Ever since Stuart-Smith J’s decision in Geophysical Service Centre v Dowell Schlumberger…
In Denso Manufacturing, Ms Sara Cockerill QC (sitting as a judge of the Commercial Court) upheld Great Lakes’ declinature of cover under an ATE policy. The Court’s decision is considered by Jamie Smith QC of 4 New Square.
THE BACKGROUND FACTS
Mploy Group Limited (“Mploy”) was an employment agency. It brought claims in the Commercial Court against Denso. On 15 March 2013 Mploy obtained ATE insurance cover from Great Lakes. The premium was deferred and payable in the event of success or partial success.
On 12 March 2013 Denso made a Part 36 Offer in the amount of £110,000. Mploy rejected the offer. At trial, Mploy achieved only limited success at trial in July 2014 obtaining an order for payment by Denso of damages of £34,410. Mploy received its costs to the date of expiry of Denso’s Part 36 Offer, but was ordered thereafter to meet Denso’s costs, which were significant.
On 11 November 2014 Mploy went into liquidation and, by the statutory transfer pursuant to the Third Party (Rights against Insurers) Act 1930, Denso became assignee of Mploy’s rights under the ATE policy.
On 3 September 2015 Denso obtained a default costs certificate requiring Mploy to pay £319,696.59 in costs. Denso sought this sum under the ATE policy. Great Lakes disputed liability to pay.
THE ISSUES AND THEIR RESOLUTION
Argument 1: Great Lakes’ reliance on conditions precedent
Policy terms and conditions
The ATE policy contained a general clause stating that:
“The Conditions which appear in this Policy … are, where their nature permits, conditions precedent to liability; failure to comply with them may mean you will not be able to claim under this Policy.”
Condition 7 of the policy, headed “Due Observance”, stated that:
“The due observance and compliance with the terms provisions and conditions of the Policy in so far as they relate to anything to be done or complied with by the Insured or Solicitor shall be conditions precedent to any liability of the Insurer to make any payment hereunder. In addition the Insured and the Solicitor are obliged to cooperate with us …”
Condition 9 of the policy obliged the insured to provide to Great Lakes (amongst other things):
“regular progress reports on the Legal Proceedings and associated costs and when specifically requested by us”.
Condition 11 of the policy required the insured to give all information and assistance required by the insured’s solicitor and Clause 11(c) further stated: “All bills or other communications relating to fees or costs which may be payable under this Policy should be forwarded to Us without delay.”
Were the terms were Conditions Precedent?
The Deputy Judge held that each of Conditions 7, 9 and 11 were “apt to be conditions precedent in circumstances where insurers are exposed to the risk of adverse costs as the central plank of their liability” (para 40).
In reaching that conclusion, the Deputy Judge:
- Started with the classic warning, given by Cozens-Hardy MR and Farwell LJ in Re Bradley and Essex and Suffolk Indemnity Society  1 KB 415, at 421 and 432-3, as to the need for careful scrutiny before resolving that policy terms are conditions precedent.
- Observed that, having reviewed more modern authorities, “the hostility to conditions precedent manifested in Re Bradley has been somewhat moderated over the years” (para 25).
- Endorsed the summary given at para 21-037 of MacGillivray on Insurance Law (13th Edn), namely:
“Little more can be said than that it is a matter of construing the policy as a whole. Such clauses should not be treated as a mere formality which is to be evaded at the cost of a forced and unnatural construction of the words used in the policy but should be construed fairly to give effect to the object for which they were inserted, but at the same time so as to protect the insured from being trapped by obscure or ambiguous phraseology”.
- Accepted Great Lakes’ argument that the provision of information by the insured was a critical aspect of the effective functioning of the policy “because the insurer is not a party to the litigation and … Once the litigation is over there are still important steps to be taken in minimising the quantum of recovery, which the assured may feel little incentive to do once the case is lost without such firm requirements” (para 40).
Timing of crystallisation of rights
Denso argued that the breaches of conditions precedent did not ‘bite’ because Mploy had become entitled to payment from Great Lakes prior to the breaches. This depended upon whether insurers’ obligations to pay were triggered by the costs order following trial (5 September 2014) or only pursuant to the default costs certificate (3 September 2015).
The issue distilled down to whether Mploy’s rights to payment arose on the making of the costs order or only on quantification.
The Deputy Judge upheld Great Lakes’ argument that crystallisation occurred only on 3 September 2015. Only then was the insured’s liability (to Denso) ascertained and determined. She referred to and relied on: Post Office v Norwich Union Fire Insurance Society  1 All ER 577; para 30-002 of MacGillivray, Cox v Bankside  CLC 180, at 442 per Phillips J and more recent judicial and extra-judicial pronouncements of Lord Mance (see para 100).
Other interpretational aspects
The Deputy Judge resolved four further interpretational aspects as to the policy terms and conditions:
- She accepted that Denso “may be right” as regards Condition 7 that the reference to co-operation meant that Mploy could not be in breach for failing to provide information unless it was requested by Great Lakes (para 48). She “would have been minded” to take the same approach to Condition 9 (para 67(ii)).
- As to Condition 11(c), she ruled that the word “All” (as in “All … communications …”) did indeed mean all and was not subject to a limitation that only material communications qualified.
- The words “without delay” in Condition 11(c) “denote passing on within days or at most well under a month (14 days used to be considered an acceptable turnaround time for business correspondence, but even this may be regarded as unacceptably slow in the modern world)” (para 56).
- The Conditions were dissimilar to the ‘subjective assessment’ clauses that had been the subject of restrictive interpretation by the Court of Appeal in Zurich Insurance plc v Maccaferri Ltd  EWCA Civ 1302;  Lloyd’s Rep IR 200 (CA).
The Deputy Judge concluded that Mploy had been in breach of Condition 11(c) in:
- Waiting until 12 February 2015 to pass on to insurers an offer from Denso’s solicitors dated 4 December 2014 to accept £210,341 net in respect of Denso’s costs (paras 55 and 56).
- Failing to pass on to Great Lakes a chasing letter from Denso’s solicitors, concerning the costs offer, dated 31 March 2015 (para 57).
- Failing to pass on to Great Lakes an email dated 13 July 2015 whereby Denso informed Mploy’s liquidators that a costs lawyer had been instructed to prepare a detailed bill of costs (para 59).
- Waiting 20 days before sending to Great Lakes a Notice of commencement of detailed assessment proceedings (paras 64 and 65).
Argument 2: non-payment of the premium
Great Lakes’ second argument in support of declinature was that Mploy had failed to comply with a condition precedent to pay the premium. This argument comprised a number of sub-arguments.
Was Mploy “Partially Successful”?
Great Lakes contended that Mploy had been “Partially Successful” within the meaning of the policy definition of that term such that the premium became payable. Denso countered that the effect of the order at trial was that Mploy enjoyed no net benefit and therefore was “Unsuccessful”.
The Deputy Judge preferred Great Lakes’ arguments: “The correct approach to construction is one which holds a balance between purposiveness and literalism and which pays due attention to the background against which the contract arises” (para 91).
Did Great Lakes fail to operate machinery within the policy for calculating the premium?
The next series of sub-arguments requiring analysis by the Deputy Judge were whether, the premium being due and owing (on account of Mploy being “Partially Successful”), Mploy was in breach of condition precedent.
The Deputy Judge ruled that there was no breach of condition precedent, because:
- Great Lakes had not made a demand for payment of the premium (para 117).
- Great Lakes had not made use of the machinery within the policy for calculation of the level of the premium (para 116). Here the Deputy Judge followed Kirby v Consindit Societa per Azioni  1 Lloyd’s Rep 75 to the effect that no liability to pay a premium arose until it had been quantified.
- There was no rule that premium is payable at any point in time and the provisions of the ATE policy gave rise to no express or implied payment date (paras 119-124).
Argument 3: set-off
The final point of substance related to whether Denso, as the statutory assignee of Mploy under the Act of 1930, had become the transferee of Mploy’s liability to pay premium such that set-off could arise.
Although her views on this issue were obiter, the Deputy Judge preferred Denso’s argument that no such transfer took place and so no set-off could occur. In expressing that preference, she:
- Noted the difference in language between section 1 of the 1930 Act and section 10 of the 2010 Act (para 148).
- Noted that the decision to that effect in Murray v Legal & General Assurance Society  2 QB 495 (Cumming Bruce J) was arguably binding upon her (paras 146 and 151).
- Accepted that Phillips J’s contrary reasoning in Cox v Bankside  2 Lloyd’s Rep 437 concerned “an entirely distinct issue”, namely the effect on a third party of a costs-inclusive excess (para 151).
- Took comfort from the consideration of the point by the Supreme Court in IEGL v Zurich Insurance plc  AC 559 at paras - per Lord Mance.
Denso is noteworthy not only for its treatment of several important principles of insurance law, but also for the warning it serves to litigators considering whether an ATE policy is suitable security for a defendant’s costs. Set against the courts’ ever-increasing readiness to treat ATE cover as valid security for costs, this case is a timely reminder that the terms and conditions of an ATE policy do present real opportunities for insurers to avoid cover. For Denso the pill was a particularly bitter one as the declinature arose from events happening after judgment in the underlying dispute and centred upon costs.