Insurance Post

Britannia's rules.

UK LEGAL REVIEW [ QQ As the new millennium approaches, the legal landscape affecting the insuranc...

UK LEGAL REVIEW
[
QQ
As the new millennium approaches, the legal landscape affecting the
insurance industry in the UK is changing and developing rapidly.


In an attempt to accommodate the rapid increase in e-commerce, European
Union member states are embracing the recent directive from the Commission
on distance marketing of financial services.


Inroads are also being made into the age-old rules applying to privity of
contract, the effect of which will be to allow beneficiaries of insurance
contracts who are not parties to enforce such contracts in certain
circumstances.


While the impact of Y2K issues has continued to engage attention in a
global context, much judicial time has also been spent on more local
issues such as the everyday duties owed by brokers to their clients.


The aftermath of 'reconstruction and renewal' at Lloyd's still gives rise
to some interesting cases concerning the position of individual Names, and
on the corporate insolvency front there has been some court assistance
given in ironing out some of the unhappier wording of the Insurance
Companies (winding up) Rules. Also, some of the gnawing questions relating
to the validity of schemes of arrangement have been answered, which will
help reconstructions in both the solvent and insolvent arenas.


The two decisions of the highest profile within the last 12 months must,
however, be the House of Lords' decision in Kleinwort Benson v Lincoln
City Council on the question of the treatment of money paid as a mistake
of law and, in the complex field of insurance pools, the judgment of Mr
Justice Moore-Bick at first instance in the case of Kingscroft Insurance
and others v Nissan Fire & Marine.


On a procedural note, the eagerly awaited Woolf reforms in the form of the
Civil Procedure Rules - introduced to facilitate access to justice through
the court system - came into force on 26 April 1999.


While several cases are beginning to come through clarifying some of the
inevitable doubts that arise about the implementation of such a change, it
is still somewhat early to see what substantive effect they might have on
the issues facing those involved in (re)insurance.


DISTANCE MARKETING


An amended proposal has recently been issued by the European Commission as
part of the Distance Marketing of Consumer Financial Services
Directive.


It aims to protect consumers and encourage cross-border trade in financial
services, boosting competition and facilitating market integration.


The directive applies to contracts for financial services made between a
supplier and a consumer under an organised sales or service-provision
scheme run by a supplier, who, for the purposes of that contract, makes
exclusive use of means of distance communication up to and including the
time at which the contract is concluded.


Consumers must be provided with the prescribed information before the
contract is concluded and, unless supplied beforehand, the contractual
terms and conditions must be supplied on a 'durable medium' after
conclusion of the contract.


The consumer has a period of between 14 and 30 days - depending on the
financial service concerned - to withdraw from the contract without
penalty.


However, there are certain exceptions, for example non-life policies for a
period of less than two months and, at the discretion of member states and
subject to conditions, mortgages.


BROKERS' DUTIES


A relatively large number of cases this year have involved defining the
extent of brokers' obligations. In the case of Sirius v Oriental, (1999) 1
AER (Comm) 699, the extent to which a broker's statement amounted to a
representation was considered.


Oriental Assurance sought to renew reinsurance for a group of
warehouses.


After an inquiry by the lead reinsurer, Sirius, Oriental's brokers faxed
confirmation to Sirius of the renewal terms, adding that they had been
informed that each warehouse had fire hydrants.


However, when increased cover was approved by Sirius, the fire hydrants in
the main warehouse were not operational. Fire subsequently destroyed the
main warehouse and Sirius brought proceedings against Oriental seeking
avoidance of the reinsurance contract for misrepresentation.


Mr Justice Longmore held that the statement in the fax was a
representation of fact that each warehouse had operational fire hydrants
and it was immaterial that Sirius realised the information given might be
outside the direct knowledge of Oriental. There was, therefore, a
misrepresentation that had induced Sirius to write the risk and it was
entitled to avoid the contract.


In the case of FNCB Ltd v Barnet Devanney (Harrow), (1999) 2 All ER (Comm)
233, the role of the brokers was expressly provided by their client.
Having been requested to arrange 'adequate insurance cover', the brokers
obtained property insurance under a composite policy for a mortgagor and
mortgagee covering the property charged to the lender under a
mortgage.


No mortgage protection clause, which seeks to ensure that the mortgagee's
cover is not prejudiced by any misconduct on the part of the mortgagor,
was included. At the time the insurance was taken out, it was widely
thought that such clauses were redundant, but only subsequent authority
confirmed that belief.


The brokers were found to have been negligent; they had not protected
their client from unnecessary risk, including the risk of litigation
involving an unresolved point of law. The clause was available at no extra
premium and should have been obtained, even though at the time a
reasonable broker may have thought such a clause gave negligible, if any,
protection.


In the case of Bollom v Byas Mosley, unreported, 9 February 1999, Mr
Justice Moore-Bick in his judgment demonstrated how stringent and detailed
a broker's duty to his client might be.


A policy of insurance on a factory included a clause requiring security
devices to be in effective operation, but the defendant brokers failed to
draw this to the attention of their clients. The factory suffered fire
damage at a time when a perimeter fence alarm was switched off. Insurers
eventually settled the claim for substantially less than a full indemnity;
the plaintiff factory owners sued their brokers for the shortfall.


The defendants, while accepting and admitting they had failed in their
duty to explain the meaning and effect of policy provisions, argued that
the plaintiffs would not have set the alarm in any event. The Commercial
Court rejected this defence on the evidence.


The defendants then argued that the plaintiffs were substantially
under-insured and so would not have received a full indemnity from their
insurers in any event. The court ruled that it was part of the defendants'
duty to consider what level of cover was required and to explain the
consequences of under-insurance. This the defendants had failed to do.


The court also rejected a defence of contributory negligence. The
plaintiffs had followed the brokers' advice and were not liable for
failure to anticipate that the broker might fail to act with all
reasonable skill and care.


The question of whether duties are owed by sub-brokers to the insured was
considered in the case of Pangood v Barclay Brown & Co, unreported, 29
January 1999. Pangood instructed Barclay Brown, a firm of brokers, to
obtain property insurance covering a nightclub. Barclay Brown approached
sub-brokers Bradstock, Blunt and Thompson, a firm of Lloyd's brokers, to
effect the cover.


The policy contained an 'auditorium warranty', stipulating procedures for
removing smoking materials such as ashtrays and cigarettes at the end of
the night. Following a fire, Pangood claimed under the policy.


The insurers refused the claim, alleging that the warranty had not been
complied with, while Pangood alleged that it had not been made aware of
the warranty.


The Court of Appeal had to decide whether a third party notice served by
Barclay Brown on Bradstock ought to have been struck out. Under this,
Barclay Brown claimed that Bradstock owed duties in contract and/or tort
to Pangood and the liability to pay Pangood lay with Bradstock and not
Barclay Brown.


The Court of Appeal found that, in accordance with established principles,
there was no contractual relationship between the insured and the
sub-brokers. Further, the sub-brokers did not owe Pangood a duty of care
in tort as there was no assumption of responsibility - Pangood had relied
solely on Barclay Brown to explain the terms of the policy. A contractual
relationship existed between the brokers and the sub-brokers, but
Bradstock was entitled to regard Barclay Brown as a knowledgeable broker
client, aware of the existence of the warranty.


THIRD PARTY RIGHTS


Pangood's position might well have been different if its cover had been
arranged now that the Contracts (Rights of Third Parties) Bill has become
law. It reforms a fundamental rule of English Law - privity of contract -
under which a person can only enforce a contract if he is a party to
it.


This rule has caused significant commercial inconvenience and led English
lawyers to deploy a variety of techniques to overcome it. The new
legislation will give a third party rights to enforce a contract if the
contract expressly so provides or if the contract confers a benefit on a
third party.


The Bill was enacted last month, but will not apply to contracts entered
into for six months after enactment unless the contracting parties
specifically state in the contract that it should.


LLOYD'S


The provisions of the reinsurance and run-off contract with Equitas of 3
September 1996 have come under scrutiny over the last year, in particular
Clause 5.5, the so-called 'pay now, sue later' clause. In the case of
Garrow v The Society of Lloyd's, (TLR) (18 June 1999), Mr Garrow was a
Lloyd's Name who did not accept 'reconstruction and renewal' (R&R).


However, under the authority of The Society of Lloyd's v Leighs, (1997)
CLC 759, he was bound by the contract of reinsurance into Equitas,
including Clause 5.5, which obliged him to pay Lloyd's his Equitas premium
contribution "free and clear from any set-off, counterclaim or other
deduction on any account whatsoever".


Under the 'pay now, sue later' provision, Names waived any claim to any
stay of execution and consented to immediate enforcement of any judgment
against them.


Although Lloyd's had obtained judgment against him for approximately
£200,000 ($325 000) in respect of his Equitas premium, Mr Garrow and about
200 others had issued cross-claims against Lloyd's claiming fraud.


Mr Garrow succeeded in setting aside a statutory demand, which had been
served by Lloyd's as the first step in proceedings in bankruptcy against
him, on the basis that his cross-claim was either equal to or greater than
the judgment against him, for the purposes of Insolvency Rule 6.5 (4).


Mr Justice Jacob took into account the fact that there was no evidence of
him dissipating assets such that Lloyd's could have obtained an injunction
against him; that Lloyd's could have enforced the judgment in other
circumstances under Clause 5.5, for example by seizing goods or indeed by
bankruptcy proceedings; that although proceedings had been issued late in
the day, Lloyd's litigation was complex and this did not mean that Mr
Garrow's claim was not genuine and serious in substance; and, that the
requirements of Practice Note 1/87, (1987) 1 WLR 119, had been satisfied
in that there was here a triable issue, allowing the court to set aside a
statutory demand.


In the case of Society of Lloyd's v Fraser, (1999) Lloyd's Rep. 1. R. 156,
the Court of Appeal also considered the effects of Clause 5.5. Mr Fraser
and other defendants were also Lloyd's Names who had rejected R&R.


Summary judgment was obtained against them under Order 14 of the Rules of
the Supreme Court in respect of their non-payment of the premiums due
under their reinsurance contract with Equitas.


Mr Fraser sought leave to appeal, saying that Clause 5.5 of the
reinsurance contract had been inserted in bad faith. Under this clause
Names were, among other things, not allowed to assert any set-off of
claims that they might have against Lloyd's against the premiums due.


Where the defendants, as in this case, asserted fraud claims against
Lloyd's, it was argued that it was wrong to apply the no set-off
provisions, alternatively it was against public policy to allow such an
escape from liability for fraud.


The Court of Appeal refused leave to appeal. It had already been
determined that Clause 5.5 was enforceable and the bad faith argument
could not be used to distinguish such previous decisions. Clause 5.5 was
an appropriate part of the reinsurance contract and clauses preventing
set-off were not unusual, often being found in various types of
contract.


UTMOST GOOD FAITH


The extent of the insurer's duty of utmost good faith to the insured was
examined by the Court of Appeal in its decision delivered on 30 July this
year in the case of Norwich Union Life Assurance Society v Qureshi, (TLR)
(13 August 1999).


Norwich Union had taken a charge over Mr Qureshi's home as part of an
insurance plan for Lloyd's Names. The charge formed security for the
payments made by Norwich Union under a guarantee against underwriting
losses provided to the Lloyd's market.


In defending proceedings to enforce the charge, Mr Qureshi claimed that
Norwich Union had breached its common law duty of good faith, as well as
Section 47 of the Financial Services Act 1986, by failing to disclose to
potential policyholders the fact that there were substantial losses about
to be incurred in the Lloyd's market.


The Court of Appeal found against him, establishing that the scope of the
common law duty extended only to those matters that were directly relevant
to the risk of the insured; in this case the life of the policyholder, not
the risk of underwriting losses.


Section 47, it confirmed, circumscribed the conduct of parties prior to
the conclusion of an investment agreement. This was not the case here,
where Norwich Union was merely seeking to enforce payment of monies that
it had already paid out to Lloyd's under its guarantee. One senses that
fear of the floodgates being opened on future potential claims of this
nature was uppermost in the court's thinking.


POOLS


The many and varied issues arising from the complicated relationships
between pool members have continued to engage those operating in such
fields. In his judgment of 29 July 1999 in the case of Kingscroft
Insurance and others v Nissan Fire & Marine, (unreported), Mr Justice
Moore-Bick considered, among other things, whether the words "companies
underwritten by HS Weavers (Underwriting) Agencies Limited, London" meant
only the companies appearing on Weavers' stamp itself, or also those
companies participating in the pool by means of reinsuring part of the
liabilities assumed by the stamp companies; and, whether all those
companies, as members of the Weavers pool, were entitled to enter into
excess of loss contracts with other reinsurers to protect their 'retained'
share of business, which the pool had ceded outwards to Nissan and the
other defendants under certain Facility Quota Share (FQS) treaties.


History


The claimants comprised all members of the Weavers pool - both stamp
companies and non-stamp members - between 1963 and 1990.


Until the end of 1974, Weavers' authority came from underwriting agency
agreements with each pool company under which Weavers was given broad
underwriting authority as well as authority to reinsure or retrocede risks
underwritten.


Weavers accordingly issued policies on behalf of both the stamp companies
and the non-stamp members, the latter not wishing to appear on the stamp
either because they were unable to write business direct or because they
preferred not to do so.


After the Insurance Companies Act 1974 came into force, each non-stamp
member that was not now authorised to carry on insurance business in the
UK entered into a Whole Account Quota Share (WAQS) reinsurance treaty with
one or more of the stamp companies as a means of continuing to participate
as a reinsurer in all the business written by the pool. By 1976, the
Weavers pool therefore comprised the stamp companies and the non-stamp
companies in the form of WAQS reinsurers.


Separately, the pool back in 1972 had increased its capacity by entering
into an external quota share reinsurance programme. In 1976 this was
replaced by two FQS reinsurance treaties (the subject matter of the
action), under which the pool ceded a proportion of all its umbrella
liability business to reinsurers, including Nissan. The amount retained by
the pool was subject to a separate non-proportional reinsurance
agreement.


Nissan and the other defendants in the action before Mr Justice Moore-Bick
argued that they were entitled to avoid both FQS treaties because the
identity of their reinsured and the existence of the other excess of loss
reinsurances of the retention had been misrepresented or not disclosed to
them.


The identity of the reinsured


The judge construed the FQS treaties to reflect the parties' intentions in
the commercial context in which the treaties were made. He found that the
phrase "companies underwritten by HS Weavers" was not so clear as only to
mean the stamp companies.


Although, strictly, Weavers did not now underwrite on behalf of the
non-stamp members, that was in fact the intention behind the WAQS
treaties.


The words "underwrite for" in the FQS treaties were used in a broad
sense.


It was also significant that Nissan and the other FQS reinsurers knew
little, if anything, about the formal structure of the Weavers pool.
Reinsurers participated in the FQS treaties to obtain a share of the
business written by Weavers on behalf of the pool, which suggested that
the reinsured identified in the FSQ treaties was intended to encompass the
Weavers pool as a whole.


Retention


In the light of the evidence of the commercial background before him, the
judge decided that the FQS treaty wording did not mean that the pool must
retain its proportion of business without any non-proportional reinsurance
of any kind.


The words "retain for their own account" could mean that the pool should
simply retain it as part of its own underwriting account. The reinsured
was entitled to manage its underwriting account properly by obtaining
excess of loss reinsurance - as indeed Nissan and the other FQS reinsurers
would expect.


In Wurttembergische AG v Home Insurance, (No. 3) (unreported, March 1999),
the scope of reinsurance coverage for pool members was considered.


Wurttembergische was a member of an insurance pool managed by Rutty
Underwriting Agencies. The company entered into a reinsurance contract
with Home Insurance that provided: "This contract is in respect of all
losses which (Wurttembergische) may be or may become liable to pay,
arising out of risks written for (Wurttembergische by Rutty)."


The underwriting agreement contained a fronting arrangement where each
member would bear its share of the risk in accordance with agreed
proportions.


The pool members also entered into an agreement between themselves whereby
if one member became insolvent and unable to pay its share of the
liabilities, the remaining solvent members would be liable for their share
of the unpaid losses of the insolvent member.


One of the pool members did become insolvent. Wurttembergische sought
indemnity for its share of the liabilities of the insolvent member from
Home, which denied coverage.


The court held that Home was not obliged to reimburse
Wurttembergische.


It did not consider that a member's liability arising out of another
member's insolvency could naturally be regarded as "arising out of risks
written" for Wurttembergische. The reinsurer's liability arose out of the
agreement the members had made between themselves.


FOLLOW THE SETTLEMENTS


In Structural Polymer Systems v Brown, (unreported, October 1998), Mr
Justice Moore-Bick considered whether an insurer is obliged to indemnify
an insured in respect of a settlement entered into by the insured but
without the insurer's consent.


The defendant, Brown, represented a Lloyd's syndicate that subscribed to a
claims-made professional indemnity policy that covered the plaintiff,
Structural Polymer Systems.


The plaintiff was retained to provide supply and consultancy services in
relation to the construction of a yacht. As a result of certain alleged
failures in the yacht, proceedings were commenced in New Zealand against
the plaintiff. A settlement agreement was produced, but failed because the
defendant syndicate did not consent to its terms.


While the defendant did not consent to the second settlement agreement
produced, that agreement was completed and the plaintiff paid £403 126
under it in full and final settlement of its liabilities.


The plaintiff sought to recover this sum from the defendant syndicate on
an application for summary judgment, which was opposed by the defendant,
primarily on the basis that he had not had an opportunity to consider the
merits of the underlying claims.


Mr Justice Moore-Bick rejected the defendant's argument. The defendant had
been given ample opportunity throughout 1997 to inspect all documents in
the plaintiff's possession and inform himself as to the merits of the
claims that would, almost inevitably, be pursued under the plaintiff's
professional indemnity policy. It was therefore too late for the defendant
to claim that he had not had an opportunity to investigate.


CLAIMS' NOTIFICATION


The first pensions mis-selling case to reach trial, J Rothschild Assurance
v Collyear and others, (1998) CLC 1697, examines issues on claims
notification.


J Rothschild Assurance sold pensions and in December 1993 its regulator,
Lautro, warned all members that irregularities in the selling of pensions
was a "problem which needs to be tackled".


Rothschild was insured under three professional indemnity policies
arranged with the defendant Lloyd's underwriters and companies. They were
claims-made policies, whose wording required the assured to notify
underwriters "as soon as possible of any circumstances which may give rise
to a claim or loss against them". Rothschild notified Lautro's warning to
underwriters, stating that 2500 of the policies it had issued were to be
reviewed.


Underwriters rejected the notification as premature, claiming that at the
time of the purported notification there was no real or material risk of a
claim against Rothschild specifically. Mr Justice Rix found that the words
"circumstances which may give rise to a claim" did not justify a
particularly strong test as to whether a claim may arise, as would have
been the case if it had been worded "circumstances likely to give rise to
a claim". The judge also found that it was legitimate to test the
notification against how matters had actually developed. The notification
was therefore valid.


Insurers argued that as Rothschild had established the review and made the
payments, no 'claim' had ever been made within the terms of the
policy.


The judge rejected this, finding that the investors, by participating in
the review process and/or accepting redress, were making 'claims' against
Rothschild.


CONTINGENCY INSURANCE


There has been a noticeable increase in the amount of contingency
insurance being written in the London market following some noteworthy
cases.


The case of DSG Retail v QBE International and others, (1999) Lloyd's Rep
IR 283, concerned over-redemption insurance taken out by Dixons and a
travel agent in a single policy to provide indemnification against any
losses made through a 'free flights' customer promotion.


The court found that the insurance was joint and not composite, since the
loss insured against by both insureds was the same and therefore the
insurable interests were identical. Accordingly, misconduct by either of
the insureds entitled the insurers to avoid the contract with both
insureds.


In any event, the risk had been presented to underwriters in a single set
of documents which both insureds had warranted as true. In those
circumstances, underwriters would not be expected to analyse that
presentation to identify which information originally came from which
potential insured. Underwriters were entitled to treat any non-disclosure
or misrepresentation in that presentation as having been made by both
insureds.


On 18 December 1998 Mr Justice Carnwath, in the case of The Continental
Assurance Company of London, (unreported), clarified the law on the
valuation of contingency insurance claims against insolvent insurers. The
liquidators of the insurers sought court directions on whether certain
prize indemnity policies, current at the date of the liquidation, were to
be valued on the basis of the full amount of the potential claim (a just
estimate) - under sub-section 2(2)(b) of Schedule 1 of the Insurance
Companies (Winding-Up) Rules 1985 - or as part return of premium paid
proportionate to the period the policy had yet to run at the date of
liquidation - under sub-paragraph 2(2)(a) of those rules.


The policies in question covered the risk to certain football clubs of
having to pay players' bonuses and other outgoings in the event of the
club gaining promotion at the end of the season.


The return of part premium is based on the theory that the policyholder
could use such premium to purchase replacement cover in the market. This
seems to apply to policies whose risk is evenly spread over the policy
period, such as house contents insurance, but not where the risk
fluctuates, as in the case of contingency cover.


Sub-paragraph 2(2)(b) provides for a just estimate in cases where the
preceding sub-paragraph 2(2)(a) does not apply. For sub-paragraph (a) to
apply, the policies in question had to be expressed to run from one
definite date to another.


The judge found as a fact that they were not so expressed. However, had
they been so expressed, sub-paragraph (a) would have applied and the
policy been valued at a part return of premium.


Underwriters might find it odd that the judge would allow this in
contingency business, where it is recognised practice that premium, at
least for the purposes of recording it in their books, is not treated as
earned progressively as each day of the policy elapses, but only once the
event has taken place, reflecting the risk's fluctuating nature.


SCHEMES OF ARRANGEMENT


Schemes of arrangement for insurance companies remain an important feature
of reorganisation and exit routes. Mr Justice Neuberger in the case of
Fletcher v Royal Automobile Club, (TLR) (3 March 1999), confirmed that the
court does have jurisdiction to set aside an order sanctioning a scheme of
arrangement implemented under Section 425 of the Companies Act 1985.


This was so in the case of the order having been obtained by fraud,
despite the fact that there was no formal mechanism provided by the 1985
Act.


The extent to which the court has continuing jurisdiction once a scheme is
sanctioned by the court has been a matter of differing opinions, but the
position is now clearer.


Mr Fletcher was an aggrieved member of the Royal Automobile Club (RAC),
which, as part of a reorganisation, implemented a scheme of
arrangement.


The order sanctioning the scheme had been granted, but Mr Fletcher claimed
that there had been misrepresentations made to the court about the
description of the various classes of members to the effect that that
there had been no rule changes in the RAC's constitution in 1996 or at
all. In fact, there had been a rule change in July 1996, which operated
until May 1997, when it lapsed.


The judge did not think that the representation in any way affected the
purposes and outcome of the scheme, nor the position of the members.
However, he dismissed the legal argument made by the RAC that once a
scheme of arrangement is sanctioned by the court it has statutory effect
and cannot subsequently be altered or terminated, except as so provided in
the scheme itself or by a subsequent scheme.


He also did not accept in this case the argument that because one scheme
took effect by virtue of the Act and not the court order - under the
authority of Kempe v Ambassador Insurance, (1998) 1 WLR 271) - it was
therefore impossible to set it aside. The judge was mindful of the fact
that to set aside a scheme can in some cases cause great hardship to
innocent third parties. However, this was a matter that went to the
court's discretion in exercising its jurisdiction and not as to whether
that jurisdiction existed or not.


The question that Mr Justice Neuberger had to decide concerning the
Section 425 scheme of arrangement in the case of Osiris Insurance, (1999)
1 BCLC 182, was whether the meeting of creditors called to approve the
scheme was validly convened.


This was an example of the increasing number of schemes of arrangement in
the insurance industry relating to solvent companies. There is a proven
track record of insolvent estimation schemes but some of the issues
relevant to solvent schemes are beginning to surface.


Osiris was a suitable candidate for a solvent scheme of arrangement.


It wrote London market and personal lines business. The run-off would have
taken several years, yet the potential liabilities were small relative to
its assets.


Emphasising that the court was not to act as a rubber stamp of the
decision reached by creditors in approving the scheme, the judge
considered the fact that only a relatively small number of creditors voted
at the meeting compared with the number of those notified, as well as the
fact that the company believed there were other policyholders whose
identity and address were not available to it.


The judge noted the conscientious efforts that the company had made to
notify all creditors and the fact that the policies were either
claims-made, with the last of these policies being underwritten in 1993,
or short-tail London market policies. It was therefore unlikely that more
claims would be made and he bore in mind that those voting comprised over
one third of all known claims in value.


The other important question that he considered was whether there was only
one class of creditor and therefore no need to have separate meetings of
creditors depending on the type of policy held. He concluded that the
proposals in the scheme apply equally to all creditors and in the
circumstances it was correct to treat creditors as falling within one
class.


ARBITRATION


- It has been established by the court at first instance that strict
formality is not necessary to commence arbitration proceedings. In the
case of Allianz Versicherungs-Aktiengesellschaft and others v Fortuna (The
'Baltic Universal'), (1999) 1 LLR 497, Mr Justice Moore-Bick held that a
notice in writing that amounted to a clear statement that the sender was
invoking an arbitration agreement and that required the recipient to take
steps in response to enable the constitution of the tribunal was
sufficient to commence arbitral proceedings.


- He emphasised that the use of a particular form of words was not
necessary, provided that it was clear that the arbitration agreement was
being invoked and that the recipient of the notice was required to take
steps accordingly.


That was sufficient to satisfy the requirements of the Limitation Act as
regards commencement of an arbitration and the commercial expectations of
those agreeing to arbitrate their disputes outside the courts.


- The extent of the court's power to remove an arbitrator has also been
examined. In dismissing the application in Laker Airways v FLS Aerospace,
(1999) 2 Lloyd's Rep 45, Mr Justice Rix held that the requirements of
S.24(1)(a) of the Arbitration Act 1996 - that "circumstances exist that
give rise to justifiable doubts as to (the arbitrator's) impartiality" -
had not been satisfied where an arbitrator appointed by one party and
leading counsel appointed by the other came from the same set of
chambers.


- The judge said it was clear that no allegations of bias had been made
against the arbitrator and held that an unjustifiable or unreasonable
doubt was not sufficient as "arbitration would become impossible if one
party could require an arbitrator to retire by making unjustified
allegations about impartiality or bias".


MISTAKES OF LAW


- The decision of the House of Lords in Kleinwort Benson v Lincoln City
Council on 29 October 1998 may prove to be one of the most significant and
controversial of recent years. The bank paid substantial sums to the local
authority under an interest rates swaps contract. Some years later, such
contracts were held to be void. The bank, which had paid the local
authority on the assumption that it was legally bound to do so, wanted its
money back.


- The law had long recognised that money paid under a mistake of fact
could be recovered. This was not, however, the case for money paid under a
mistake of law. In Kleinwort Benson the House of Lords abolished this
anomalous distinction and recognised that money paid under a mistake of
law was also, in principle, repayable to the mistaken party.


- However, had the bank made any mistake in this case? When it paid the
local authority it was, indeed, bound to do so, since the law at that time
regarded the swaps contract as valid. How, then, could it be said that the
bank paid by mistake?


- Nevertheless, a majority of the House of Lords were able to perform this
forensic gymnastic: at the date payment was made, the bank mistakenly
believed the swaps contract to be binding. Although the courts did not
actually declare such contracts void for some years to come, nevertheless
that was, and always had been, the law. Furthermore, a claim for repayment
would not become time-barred until seven years after the mistake was
disclosed, even though payment may have been made many years earlier. The
decision has therefore changed the law as it stood for about 200 years and
applied the change retrospectively.


- It is essential that (re)insurers be aware of and, if necessary, protect
themselves against the potential ramifications of this judgment. For
example, the House of Lords established in Black Sea v Baltic Insurance,
(1998) 2 AER 833, that in the absence of custom and practice there is no
implied duty on a proportional reinsurer to contribute to cedants' costs
in contesting coverage with its insureds (eg, declaratory judgment
costs).


- If custom and practice is not established, can the reinsurer claim costs
back? In addition, can an excess of loss reinsurer that has settled claims
consisting of an aggregation of different losses on an underlying policy
take back these payments in the light of the Court of Appeal's decision in
Yasuda Fire v Lloyd's Syndicates, (1998) CLC 330?


Certain of the decisions discussed here are from the end of 1998, either
because they were delivered too late to be included in last year's report,
or because they were not reported until 1999.


This article was prepared by members of DJ Freeman's insurance department,
which provides services in all areas of the (re)insurance industry in
contentious and non-contentious corporate, commercial, regulatory and
restructuring and insolvency matters.
  • LinkedIn  
  • Save this article
  • Print this page  

You need to sign in to use this feature. If you don’t have an Insurance Post account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an indvidual account here: