Legal Watch:Property Risks & CoverageNovember 2014Issue 011

In This Issue:

• Relief from sanctions

• Failure of claim for losses caused by employee theft

• Committal for contempt of court in insurance claim

• Stay for ADR and costs budgets in claims over £2m

Contact UsIf you would like any further information on the cases or articles featured in this issue, please contact:

Geoff Owen

T: 0190 829 8216E: gro@greenwoods-solicitors.com

Julia WilkinsonT: 0844 245 4052E: julia.wilkinson@plexuslaw.co.uk

Gary Wicks

T: 0844 245 5217E: gary.wicks@plexuslaw.co.uk

Marise Gellert

T: 0207 469 6249E: msg@greenwoods-solicitors.com

IntroductionRelief from sanctions remains a ‘hot topic’ and thanks this month go to Geoff Owen for his article on Caliendo and another v Mishcon De Reya and another (2014).

Thanks also go to Julia Wilkinson for her article on the Ted Baker case below.

Greenwoods acted for the defendant in the earlier proceedings in the case of Bate v Aviva Insurance UK Limited (2014), which was first covered in Issue 85 (July 2013) of Greenwoods’ Property, Insurance & Construction Review. The latest decision relates to the committal of the claimant for contempt of court in relation to the creation of false documents in support of the insurance claim.

Finally this month, we feature the case of CIP Properties (AIPT) Limited v Galliford Try Infrastructure Limited, EIC Limited and others (2014) in relation to granting a stay for ADR and the provision of costs budgets and in which Gary Wicks, a Partner at Plexus Law, is acting for the third party, EIC Limited.

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Relief from sanctionsThe case of Caliendo and another v Mishcon De Reya and another (2014) EWHC 3414 (Ch) combines a costs case with the application of Jackson/Denton.

The claimant applied for relief from sanctions imposed for a failure to serve notice on the defendant solicitors of the existence of a conditional fee agreement (CFA) and an after-the-event (ATE) insurance policy within the seven-day period specified by CPR 44.15(1) and the Practice Direction - Pre-Action Conduct (PDPAC).

The claimant had retained the defendants to act on its behalf in relation to the disposal of its interests in various corporate entities. It alleged professional negligence against them and pre-action correspondence followed. The claimant entered into the ATE policy and CFAs with its solicitors and counsel in relation to the proposed claim. However, the claimant was some three-and-a-half months late in notifying the defendants of the funding arrangements. According to the claimant, its failure to provide notice within seven days of the funding arrangements having been entered into, as required by the PDPAC, was unintentional and had been rectified as soon as it came to its notice. It issued proceedings and applied under CPR 3.9 for relief from sanctions.

Allowing the application, the High Court judge held that the correct approach to applications for relief from sanctions had been authoritatively stated by the Court of Appeal in Denton. According to that judgment, the court’s first task was to identify and assess the seriousness and significance of the failure to comply with any rule, practice direction or court order which engaged CPR 3.9. If the breach was neither serious nor significant, the court was unlikely to need to spend much time on the second or third stages, which were, respectively, to consider why the default occurred and to evaluate all the circumstances of the case so as to enable the court to deal justly with the application. Such an evaluation included the need for litigation to be conducted efficiently and at proportionate cost (factor a), and to enforce compliance with the rules, practice directions and orders

(factor b). In a case where the failure was neither serious nor significant, where a good reason was demonstrated, or where it was otherwise obvious that relief from sanctions was appropriate, parties should agree that such relief be granted without the need for the expenditure of further costs.

The assessment to be made was of the seriousness or significance of the breach, not the consequences for the defendants of the grant of relief. It was relevant that the rules provided automatic sanctions for the breach, presumably because funding arrangements were by their nature of considerable significance and failure to notify a defendant of them might cause it to proceed to its detriment in determining whether or not to defend the claim. In the instant case, however, the defendants had not sought to assert that it would have acted differently had it been served with notice of the funding arrangements within the required period; therefore, earlier notification would not have altered their position as regards any potential settlement. It followed that the defendants were unable to show material prejudice in their conduct of the case arising from the breach.

‘...the rules were a means to an end and not an end in themselves. A culture of observance had to be fostered fairly, without inappropriate penalty’Taking the matter in the round, it was not fair, just or proportionate to deny the claimant relief on the basis of factor (a). The importance of observing the rules and the need for a culture change away from what was perceived, historically, to be an unduly relaxed approach to compliance

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was inherent in factor b). However, the rules were a means to an end and not an end in themselves. A culture of observance had to be fostered fairly, without inappropriate penalty. Therefore, while the default was serious in the sense that it occurred in respect of a rule for which an automatic sanction was imposed in the event of its breach, it had not had a serious or significant adverse effect on the efficient conduct and progress of the litigation. Notwithstanding the need to encourage compliance, it would not be just to withhold relief from sanction.

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Failure of claim for losses caused by employee theft (1)Ted Baker PLC No (2) Ordinary Designer Label Ltd v (1) Axa Insurance UK PLC (2) Fusion Insurance Services Ltd (3) Tokio Marine Europe Insurance Ltd (2014)

BackgroundIn December 2008 an employee of the well-known clothing retailer, Ted Baker, was arrested for the theft of stock from a warehouse in London and was later convicted, along with his two delivery driver accomplices, of stealing items between 2004 and 2008.

Ted Baker was insured under a commercial combined insurance policy underwritten by Axa and its co-defendants, Fusion and Tokio Marine. The retailer brought a claim under the policy for loss of stock amounting to £1m and for consequential loss and business interruption of £3m. Cover was declined by insurers on the basis that employee theft was not covered by the policy and that, in line with usual market practice, Ted Baker would have needed to have taken out discrete fidelity insurance to cover this eventuality.

In 2012 Ted Baker succeeded in establishing against insurers, as a preliminary issue before Eder J, that employee theft was covered by the policy notwithstanding the lack of fidelity insurance and the fact that, according to insurers, no premium was charged for the cover. AXA had argued that the insurance contract should be rectified on the basis that that neither party had intended the insurance cover to extend to employee theft and that Ted Baker should be estopped from relying on the policy wording. They had also alleged that non-disclosure and misrepresentation by Ted Baker’s brokers rendered any cover void. Insurers’ arguments were rejected and leave to appeal to the Court of Appeal on the estoppel issue was refused. The 2012 decision considered what evidence is admissible in construing an insurance policy; in essence the message from the Court of Appeal was that the courts will construe policy wording literally

and that express policy wording will take priority over what the parties may have intended or what the usual market practices might be.

The 2014 decisionThe judge had also confirmed in 2012 that Ted Baker could pursue its claim for business interruption losses alleged to have arisen from the employee theft and it is this claim that is the subject of the decision handed down on 30 October 2014.

The two key issues occupying the court on this occasion were (1) whether the claimants had complied with Special Claims Conditions relating to cooperation and providing information reasonably required by insurers in support of the claim; and (2) whether each theft had led to losses that exceeded the excess of £5,000 for “each and every loss”.

Special Claims Conditions

Claims Condition 15 provided that it was a condition precedent to any liability on the part of the insurers under the policy that the terms of the policy, in so far as they related to anything to be done or complied with by the insured, were “duly and faithfully observed”.

Special Claims Condition 2 required the retailer at 2 (b) (i) to provide particulars of their claim to insurers “no later than 30 days after the expiry of the Indemnity Period or within such further time as [insurers] might allow” and at 2 (b) (ii) to deliver to insurers certain financial information as may be reasonably required by them for the purpose of investigating and verifying the claim.

In relation to Special Claims Condition 2 (b) (i) the court held that it was common ground that compliance with this condition was a condition precedent to any recovery. Therefore, although Ted Baker had notified insurers about potential claims arising out of thefts in 2005 – 2008, no details of the 2004 thefts had been provided until 2012. This

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meant that those claims were precluded.

In relation to Special Claims Condition 2 (b) (ii) the insurers argued that a failure by Ted Baker to provide certain documentation and information debarred it from advancing any claim at all; this raised issues as to the construction of the policy wording. Ted Baker alleged that the insurers were unable to rely on any such failure by the company for a number of reasons including contractual agreement and estoppel. A very detailed consideration was necessary of the parties’ conduct and actions during the period following the discovery of the employee theft, including the extensive exchanges between Ted Baker’s representatives and insurers.

‘...generally it is reasonable for insurers to reserve their position pending receipt of further documents and information and [that] a requirement on the insured to provide them may be reasonable if, for example, insurers need them to make decisions on coverage...’Whilst Ted Baker provided insurers with some information about its claim, it was unwilling to incur the costs of providing any detailed financial information until insurers had accepted that there was, in principle, cover under the policy. One insurer (AIG) accepted cover, but Axa, Fusion

and Tokio Marine refused to do so.

The court held that generally it is reasonable for insurers to reserve their position pending receipt of further documents and information and that a requirement on the insured to provide them may be reasonable if, for example, insurers need them to make decisions on coverage. He noted, however, that what may be “reasonably required” depends upon the circumstances of each case.

Here the parties agreed that the request by insurers for profit and loss and management accounts for 2005–2008 (referred to as “the Category 7 documents”) was reasonable and that a request for management accounts is routine for commercial claims such as this one. There was no dispute either that this information had not been provided to insurers and the parties’ expert witnesses could see no reason why not.

Ted Baker sought to argue, amongst other things, that because the loss adjusters had agreed to take instructions on whether or not insurers would meet the accountancy costs of preparing the detailed financial and stock information necessary to support the claim and to go back to Ted Baker once they had instructions, but failed to so, the insurers had agreed Ted Baker need not provide it or they (the insurers) were estopped from demanding financial information.

The judge found that it was reasonable for the company to assume that they were not obliged to provide the detailed information until they had a response and policy liability was resolved. He held that unless and until the insurers had confirmed at the very least that employee theft was an insured peril, the requirement on Ted Baker to deliver any documents other than the Category 7 documents was not reasonable having regard to the time and expense the company would have incurred in providing them. However, this “agreement” or “estoppel” did not extend to the Category 7 documents, as providing them would not have involved the company in any additional costs. As the

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documents were not delivered to insurers, the claim failed.

Excess

Despite this the court went on to consider quantum which turned, at least in part, on what the guilty employee had stolen and when, between 2004 and 2008. Crucially for Ted Baker the insurance policy was subject to an excess of £5,000 for “each and every loss” and it was therefore necessary to determine the amount and value of the stock that was taken on each occasion.

The judge reminded us that in an insurance claim the burden always remains on the claimant to establish on the balance of probabilities that a relevant event was caused by one or more insured perils. So here it was important for Ted Baker to establish that a theft had occurred. There was limited direct evidence to establish that the employee was responsible for the entirety of the lost stock. The judge accepted Ted Baker’s arguments:

1. That discharging the burden legal test of proof might be established other than by direct evidence (e.g. financial modelling);

2. That the balance of probabilities test is not appropriate to measure loss; and

3. That a lack of precision in determining loss is not a bar to making a recovery. He said that once an actionable head of loss has been established the court will generally assess damages as best it can by reference to the materials available to it.

However, whilst the judge accepted on the evidence here that the employee was responsible for the thefts, it proved impossible, despite extensive expert evidence, for Ted Baker to determine and quantify how many thefts had occurred in a particular period, what had been stolen on each occasion and how many items were in each box taken. It could not be established, therefore, that the claims exceeded the excess and the claim would have failed on that basis in any event.

SummaryWhilst, as ever, the decision turned on the specific facts and evidence in the case, it provides a useful summary

of some key themes in insurance claims including policy interpretation, conditions precedent, the burden of proving an insured peril has occurred and evidencing the loss. The judge made it clear that he did not reach his conclusion with any degree of enthusiasm. However, he did not see that he had any alternative in light of the policy wording and evidence before him. The judge also expressed concern as to the disproportionate costs incurred and that he would not now expect a similar situation to arise post-Jackson.

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Committal for contempt of court in insurance claimIn Bate v Aviva Insurance UK Limited (2014) the claimant was sentenced to nine months’ imprisonment (suspended for two years) for having acted in contempt of court by creating or colluding in the creation of false documents in support of an insurance claim

BackgroundThe initial claim arose out of a serious (accidental) fire at the claimant’s premises on 5 June 2006. Indemnity provided under a high net worth policy was refused by the defendant on several grounds, including material non-disclosure and misrepresentation. The claim was advanced for in excess of £2.8m but the trial in early 2013 was limited to liability and some issues of principle on damages.

The claim for indemnity was dismissed and the claimant (B) was found to have been actively dishonest in various ways when presenting his claim. The Court of Appeal upheld that decision.

The applicationThe defendant (A) applied to have (B) committed for contempt of court on the basis of the trial judge’s findings of dishonesty.

In particular, A alleged that B had created, or colluded in the creation of, false documents in support of his claim, created after the event as part of a dishonest scheme to succeed. A also alleged that B had acted in contempt in relation to his disclosure obligations, and that he had wilfully and deliberately interfered with witness evidence to increase his prospects of success.

In denying the allegations made against him and resisting the application, B, who at the time of the hearing of the application was 71 and in poor health, gave live evidence during which he put forward a revised version of events which had not been raised either at the trial or on appeal.

A did not call any witnesses to support its application and B sought to argue that in so doing, they denied him a chance to cross examine those witnesses, contrary to Article 6 of the European Convention on Human Rights (ECHR).

Judgment The court held that B’s arguments regarding the ECHR were misconceived. It would be absurd for the court to have to revisit witness evidence it had already heard in order to arrive at the facts on which the current application was based. The application for contempt formed part of the underlying civil action and so the court should start with those findings. It was for the court to reconsider the previous findings of dishonesty, which were made on the basis of the civil standard of proof (the balance of probabilities), and ask itself whether, after hearing B’s evidence and submissions in the current application, it was sure beyond reasonable doubt that those findings were indeed correct, that being the burden of proof for the current application. If, however, it considered that what B said might be true, he had to be given the benefit of the doubt and contempt of court could not be proved.

It would be absurd for the court to have to revisit witness evidence it had already heard in order to arrive at the facts on which the current application was based.

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It was clear that the allegations made in B’s live evidence in opposition to the current application were new allegations, which were not supported by the documentary evidence and that evidence depended solely on an assertion which he had not made at trial.

It was clear that in order to resist the committal application, he had changed his claims.

In the circumstances, the court held that A had proved contempt in relation to its allegation that B had created or colluded in the creation of false documents in support of his claim. However, A had failed to prove beyond reasonable doubt that he had wilfully and deliberately interfered with witness evidence, or that he had acted in contempt in relation to his disclosure obligations.

B’s age, ill-health and previously good character were taken into account by the court on sentencing and on that basis, B avoided an immediate custodial sentence. In the circumstances, the court held that the appropriate sentence was nine months’ imprisonment, suspended for two years.

CommentHopefully this decision will be widely reported in both the legal and tabloid press and will act as a deterrent to other claimants considering committing insurance fraud. All too often insurers stop at the point when the claim is dismissed but this case shows that it is worth persevering in the right circumstances.

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Stay for ADR and costs budgets in claims over £2mIn the case of CIP Properties (AIPT) Limited (Claimant) v Galliford Try Infrastructure Limited (Defendant) & EIC Limited (Third Party) Kone Plc (Fourth Party) DLG Architects LLP (Fifth Party) Damond Lock Grabowski & Partners (A Firm) (Sixth Party) (2014) the court considered whether the case should be stayed for ADR and whether, on a point of principle, a costs budget should be ordered where the claimant was seeking damages in excess of £18m, notwithstanding that the mandatory limit for cases requiring costs budgets was £2m at the time the claim was started.

BackgroundThe claim arose out of alleged defects at a large development on the site of a former children’s hospital in Birmingham and the claim against the defendant main contractors (G) was based on the actual/estimated cost of remedial work, in the sum of £18m. G then issued third party proceedings against the architects and various of their sub-contractors.

Two issues arose during the case management conference in relation to:

1. The interaction between alternative dispute resolution (ADR) and case management in the Technology and Construction Court (TCC) and particularly, whether a ‘window’ of three or four months should be fixed when the case would be put on hold, to enable the parties to devote their attention to resolving the dispute by way of ADR.

2. On a point of principle whether the court had the power to order the filing and exchange of costs budgets in cases where the claim was worth in excess of £2m (under the old regime) or £10m (under the new regime). The defendant argued that although the mandatory limit under CPR3.13 was £2m at the time this case was issued and that even now the limit is £10m, such that

this case is outside those mandatory limits, the court should exercise its discretion in favour of ordering that costs budgets be filed and exchanged. There was also an issue as to whether the defendant was required to prepare more than one costs budget to deal separately with the claims against it and the claims it was seeking to pass on.

JudgmentA ‘window’ or stay for ADR

The point was made that judges in the TCC set great store by ADR, as disputes, such as this one are time-consuming and can be very expensive to fight out in the traditional way.

However, when setting directions for the trial of a large case, although the court would commonly allow a reasonable period between each step in the process, to enable the parties to engage in ADR between those two steps prior to incurring further tranches of costs, if they were agreed that that was a sensible course, it was usually inappropriate at a case management conference for the court to build in some sort of special ‘window’ of three or four months to enable the parties to put the case on hold while they engage in ADR. The judge took the view that fixing any lengthy ‘window’ for purposes unconnected with the preparation for trial was bad management.

That was even more so in cases such as this where there was a dispute as to when that ‘window’ should be. The claimants vehemently opposed the ‘window’ being before disclosure, as was proposed by the other parties, as their view was that they needed disclosure to be able to engage in a meaningful mediation.

The judge took the view that a sensible timetable for trial that allowed the parties to take part in ADR along the way was a sensible case management tool and that it would not

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only be inappropriate for the court to decide a dispute as to precisely when the parties should mediate but it was wrong in principle for the court to fix a ‘window’ for ADR at a time when at least one significant party (here the claimants) did not want it.

The judge stressed that this was not to undermine the importance of ADR or the adverse costs consequences that may be visited upon those who do not engage in the process but rather to emphasise that the parties must take all proper steps to settle the litigation whilst at the same time preparing the case for trial.

Costs budgets

The court held that although costs budgets were not mandatory in cases of this size, the court has an overriding discretion to order the provision of costs budgets in all cases. The court expressed concern that if the claimant was correct in its contention that there was no such discretion, this could lead to abuses of process, whereby claimants who wanted to avoid the costs management regime could frame their claims for £1 more than £2m (now £1 more than £10m). That would be contrary to the Jackson Report and the provisions of the CPR that flow directly from it.

‘Costs budgets are generally regarded as a good idea and a useful case management tool’The court also held, on analysis, that the discretion was unfettered. Costs budgets are generally regarded as a good idea and a useful case management tool.

The issue arose as to whether the defendant would be required to prepare several costs budgets, dealing with the defence of its claim by the claimant and then separately with its claims against the other parties. The defendant resisted that, arguing that it would be unworkable, impractical and expensive to require them to undertake that task when there were inevitably overlaps between the issues. The judge

agreed and said he was “acutely aware that the preparation of costs budgets can, of itself, be an expensive task” and that was one of the complaints regularly made about the costs budgeting provisions in the CPR but that it would be unfair, and not in accordance with the overriding objective, to require the defendant to incur significant cost in providing a breakdown of what might be spent defending the claim and what might be spent passing it on within its costs budget.

Accordingly, the judge ruled that the court in this case had a complete discretion to decide whether costs budgets should be filed and exchanged.

CommentThe judge was only dealing with a point of principle in this decision. However, he made it clear that if the claimants continued to oppose the provision of costs budgets, the case management conference would need to be re-fixed for the matter to be argued out in detail. Although he made no comment on the facts, he observed that the provision of costs budgets and the possibility of subsequent costs management orders were at least one way of keeping potentially substantial experts’ fees under some control in cases of this size, which rather suggests that if the case does come back before him, he may well exercise that discretion and order the provision of costs budgets.

The information and opinions contained in this document are not intended to be a comprehensive study, nor to provide legal advice, and should not be relied on or treated as a substitute for specific advice concerning individual situations. This document speaks as of its date and does not reflect any changes in law or practice after that date. Plexus Law and Greenwoods Solicitors are trading names of Parabis Law LLP, a Limited Liability Partnership incorporated in England & Wales. Reg No: OC315763. Registered office: 8 Bedford Park, Croydon, Surrey CR0 2AP. Parabis Law LLP is authorised and regulated by the SRA.

www.plexuslaw.co.ukwww.greenwoods-solicitors.com

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Contact UsFor information on articles and cases featured in other editions of Property Risks and Coverage Newsletters, please contact:

Marise Gellert

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