UK Court Opinions

UK COURT OF APPEALS DISMISSES REINSURER’S APPEAL OF DECISION FINDING CREATION OF REINSURANCE CONTRACT PRIOR TO CASUALTY

January 27, 2009 by Carlton Fields

We previously posted on November 12, 2008 about a British court’s decision holding that a reinsurance contract was created prior to a putatively covered ocean-going casualty, based on certain written exchanges between the parties reflecting their negotiations. The reinsurer, Aigaion Insurance Company S.A. (“Aigaion”), appealed, arguing that the lower court’s decision was unclear, and that even if a contract had been formed, it contained a warranty provision allowing the policy to lapse without notice in the case of non-payment of premium (the parties did not dispute that the reinsured, Allianz Insurance Company of Egypt, forwarded timely premium payment to an intermediary broker, who failed to then forward payment to Aigaion).

The Court of Appeals disagreed with Aigaion, finding no basis for its appeal, which it dismissed. The Court found that whether or not the parties negotiated the warranty provision Aigaion sought, it was nonetheless not explicitly included in the terms of the agreement that the lower court had found the parties made by a date certain which, at the latest, preceded the casualty. Allianz Insurance Company of Egypt v. Aigaion Insurance Company, S.A. [2008] EWCA Civ 1455 (Court of Appeals, Civ. Div. Dec. 19, 2008).

This post written by John Pitblado.

RELEASE OF CLAIMS HELD TO CONFER EXCLUSIVE JURISDICTION ON ENGLISH COURTS TO DECIDE ACTIONS OF “FRAUD”

January 20, 2009 by Carlton Fields

This is the latest chapter in the transatlantic saga involving the Seaton Insurance and Stonewall Insurance companies. We blogged earlier about related lawsuits in the United States (see our December 22, 2008 post), and an English court’s decision denying those insurance companies’ application for a stay for proceedings pending resolution of a motion to dismiss in the United States District Court for the Southern District of New York (see our July 23, 2008 post). This complex case presents interesting issues of the interface between US and UK courts and between US and UK law.

The underlying facts and procedural history of the disputes are tortuously complex. At the risk of understatement, it suffices to say that Seaton and Stonewell became involved in litigation with Cavell USA, owned by British citizen Kenneth Randall, over Cavell’s handling of the run-off of their insurance obligations under an administration agreement. The parties entered into a written settlement of their disputes (the “Term Sheet”), which contained a provision that the settlement “shall be governed by and construed in accordance with English law and the parties submit to the exclusive jurisdiction of the English courts.” The Term Sheet included a “carve-out” provision for “fraud” on the part of former managers, related companies and individuals.

After entering into the settlement with Cavell, Seaton and Stonewell initiated arbitration with their reinsurer in the United States, National Indemnity Company (“NICO”), and served subpoenas on Cavell. Seaton and Stonewell also sued Cavell in the United States District Court for the Southern District of New York, alleging what was said to be “fraud” under New York law. The gist of the fraud claim focused on the delegation by Cavell of claims handling for Seaton and Stonewall to NICO pursuant to a Collaboration Agreement; it was alleged that Cavell and Randall “fraudulently” subordinated the interests of Seaton and Stonewall to those of NICO by entering into, operating and concealing the Collaboration Agreement.

Cavell and Randall then separately sued Seaton and Stonewell in the United Kingdom, seeking a declaration that all of their disputes had been compromised by the Term Sheet, as well as damages resulting from Seaton and Stonewell involving them in the United States arbitration and litigation. Seaton and Stonewell challenged the jurisdiction of the English court, and sought the aforementioned (denied) stay of the English lawsuit pending a decision on a motion to dismiss the United States lawsuit they had filed.

In May 2008, the English court ordered a trial of preliminary issues, which included: “(1) whether the parties have agreed to submit all their disputes, including claims in fraud to the exclusive jurisdiction of the English Court; (2)(i) what is meant by fraud; and (ii) whether claims advanced in the New York Court are claims in fraud, within the meaning of the carve-out.” The claimants, Cavell and Randall, submitted that the answer to issue (1) was “yes,” since any proceedings brought other than in the English court system are in breach of the Term Sheet. They also submitted that the answer to issue (2)(i) was that “fraud” meant “deceit,” as in the English tort of deceit, “and no more.” Finally, the claimants argued that the answer to (2)(ii) did not arise but, if so, it was “no.” The English court agreed with the claimants on both issues (1) and (2)(i). It found a determination of issue (2)(ii) to be unnecessary in light of its predicate determinations.

Reaching the first delineated issue, the court observed that resolution turned on a “double actionability” test: any claim brought must constitute “fraud” both within the meaning of the Term Sheet, as construed under English law (there was no dispute that English law governed interpretation of the Term Sheet), and as a matter of the law governing the “antecedent transactions,” that is, the alleged “fraudulent” conduct itself. Thus, the court would – in both sides’ views – be required to determine whether a particular claim is or is not a claim of “fraud” within the meaning of the carve-out. “The critical difference between the parties was that, on the Claimants’ case, this Court would be dealing, in addition, with the substance of any surviving claim; whereas, on the Defendants’ case, determination of the substance of any claims would rest with some other court or tribunal.” The court, as noted, concluded that the parties agreed to submit all disputes to the exclusive jurisdiction of the English courts, principally finding that a provision for all disputes not otherwise resolved to be dealt with in a single jurisdiction was consistent with the Term Sheet’s overall purpose of achieving an orderly termination of the parties’ relationships. The court further observed that the plain language of the jurisdiction clause (“and the parties submit to the exclusive jurisdiction of the English Courts”) “is wide rather than restricted,” and did not exclude claims sounding in fraud.

The court next turned to what was meant by “fraud” in the carve-out, beginning with the natural meaning of “fraud” in an English contract. Fraud has the “ordinary and primary meaning of deceit,” although it was observed that fraud was also capable of a wider meaning, referring generally to “dishonesty” as required by the context. However, the context did not require such a broad meaning in the court’s view, as it would have eviscerated the Term Sheet’s purpose, allowing virtually any claim permitted by clever pleading. “Indeed, once the safe ground of the primary meaning of ‘fraud’ is abandoned, it is not at all clear where to stop.” Thus, the court concluded that “fraud,” as was meant by the carve-out, had only the primary meaning of deceit. Cavell USA Inc. v. Seaton Insurance Co. [2008] EWHC 3043 (Nov. 12, 2008).

This post written by Brian Perryman.

UK COURT REFUSES TO HOLD DIRECTOR LIABLE ON JUDGMENT AGAINST INSURER

January 9, 2009 by Carlton Fields

As we previously posted in July, 2007, a UK court assessed costs against insurance broker Horace Holman & Co. (“Horace”) in an action Horace brought against Equitas Ltd. (“Equitas”) which the Court found to be “largely fruitless.” The matter was recently brought back before the Court by Equitas, which sought post-judgment enforcement of the order, insofar as Horace has not made ordered payments. Horace responded that it was in liquidation proceedings, and Equitas responded by asserting that Horace’s liability is recoverable from Mr. Arwyn Powell, who was added as a party to the proceeding. Mr. Powell was Holman’s sole shareholder and managing director, and also shareholder and director of related companies, including Camomile Management Consulting Ltd. (“Camomile”), which was a creditor of Horace in the liquidation proceedings.

The Court rejected the enforcement orders sought by Equitas. First, the Court rejected the allegation that Horace’s liquidation was a previously devised plan to avoid any judgment in the event one was obtained against it, and that Equitas thus had no further rights against Horace than as creditor in the liquidation proceedings. The court rejected claims directly against Mr. Powell as sole shareholder of Horace, finding no ground for “piercing the corporate veil.” The Court also rejected the claim that Powell, as Camomile’s shareholder, stood to benefit from liquidation, and Camomile’s position as creditor in that proceeding. Finally, the Court found it dispositive that Equitas failed to warn Powell that it would seek to recover directly against him, prior to making its application for such recovery. Equitas Ltd. v. Horace Holman & Co., Ltd. [2008] EWHC 2287 (Comm) (Oct. 3, 2008).

This post written by John Pitblado.

ENGLISH REINSURANCE ASSETS TO BE REMITTED TO AUSTRALIAN LIQUIDATORS, BUT FOR WHAT REASON?

January 8, 2009 by Carlton Fields

In a July 12, 2007 post, we reported on issues relating to HIH Casualty and General Insurance Limited (“HIH”). The question before the court was whether it had jurisdiction to entertain a request under the Insolvency Act for directions to the liquidators in England to transfer assets collected by them to the liquidators in an Australian liquidation. The Court of Appeal held that it would not direct a transfer of the English assets by the English provisional liquidators to the Australian liquidators because to do so would prejudice the interests of many of the creditors. The House of Lords disagreed, allowing an appeal and ruling that the English assets of the insolvent insurer should be remitted to the Australian liquidator. There were sharp differences of opinion as to why exactly that should be the case.

The HIH group presented winding up petitions to the Supreme Court of New South Wales in 2001. Some of the assets, which consisted mostly of reinsurance claims on London policies, were situated in England, so English provisional liquidators were appointed. The Australian judge subsequently issued winding up orders and sent a letter to the High Court in London asking that the provisional liquidators remit the assets to the Australian liquidators for distribution in accordance with Australian law. The question on appeal was whether the English court could and should accede to the request. The alternative was a separate liquidation and distribution of the English assets under the English Insolvency Act of 1986. The manner of distribution mattered because Australian law generally gave priority to insurance creditors at the expense of other creditors, while the same result would not obtain under English law.

The decision was resolved primarily by analyzing the tension between section 426(4) of the Insolvency Act, which allows an English court with insolvency jurisdiction to assist designated foreign courts (including Australian courts), and section 426(5) of the same Act, which allows a court discretion to provide assistance in accordance with the rules of private international law, including the common law principle of “modified universalism.” That principle requires United Kingdom courts to cooperate with Australian courts to ensure that all the assets are distributed under a single system of distribution. While the court stated that a refusal to remit the assets might be appropriate if it causes a manifest injustice to a creditor, it ultimately found that the Australian distribution was not unacceptably discriminatory or contrary to public policy.

The dispute was focused on whether the basis of jurisdiction ought to be grounded in the common law considerations allowed by section 426(5) or the discrete statutory authority of section 426(4). Lord Hoffmann would have allowed the remission solely through the exercise of common law principles. He argued that under the common law doctrine of ancillary winding up, English courts may “disapply” parts of the statutory scheme by authorizing the English liquidator to allow actions he is obliged by statute to perform in accordance with English law to be performed by the foreign liquidator in accordance with foreign law. Others, including Lord Phillips, rejected this view: “I do not propose to stray from the firm area of common ground [of allowing the appeal under section 426] onto the controversial area of whether, in the absence of statutory jurisdiction, the same result could have been reached under a discretion available under the common law.” Lord Neuberger, too, opposed Lord Hoffman’s view, stating that he took “the view that it would not have been open to an English court to make the order sought by the Australian liquidators in the absence of section 426(4) and (5) of the 1986 Act.” McGrath v. Riddell [2008] 1 WLR 852, [2008] UKHL 21 (Apr. 9, 2008).

This post written by Brian Perryman.

UK COMMERCIAL COURT DENIES BROKER’S APPLICATION TO WITHDRAW ADMISSIONS REGARDING MARKET ISSUES

December 11, 2008 by Carlton Fields

We previously reported on problems in the London Personal Accident Reinsurance market in the 1990s, including an extensive Commercial Court opinion involving Sphere Drake Insurance Limited and its broker, Stirling Cooke Brown. In the present action, American Reliable Insurance Company, one of the participants in that market, sued its reinsurance broker in the UK Commercial Court, seeking to recover damages. Prior to the case management conference, after admitting certain factual findings made by the court in the prior Sphere Drake case, the defendant broker, Willis Limited (“Willis”), sought to withdraw some of those admissions, including admissions regarding the nature of the Personal Accident Reinsurance market. Willis had also been sued by another one of its former clients, CNA Insurance Company Limited, and had made admissions in that case which were inconsistent with those it had made in the American Reliable case.

The Court denied Willis’ application to withdraw its admissions. In support of the denial, the Court explained that Willis neither presented new evidence nor made any positive challenges to the prior admissions. This opinion demonstrates some of the substantial differences between civil case management in US and UK courts. American Reliable Insurance Company v. Willis Limited [2008] EWHC 2677 (Comm. Oct. 24, 2008) (Note: Carlton Fields has represented American Reliable Insurance Company in disputes in the Personal Accident Reinsurance market).

This post written by Dan Crisp.