Legal Watch: Professional Indemnity. May 2015 Issue 001

Transcription

1 Legal Watch: Professional Indemnity May 2015 Issue 001

2 Surveyors succeed in defeating lender s novel causation argument In the recent case of Tiuta International Ltd (in liquidation) v De Villiers Surveyors Ltd, the claimant lender sought damages against the defendant valuers for negligently valuing a partlybuilt residential development in Sunningdale. The defendant succeeded in a summary judgment application on causation issues raised in its defence, defeating the novel causation arguments raised by the claimant. Background In November 2011, the defendant valued the property at 3.25m in its current condition, and with a gross development value (GDV) of 4.9m on completion of the works (the November valuation). The claimant, Tiuta, relied on the November valuation in agreeing with the borrower in December 2011 a new facility to advance up to just over 3m. Approximately 2.8m of the new facility had been drawn upon by June By the time that the facility expired, the borrower had failed to repay the loan and the claimant appointed receivers to realise the value of the property. Tiuta alleged that the true values were substantially less than the November valuation ( 2.24m for market value and 3.77m for GDV). In this issue: Surveyors succeed in defeating lender s novel causation argument PI policy extends to claimant s disbursement loans Ignore an invitation to mediate at your peril part II Policyholder succeeds with implied terms in insurance contract An important fact for purposes of the summary judgment application was that Tiuta had previously advanced 2.2m to the borrower during 2011 under a previous facility. These monies were advanced before the new facility was created in December 2011, on the basis of an earlier valuation carried out by the defendant in February 2011 (the February valuation). In the February valuation, the defendant had valued the property in its then current state at 2.3m and valued the GDV at 4.46m. At the time when the monies under the new facility were first drawn down, the borrower was already indebted to Tiuta for a total sum of 2.56m (the existing indebtedness). 01

3 Summary judgment application The defendant submitted that it was unarguable that any loss attributable to the existing indebtedness was caused by any negligence in the November valuation. That is because, had the defendant valued non-negligently and in consequence no new facility had been offered, Tiuta would have remained exposed to the existing indebtedness in any event. That money was advanced on the basis of the February 2011 valuation, which was not alleged to have been made negligently. The new facility did not cause Tiuta to lend that money to the borrower and any negligence therefore did not cause Tiuta loss, to the extent that it was already exposed in that amount. The defendant s argument was based on established principles of factual causation, namely the need to satisfy the but for test to establish recoverable loss (Nykredit Mortgage Bank (1997) relied upon). The basic measure is the comparison between (i) what the claimant s position would have been if the defendant had fulfilled his duty of care and (ii) the claimant s actual position. The defendant applied for summary judgment on this basis. Tiuta argued that the 2012 draw down was provided as a completely new loan, with different terms and a new facility fee, and that the new advance fully discharged the existing loan account and the first legal charge. The new loan was secured by a new charge registered at the Land Registry in January Accordingly, the claimant said the whole of the monies now due to the claimant were advanced in 2012, in reliance on the alleged negligent November 2011 valuation. The whole of any loss established after realisation was therefore the direct consequence of reliance on the November valuation. The reason why the claimant did not bring a claim based on the February valuation is that the first loan was fully redeemed and no loss was suffered. The claimant referred to the decision in Preferred Mortgages Ltd v Bradford and Bingley Estates Agencies Ltd (2002). In Preferred Mortgages, the court held that a lender s claim against a valuer for a negligent valuation was extinguished upon the redemption 02 of the loan based on that valuation. There is no cause of action in those circumstances. Tiuta argued that following Preferred Mortgages would leave it without a remedy, on the assumption that the first loan was redeemed. Tiuta contended that the court should therefore not apply the normal but for test in these circumstances to avoid this legal black hole. High Court decision The defendant s application was allowed. For purposes of the summary judgment application, the court assumed in favour of the claimant, that the original loan and charge were redeemed. The decision of the Court of Appeal in Preferred Mortgages did not lead to the conclusion that the usual but for test of causation should be disapplied in cases such as this. There was nothing in the Preferred Mortgages decision that supported the claimant s argument that causation should be decided on a different basis in such cases. The fact that no claim lies in respect of the first valuation did not make the application of the but for test to the November valuation inappropriate or unfair. The claim in respect of the November valuation must stand or fall on its own merits, in accordance with the principles in Nykredit. There was no inconsistency between that approach and the decision in Preferred Mortgages. All the money advanced to the borrower is treated as having been advanced under the new facility, which was made in reliance on the November valuation, and the existing loan was repaid out of the new advance. That had not caused the claimant loss. The relevant comparison, for the purposes of determining factual causation of loss, was with the position in the no-negligence world. If the defendant had valued non-negligently, and so the second loan facility had not proceeded, the claimant would have been exposed nonetheless to loss attributable to the existing indebtedness. The losses claimed by Tiuta were attributable to the existing indebtedness, namely, the monies advanced and already outstanding at the time of the new loan facility and were not caused by any negligence of the defendant in the November valuation.

4 Commentary The court granted summary judgment in favour of the defendant on the claim as it was currently pleaded. On the basis of the established case law, any loss attributable to the existing indebtedness was not caused by the alleged negligence. However, this does not in principle prevent the claimant from seeking to amend its particulars of claim, to rely on the value of a claim for any loss that would have been caused by negligence in the February valuation. Tiuta International Ltd (in liquidation) v De Villiers Surveyors Ltd [2015] EWHC 773 (Ch) 03

5 PI policy extends to claimant s disbursement loans In February this year, the Court of Appeal handed down judgment in the case of Impact Funding Solutions Ltd v Barrington Support Services Limited. The decision will be of interest to solicitors professional indemnity insurers. The court held that a professional indemnity insurer was obliged to indemnify solicitors who were liable to reimburse loans for disbursements on behalf of their clients. Background Impact Funding Solutions Limited (Impact) is a finance company which funds disbursements in actions brought by claimants. The claimants in the present case alleged work related hearing loss. Impact provided funding to cover disbursements by way of loans made to the claimants. The disbursements were to include, for example, expert medical reports required by the claimants in order to succeed. The relationship between Impact and the solicitors in this case, Barrington Support Services Limited (Barrington), was governed by a Disbursements Funding Master Agreement (DFMA). If the claim was successful, the cost of the loans would be recoverable from the defendant. If the claim failed, or settled on unfavourable terms, the costs would be recovered from the claimants (LEI or ATE) insurance. However, if such insurance was not available e.g. due to valid avoidance of the policy or denial of liability, the solicitors (rather than their clients) would be liable to Impact. The careful arrangements put in place fell apart because Barrington did not properly assess the merits of the claims pursuant to the CFAs. This failure was a breach of duty towards its clients but also constituted a breach of the DFMA. As a result, numerous claims were abandoned for reasons of limitation or because they were intrinsically unmeritorious. Unsurprisingly, the ATE insurers declined to pay the costs of the abandoned actions or to reimburse the loans made by Impact to pay for genuine disbursements. Barrington was successfully pursued by Impact for recovery of the loans. Impact obtained judgment in the sum of 581, but Barrington went into liquidation before the judgment could be satisfied. Impact then brought proceedings against Barrington s professional indemnity insurers, AIG, pursuant to the Third Parties (Rights Against Insurers) Act AIG was entitled to rely on any defence which it would have had if it had been sued by its insured, Barrington, and sought to rely on an exclusion clause. The policy s minimum terms and conditions provided that the insurer could exclude any trading or personal debt of any insured, or breach by any insured of the terms of any contract or arrangement for the supply to, or use by, any insured of goods or services in the course of the insured firm s practice. The High Court decision His Honour Judge Waksman QC held that AIG was entitled to rely on the exclusion clause broadly because Impact was providing a service to Barrington. Barrington was in breach of contract for the service and therefore came within the exception. The Appeal Court decision Lord Justice Longmore said that in order to assess the rival arguments, it was important to stand back from the detail and ask what was the essential purpose of the exclusion clause of the solicitors professional indemnity insurance. The Court of Appeal found that the main purpose of the clause was to prevent solicitors seeking indemnity for personal liabilities as opposed to professional obligations to clients. Personal liabilities would include liabilities pursuant to a photocopier or cleaning contract or a lease agreement for the solicitor s office premises. These obligations are to 04

6 be distinguished from the obligations which are incurred in connection with the solicitor s duty to his clients which are intended to be covered by the policy. The court held that Impact s loans were essentially part and parcel of the obligations assumed by a solicitor in respect of his professional duties to his client rather than obligations personal to the solicitor. They are inherently part of his professional practice and are assumed as an essential part of his duty is to advise the client as to the likelihood of success in intended litigation. A solicitor, who negligently advises his client that a claim is likely to succeed and causes a client to needlessly incur disbursements, will be liable to the client for those disbursements. Commentary The case confirms that solicitors professional indemnity insurers may be expected to indemnify a firm of solicitors where they are held liable to repay disbursements made by way of a loan by a loan company. The decision will be disappointing for insurers involved in the solicitors professional indemnity market as it appears to increase their potential liability. The judgment at least provides some clarity on what the courts will interpret is included in such debt or trading liability exclusion clauses. It is also a stark reminder to claimant solicitors of their duty to properly advise their clients on the prospects of success of a claim and that disbursements should not be incurred in litigation which is unlikely to succeed. In this case Impact was required to issue two sets of proceedings under the Third Parties (Rights Against Insurers) Act 1930, first against Barrington and the second against AIG. When the replacement Third Parties (Rights Against Insurers) Act 2010 finally comes into force, claimants will only need to issue one set of proceedings against both the insured and insurer. Impact Funding Solutions Ltd v Barrington Support Services Limited (Formerly Lawyers at Work Ltd) and AIG Europe Insurance UK Ltd (Formerly known as Chartis Insurance UK Limited) [2015] EWCA Civ 31 05

7 Ignore an invitation to mediate at your peril part II In our December 2013 issue, we used this caution in relation to our discussion of the decision in PGF II SA v OMFS Co 1 Limited. The recent decision in Laporte & another v The Commissioner of Police of the Metropolis is a further example of a successful defendant being deprived of his costs because of a failure to adequately consider mediation. Background The court had to determine the costs to be awarded following its judgment in proceedings brought by the claimants for damages for assault, battery, false imprisonment and malicious prosecution against the defendant commissioner. The defendant won on every substantive issue in the case. However, the claimants asserted that there should be no order for costs because the defendant refused to engage in ADR. In addition, the claimants relied upon the defendant s failure to reply to the letter of claim and upon errors in its schedule of costs. In response, the defendant not only sought an award of costs against the claimants but contended that they should be assessed on an indemnity basis and that a payment on account of 100,000 should be made. The defendant had, in the allocation questionnaire to the proceedings, declined the opportunity to attempt to settle. He failed to respond to a formal offer of mediation from the claimants despite a court order to do so. After further approaches, he offered to meet the claimants in a mediation hearing to narrow the issues for trial, but arrangements had still not been concluded nine months later when the defendant advised that it was no longer prepared to mediate. The defendant never provided any substantive reasons for the refusal to mediate. However, the refusal was partly because he believed that the claimants considered a money offer to be a prerequisite to compromise. The issue was therefore whether and to what extent the defendant was entitled to his costs. The High Court judgment The court cited CPR 44.2 which establishes the general rule that costs will follow the event and that the unsuccessful party will be ordered to pay the costs of the successful party. However, CPR 44 also provides that decisions relating to costs are in the discretion of the court allowing for exceptions to the general rule. In deciding what order to make, the court will have regard to all the circumstances including the conduct of the parties. This may include an unreasonable refusal to engage in ADR. The burden was on the claimants to show why there should be a departure from the general rule. In Halsey v Milton Keynes General NHS Trust (2004) the Court of Appeal acknowledged the potential benefits of ADR whilst recognising that, ultimately, the court had no power to order parties to engage in it. Robust encouragement might well be appropriate. Compulsion was not. A departure from the general costs rule was not justified unless it was shown that the successful party acted unreasonably in refusing to agree to ADR. The court considered the list of factors set out in Halsey when addressing this issue: (i) the nature of the dispute (ii) the merits of the case (iii) the extent to which other settlement methods had been attempted (iv) whether the costs of the ADR would be disproportionately high (v) whether any delay in setting up and attending the ADR would have been prejudicial and (vi) whether the ADR had a reasonable prospect of success. In PGF the Court of Appeal gave further guidance in cases where the winning side had failed to adequately articulate its earlier failure to engage in ADR. The guidance called for constructive engagement in ADR rather than flat rejection or silence. 06

8 The court considered the Halsey factors in this case as follows: 1. The nature of the dispute Despite the defendant s argument that the claimants were seeking to litigate a point of legal principle concerning the scope of police powers, the court held that this was not a case in which the nature of the dispute made it unsuitable for mediation. The claimants could have obtained some level of damages and there were issues of fact to be resolved upon which both parties ran the risk of adverse findings. 2. The merits of the case The fact that a party reasonably believes that he has a watertight case may well be sufficient justification for a refusal to mediate. In this case the defendant conceded that he was prepared to mediate up to the point that it was apparent that there was no scope for narrowing the issues. The defendant s prior apparent willingness to mediate was interpreted by the court to be a concession that the merits of the defence were not perceived to be so strong as to have justified a refusal to engage in ADR. 3. The extent to which other settlement methods had been attempted The defendant had made no offers to settle the case before ADR was suggested. 4. Costs of mediation The defendant conceded that the costs of mediation would not have been disproportionately high but contended that an offer to settle would have had to include a large costs liability to the claimants. In the court s opinion, this was potentially relevant to the prospects of success of mediation. 5. Potential delay There was no reason why mediation in this case would have had the effect of delaying the trial of the action. 6. Prospects of success The court in Halsey spent more time on this factor than the others. It is inappropriate for the court to confine itself to a consideration of whether, viewed objectively, mediation would have had a reasonable prospect of success. This was an unduly narrow approach, which focused on the nature of the dispute and left out of account the parties willingness to compromise and the reasonableness of their attitudes. The burden is on the unsuccessful party to show that there was a reasonable prospect of a successful mediation. The defendant s primary justification for refusing mediation was because its solicitor formed the view that the claimants would only accept a financial offer and that the defendant was unlikely to make one and therefore ADR was inappropriate. The court rejected this argument, noting that at no time had the defendant excluded the possibility of making a money offer or the claimants insisted on it being a precondition. On the evidence before it, the court was satisfied that there was a reasonable chance that ADR would have been successful in whole or in part. Having considered each of the factors and having regard to other circumstances and arguments raised, the court found that the defendant failed without adequate (or adequately articulated) justification to engage in ADR, which had a reasonable prospect of success. That would therefore impact on the exercise of the court s discretion as to costs. Taking into account the defendant s other conduct, including a failure to respond to the letter of claim, the court awarded the defendant only two thirds of his costs against the claimants to be assessed on the standard basis. Commentary This case is perhaps slightly unusual because the defendant was ordered by the court to respond to the claimants formal offer of mediation. The defendant failed to do so and this may have had a bearing on the outcome. Nevertheless, the case is a further reminder that a party cannot simply refuse to engage in ADR without providing adequate reasons for that refusal. The factors set out in Halsey should be borne in mind when articulating any refusal to engage in ADR and those reasons should be set out clearly. Laporte & another v The Commissioner of Police of the Metropolis [2015] EWHC 371 (QB) 07

9 Policyholder succeeds with implied terms in insurance contract Rathbone Brothers plc & Michael Paul Egerton Vernon v Novae Corporate Underwriting Limited & Others The appeals in this case concerned disputes about the construction and effect of the excess layer of a professional indemnity policy issued to Rathbone Brothers plc by the members of Lloyd s Syndicate 2007 and other underwriters for the 2008 year of account. Background The first claimant, Rathbone Brothers plc (Rathbone plc), is a substantial international group whose trust business included the management of family trusts for wealthy clients. The disputes arise out of litigation before the courts of Jersey brought by beneficiaries of a discretionary trust set up by the late Mr Jack Walker, an industrialist and for many years chairman of Blackburn Rovers FC (the Walker Trust). The second claimant (PEV), is a solicitor and was a trustee of a substantial number of trusts, including the Walker Trust. By an agreement dated 31 March 2000 (the employment contract), PEV became an employee of Rathbone Trust Company Jersey Limited (Rathbone Trustees). On 31 July 2003, Rathbone Trustees and Rathbone plc entered into what was entitled An Instrument of Release and Indemnity with PEV (the Rathbone indemnity). This indemnified him with respect to certain liabilities arising from the performance of his duties. The indemnity had a limit of 40m per event excluding fraud and wilful misconduct. PEV ceased to work full time on 30 June 2007, whereafter he became a consultant of Rathbone Trustees by a number of consecutive agreements on materially the same terms, commencing with that of 3 August 2007 (the consultancy agreement). Walker Representatives Limited became the corporate trustee of the Walker Trust in Its directors were partners or directors of Rathbone Trustees and included PEV. PEV had been a personal trustee of the trust since Rathbone Trustees had detailed involvement in all aspects of running the trust. The fees for their services did not distinguish the different functions of personal trustee, corporate trustee, and administration. As an employee of Rathbone Trustees, PEV was remunerated on the basis of the employment contract by a fixed salary. He had to give credit to Rathbone Trustees in respect of any remuneration he received by virtue of being a personal trustee of the Walker Trust. This arrangement continued when he became a consultant. PII cover There was no specific reference in the Rathbone indemnity to professional indemnity insurance, but Rathbone Trustees did in fact provide insurance for its staff. However, in the consultancy agreement made in August 2003 there was the following express clause:- Rathbone Trustees will provide you with professional indemnity insurance (on a similar basis to that provided to Rathbone Trustees staff) for work done and services provided to specified clients and any clients for which Rathbone Trustees receive appropriate fees. Rathbone plc took out PII cover for itself and its subsidiaries, including Rathbone Trustees. The first layer of 5m was with AIG. The excess layer was placed with the defendants, limited to 45m. Proceedings were brought in Jersey. The beneficiaries alleged breaches of professional and fiduciary duties of the trustees due to poor investment decisions. 08

10 PEV and Rathbone plc subsequently sought cover under the professional liability policy. AIG as primary insurer accepted cover (although placing a reservation in the light of those proceedings), but the defendants as excess insurers denied any cover. The excess insurers contended that PEV was not covered under the policy, because he was not a paid employee when acting as a personal trustee and consultant, and that even if he was, it would only be liable after the contractual indemnity had been exhausted, because the insurance only applied excess over insurance and indemnification available from any other source. Furthermore, the insurers claimed to be entitled to be subrogated to PEV s contractual right to the indemnity. PEV and Rathbone plc brought proceedings to establish the PII cover against continuing substantial defence costs and against liability in the Jersey proceedings, if such was established at the Jersey trial. The main issues were: (i) whether there was cover for PEV under the policy; (ii) whether, by virtue of an excess clause, PEV had to first exhaust his remedies otherwise than against the insurers; and (iii) whether the insurers had a right of subrogation or contribution. High Court judgment Burton J held that PEV could recover under the policy and that the excess insurers were not entitled to rely upon the excess clause. However, he held that they were subrogated to PEV s right to sue on the indemnity once they had paid out under the policy. The excess insurers appealed the two findings which went against them and Rathbone plc appealed the finding that the insurers had an effective right of subrogation against them. Court of Appeal judgment The appeals were dismissed save on the subrogation issue where the appeal was upheld. The court found as follows on the main issues: 1. Whether there was cover for PEV under the policy Under the excess insurance policy the insured was defined as being any insured company or any insured person and an insured person was further defined as a paid employee (full time, part time or temporary) working under the direct control or supervision of an insured company in the performance of professional services On a proper construction of the policy, PEV was a paid employee working under the direct control or supervision of an insured company, both before and after The provision of trustee services both corporate and personal was a major part of Rathbone plc s business and one of the principal reasons why it sought PII. The excess insurers were undertaking to cover liabilities resulting from the exercise of those functions, notwithstanding that the employer could not directly control their exercise. In any event, there was quite extensive supervision, even under the consultancy agreement, in relation to the way in which the duties as a personal trustee were performed Accordingly, in his capacity as a personal trustee of the Walker Trust, PEV was an insured person in respect of the wrongful acts alleged in the Jersey proceedings under the policy for the relevant period. 2. Whether PEV had to first exhaust his remedies otherwise than against insurers The excess clause of the policy provided as follows: Insurance provided by this policy applies excess over insurance and indemnification available from any other source. The insurers submitted that this allowed them to refuse to pay out on the policy until PEV had exhausted his claims under the Rathbone indemnity. The court held that PEV was not required by the excess clause to proceed first against Rathbone plc under the indemnity. If the insurers could take advantage of an indemnity given by one co-insured to another, this would significantly undermine the protection afforded by the policy. 09

11 Employers frequently give indemnities to directors and employees for liabilities arising out of their negligent conduct. A major reason for taking insurance is to protect against the risks of incurring liability as a consequence of such negligence. It would require very clear language to treat the indemnity granted by the insured company to be the primary source of cover ahead of the insurance for which the insured company has paid. 3. Whether the insurers had a right of subrogation or contribution The right of subrogation was described by Lord Bingham of Cornhill as follows in Caledonia North Sea v British Telecommunications plc (2002): an insurer who has fully indemnified an insured against a loss covered by a contract of insurance between them may ordinarily enforce, in the insurer s own name, any right of recourse available to the insured: the right of underwriters is merely to make such claim for damages as the insured himself could have made... Commentary The judgment will be welcomed by PII policyholders and particularly by those acting as professional trustees. In this case the Court of Appeal looked beyond the strict wording of the terms of the insurance policy to ascertain the intention of the parties. In doing so, the court went so far as to imply terms, but stated that it was simply making express what the parties must have intended, to reflect the commercial reality of the insurance policy. To do otherwise would have defeated the purpose for which the insured had paid the insurance premiums. Rathbone Brothers plc & Michael Paul Egerton Vernon v Novae Corporate Underwriting Limited & Others [2014] EWCA Civ 1464 The court held that the insurers could not exercise any right of subrogation so as to be indemnified out of the Rathbone indemnity. The court should imply a term that the excess insurers would not seek to be subrogated to PEV s rights against Rathbone plc under the Rathbone indemnity. It could not have been the intention of the parties that insurers should be able to enforce rights of indemnity against a co-insured where the co-insured was indemnifying the very same risk as the insurers. It would undermine the purpose of the policy to treat the indemnity as the primary source of protection. The Rathbone indemnity was to be only a secondary source of protection for PEV. In any event the exercise of a right of subrogation was precluded by the terms of the indemnity. A term should be implied into the indemnity contract to the effect that it was intended to provide supplemental protection only, once the claim against the insurance company had been exhausted. 010

12 Other publications If you would like to receive any of the below, please indicating which you would like to receive. Weekly: Legal Watch: Personal Injury Monthly: Legal Watch: Property Risks & Coverage Quarterly: Legal Watch: Counter Fraud Legal Watch: Disease Legal Watch: Health & Safety Legal Watch: Professional Indemnity Contact us For more information please contact: Karen Scott, Knowledge Management Lawyer T: E: Simon Beckwith, Partner T: E: To unsubscribe from the Legal Watch: Professional Indemnity newsletter please Peter Court, Partner T: E: Jeremy Newman, Partner T: E: 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: OC Registered office: 12 Dingwall Road, Croydon, CR0 2NA. Parabis Law LLP is authorised and regulated by the SRA.