Weekly Update A Summary Of Recent Developments In Insurance, Reinsurance And Litigation Law - 40/10

This Week's Caselaw

Oceanbulk Shipping v TMT Asia Ltd & Ors

Admissibility of without prejudice negotiations to interpret the terms of a settlement agreement

http://www.bailii.org/uk/cases/UKSC/2010/44.html

The defendants sought to adduce evidence of exchanges between the parties made during without prejudice negotiations and before a settlement agreement was concluded, because those exchanges were said to be relevant to the proper interpretation of the settlement agreement. At first instance (Weekly Update 28/09) the judge held that the evidence was admissible.

The Court of Appeal (by a 2:1 majority) overturned that decision (Weekly Update 7/10). The Supreme Court has now unanimously held that the evidence is admissible. The House of Lords in Chartbrook v Persimmon Homes [2009] (Weekly Update 24/09) accepted that it may be possible to admit evidence of prior communications between the parties as part of the background which may throw light on what they meant by the language they used. Accordingly, it was not in dispute that, absent the without prejudice rule, statements made in the course of negotiations may be admissible as part of the factual matrix as an aid to interpretation.

The Supreme Court accepted that the without prejudice rule is an important protection intended to encourage settlements. As Lord Clarke put it: "its boundaries should not be lightly eroded". The use of without prejudice communications to interpret a contract was not one of the previously accepted exceptions to the rule. However, it was held there was no reason why the ordinary principles governing the interpretation of a settlement agreement should be different even though the negotiations which led to it were without prejudice: "As I see it, the process of interpretation should in principle be the same, whether the negotiations were without prejudice or not. In both cases the evidence is admitted in order to enable the court to make an objective assessment of the parties' intentions" (per Lord Clarke). It was held that this stance would encourage, rather than discourage, parties to settle. Furthermore, rectification of a settlement agreement is already recognised as an exception to the without prejudice rule and "there is also no sensible basis on which a line can be drawn between the rectification case and this type of case".

Sugar Hut Group & Ors v Great Lakes Reinsurance & Ors

Insurers relying on defences of non-disclosure, breach of warranties and breach of condition precedent

http://www.bailii.org/ew/cases/EWHC/Comm/2010/2636.html

Clyde & Co for defendants (Toby Rogers and Dominic How)

The defendants insured four nightclubs. A fire at one of the nightclubs caused substantial damage and the claimants sought an indemnity from insurers. Insurers denied liability on the following grounds:

Material non-disclosure. The proposal form asked "how long have you traded in this name", to which the response was "2007". A further question asked "have you ever traded in any other names", to which the reply was "yes". Some two months prior to completion of the proposal form 3 companies in the insured group went into administration due to financial difficulties and new companies were then formed to take over their businesses and were substituted as insureds. Insurers argued that had they known about the background to this they would have had grave concerns. It was alleged that a former shareholder of the 3 "old" companies had been siphoning money from the business. Burton J accepted that a prudent underwriter would have wanted to know whether there was a risk that the financial viability of the business going forward was endangered. The judge said that there was no criticism of the underwriter due to the fact that he did not have any Underwriting Guidelines. The insured argued that, however careful and experienced an underwriter is, if he has avoided for non-disclosure he will be "bound to say" that information not disclosed to him was material. Accordingly, the judge looked at the surrounding circumstances of the case. He found no evidence that the underwriter had been so keen to accept the risk that he would "not have batted an eyelid" had the undisclosed facts been disclosed to him. Nor did the judge find that there had been a waiver of disclosure. The insured had sought to argue that as the insured was invited to disclose "any other facts not covered by the questions in this form", given that the only information sought about trading history was covered by express questions, no other information was required. Burton J dismissed that argument:"the Claimants cannot rely on factors not being "covered by the questions" if the reality is that they were not covered by the answers". Breach of warranties. The insurers argued the breach of two warranties: a Frying and Cooking Equipment warranty (requiring (inter alia) that ducting be kept free from combustible materials and checked "at least once every 6 months"). Burton J rejected the argument by the insured that the duct should be checked every 6 months starting from the date of inception of the policy. Instead, (as a matter of business efficacy) the check should be every 6 months since the last check. There had therefore been a breach. The judge held that the part referring to...

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