to re-draft the order sought.

However, this was an example of a rare case where the application failed at the jurisdictional, rather than discretionary, stage.

The judge held that the strengths and weaknesses of the anticipated claims would not be materially changed if pre-action disclosure was granted. All an order would do would be to allow the applicants to plead more specifically what they could already plead. Nor would there be any savings of costs.

US Caselaw

Some of the topics covered in this week's caselaw have been considered in recent months by the US courts too. Our US colleagues have written updates on the following topics: