Panel Discussion Q&As

Transcription

1 Panel Discussion Q&As Two Important Recent Cases on Recovery of Consequential/Indirect Loss - Fiona Sinclair QC Q. Material damage insurance policies usually cover business interruption losses such as loss of profit, but when insurers try to recover those losses from third parties, they are often confronted with a clause excluding liability for consequential or indirect loss. Among the recent authorities on the construction of contracts, is there any help for those of us making or defending a recovery action with that sort of exclusion clause? A. In ordinary language, a consequence is simply an effect of a cause. In that sense, any loss for which compensation is recoverable is a consequential loss: the loss must have been caused by the breach. Contrast the traditional legal meaning: consequential / indirect loss is distinguished from direct loss, and the distinction mirrors the two limbs of the rule in Hadley v Baxendale. Direct loss is loss recoverable under the 1 st limb ie. loss which arises from the breach naturally, ie. according to the ordinary course of things. Consequential/indirect loss is loss recoverable only under the 2 nd limb ie. loss which doesn t arise naturally from the breach but was in the contemplation of the parties at the time of contracting as the probable result of breach. For consequential loss to occur, the parties must share knowledge of special, unusual circumstances which mean that further losses arise. So identifying consequential loss has to do with the knowledge of the parties at the time of the contract. That certainly isn t what the word consequential would suggest to non-lawyers! But now see:- TRANSOCEAN DRILLING V PROVIDENCE RESOURCES [2016] EWCA Civ 372 Transocean provided an offshore drilling rig to Providence. Providence claimed its wasted operating costs during a downtime; Transocean relied on an exclusion of liability for consequential loss in the supply contract. CA held that Providence s operating costs were caught by the exclusion for consequential loss. Note: 1. CA rejected a restrictive approach to the construction of exclusion clauses. Instead of construing exclusion clauses narrowly and against the party relying on them etc, exclusion clauses are to be construed like any other clause of the contract: by giving their language its fair and natural meaning. This approach recognises that parties to a commercial contract are free to allocate risks as they see fit, and it is not for the court to rewrite their contract. It chimes with the greater emphasis on literalism in contract construction which started with Arnold v Britton. 2. The contract itself defined consequential loss. CA rejected the argument that the definition should be understood as influenced by the traditional approach to the 4 NEW SQUARE LINCOLN S INN LONDON WC2A 3RJ T: +44 (0) F: +44 (0) DX: LDE 1041 E: CLERKS@4NEWSQUARE.COM

2 distinction between direct and indirect/consequential loss. Although CA didn t have to rule on that distinction, Moore-Bick LJ said that it is doubtful that some of the old cases on the meaning of consequential loss would be decided in the same way today. STAR POLARIS LLC V HHIC-PHIL INC ( THE STAR POLARIS ) [2016] EWHC 2941 (Comm) Shipbuilding contract. Following delivery of The Star Polaris, she suffered an engine failure and had to be towed to a dockyard for repairs. The owner claimed various losses from the shipbuilder. The shipbuilder relied on a contractual exclusion of liability for consequential loss. It argued that this phrase should be understood, not by reference to the parties knowledge at the time of contract as per the traditional understanding, but in literal terms, as meaning simply loss caused by the breach. Important: the shipbuilding contract was an exclusive remedy contract - it made specific provision for the shipbuilder to repair defects discovered (or pay for their repair), and that provision was expressed to replace all other liabilities of the shipbuilder under the contract or at common law. In that context, shipbuilder argued, the exclusion of consequential loss meant all loss caused by the breach apart from the cost of repair. Sir Jeremy Cooke agreed. Held: The exclusion clause had to be interpreted in the light of the contractual regime for liability; since the contract made clear that in the event of a defect the owner would be entitled to repair, and the contract made this an exhaustive remedy for defects, the exclusion clause was effective to exclude all other losses. Therefore consequential, in the context of this contract, meant merely caused by the breach. This is the first English authority in which Court has deliberately departed from the traditional meaning of consequential loss. In construing the term, Court regarded the contractual context as more important than the traditional legal meaning. CONCLUSION: These decisions offer most assistance to parties defending recovery actions. We can expect to see more defendants arguing that the particular contractual context means that an exclusion of liability for consequential or indirect loss should be given its ordinary English meaning ie. excluding liability for loss caused by the breach; rather than, in accordance with its traditional legal meaning, something to do with the parties knowledge when the contract was made.

3 What is the impact of the Gard Marine case on contractual provisions for joint insurance in construction cases; and where does it leave Tyco v. Rolls-Royce? - Neil Hext QC 1. Gard Marine and Energy Ltd v. China National Chartering Co Ltd [2017] UKSC 16 is a decision handed down by the Supreme Court in May. It a strong case in favour of construing contracts containing joint-names insurance provisions as implicitly excluding the liability of either party to the contract in respect of matters that are covered by the insurance. 2. The case arose out of the grounding of a vessel as it exited the port of Kashima in Japan. There was an allegation that Kashima was not a safe port and that this was a breach of the safe port warranty in the charterparty by which the ship had been chartered. However, that same charterparty also provided for the charterers to take out hull insurance in the joint names of themselves and the owners. The question that arose was whether that provision for insurance gave rise to an implied exclusion of liability on the part of the charterer, on the basis that the contract created an insurance pot out of which the parties were to be compensated in the case of damage to the hull, leaving neither party liable to the other in respect of that damage. 3. Up until 2008, the direction of travel in these types of cases was that joint names insurance provisions were treated as tending to displacce the ordinary rules of responsibility of the parties one to the other in both contract and tort. However, that orthodoxy was brought into question in Tyco v. Rolls-Royce [2008] EWCA Civ 286. In that case there was a flood in a manufacturing facility caused by the allegedly negligent installation of a sprinkler system. The contract between the parties included a requirement for the provision of a joint-names policy covering certain types of loss. But it also contained a provision by which the contractor gave the employer an unqualified indemnity for breach of contract on its part. The Court of Appeal held that the joint names provision gave rise to no defence. Part of the court s reasoning was that one could not read into the joint names provision an implied exclusion of liability in the face of the express indemnity. 4. At first instance in Gard Marine, the judge was heavily influenced by Tyco. The cases were similar because the safe port warranty that the charterer had given was not qualified in any way. It was held that the joint names insurance provision could not trump the express terms of that warranty. 5. However, that conclusion was rejected by the Supreme Court. The critical question was identified as being, was the insurance fund intended to be the sole avenue for making good relevant loss or damage? The court held, by a majority of 3 to 2, that it was, and that that was so notwithstanding the presence of the safe port warranty. 6. Thus the tension between the joint names insurance provision and the safe port warranty was resolved in favour of the commercial logic of the former. The Tyco case was not mentioned in the leading judgment. But it is difficult to square the Court of Appeal s reasoning in that case with the approach taken in Gard Marine. So Tyco has not been declared to be bad law; but following Gard Marine, the influence of the reasoning in that case must surely be significantly reduced. Neil Hext. The author assumes no responsibility to any party in respect of this paper or any seminar at which it is presented. 4 NEW SQUARE LINCOLN S INN LONDON WC2A 3RJ T: +44 (0) F: +44 (0) DX: LDE 1041 E: CLERKS@4NEWSQUARE.COM

4 After IMI v Delta where are we now? Sian Mirchandani This case concerns the interpretation of section 1(4) of the Civil Liability (Contribution) Act 1978, which deals with the effect of bona fide settlement. It only applies where there is a contribution claim under the 1978 Act, following a settlement of the main action. The significance of the case is focused on the meaning and effect of the words underlined below, the proviso : Previously 1(4) A person who has made or agreed to make any payment in bona fide settlement or compromise of any claim made against him in respect of any damage (including a payment into court which has been accepted) shall be entitled to recover contribution in accordance with this section without regard to whether or not he himself is or ever was liable in respect of the damage, provided, however, that he would have been liable assuming that the factual basis of the claim against him could be established. The preceding law was based on Chadwick J s interpretation of section 1(4) in Arab Monetary Fund v Hashim 28 May 1993, unreported, that the proviso in section 1(4): "provided, however, that he would have been liable assuming that the factual basis of the claim against him could be established. should be interpreted to mean that 'collateral defences' i.e. defence arguments which are not inconsistent with the facts alleged by C, such as where the burden of proving them falls on D1 and not C, (which may be in nature a defence of confess and avoid, or a statutory limitation defence) may be subjected to an inquiry of the court into those alleged facts; that this is permitted notwithstanding the 'bona fide' settlement that has happened between C and D1, and notwithstanding the wording of the rest of s.1(4) which would otherwise give rise to an entitlement to a contribution. Background to IMI v Delta The main action was brought by 23 companies in the Travis Perkins group. The claim concerned losses due to an alleged copper fittings cartel by two IMI companies (this is one case in a series of cases referred to as the Copper Tubes and Copper Fittings claims ). The IMI defendants alleged the claim was statute barred. The claimant s Reply alleged the cartel had been deliberately concealed, such that by the operation of s.32, time had not begun to run or ran from the date when claimants could (with reasonable diligence) have discovered it. One of the IMI defendants had brought a contribution claim against two Delta companies. The Delta defendants denied liability stating the main action was statute barred since the claimants (the Travis Perkins companies) could not satisfy the conditions of s.32(1)(b) of the Limitation Act that any fact relevant to the plaintiff s right of action has been deliberately concealed from him by the defendant. The main action settled between C and IMI defendants. The IMI defendant continued its pursuit of a contribution claim against Delta defendants, relying on section 1(4). The matter came to a preliminary issue trial before Rose J to determine the scope of section 1(4).

5 First instance Rose J. held (applying Chadwick J s approach in Arab Monetary Fund v Hashim) that IMI s contribution claim was not statute barred. The judge held that section 1(4) allowed a collateral defence, to be raised by Delta if it was a defence that in the main action IMI had to prove, rather than a matter that C had to prove. However, under section 1(4), Travis Perkins plea in the Reply that the cartel was deliberately concealed is assumed to be true; as a result the limitation argument failed. The key distinction, or what made a defence collateral was that it be a defence, capable of being raised by D, that did not involve a denial of the factual basis of the claimant s cause of action against D, i.e. that it was not inconsistent with the material allegations of fact made by C against D. Court of Appeal Delta appealed from Rose J s decision. The Court of Appeal dismissed Delta s appeal. Delta was precluded from resisting IMI s contribution claim on the basis of the limitation defence. Under section 1(4), the liability of the contribution claimant (IMI) to the main claimant (Travis Perkins) cannot be re-opened by the contribution defendant (Delta) if the conditions of a proviso are satisfied that is, if IMI would have been liable assuming that the factual basis of the claim against him could be established. The decision in Arab Monetary Fund v Hashim had been wrongly decided. Rose J s conclusion was upheld by the Court of Appeal but on different grounds, which entirely re-wrote the interpretation of section 1(4): 1 (1) the effect of section1(4) is that a contribution claim made by D1 against D2, following settlement of the main action did not require or indeed permit any investigation into whether D1 was actually liable; 2 (2) if the settlement is bona fide, the court does not ask whether D1 (the original defendant, now seeking a contribution) was or was not liable to C on the facts, the court only asks if the facts pleaded by C s particulars of claim disclosed a reasonable cause of action against D1 such as to make him liable in law, in respect of the damage. 3 The key to a section 1(4) claim is that there will first have been a bona fide settlement of C s claim. The scheme of the subsection is that, given such a settlement, for the purposes of D1 s contribution claim against D2, it is assumed in D1 s favour that the factual basis of C s claim could be established at a trial of the main claim. 4 (emphasis added) 1 See [52-53], [59-60], [67-69]. 2 See [58]. 3 See [59, 61]. 4 Per Sir Colin Rimer at [58-59], [64].

6 Where this leaves us now Where section 1(4) applies, and there has been a bona fide settlement of the main action: - the contribution defendant cannot resist the contribution claim on the basis that the contribution claimant was never liable in the first place - the proviso only involves an inquiry into whether the Particulars of Claim disclose a cause of action, however the CA also upheld Rose J s application of the section as a secondary and alternative view, which would mean the inquiry looks at C s pleaded Reply too. This new interpretation offers settling parties greater protection from attempts by the contribution defendant to re-open the claim which has been settled. It remains to be seen how section 1(4) is to be applied when the main claim has settled before the case is pleaded.

7 The use of loss adjusters in lieu of multiple experts - Amanda Savage Q. Is it ever appropriate at least in an insurance dispute for a court to restrict a party s (expert) evidence to that of a loss adjuster, rather than multiple experts in multiple disciplines (e.g. engineering, surveying and so on? A. The short answer is that it is rarely (if ever) likely to be appropriate. Consider, by way of example, a claim against an insurance broker for failure to advise about warranties and disclosure obligations leading to the insurer refusing to indemnity for the consequences of a fire at the Claimant s premises. The Claimant suffers damage to its premises, its plant and equipment, and BI losses. The Claimant seeks to rely on expert evidence from (say) a surveyor, an engineer, and a forensic accountant. The Defendant argues that the parties should be restricted to the evidence of one loss adjuster each. The Defendant s argument is, or might be that, but for the broker s (alleged) negligence, valid insurance would have been in place and the Claimant s (insurance) loss would have been adjusted by a loss adjuster (and paid on that basis). So the evidence in the claim should be similarly confined. The response would seem to me to be two-fold: As a matter of principle, unless the Defendant has put in some particular aspect of the loss adjusting exercise which demonstrates that the Claimant would not have been (hypothetically) entitled to its actual losses, then the Claimant is entitled to damages representing its actual loss As a matter of practice, those losses are likely to be best assessed by experts in the relevant disciplines. In most cases any (hypothetical) loss adjuster would have called up expertise in the relevant disciplines and any loss adjuster instructed for the proceedings would also have to call upon such expertise. As such the restriction of evidence in this way would be unlikely to be the short cut or costs saving exercise it might at first appear to be. The Chair of the Panel reminded us that the TCC is concerned to hear evidence from those who are best able to assist the Court. A loss adjuster is not an expert as such. Unless the loss adjuster can properly give the required expert assistance, then experts in the relevant disciplines are likely to be more appropriate. The Chair also noted that, from a pragmatic point of view, it may be convenient for the loss adjuster to pull the details of the claim together in one document, giving direct factual evidence where she/he can, and giving reference to other (may be hearsay) evidence where it is convenient to do so, and cross referring to relevant documents. That might well assist the court and save a great deal of time.