Insurance Update
October 2009
Conflict of laws ... 1
Gard Marine and Energy Ltd v Tunnicliffe & Glacier Reinsurance AG – challenge to English jurisdiction ... 1
Illegality... 3
K/S Lincoln v CB Richard Ellis Hotels Ltd – effect of alleged tax fraud on professional negligence claim ... 3
Warranty of authority... 5
Excel Securities plc v Masood – solicitor’s liability in cases of identity fraud ... 5
In brief ... 6
Duty of specialist consulting engineer ... 6
Insurance contract law reform ... 7
Proposal forms ... 7
Rome I ... 7
Summary judgment... 7
Conflict of laws
Gard Marine and Energy Ltd v Tunnicliffe & Glacier Reinsurance AG – challenge to English jurisdiction
[2009] EWHC 2388 (Comm) http://www.bailii.org/ew/cases/EWHC/Comm/2009/2388.html
This case provides a useful review of the principles applying to challenges to the English courts’ jurisdiction in insurance disputes.
The claimant insurance company Gard insured a risk of loss arising out of named windstorm in the Gulf of Mexico. It reinsured the risk through Lloyd’s broker Agnew Higgins Pickering & Co Ltd with English and Swiss underwriters. The insured made a claim following Hurricane Rita and, following settlement of the claim, Gard made claims against the reinsurers and subsequently against the brokers.
The Swiss reinsurer Glacier Re objected to the jurisdiction of the English Court, claiming that it was entitled to be sued in Switzerland under the general rule requiring a defendant to be sued in its country of domicile (Article 2 Brussels and Lugano Conventions).. It also began concurrent proceedings in Switzerland seeking to recover sums already paid to Gard. In
June 2009 the Swiss Court held that it did not have jurisdiction because Gard was not domiciled in Switzerland.
The following issues arose on the application before the English Court:
What was the applicable law of the Glacier Re reinsurance contract?
Did the court have jurisdiction under Articles 5(1) or 6(1) of the Lugano Convention?
Should the court exercise its discretion to decline jurisdiction even if there was a risk of irreconcilable judgments under Article 6(1)?
Applicable law
Applying Articles 3 and 4 of the Rome Convention, the judge held that Gard had a good arguable case that the reinsurance contract was governed by English law and not Swiss law as Glacier Re contended. The following factors were material to this decision:
a Lloyd's policy J(A) form was used for the London market placement and the slip was a Lloyd's brokers’ slip subject to an express choice of English law and jurisdiction;
the parties knew that the intention was to provide consistent reinsurance cover to participants on the primary insurance cover which could only be achieved if the same applicable law applied to all the lines written on the reinsurance;
the Glacier Re slip was in English in a London market form and used London market wording;
the underlying policy was a London market policy which would have been governed by English law;
it was not a Swiss market placement as Glacier Re contended since the brokers were based in London and were inviting Glacier Re to participate in a London market placement.
Article 5(1)
Article 5(1) of the Lugano Convention provides:
“A person domiciled in a Contracting State may, in another Contracting State, be sued … in matters relating to a contract, in the courts for the place of performance of the obligation in question ... “.
Gard had not shown a good arguable case that the English court had jurisdiction under art 5(1) of the Convention. Under English law the general rule is that the place of performance is where the creditor resides. Since Gard resided in Bermuda, Glacier Re argued that Article 5(1) was inapplicable. Gard said that both parties contemplated that payments would be made to the brokers in London but it failed to establish that there was an obligation to pay claims in this way. A practice of doing so was insufficient. There were no particular features of the reinsurance policy that supported the implication of the term suggested and in any event there was insufficient evidence of practice or custom to found the required implication.
Article 6(1) Art 6(1) provides:
“A person domiciled in a Contracting State may also be sued … where he is one of a number of defendants, in the courts for the place where any one of them is domiciled”.
The judge accepted that the claim against Glacier Re was intrinsically connected with the claims against the English insurer and broker and that Gard had at least a good arguable case that there would be a risk of irreconcilable judgments were the claim against Glacier Re to be determined by the Swiss courts. In addition to overlapping evidence concerning the factual matrix to interpret the reinsurance contracts, both reinsurers alleged that the broker made misrepresentations or failed to make proper disclosure. The two slips were placed as part of a single exercise with the same placing information and there was a clear risk of inconsistent findings of fact.
Discretion
Glacier Re argued that even if there were a risk of irreconcilable judgments, the court should exercise its discretion to decline jurisdiction under Article 6(1) on the basis of the lack of connection between the reinsurance contract and England. The judge rejected this submission and held that the case would be heard in England.
Comment: a further argument was raised by Glacier Re in connection with Article 6(1). It claimed that the court could not assume jurisdiction under Article 6(1) by reference to the claim against the brokers since proceedings had not been brought against them at the date of issue of the claim form against Glacier Re. The joinder of the brokers as an additional defendant at a later date could not change this. The judge did not accept that the claim against the brokers had to be ignored since they were always domiciled in England and under English law a claim by or against a subsequently joined party is deemed to have been commenced at the same date as the original action. The judge didn’t expand upon the point in his judgment but given that the doctrine of “relation back” under section 35 of the Limitation Act 1980 has been contentious in the past (see for example O’Byrne v Aventis concerning the substitution of a party outside the 10 year longstop period for product liability claims), we may not have seen the last of this argument.
Illegality
K/S Lincoln v CB Richard Ellis Hotels Ltd – effect of alleged tax fraud on professional negligence claim
[2009] EWHC 2344 (TCC) http://www.bailii.org/ew/cases/EWHC/TCC/2009/2344.html
It is no defence to a professional negligence claim that the claimant’s related contract with a third party is tainted by illegality. If neither the duty owed by the professional defendant nor the contract between the claimant and the defendant is based upon an illegal or fraudulent intention, fraud connected with an underlying contract is too remote to require the professional negligence claim to be dismissed.
The eight claimants were special purchase vehicles created by a Danish company to buy eight hotels in England. They engaged the defendant surveyor to carry out valuations of the hotels. They claim that the defendant negligently overvalued the hotels.
The defendant raised as a defence an allegedly fraudulent tax evasion concerning the contracts for the sales of the hotels involving an 8% uplift on the sale price. The defendant was not party to those contracts and had no direct involvement with them.
The judge could see no public policy interest requiring the claim to be dismissed. In his view, the alleged fraud did not taint the contract between the parties. However, he refused to strike out this defence prior to disclosure given the complexities in this area of the law. Whilst the claimants continued to frame their case in damages relying on the 8% uplift (pleaded as an alternative case on quantum), the illegality defence would be allowed to stand and details of the tax position would form part of their standard disclosure. If, on the other hand, they decided to delete any reliance on the 8% uplift from their particulars of claim, their striking out claim would be more favourably received on a future occasion.
If the defendant chooses to persist with the illegality argument even after the claim is amended, the judge put it on notice that it would be at immediate risk as to the costs of the disclosure exercise. He encouraged the claimants to make an application for an interim payment of those costs in such an event.
Comment: there is great potential for confusion concerning the effect of dishonesty upon claims, not least because a different approach applies in insurance law to that governing other types of claim. The Court of Appeal reviewed the non-insurance position earlier this year in Shah v Ul-Haq, noting that it is generally the policy of the law to allow fraudulently exaggerated claims to succeed to the extent that they are genuine. By contrast, where the claim is made under an insurance contract the entire claim is forfeit and sums already paid out to the claimant can be recovered by insurers (Axa v Gottlieb).
There is, however, a different line of cases where the defendant has raised illegality as a complete defence to the claim. The House of Lords last looked at the defence of ex turpi causa as it is sometimes called this summer in Stone & Rolls Ltd v Moore Stephen. This defence applies where the claimant is seeking to recover a benefit from its own wrong doing, as was argued to be the case in Stone & Rolls, and where the claim concerns a contract entered into with the intention of committing an illegal act. It is this second strand of the rule which was considered in the present case. In this area too, the courts seem to be adopting much the same pragmatic approach as they take to partially fraudulent or dishonest claims
The judge was clearly influenced in his analysis by a decision which was not referred to in Stone & Rolls, 21st Century Logistic Solution Ltd v Madysen Ltd. The claimant was involved in a missing trader VAT fraud. It sold goods to the defendant with the intention of failing to account to HMCE for VAT. The judge held that this did not entitle the defendant to retain the goods without paying for them. The claimant’s fraudulent intention was too remote from the contract of sale for it to be unenforceable on grounds of illegality. The intended fraud would only have been committed when the claimant failed to account to HMCE for VAT at the end of the accounting period, something which never happened. It was also relevant to the decision, given the public policy element of the ex turpi causa rule, that unless the defendant paid for the goods, HMCE would be unable to claim the VAT on the transaction. The courts will be particularly slow to let a defendant off the hook in such circumstances.
Warranty of authority
Excel Securities plc v Masood – solicitor’s liability in cases of identity fraud
[2009] QBD (Merc) (Manchester) Judge Hegarty QC
When solicitors innocently act in a case of identity fraud, there is a risk that the lender will seek to recover its loss from them alleging that they had warranted the identity of their client or his title to the property in question. The decision last year in Platform Funding Ltd v Bank of Scotland Plc was worrying for professionals who find themselves in this position. The Court of Appeal held that a surveyor who accepts instructions to survey a particular property assumes an unqualified obligation to inspect that property. If he is tricked into surveying the wrong property, he will be liable for breach of contract even where he has not been negligent.
In the present case the claimant lender agreed to make a short-term commercial loan to someone claiming to be James Goulding, secured on his property, following proof of identity and residence. The borrower instructed the defendant solicitors to act on his behalf in the transaction and supplied copies of his driving licence and utility bills. He later attended their offices with the original identification documents. The defendants advised the lender’s solicitors that they were instructed to act by the borrower and, as instructed by the borrower, paid the proceeds of the loan to a company who paid the moneys to the borrower. Ultimately the real James Goulding successfully applied for the vacation of the charge registered in favour of the lender over the property.
The lender, as well as trying to recover the moneys from the fraudster, claimed for breach of warranty of authority and applied for summary judgment against the defendants. The judge dismissed the application, holding that the solicitors had not impliedly warranted either the identity of their client or his title to certain property, only that they had authority to act on his behalf. Even if that was the wrong analysis, there was a further issue as to whether the lender had relied upon the implied warranty of authority in paying over the loan moneys. This would have to be determined at trial since there was a real prospect of establishing that the lender had relied on its own enquiries as to the identity of the borrower.
Comment: this careful and detailed judgment reviews all the case law on this topic. The judge adopts the approach taken by the Court of Appeal in Midland Bank plc v Cox McQueen and the dissenting judgment of Sir Anthony Clarke MR in Platform Funding. In ordinary circumstances solicitors owe no duty to the opposite party in connection with any transaction in which they are instructed except where they give an express solicitor’s undertaking. The implied warranty of authority is an exception to this rule and should not be used to impose an unqualified obligation amounting in effect to a guarantee of the solicitor’s client’s identity and title.
The justification for the implied warranty is that an agent is in a better position to know or ascertain whether he has the requisite authority. This is not so in a case such as Excel where the lender is seeking to be protected against the commercial risks involved in lending to a person who may not be all that he claims to be. The judge could see no justification for transferring this risk from the lender to the defendant solicitors, who could reasonably have
creditworthiness of the borrower. Had the lender wanted such protection, it could have required an express warranty or undertaking.
So when will a solicitor be at risk? This question is particularly important in view of the increasing number of claims brought by lenders against conveyancing practices following mortgage frauds (see Martin Finigan’s analysis of trends in claims against solicitors in Insurance Day 2 October 2009). In Zwebner v The Mortgage Corporation Mr Zwebner applied to the defendant for a loan to be secured on a property jointly owned by himself and his wife. The defendant’s solicitors undertook that all appropriate documents would be “properly executed” on or before completion. The Court of Appeal held that the solicitors had undertaken an unqualified obligation to obtain the signature of Mrs Zwebner which had been forged by her husband. A solicitor may also be liable to the purchaser and his mortgagees where he acts on behalf of both husband and wife in connection with the sale of the matrimonial home where the husband has forged her signature on the relevant documents (Penn v Bristol & West Building Society).
It does seem that in practice the court is more likely to impose an absolute obligation on the solicitor where a breach of the general duty of care is also established. In Zwebner the solicitors had never met either husband or wife, the wife had never signed the remortgage instructions, the wife was not asked to approve the payment of the balance of mortgage monies to her husband and they had no contact with her save a telephone conversation in which language difficulties precluded any understanding. In Excel the judge noted that there was no allegation that the solicitors had failed to comply with their money laundering obligations. Had they not obtained the required proofs of identity, the position might well have been different.
In Midland Bank Plc v Cox McQueen, the Court of Appeal took a more favourable line for solciitors and said that Zwebner should not be given a wide application. In order to distinguish Zwebner, the court latched on to not very convincing differences in language between the cases. In Zwebner the solicitors had undertaken that “All appropriate documents will be properly executed on or before completion”. In Midland Bank the solicitors signed a certificate stating “We hereby certify that the contents of this document have been fully explained to Constance Jean Dukes and that she fully understands the portent and has signed this document of her own free will”. The court relied upon the fact that a certificate is not the same as an undertaking and that the word “properly” was not used in Midland Bank. In the absence of language in the retainer which clearly places an absolute obligation on the solicitor, the court should be slow to require more of solicitors than a duty to exercise reasonable care. This sensible approach was endorsed in Excel.
In brief
Duty of specialist consulting engineer
Where a consulting engineer's design for foundation works had been defective, so that a civil engineering contractor had had to abandon it, the contractor was entitled to damages, .A "reasonable skill and care" provision in the professional appointment did not cover all of the consultant ’s obligations, some of which were strict liability obligations. The consultant should not have recommended the pre-loading scheme and should not have placed the
whole responsibility for the design upon its employee, who had no relevant experience, without supervising his work or at least checking it before it had been put into practice (Costain Ltd v Charles Haswell & Partners Ltd).
Insurance contract law reform
The responses to the recent consultation on micro-businesses will be published in November 2009. The Consumer Bill and the Final Report are due to be published in December 2009. Issues papers on damages for late payment, the insured's post-contractual duty of good faith and a policy statement on non-disclosure, misrepresentation and warranties in business insurance are planned for 2010. For further details see http://www.lawcom.gov.uk/insurance_contract.htm.
Proposal forms
In an insurance questionnaire, the defendant insurance company asked questions which were limited to the bankruptcy or insolvency of the claimant company and its directors. The claimant was entitled to assume that the insurer was not interested in the financial position of other companies in which the directors were or had been involved (R&R Developments Ltd v Axa Insurance UK plc).
Rome I
Rome I (Regulation 593/2008/EC on the law applicable to contractual obligations) which aims to standardise the rules for determining the applicable law so as to reduce the risk of forum shopping will apply to contracts concluded after 17 December 2009.
Summary judgment
It was not appropriate to make an order for summary judgment where the draconian interpretation of the insurance policy urged by the claimant would mean that, unless an approved alarm and protective measures were installed at the insured’s premises and they were fully working and in effective order when the premises were closed, the entire policy and the insurer’s risks under it would be automatically discharged. The fact that the warranties in question contained standard terms that might affect policy holders other than the insured also meant that these issues could only be determined at trial (A C Ward & Sons Ltd v Catlin (Five) Ltd.
Miranda Whiteley
Professional Support Lawyer for Mills & Reeve LLP
+44(0)1223 222459
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