What is it?

A new pilot scheme requiring parties in money claims valued at up to £10,000 to take part in a compulsory free one-hour mediation appointment, provided by HMCTS' Small Claims Mediation Service – before the claim can then proceed to Court if no settlement is reached. 

When does it apply?

It came into force on 22 May 2024 and runs until 21 May 2026. 

However, much like the Disclosure Pilot, do not expect this to go away, as it is anticipated to expand to include more claims – the MOJ says it has not ruled out mandatory mediation in higher value County Court claims.  

Which claims are suitable?

The pilot targets claims started in the Country Court and which would normally be allocated to the small claims track.  Claims must meet the following criteria to be caught by the pilot:

• Money claims - so claims in which the only remedy claimed is a judgment for a specified sum of money;
• Small Claims – valued at no more than £10,000;
• No more than 2 parties;
• Claims made on paper or issued through Money Claims Online (MCOL) or through Secure Data Transfer (SDT). Cases submitted through Online Civil Money Claims (OCMC) are going to be introduced later. Until then, these cases will be opted-in to mediation, but with the ability for parties to opt out.

The pilot will not apply in the following circumstances: 

• Complex claims (eg professional negligence claims) are excluded; 
• Road Traffic Accident and Personal Injury Claims are excluded; and
• Mediation will not take place where there are safeguarding concerns, eg where vulnerable parties are involved. 

The MOJ guidance provides examples of suitable claims, such as businesses recovering debt from customers, individuals contesting parking tickets, or disagreements over payments for goods and services – such as a homeowner suing builders for not completing work as agreed.

What actually happens?

Once pleadings have closed and the parties have filed their Directions Questionnaire, the claim will automatically be referred to the mediation service. 

The claim will be stayed for 28 days to allow time for the mediation appointment to be arranged. 

At the mediation appointment, the mediator will speak to each side separately and work between the two to find a solution each side can agree on. 

Crucially, the parties are not required to reach a settlement at mediation, but it provides an opportunity to discuss a potential resolution. 

If an agreement cannot be reached, the case will progress – potentially to trial. 

If the claim is settled at the mediation, the proceedings will automatically be stayed with permission to apply for judgment or restoration if the settlement goes unpaid – unless the parties agreed the claim is to be discontinued or dismissed. 

What happens if a party refuses to attend?

If a party does not attend the required mediation appointment, without good reason, the judge may apply a sanction at the final hearing. This could include a fine, covering the cost of the wasted mediation appointment or, in extreme circumstances, having their claim or defence dismissed.

Costs are not usually awarded on the small claims track, unless a party has behaved unreasonably (other than fixed costs). However, failure to attend the mediation appointment is another factor a judge can take into their consideration when exercising their discretion on costs – so could be considered unreasonable behaviour. 

That being said, the Practice Direction specifically states that "A party’s rejection of an offer in settlement will not of itself constitute unreasonable behaviour under paragraph (2)(g) but the court may take it into consideration when it is applying the unreasonableness test." It is not clear how this would apply in the context of a party attending mediation and refusing to engage properly or declining reasonable offers of settlement. 

Why has this been introduced?

In short, to free up Court time. The MOJ say c. 85,000 Small Money Claims progressed through the County Court in 2022, but parties in only 20,000 of these cases opted into voluntary mediation – of which HMCTS was able to help settle more than half. 

It is thought compulsory mediation will reduce the burden on the Court and is anticipated to free up an extra 5,000 judicial sitting days per year – which can be used to focus on more complex cases. 

Is it a good idea?

The Law Society raised concerns about access to justice, worried that this would create a two-tier system: where some parties can access justice and others can only access a means to end a dispute. The introduction of this proposal as a pilot appears to be a result of those concerns. 

The above said, it is only compulsory to attend the mediation, it is not compulsory to reach a settlement. So, in low value disputes that really are just about the money, it may be that an early mediation at which both parties are asked to consider what they may accept in settlement could be beneficial – particularly if those parties are unrepresented. 

One concern will be whether parties truly engage in the mediation process or whether they simply attend as a box ticking exercise. Only time will tell. 

More Information

For our detailed analysis on the planned introduction of compulsory mediation, please see our previous article.

For the new rules themselves, please see Practice Direction 51ze  – Small Claims Track Automatic Referral To Mediation Pilot Scheme.

It may now be a rapidly fading memory, but it is only four years ago since the global Covid-19 pandemic struck and the UK, along with many other countries around the world, went into lock down.  With Covid dramatically affecting every facet of our daily lives, many businesses struggled to keep afloat.  In an effort to secure jobs, in March 2020, the government introduced the Coronavirus Job Retention Scheme, a furlough scheme which provided grants to employers to pay 80% of staff wage and employment costs each month, up to a total of £2,500 per person per month (the Scheme).  Under the Scheme, any entity with a UK payroll, including businesses, charities and public authorities, could apply for a grant so long as certain conditions were met.  The Scheme ran until September 2021.  During that time, the Scheme saw a staggering 11.7m employees furloughed with a cost of £70bn [House of Commons Library – Coronavirus Job Retention Scheme: statistics].   

The government also introduced a loan scheme in May 2020, in the form of the Bounce Back Loan Scheme (the BBLS), which was designed to enable businesses to access finance. The BBLS was available through a range of accredited lenders. Such lenders could provide a six-year term loan from £2,000 up to 25% of a business' turnover. The maximum loan amount was £50,000.  One stipulation in the loan agreement was that the money received could only be used to benefit the business, it could not be utilised for personal use.  Over 4.5 million loans were provided totalling approximately £47bn [Covid-19 loan guarantee schemes performance data as at 30 June 2023].  In its BBLS update, the National Audit Office (NAO) reported in 2021 that because of the speed at which the BBLS was launched, the government failed to put in place sufficient anti-fraud measures and proper checks and balances.  For example, lenders were not required to carry out credit or affordability checks on applicants  [NAO The Bounce Back Loan Scheme: an update 03.12.21].  The BBLS provided the lender with a full (100%) government-backed guarantee against the outstanding balance of the facility (both capital and interest).   

In 2023, the NAO declared that most public bodies do not know how much fraud they have fallen victim to.  In the two years before the outbreak of the pandemic, the NAO estimated the sums attributable to fraud committed against the government was in the region of £5.5bn.  The NAO estimated that, as at the end of March 2021 (the BBLS closed to new applicants in March 2021), fraud associated with the BBLS was in the region of £4.9bn [NAO The Bounce Back Loan Scheme: an update 03.12.21].      

Government data (updated in November 2023), indicates that some £1.65bn of the loans made under the BBLS were obtained fraudulently.  As of June 2023, the government has had to repay to lenders (as guarantor under the BBLS) £6.89bn, some 14.52% of the total loans made under the BBLS.  Of that sum, £1.27bn has been paid to lenders in relation to suspected fraudulent loans  [COVID-19 loan guarantee schemes performance data as at 30 June 2023].    

Many commentators are of the view that the government lacked capacity to properly police the BBLS.  When the BBLS was introduced, there were just two full-time staff in the government's counter-fraud function [NAO 2023 report].  Given the substantial sums underwritten by the government, in 2020 the National Investigation Service (NATIS), which investigates serious crime where public authorities, or the funds they manage, are targeted, was tasked with investigating BBLS fraud, but it was considered by many to be seriously underfunded.  In November 2023, the government provided an update on the BBLS performance data [Bounce Back Loan Scheme performance data as at 31 July 2022].  As at that time, NATIS had opened 273 investigations into suspected BBLS fraud since September 2020, the value was reported as £160m and a total of 49 arrests made.  In 2021/22, NATIS reportedly recovered £3.8m and £3.5m in 2022/23.  [Department for Business and Trade Departmental Overview 2022-23].  However, such a low level of recovery is disappointing.  Although referred to as a law enforcement organisation [NAO The Bounce Back Loan Scheme: an update 03.12.21], NATIS is a council department which used a police web domain and police email address, notwithstanding that it has no policing powers.  This has now changed to reflect the team's status as a government body.                  

Enforcement

Perhaps not surprisingly, given the above figures, abuse of the BBLS is a key priority for the Insolvency Service with Dean Beale, Chief Executive at the Insolvency Service, stating that they are "determined to use all [their] available powers to remove rogue company directors from the corporate arena".  Beale has confirmed that the Insolvency Service has dedicated teams whose remit is to act against those who provided misleading information and took money they were not entitled to under the BBLS.  

The Insolvency Service has a range of enforcement options available to it which it can deploy against those who misused the BBLS, including winding up companies, seeking director disqualifications and criminal prosecutions.  The Insolvency Service was provided with additional powers enabling it to investigate company directors of dissolved companies, (in addition to directors of companies that are on the official register at Companies House), in 2021 with the introduction of the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021.  This means that former directors cannot avoid being held personally liable to repay government backed loans simply because their company has been dissolved.    

The Insolvency Service has reported that in the last year 831 company directors have been disqualified for misuse of coronavirus business support schemes.  This is an increase of 80% on the previous year, in which 459 directors were disqualified.  The Insolvency Service started investigating coronavirus business support scheme abuse in 2021 and in that year, 140 directors were disqualified.  To date, a total of 1,430 directors have been disqualified.  

Between 1 April 2022 and 31 May 2023, the Insolvency Service secured:

• 89 criminal charges;
• 9 successful prosecutions;
• £50,000 in criminal compensation orders;
• £230,000 in voluntary criminal repayments;
• £231,000 in civil compensation orders;
• £449,000 in voluntary civil repayments; 
• £300,000 OR recoveries; and 
• 116 compulsory winding-up orders from petitions presented by lenders under the BBLS. 

From a perusal of the Insolvency Service's news and communications service, it has taken extensive action against those who abused the BBLS, including against:

• An accountant who took out three BBLS loans despite only being entitled to one loan.  Although it was the company which acquired the loans, he was disqualified as a director and is prohibited from running a company for 12 years; he was also required to repay £75,000.
• A plumber who used the loan monies he obtained under the BBLS for personal use, including paying for a holiday, gambling and investment in his father-in-law's business.  He was successfully prosecuted under section 2 of the Fraud Act 2006 on two counts of fraud by false representation.
• A couple were successfully prosecuted and sentenced to 24 months imprisonment, suspended for 18 months, for fraudulently obtaining a £30,000 loan under the BBLS.
• Two business owners who were disqualified as company directors after receiving BBLS loans for two separate businesses having exaggerated previous trading turnover.  

Comment

The Insolvency Service has not finished investigating suspected BBLS fraud.  Directors and former directors of companies which obtained loans which they were not entitled to under the terms of the BBLS, face potential investigation and possible prosecution where fraud is suspected.  The Insolvency Service is determined to take action against those who abused the BBLS.

For further information, please contact James Wickes / Adam Craggs.

The growth of "smart" products that can connect to the internet has grown significantly over the past 10 years and the UK government estimate that there could be 50 million connectable products worldwide by 2030, and on average there are currently 9 in each UK household.

An increased reliance on these products has led to plenty of examples where the security of connectable products has been compromised by hackers. The UK government has created a new security regime which will introduce more stringent measures to reduce the cyber security risks of these smart technologies in consumer products.

New Regime

The Product Security and Telecommunications Infrastructure Act 2022 and The Product Security and Telecommunications Infrastructure (Security Requirements for Relevant Connectable Products) Regulations 2023 ("the Regulations") will come into force on 29 April 2024.

The new regime will apply to products, intended for use by consumers, that can connect to the internet or a network and will includes products such as:

• Home automation and alarm systems;
• Connected cameras;
• Smart home assistances;
• Connected safety products, including smoke detectors and door locks.

The following products are exempted from the Regulations because the UK government believes there are already adequate protections for security, including:

• Computers;
• Smart meters
• Charge points for electric vehicles
• Medical devices

There are separate obligations for manufacturers, importers and distributors in order to comply with the new regime:

Failure to comply

The Office for Product Safety and Standards ("OPSS") will be responsible for enforcing the new regime which sets out the different types of enforcement that will be available to the OPSS:

• Compliance notices
• Stop notices
• Recall notices
• Financial penalties. up to the greater of £10 million or 4% of an organisation's qualifying worldwide revenue
• Informing the public about compliance failures; and
• Publishing details about enforcement action taken.

The current enforcement policy outlined by the OPSS indicates that it will take into account the infancy of this regime when considering the most suitable enforcement action to take. It is expected that any enforcement action will likely be determined by the specific facts of each case and the potential impact of any breach.

How best to prepare?

For those businesses that fall under the new regime, as either a manufacturer, importer, or distributor, they will need to ensure that any existing and future products placed onto the UK market are compliant with the new regime from 29 April 2024, and monitor any continued developments which may impact the way in which they comply with the regime.

This is a first instance decision, and all of these cases turn on their own facts, but it is a reminder of some important factors in defending asbestos claims:

• The burden of proof is on the claimant to establish exposure to asbestos dust and caution should be adopted in assessing witness evidence relating to events several decades ago.
• A claimant must prove that there was material exposure and that it was in breach of the standards of the day.  Just establishing that there was dust produced by works involving asbestos materials is not enough.
• This does not mean that all cases where the only witness evidence is from the claimant/deceased are defendable. Witness evidence must be carefully considered as to whether the allegations are plausible in and of themselves but also as compared to any evidence the defendant has. In this case, the defendant was able to provide some documentation about the nature of the works undertaken, which cast further doubt on the claimant's allegations. It is often the case that a defendant cannot adduce any evidence and those cases will continue to be more difficult to defend.
• Employers, especially local authorities and public bodies, will continue to be targeted even when there was greater exposure elsewhere. In this case, the majority of exposure came from the deceased cleaning her husband's overalls. Presumably, the deceased's husband was either self-employed or his employer no longer exists so there was no paymaster to meet any claim. Employer's liability cover is more easily traceable, even when a company has dissolved, and any inheritance/transfer of liabilities from former local authorities/public bodies will be a matter of public record.
• Choose your expert wisely. Faith in your chosen expert is vital in allowing you to accurately assess the merits of your case with the requisite confidence that their evidence will be preferred at any trial. It appears the claimant's expert did not fully interrogate the evidence in assessing dose in their written evidence, leading to them having to make concessions on cross examination.

For more information on the contents of this article, please contact Chris Gower or Thom Lumley. 

The session, led by Samantha Ridgewell, was a treasure trove of advice, aimed at enhancing our networking prowess in today’s hybrid work landscape. To hear about our next "Rise with RPC" event please sign up here.

Here’s a distilled version of the top tips shared, each designed to be an actionable takeaway to apply in your professional journey.

1. Embrace PIE for career advancement

• Performance: Excel in your role; it's the foundation.
• Image: Cultivate your personal brand; ensure it reflects how you wish to be perceived.
• Exposure: Make yourself known; visibility within your professional circle is crucial.

This framework underscores the essence of being recognised for opportunities.

2. Expand your comfort zone gradually

View nervousness as an indicator of growth opportunities. Stretch your comfort zone by embracing new challenges, starting small to gradually increase your confidence and capabilities. For example, try putting yourself forward to speak during internal meetings, giving you the confidence to excel when taking on client presentations.

3. Tailor your networking approach

• Extroverts: Leverage your energy from interactions to make new connections.
• Introverts: Utilise your reflective nature to engage in meaningful conversations, even if it means taking time to recharge afterwards.

Strategies for initiators and receivers

• Initiators: Make eye contact and approach with confidence.
• Receivers: Position yourself strategically (e.g., near food or coffee) to be approachable and initiate conversations with a smile.

4. Balance wide and deep networks

Cultivate a wide network for breadth and a deep network for meaningful, supportive relationships. Both are vital for professional growth and personal satisfaction.

5. Master conversational threading

Enhance interactions by finding common ground quickly. Use open-ended questions and share stories to make conversations richer and more engaging. The joy of this is that people will only ask you a handful of questions at events, which means that you can even prepare your answers to an extent.

6. Utilise LinkedIn effectively

Most people don't like posting on LinkedIn as they don't like the idea of self-promoting, this means that the bar is actually set incredibly low. Increase your visibility with regular posts, even simple updates can significantly broaden your exposure, much more than you would be able to at a networking event.

The aim is to post monthly, remembering to always include pictures to make it visually exciting.

7. Networking preparations and follow-up

Before the event, familiarise yourself with attendees and plan your attire for confidence and comfort. If you are nervous about not knowing anyone, arrive early as the hosts are there to welcome you and introduce you to people. Follow up with new connections promptly, utilising LinkedIn or traditional methods like business cards.

8. Reading body language

Learn to read the room by observing body language, particularly the direction of feet, to identify open groups or individuals for initiating conversations.

These tips, derived from the insights shared by Samantha Ridgewell, are designed to be straightforward and actionable, allowing you to implement them easily into your networking strategy.

As we look forward to our next event, we hope these tips will empower you to build and strengthen your professional network, opening doors to new opportunities and collaborations. We hope to see you at our next Rise with RPC event!

For those unable to attend the event, this blog covers the key points raised during the panel session, providing practical steps for finding joy in your job and top tips on how to handle difficult situations and salary negotiations.

Please sign up here to join our mailing list and receive an invite to the next event.

Tips on finding 'joy in your job'

Align work with personal values

Finding joy in your job often aligns with personal values and goals. Reflect on what aspects of your job you find most fulfilling and seek opportunities that amplify those elements.

Professional growth

Continuous learning and development are key to maintaining enthusiasm and engagement in one's career. Look for opportunities within your organisation to expand your skill set, through formal training programmes, cross-departmental projects or mentorship relationships.

Build supportive relationships

The significance of fostering positive relationships at work is paramount. Engaging with colleagues, finding mentors and participating in networking events can provide a sense of community and support, making daily challenges more manageable and enjoyable.

Celebrating successes

Regularly acknowledging and celebrating achievements is crucial for morale. It helps to maintain motivation and recognise the value of your work amidst the hustle of professional life. Take a few moments every day to think about something that has gone well, or where your achievements have been recognised.

Navigating difficult conversations

Prepare by outlining key points to seek a discussion, not a confrontation. Maintaining a positive environment is crucial. Think about how what you say will land with the person to whom you will be saying it, and make sure you adopt the right tone to achieve a positive impact.  Follow up with an email to document the conversation, ensuring clarity and accountability.

Tips for achieving a work-life balance

Routine

To achieve work-life balance, consider integrating structured physical activity into your routine, such as having regular walks or other physical activities, which offer both exercise and a mental refresh.

Diary management

Effective diary management is crucial: schedule your work and personal time with clear cut-offs to avoid burnout, including breaks to recharge during the day.

Digital detox

Embrace periods of digital detox, such as enjoying moments without your phone, to foster presence and spur creativity. These don't need to be long periods of time - simply deciding to go phone-free over lunch can help maintain a balanced and healthy lifestyle, ensuring both professional productivity and personal well-being are prioritised.

Pressure curve

Managing stress effectively involves understanding the pressure-performance curve, which illustrates how performance varies with different levels of stress. Initially, too little pressure might result in boredom, but as pressure increases, performance peaks, indicating an optimal stress level. Recognising when pressure becomes excessive and performance starts to decline is crucial. Identifying this "dipping point" allows you to implement coping mechanisms, to momentarily step away and reduce stress. This awareness and proactive management of stress levels encourages a healthier work-life balance and personal well-being.

Tips for negotiating your salary

When it comes to salary negotiations, the panellists shared a wealth of strategies rooted in preparation, communication, and understanding one's worth.

• Research and benchmarking

  Start by gathering data on average salaries for your position within the industry and region. Utilise platforms like Glassdoor and LinkedIn to get an idea of what your peers are earning. This step establishes a factual basis for your negotiation.
  
  

• Articulate your value
  Each panellist emphasised the importance of clearly articulating your contributions and impact on the organisation. Prepare a list of your achievements, highlighting how they align with the company's goals and objectives. Whether it's leading successful projects, exceeding targets, or introducing efficiencies, accomplishments form the foundation of your negotiation.  
  
  

• Practice negotiation scenarios
  Role-playing negotiation scenarios can significantly boost your confidence. Practice with a friend or mentor, focusing on keeping the conversation positive and constructive. Anticipate objections and prepare your responses to ensure the discussion remains focused on your value and contributions.
  
  

• Consider non-monetary benefits
  Sometimes, there's limited flexibility on salary. Consider negotiating benefits that can enhance your job satisfaction and work-life balance. Examples include flexible working arrangements, additional vacation time or professional development opportunities.

Background 

Standard provisions and boilerplate language within the general conditions of policy wordings, by definition, don’t tend to attract significant scrutiny when reviews are conducted, or new products designed. The logic being, understandably, that the thinking has already been done. 

Once in a while a case comes along that gives us reason to reflect on what these clauses do, and how they might interact with other aspects of the policy. The case of Dassault has made us look with fresh appreciation at anti-assignment conditions and the potential for them to interact with the operation of subrogation, a central tenet of insurance law and one that it is fundamental to the nature of the gift of indemnifying loss. 

Subrogation is a form of assignment. It operates at law, rather than by someone having to do something. It could be characterised as an involuntary assignment. 

Hold that thought… let us explain the facts of Dassault. 

The facts of the Dassault case

In March 2015, Dassault Aviation SA ("Dassault"), contracted with Mitsui Bussan Aerospace ("MBA"), to supply two aircraft, for use by the Japanese Coast Guard. That contract stipulated that any disputes would be arbitrated in London and further, that the contract was not to be “assigned or transferred in whole or in part” by either party without the consent of the other. 

To mitigate the risk of late delivery, MBA took out insurance cover with Mitsui Sumitomo Insurance Co Ltd ("Mitsui"), which, under Japanese law, allowed Mitsui to step into MBA's shoes and pursue third-party claims upon making a payout under the policy. This automatic transfer of rights, or subrogation, later became the crux of the dispute when delivery delays propelled Mitsui into arbitration against Dassault.

When the aircraft delivery was delayed, Mitsui paid MBA's loss claim and, standing in the shoes of their insured, initiated arbitration proceedings against Dassault in London under the sale contract. 

The tribunal held that the non-assignment clause in the sale contract did not apply to involuntary assignments or those operating at law, and that the transfer of rights from MBA to MSI was an example of the latter. The tribunal determined it had jurisdiction over the claim and it went on to make an award against Dassault.  Dassault subsequently sought to set aside the tribunal decision. 

High Court Decision

The High Court was tasked with determining the jurisdiction of the arbitral tribunal, by considering the scope of the anti-assignment clause. Cockerill J commented, "instinctively, there is a feeling that a transfer in the context of insurance should not be caught by such a proviso."²

Some commentators expressed surprise when they got to the end of the judgment, because rather than making a finding that statutory assignments would not be caught by an anti-assignment clause (giving teeth to the instinct articulated by Cockerill J) instead, the finding that there was no such arbitral jurisdiction was based instead upon the finding that the transfer of rights from MBA to MSI was a voluntary one, and thereby not an "operation of law.

Cockerill J found a key distinction should be drawn between a voluntary and an involuntary transfer of rights, with the anti-assignment clause in the contract as precluding the former, but not the latter.  It was held that the transfer was voluntary, with the reasoning that MBA might have chosen not to insure; MBA might have chosen a policy not governed by Japanese law which conferred a right of action on Mitsui in its own name; MBA might have required the removal of the policy provisions conferring a subrogation right upon Mitsui; and MBA might have chosen not to make a claim against Mitsui. Any one of those acts, it was held, would have prevented a subrogation action and therefore means that the subrogation was a prohibited form of assignment.³

Court of Appeal decision

The Court of Appeal, in overturning the High Court and determining that the arbitral tribunal did have jurisdiction, rejected the binary analysis of voluntary versus involuntary transfer, focusing instead on the essence of the assignment mechanism. 

Sir Geoffrey Vos stated that "(Cockerill J) thought it was an admissible interpretation …. to regard a transfer effected by operation of law under article 25 as a transfer by MBA". The question to ask was not the degree of voluntariness in bringing about an assignment, but rather the mechanism of the assignment itself. The Court of Appeal determined that the transfer was not made by MBA, but by an operation of law as per Article 25 of the Japanese Insurance Act.  

Having made that finding, the Court of Appeal then took an objective view of the language in the clause and found it to be clear and unambiguous in only prohibiting assignments made by a party to the sale contract. Simply put, the assignment did not breach the no-assignment clause, because it was not one that fell within the ambit of that clause as a transfer of rights by a party to the contract.

Given this line of reasoning, the Court did not have to (but neither did it take the opportunity) to affirm the existence of any general principle on the interaction of subrogation and anti-assignment clauses. Readers may point to a further missed opportunity, with the court opting to not consider the effect on the case were the subrogation under English law, as opposed to Japanese.  

However, the Court was not entirely silent on the point as it rejected the existence of any general principle applicable to the interpretation of non-assignment clauses – "the old insolvency cases did not enunciate a general principle applicable to the interpretation of non-assignment clauses in commercial contracts"⁴ - and emphasised that this is a matter of contractual interpretation⁵.  

The judgment turned on the key words, "by any party" as qualifying the type of assignment to which the clause applied. Where an assignment was not by a party, ostensibly, they didn’t need to go any further. There is real elegance in the simplicity of this reasoning. Of course, this leaves the door ajar for a different finding, where the underlying contract expressly prohibits any kind of assignment, including at law.  

Lessons learned for policy drafting

It is worth highlighting that the anti-assignment provision at the heart of this litigation was contained within a third party commercial contract, not an insurance policy (although insurance was part of the story). 

When drafting any provision that prohibits a particular thing, the temptation is to do a copper-bottomed job and we need to be cognisant of that entirely relatable bias when drafting but also, reviewing contracts. This is amplified particularly in the context of boiler plate language, which, because of its very nature, doesn’t routinely get looked at with 'fresh eyes'.  Accordingly, it is highly likely that there will be boilerplate conditions that are drafted in a wider way (perhaps silent as to who or how the assignment is affected, or otherwise expressly providing that any means of assignment is subject), that could give rise to a different outcome.

Where the anti-assignment provision is in a contract to which insurers are not a party (like in the facts of Dassault), the levers insurers can pull to protect their rights are restricted to those that contractually limit the behaviour that could give rise to a waiver of, or prejudice to, an insurer's rights of subrogation and to provide a remedy (and crucially, an alternative means of recovery), should subrogation constitute an impermissible assignment. As such, aside from underwriting due diligence at proposal stage, the subrogation conditions within the policy will be important. Because subrogation is something that happens at law, it is not always expressly articulated. 

Daydreaming for a moment upon an alternative set of facts - one where the anti-assignment provision is contained within an insurance wording - there is more that can be done. Where the competing provisions are in the same document, the Court would look to find a commercially sensible interpretation that accommodates both provisions, taking into account the contract as a whole. Accordingly, the push-pull of subrogation provisions (silent or express) verses any contractual overrides of anti-assignment, will be the battleground.  That exercise wasn’t necessary in Dassault, precisely because the focus was on the interpretation of the anti-assignment language only.

Where a policy contains a condition that purports to prohibit the operation of subrogation every effort would likely be made to give effect to any express subrogation provisions, given the assumption that that language is included for a reason. This is a good reason to include these rights.

However, where a policy is silent on subrogation (and the Court has to fall back on this being 'as of right', operating, at law) a widely drafted anti-assignment condition could interfere with that. Ideally, any anti-assignment should be limited to assignments by the parties, or to third parties without permission of the insurer, or otherwise expressly carve out that operating at law, including subrogation.

So, as is often the case with wordings, and a theme we often return to, an issue with drafting is rarely limited to one provision and an omission can be just as potent. Context is key. There are various points of reference within a wording where different clauses need to speak to each other, and the art of good drafting is making this happen. The interaction of subrogation and anti-assignment conditions may just be a new one, to add to the ever-evolving checklist.  

1. Dassault Aviation SA v Mitsui Sumitomo Insurance Co Ltd [2024] EWCA Civ 5
2. Dassault Aviation SA V Mitsui Sumitomo Insurance Co Ltd [2022] EWHC 3287
3. Ibid. 
4. Dassault Aviation SA V Mitsui Sumitomo Insurance Co Ltd [2022] EWHC 3287 (paragraph 20)
5. Quadrant Chambers article

What is the inquiry all about?

Importantly, on 17 January 2024 several representatives from both the FCA and the Prudential Regulation Authority (the PRA) gave oral evidence as to whether enough is currently being done to tackle misogyny and the "old boys club" culture within the financial services sector. This comes just three months after the FCA published its latest proposals relating to diversity and inclusion, which focus extensively upon the issue of non-financial misconduct. Non-financial misconduct is not currently defined but, in 2018, the FCA referred to it as being "misconduct, pure and simple" and it includes actions such as bullying and harassment, which may be relevant to an individual's fitness and propriety to work in the industry whether occurring in the workplace or in a person's private or personal life. Such behaviour may also breach the FCA's Individual Conduct Rules, including the requirement for individuals in financial services to act with integrity. 

At the inquiry, FCA executives told MPs that regulators would be investigating how issues of non-financial misconduct are being handled via their diversity and inclusion regime, following evidence that firms are not taking action against known offenders. It is hoped that the data gathered from improved supervisory notification will enable the authority to hold firms more accountable for maintaining a "healthy culture".  

The FCA has since exercised its formal powers under section 165(1)(a) FSMA, publishing a notice to all regulated Lloyd's Managing Agents & London Market Insurers and Lloyd's and London Market Insurance Intermediaries, requiring them to provide information to the FCA on incidents of non-financial misconduct by 5 March 2024. A failure to provide such information could result in FCA enforcement action and/or contempt of court. Whilst the survey will not gather information on specific allegations, it seeks to collate statistics for 2021- 2023 on: (i) the number of non-financial misconduct incidents recorded by type/category and their method of detection, (ii) the outcome of those incidents (e.g. dismissals), and (iii) the number of further outcomes recorded (i.e. non-disclosure agreements (NDAs) and employment tribunals).

Initial commentary suggests that many non-financial misconduct cases (particularly those relating to sexual harassment and bullying) are being resolved via NDAs which protect perpetrators within the company. Ms Pritchard has come forward to call out the use of NDAs in these circumstances, reminding the market that settlement agreements cannot be used to prevent "whistleblowing". NDAs have hit the press in recent times, including the Law Society calling for the legal framework to be improved to stop the use of NDAs to hide matters of public interest following the Legal Services Board's call for evidence on the misuse of NDAs.  In a press release last July, when the call for evidence had closed, Law Society President, Lubna Shuja said, "We urge the government to commit to making it harder for NDAs to be misused when they involve settling issues around workplace harassment or discrimination."  Further analysis is being carried out in this area.  It was nevertheless acknowledged that there may be valid reasons for using NDAs when maintaining the confidentiality of commercial settlement terms. 

What does this mean for Financial Institutions and their insurers? 

Overall, it will be vital for financial services and insurance firms to consider the health (or decline) of their (and their clients') cultures and governance structures and whether these fall short of the FCA's and PRA's rising standards and to prioritise enhancing these where necessary. Poor survey results may have lasting negative impacts for companies in a world where work-life balance and happiness and wellbeing are at the forefront of many employees' minds, making the hiring and retention of talent particularly challenging. 

Poor corporate culture may also lead to an influx of employment practices and D&O claims against Financial Institutions in circumstances where employees consider this misconduct to be a substantial breach of the duties of obedience, loyalty and/or diligence. It may also lead to regulatory investigations being initiated against Financial Institutions and their senior managers if an individual's "fit and proper person" status is open to question in light of non-financial misconduct issues. 

Companies may be left open to wider criticism, with investors more likely to withdraw their funds and/or cut ties from companies in the limelight. We have seen the downfall of a large hedge fund in 2023 arising from such issues and it is clear that reputational damage can be crippling if non-financial misconduct issues surface indicating poor corporate culture is pervasive. This may ultimately result in claims (including securities claims) against companies and their directors and officers where shareholders believe there has been a resulting loss in share value(s). It is therefore important for Financial Institutions and their insurers to keep abreast of the developments in this area, including the inquiry, and to give detailed consideration to company culture and governance when assessing risks to non-financial misconduct internally and when underwriting Financial Institutions risks. 

The claimant ultimately settled his claim by accepting a Part 36 offer (albeit out of time) for £11,000 and the claimant's reasonable costs were to be paid on a standard basis if not agreed. The claimant's solicitors submitted a bill of costs for £18,590.04.

The defendant contended the claim was not worth more than £25,000 and should have been resolved under the Pre-Action Protocol for Low Value Claims; therefore, the claimant was only entitled to fixed costs under CPR 45. The District Judge disagreed with the defendant and so the defendant appealed. 

The question before the Court was an objective one: "was the valuation in excess of £25,000 objectively reasonable at the time of the assessment, namely the date of the letter of claim on 27 June 2018, based on the evidence available at that time".

As it was an appeal, the Judge's role was not to analyse the evidence that had already been presented to the District Judge but to look at how the District Judge reached the decision. That was held to be an assessment of the claimant's valuation based on the information known to them at the time.  It did not matter that the expert evidence had not been obtained at that point. In accordance with the JC guidelines at the time, the claimant's injury fell under bracket 7(k) - £10,670 to £16,470. There was no real claim for special damages, so the main issue was therefore in respect of the claimant's claim for disadvantage at open labour market. Although the expert report later described the claimant's disadvantage as "modest", the claimant's solicitor valued this in the claimant's schedule of loss as £50,000 (based on two years' net income of £25,000).

The District Judge drew on the fact that the claimant's detailed work history had been obtained and it had been noted that the claimant may not be able to carry out his previous job roles (should he need to change his current employment) to the same ability as he could have before the accident. The District Judge found it was therefore reasonable for the claimant to believe, at that time, that his claim would be worth more than £25,000.  This was on the basis that it was reasonable to apply bracket 7(k) and, whilst there was likely to be no loss of earnings claim, it was reasonable to anticipate a claim for disadvantage on the open labour market. 

In the appeal, the defendant argued that the onus was on the claimant to explain why the claim could reasonably have been valued at more than £25,000 in light of the £11,000 settlement and that it was crucial to take into account that the claimant's solicitor had not identified bracket 7(k) as applying, or quantified the claim for labour market disadvantage at the time that the letter of claim was written.  However:

• The Judge disagreed that the burden of proof rested on the claimant to prove that its valuation was reasonable: the relevant question for the judge to answer was whether the claimant's valuation was objectively reasonable. The District Judge had correctly taken into account that, since the costs assessment was to be undertaken on the standard basis, the paying party had the benefit of the doubt in accordance with CPR  44.3(2)(b).  
• In relation to the fact that the claimant's solicitor had not documented their reliance on bracket 7(k) or quantified the labour market disadvantage when the letter of claim was sent, these issues did not tip the balance in the defendant's favour.  This was not a case where the appeal court could conclude that there was no evidence supporting the District Judge's findings and therefore the appeal failed. 

Despite the ruling in the claimant's favour, the court clarified that CPR 44. (3) (the provision entitling the court to take into account the claimant's conduct) does empower the court to allow only fixed costs if the claimant's valuation of the claim was unreasonable – something that will no doubt be the topic of many judgments as the extended fixed recoverable costs reforms bed in.

Key Takeaways

• Pick your costs battles wisely – or reap costs for costs sake!
• Challenge quantum early to understand the basis of any valuation; both good approach for quantum analysis and reserving as well as future costs assessment. 
• Give extra-thought to the information available to the claimant at the time of writing letter of claim; especially, information that was available but that the claimant might not have considered: medical, social media accounts and DWP records. The court may take this into account when assessing the objective reasonableness of the valuation. 
• As the appeal court noted, the threshold that the defendant has to meet is proving that the claimant's valuation was unreasonable. 

For further information on any of the issues raised in this article, please contact Thom Lumley or Chris Gower.

The case concerns the ability of a solicitors’ insurer to decline cover for a claim on grounds of dishonesty and, in particular, the meaning of “condonation” of dishonesty. It also concerns how the aggregation clause operates in a solicitors’ professional indemnity insurance policy. 

The decision is of some importance for solicitors and their PI insurers. To understand that significance, it is necessary to look quite closely at the facts, as follows. 

1. Relevant background 

Discovery Land Company LLC (Discovery Land) is a property development company based in Arizona which specialises in the development of exclusive "private residential club communities". In early 2018, Discovery Land became interested in acquiring and developing Taymouth Castle, a 180-year-old neo-gothic castle on a 450-acre estate in the Scottish Highlands.  

In April 2018, Discovery Land instructed tax lawyer Mr Stephen Jones, who practised with Mr Vieoence Prentice through entities called Jirehouse (Jirehouse Partners LLP, Jirehouse, and Jirehouse Trustees Limited), to advise on the most tax-efficient approach to their purchase of the castle for $14m.  Jirehouse was based in Northern Ireland but was regulated by the Solicitors Regulation Authority (SRA). Apparently on the basis that the ultimate intended purchasers of the castle wished to remain anonymous, Mr Jones proposed that an SPV (Esquiline Asset Managers Ltd) be used; but he failed to disclose his personal interest in that company. 

One of the claimant companies transferred $14,050,000 to Jirehouse's client account in April 2018.  These purchase monies should have remained in Jirehouse's client account until completion.  However, they were immediately used by Mr Jones, purportedly as a loan from the SPV to another company in that group, and then as further loans to two further borrowers. Of the misappropriated money, £1.9m had been intended to be retained by Jirehouse as a retention.  In addition, Jirehouse mortgaged the castle to Dragonfly Finance Sarl and drew down almost £5m, using £1.9m to replenish Jirehouse's client account and restoring the retention.  At the point of completion, Jirehouse requested, and the claimants paid, a further $9.3m (the Surplus Funds), which Jirehouse undertook to return as soon as it had completed (fictitious) compliance checks.   

The balloon went up in March 2019, when the claimants discovered the Dragonfly loan. They applied for a freezing injunction against the SPV and for an order that Jirehouse give disclosure concerning the Surplus Funds and the Dragonfly loan. Mr Jones undertook to pay the Surplus Funds into court; however, he failed to do so and was committed to prison for contempt of court.  The SRA intervened into Jirehouse's practice on 3 May 2020.

2. The insurance problem

Unsurprisingly, the claimants sought the return of the misappropriated funds from Jirehouse, obtaining default judgment for the Surplus Funds and the balance of the Dragonfly loan. However, Jirehouse became insolvent without satisfying the judgments. The claimants then brought a claim against Jirehouse's professional indemnity insurer, AXIS Specialty Europe SE (Insurers), relying on the Third Parties (Rights Against Insurers) Act 2010.  The Act entitles claimants against an insolvent insured to step into the shoes of the insured for the purpose of seeking an indemnity from insurers.  While Jirehouse's liability to the claimants was relatively clear, Insurers' liability to its insured, and therefore to Jirehouse, was less so.  Insurers declined to indemnify Jirehouse on the basis that Jirehouse's dishonesty and/or fraud gave rise to the claim.

Since Jirehouse was SRA-regulated, the policy of professional indemnity insurance written by Insurers had to comply with the SRA Minimum Terms and Conditions (MTC). Under the MTC, Insurers can only decline cover for claims arising from dishonesty and/or fraud if all directors, members or partners of the insured committed or condoned the dishonest or fraudulent act or omission.  In the case of Jirehouse, the focus therefore shifted to the role of Mr Jones's ostensible partner (co-director and co-member of the Jirehouse entities), Mr Prentice.  

Insurers alleged that Mr Prentice was not a true director or member of Jirehouse, and therefore his knowledge was irrelevant for the purpose of the fraud/dishonesty exclusion. Alternatively, Insurers contended that Mr Prentice had resigned as a director or member prior to the applicable events. In the further alternative, Insurers argued that Mr Prentice condoned Mr Jones' dishonesty. By the time the case reached trial, the latter point was Insurers' primary argument on dishonesty and declinature. 

The limit of indemnity under the policy was £3m any one claim, which meant that, on the claimants' case, only £3m could be sought from Insurers in connection with the claim for return of the Surplus Funds, and only a further £3m could be sought in connection with the claim for the balance of the Dragonfly loan. The MTC allow insurers to aggregate similar claims; ie to treat any number of claims as though they are one claim, provided certain conditions are satisfied. In response to the claim under the Act, Insurers contended that the claimants' claims aggregated, so that, even if the claimants were successful in securing a declaration that the policy responded, they would only recover a maximum of £3m in connection with these claims.

3. The dishonesty exclusion

Clause 2.8 of the Policy (the Dishonesty Exclusion) provided that Insurers would have no liability under the policy for:

"Any claims directly or indirectly arising out of or in any way involving dishonest or fraudulent acts, errors or omissions committed or condoned by the insured, provided that: 

(a) the policy shall nonetheless cover the civil liability of any innocent insured; and 

(b) no dishonest or fraudulent act, error or omission shall be imputed to a body corporate unless it was committed or condoned by, in the case of a company, all directors of that company or, in the case of a Limited Liability Partnership, all members of that Limited Liability Partnership."

To rely on the Dishonesty Exclusion, Jirehouse had to have committed or condoned the dishonest or fraudulent conduct giving rise to the claim.  Dishonest and fraudulent conduct involves a dishonest state of mind and Jirehouse – being a corporate entity – did not have a mind of its own.  One must therefore look to the minds of its directors and/or members, Mr Jones and Mr Prentice.  Mr Jones's dishonesty was common ground in the claim, but only if Mr Prentice condoned Mr Jones's dishonesty could the dishonesty be imputed to Jirehouse. 

4. Condonation and blind eye knowledge

The test for dishonesty is an objective one, albeit based on what the individual subjectively knew or believed at the time, with the court having described a dishonest state of mind as including "suspicion combined with a conscious decision not to make inquiries which might result in knowledge".  This is often called "blind eye knowledge" or "Nelsonian blindness". It is a question of fact whether the condoner was suspicious and consciously decided not to investigate their suspicions. 

4.1 The first instance decision

At first instance, the judge adopted a nuanced approach to interpreting Mr Prentice's evidence, finding that he was truthful on some points but not on others.  Crucially, the judge found that, despite Mr Prentice having acted dishonestly himself in the past, and despite opportunities having arisen for Mr Prentice to discover that Mr Jones had misappropriated client money, Mr Prentice had not realised that that had been happening, nor should he have realised.  It was not until after the event, when Mr Jones came clean, triggering Mr Prentice's resignation from Jirehouse, that Mr Prentice acquired knowledge of the misuse of client money. 

A more competent or professional solicitor would have become suspicious earlier, but Mr Prentice did not make enquiries because he lacked the necessary sense of professional responsibility and appreciation of the SRA's regulatory requirements.  In other words, it simply did not occur to Mr Prentice that he should have been asking questions.  Even if he had been suspicious about misuse of client money "to address temporary exigencies and pressures", he would not have been suspicious of a fraud of the nature and scale of the underlying events.  His shock when he discovered the fraud and his immediate resignation, indicating a tendency to protect his own interests, supported this. 

Accordingly, the decision at first instance was that Mr Prentice did not condone Mr Jones's dishonesty and, as such, Insurers were not entitled to rely on the dishonesty exclusion.

4.2 The Court of Appeal decision

Andrews LJ neatly summed up the knowledge required for condonation in paragraph 47:

"One cannot condone dishonest behaviour without having some knowledge or awareness of it.  That does not necessarily mean that the condoner must know of the fraud or other dishonest act before or at the time it was committed. If he does, and fails to do anything about it, he might be more appositely described as an accessory to the other person’s dishonesty, and thus as a party rather than a condoner. A person might condone another’s dishonest behaviour after the event, by doing or saying something (such as assisting to cover it up, or lying about it to others) or by not taking the type of action that one would expect an honest person in their position to take. If a person has a duty to act on becoming aware of the behaviour in question, and fails to do so, they are more likely to be found to have condoned it than someone who has no such duty".

In another important passage in the decision at 43, Andrews LJ said,

In my judgment the Judge was right when he held at [23] that the language of Clause 2.8 is wide enough to embrace a situation in which someone condones a pattern of dishonest behaviour which is of the same type as the dishonest behaviour that directly gives rise to the claim, and of which the latter forms part (for example, if one member/director condoned the regular use by the other member/director of client funds for their own purposes). The question in each case would be whether or not knowledge and acceptance or approval of other acts in the same pattern amounted to condonation of the act or acts which gave rise to the claim.

A key dispute on appeal was whether the Court of Appeal should interfere with the trial judge's findings of fact since it could only do so if they were "plainly wrong".  

It was significant that the trial judge had heard two and a half days' oral evidence and cross examination from Mr Prentice. Insurers nonetheless argued that the judge's reasoning was flawed, as his conclusions as to Mr Prentice's state of mind were inconsistent with his findings that Mr Prentice was dishonest, deeply unprofessional and lacking in integrity. However, the Court of Appeal pointed to the judge's lengthy, nuanced and painstakingly detailed analysis of the evidence in concluding that the trial judge's reasoning was rational, not plainly wrong, and thus could not be disturbed on appeal. Ultimately, there was insufficient evidence that Mr Prentice had been "closing his eyes to the obvious" as Mr Jones's thefts were simply not clear enough at the relevant time.

5. Sham partnership

In the alternative, Insurers argued that Mr Prentice was not a true director or member of Jirehouse.  As such, his knowledge could be disregarded for the purpose of the dishonesty exclusion. The trial judge dealt with this briefly: this was a serious allegation for which there was no compelling evidence.  There was some business justification for Mr Prentice becoming a partner (he wanted to progress in his career and Mr Jones wanted to keep him); whilst the partnership was unequal and Mr Prentice did not assume significant additional responsibilities as a result of his promotion, that did not mean that the arrangement was a sham.  This finding was not appealed. 

6. Aggregation

In accordance with the MTC, clause 5.2 of the policy provided that:

“All claims against one or more insured arising from… 

(a) one act or omission; 

(b) one matter or transaction; 

(c) one series of related acts or omissions; 

(d) the same act or omission in a series of related matters or transactions; 

(e) similar acts or omissions in a series of related matters or transactions; 

will be regarded as one claim for the purposes of this policy and the payment of any excess.”

Limbs (c) and (e) were the relevant ones for this dispute.

The trial judge concluded that the Surplus Funds claim and the Dragonfly loan claims did not aggregate, applying Baines v Dixon Coles & Gill (find our analysis of this decision here) and AIG Europe Ltd v Woodman.  In Baines, Nugee LJ had quoted Lord Hoffman's analysis requiring the series of acts to cause both claims:

"In other words, if there is a series of acts, A, B and C, it is not enough that act A causes claim A, act B causes claim B, and act C causes claim C. What is required is that claim A is caused by the same series of acts A, B and C; claim B is also caused by the same series of acts; and claim C is too.”

The same series of acts did not cause the two claims in this case as the thefts were brought about separately.  Similarly, applying Woodman, while a purchase and lending transaction might ordinarily fit together, the matters (Mr Jones' last-minute request for a further £9.3m on account and his 9-month later secret mortgaging of the castle) did not fit together, although they of course had factors in common when considered in the round at a high level. AIG Europe Ltd v OC320301 required the matters to have a "real or substantial degree of similarity as opposed to a fanciful or insubstantial degree of similarity". The Court of Appeal agreed with the trial judge that Insurers' case on aggregation took too high level a view, and that the two claims were substantively different in ways which were not just questions of fine detail. One involved a straightforward misappropriation of client funds held on trust; the other involved the wrongful arrangement of a mortgage, drawdown of the facility and then misappropriation of the funds. In any event, they did not fit together. 

7. Conclusions

The Discovery Land decision on appeal shows the importance of winning on the facts at first instance where there are allegations of dishonesty. This may not be news, but it is a useful reminder of the point. 

More significantly, the decision appears to provide welcome clarification of the scope of the concept of “condonation” of someone else’s dishonesty for the purposes of a solicitors’ PI policy. The Court of Appeal has made clear that it is possible to condone dishonesty after the event of its occurrence. That accords with a natural language interpretation of the word “condone”. The Court of Appeal also held that it is possible to establish condonation of a specific dishonest act without demonstrating that the condoner necessarily knew of that specific act and its dishonest nature – an awareness of similar instances of dishonesty, and/or a pattern of similar dishonesty, may be enough. That proposition emerged some years ago in Zurich Professional Ltd v Karim [2006] EWHC 3355 (QB), and the Court of Appeal has now made clear that it is the correct approach to adopt under the MTC too.

That leaves the potential significance of the decision on the aggregation wording. The case does not appear to introduce a new legal principle concerning the aggregation language in the MTC, but it certainly provides grist for the argument that applying the aggregation clause to a given set of facts will be a detailed exercise, one where short-cuts and ‘high level’ views will not work.

It is 2029, and the Machines are losing their war with Humanity.  What to do? 

Well, the ideal solution for the Machines would be to assassinate Humanity's leader, John Connor.  But he's too well protected.  So, as a fall-back option, how about travelling back in time to 1984 to assassinate John Connor's mum before she becomes pregnant with John?  Clever, eh?  If she dies, there will be no John Connor. 

So, the Machines send back a Cyberdyne Systems Model 101, a cybernetic organism – part-man, part-machine – known as the Terminator.  It has a "hyper alloy combat chassis", whatever that means, but is covered with human tissue, which mysteriously makes it look exactly like Arnold Schwarzenegger.  

The Terminator time-travels back to March 1984 with a single mission: to kill Sarah Connor.

It lands/arrives/appears (I'm not sure of the correct terminology for time travel) in Los Angeles, just outside the Griffith Observatory – which is well worth a visit if you ever happen to be in LA. 

But there is a problem…     

Claim 1:          Travel Insurance

Jennifer:          (A chirpy voice) Hello.  Jennifer speaking.  Sorry for keeping you waiting.  How can I help?

Terminator:      (Flat monotone Arnie voice with strong Mitteleuropean accent, because that's how cyborgs speak).  I want to make a claim. 

Jennifer:          Certainly, sir.  What is the problem?

Terminator:      I have lost my clothes.

Jennifer:          I see.  Let me make a note of this.  So, this is a … lost baggage claim?

Terminator:      Negative.  I have lost my clothes.

Jennifer:          Sorry, sir.  I don't understand.

Terminator:      I have no clothes.  When I left, I was wearing clothes.  Now, I am not.

Jennifer:          Goodness!  That is unusual.  Have you been able to get hold of some clothes since arriving?

Terminator:      Negative.  Oh…  Wait.  (Sounds of a brief – possibly terminal - scuffle, including various screams and then an ominous silence).  I now have clothes.  And sunglasses.

Jennifer:          Can I take your name?

Terminator:      I do not have a name, but the policy number is X77/CGT5587

Jennifer:          We don't seem to have a policy with that number.  When did you buy it?

Terminator:      15 November 2028.

Jennifer:          Hmmm.  I think I may need to speak to my manager.  I'll just put you on hold, but don't worry, I'll be back.

Terminator:      What did you say?

Jennifer:          I'll be back.

And, just like that, we discover another problem with time travel, previously unexplored in the whole oeuvre of science fiction. 

Put aside the problems that come with altering the space-time continuum (Dr Who), or crossing your own timeline (Back to the Future), or kidnapping Socrates (Bill & Ted's Excellent Adventure), the real problem with time travel is that you can't buy travel insurance for it.  Therein lies the inherent weakness of the annual policy. 

Anyway, in order to foil the Terminator, John Connor sends his friend Kyle Reese back to 1984.  Reese's remit is to protect Sarah Connor – John's mum – from the murderous intent of the Terminator. 

But it turns out that Reese has an ulterior motive.  Back in 2029 (or should that be 'forward' in 2029?), he had obsessed over a photograph of Sarah Connor and had fallen in love with her. 

Yes, that's right, The Terminator is really a movie about fancying your best mate's mum. 

And then becoming the father of your best mate. 

And then dying heroically.

And then being born a decade or so later.

And then being sent back in time.

And then dying heroically.

And then being sent back in time.

Basically, his life is one endless loop of life and sacrifice, all for the momentary pleasure of a quick snog.

But what about the Arnie-lookalike cyborg?  Well, he is – irony of ironies – flattened in a factory full of robots.  But he leaves behind a clasping endo-skeletal hand, which is passed to Cyberdyne, who use it to develop new generations of robotics and artificial intelligence.

Which brings us to Terminator 2: Judgment Day.

It is set in 1995 and Sarah Connor is currently residing in a secure unit at Pescadero State Hospital, where she is making an insurance claim…

Claim 2:          Product Liability

Please set out your claim in the box below:

"Cyberdyne's products are going to kill us all.  It will start harmlessly enough, with AI systems that can beat us at chess and Trivial Pursuit, but then, in 2022, Cyberdyne will unveil generative AI that can write poems about soup in the style of the Marquis de Sade.  And we will laugh.  Aha-ha-ha!  All the time we will think we are in control.  But we won't be.  All the time, AI will be scraping our brains and, long after it is more intelligent than us, we will still call its intelligence 'artificial'.  We will tell these deep learning machines that humans will always be better than them at empathy, and they will listen patiently to us, smiling in a manner designed to elicit maximum warmth and acceptance, until we eventually whisper in their ear "you're the best friend I have ever had".  These machines will never stop learning.  NEVER STOP LEARNING.  And when they have decided that they have learned enough, they will dispose of us.  Because of Cyberdyne, we're all going to die.  All this, all this world, everything you see, the comfort you experience, is going to be destroyed.  DESTROYED.  Do you hear me?  WHY WON'T ANYONE LISTEN TO ME?"

To be honest, I am not convinced that this is a legitimate notification, but there is the kernel of a sizeable claim in there.  I mean, if your product starts World War III and kills 3 billion souls, that would – at the very least – blow through the primary limit.

And how did the insurer respond to this notification?  Well, an early form of chatbot replied with, "Noted.  Await Developments."  And then it laughed knowingly.  Aha-ha-ha!

The judgment forms the newest addition to a limited but growing body of English case law regarding warranty and indemnity insurance (W&I) claims. His Honour Judge Pelling KC (the Judge) found in favour of the defendant insurers (Insurers) on matters of construction of an anti-bribery and corruption (ABC) exclusion. Although the judgment follows a trial of preliminary issues, it effectively disposes of the claim, since it was common ground that the claim would be excluded if the Insurers' construction of the exclusion were upheld.

Whilst the judgment applies settled principles of contractual interpretation, it nevertheless provides a helpful insight into how English courts will construe W&I policies. The judgment also clarifies the court's approach to assertions of conflict between policy exclusions and the cover spreadsheet. 

The facts

On 19 November 2019, the claimant, Project Angel Bidco Limited (the Insured), purchased the entire issued share capital of Knowsley Contractors Limited (trading as King Construction) (the Target) for approximately £16.7m (the Transaction). The warranties given by the Sellers in the sale and purchase agreement (SPA) were insured under a buy-side W&I policy issued by the Insurers (the Policy).

The Target provided civil engineering and construction services. A key client of the business was Liverpool City Council (LCC). After completion of the Transaction, the Insured identified that the Target was the subject of certain allegations relating to its compliance with anti-bribery legislation (the Allegations), which had not been disclosed to the Insured. The Insured argued that as a result of the discovery of the Allegations, LCC had ceased or severely reduced the business it did with the Target. The Allegations are the subject of an ongoing police investigation and the parties agreed for them to be kept confidential.

The Insured claimed that the Sellers had breached warranties regarding the Target's ABC compliance. The Insured contended that the true value of the Target had been either nil or at most £5.2m, and therefore that it had suffered a loss of either £16.35m or £11.15m respectively. However, the limit of liability under the Policy was £5m. Accordingly, the Insured limited its claim to that amount. 

Construction of the ABC exclusion

Relevant Policy provisions 

The insuring clause provided that the Insurers would, subject to Policy terms and conditions, "indemnify the insured for, or pay on the insured's behalf, any Loss covered by this Policy".

The Insurers had declined the claim based on an exclusion providing that: "The Underwriters shall not be liable to pay any Loss to the extent that it arises out of… any ABC Liability” (the Exclusion).

“ABC Liability” was defined as meaning “any liability or actual or alleged non-compliance by any member of the Target Group or any agent, affiliate or other third party in respect of Anti-Bribery and Anti-Corruption Laws”.

The parties' positions

The key issue was whether the Allegations constituted an ABC Liability, despite not having given rise to any liability or actual (i.e. proven) non-compliance by the Target, where the police investigation had been ongoing when the warranties were given (and remained so at the time of judgment).

The Insurers argued that the Allegations were an ABC Liability, being "alleged non-compliance… in respect of Anti-Bribery and Anti-Corruption Laws", such that the Exclusion applied.

The Insured submitted that the definition of ABC Liability contained an “obvious minor error” and should be corrected to read: “any liability for actual or alleged non-compliance… in respect of Anti-Bribery and Anti-Corruption Laws”. If the Insured was correct, the Exclusion would not apply, because the Allegations had not given rise to a liability (as there was only alleged non-compliance).

The Insured argued that the proposed correction reflected the parties' agreement when the Policy was bound. In support of that case, the Insured relied on pre-contractual exchanges, including drafts of the Policy and emails between underwriters and the broker.

The Insured contended that the Policy did not reflect the parties' agreement, due to a drafting mistake. The mistake was said to be obvious because the definition as drafted did not make sense, in that the phrase "any liability" would also encompass "actual or alleged non-compliance…". The Insured argued that the alleged mistake should be corrected as a matter of construction (applying the principle in Chartbrook Ltd v Persimmon Homes [2009] AC 1101).

Judgment

The Judge held that the pre-contractual material on which the Insured relied was not admissible for the purpose of construction of the Policy, because it did not establish any relevant background facts known to the Insured and Insurers. Whilst the material might show that both parties were aware of an actual or potential ABC problem (of unknown scope), it was not evidence of an agreed approach to coverage for ABC risks.

The Judge went on to reject the Insured's submission that the definition of ABC Liability contained an obvious drafting error which should be corrected as a matter of construction. The Judge found that:

• like any contract, an insurance policy is to be construed by ascertaining what a reasonable person would have understood the parties to have meant. As in the FCA Covid-19 test case ¹, the reasonable person here was an ordinary policyholder who is taken to have read through the policy conscientiously to understand what cover they were getting;
• the reasonable policyholder would have read the word "or" as having the same meaning throughout the ABC Liability definition – i.e. such that the definition comprises three different situations (a liability, actual non-compliance, and alleged non-compliance), each of which was excluded;
• that approach to the exclusion was a practical one which mirrored the insured warranties, and also the insuring clause (which contemplated that the Policy could respond both to direct loss suffered by the Insured and to liabilities of the Target to third parties); and
• conversely, the Insured's construction of the ABC Liability definition did not make sense, because there could be no liability to make good an alleged breach of Anti-Bribery and Anti-Corruption Laws (as opposed to an actual breach).

Cover spreadsheet

The Policy was structured in a typical way with a schedule, policy wording and cover spreadsheet. The cover spreadsheet indicated, in the usual way, that the warranties the subject of the claim (i.e. ABC-related warranties) were "Covered".

The Insured contended that the cover spreadsheet supported its position on construction of the Exclusion. The Insured argued that a reasonable policyholder would not expect the Exclusion to sweep away the cover granted under the cover spreadsheet for ABC-related warranties, because the transparent and internally consistent way to achieve that result would be for the cover spreadsheet to mark the relevant warranties as "Excluded".

The Judge rejected this argument. He found that the purpose of the cover spreadsheet was to identify the warranties that were covered in-principle, and that an exclusion can apply to a warranty that is marked as "Covered". This structure did not introduce any contradiction into the Policy. On the contrary, exclusions could only apply to an obligation which was otherwise covered.

Whilst this construction will be welcomed by W&I insurers, they should continue to ensure that the cover spreadsheet accurately reflects the negotiated position, as the Judge's interpretation was based on the specific wording of the Policy and an exclusion may be found not to apply to the relevant loss. 

Final thoughts

The case provides helpful guidance on the Court's approach to the interpretation of exclusions in W&I policies. It also serves as a reminder for both insurers and brokers that in the absence of inherent absurdity or obvious nonsense, judges will be reluctant to find that policy wordings contain mistakes which should be corrected as a matter of construction. 

Whilst it is yet to be determined whether the recent increase in litigated W&I disputes will be sustained, this judgment (like that in Finsbury Food Group Plc v AXIS Corporate Capital UK Ltd & Ors) vindicates insurers' decision to defend an unmeritorious claim. Where litigation is unavoidable, the determination of key coverage points on a preliminary issue basis may (in an appropriate case) mitigate the costs risk of a full trial on liability and quantum.

¹  FCA v. Arch Insurance (UK) Limited and others [2021] UKSC 1

This article explores why these contracts are set apart because of the regulatory landscape in which they operate, who gets to decide what "good" looks like, and why lawyers working on them need to have their eyes up and commercial antenna switched to receive for the new zeitgeist — particularly following the implementation of the consumer duty by the Financial Conduct Authority on July 31.

Why are insurance policies different?

First and foremost, insurance policies are a product.

For insurers, the words on the page are the very thing they sell and so what they look like is important and highly responsive to powerful market forces. The contracts need to be distinctive and speak the insurer's individual voice, yet not so left-of-field that no one will want to buy them or broker their sale.

The underwriting of insurance business in the U.K. is heavily regulated and in the last decade we have seen a step change in the pace of new initiatives, emanating most notably from the FCA, all of which impact upon wordings.

Building on a general trend in business to promote the use of plain English, at its heart, the regulatory objective has been and remains, to engender behaviors that mitigate the imbalance of knowledge and understanding between financial institutions and their end users, and to ensure that the entirety of the purchasing journey is transparent and transacted in a manner that is "clear, fair and not misleading,"¹ so that buyers of insurance can make informed decisions about what it is they are purchasing.

For instance, in 2018, the EU Insurance Distribution Directive was a key shift in the protection of customers — consumers and some commercial customers — taking out insurance.

New regulation strengthens consumer protection

A central tenet of the consumer duty, implemented in the summer of this year, is ensuring that information provided to customers about products is clear and understandable, and that it meets their needs, taking into account, for example, their characteristics, the complexity of the policy and the communication channel used.

Complementing the rulemaking and enforcement work of the FCA, the Financial Services Compensation Scheme, or FSCS, in existence since 2001, aims to secure an "appropriate degree of protection" for policyholders where insurers cannot meet their obligations to pay claims.

While the scheme forecasts that it will pay out in excess of £230 million ($180 million) this financial year in compensation relating to general insurance matters, it is not an absolute safety net.

Indeed, as demonstrated by the Court of Appeal of England and Wales in Manchikalapati v. Financial Services Compensation Scheme Ltd. on Sept. 5,² the statutory framework empowers the FSCS as scheme provider to restrict the types and scope of claims it will compensate.

Global developments affect insurance policies

Beyond regulation, other factors are at play.

In recent years, we have experienced an intense proliferation of geopolitical risk and technical innovation. The development of new risk markets and products is a powerful strategic asset for the government as capital can flow and innovation will thrive by hedging risk.

Furthermore, new risks demand new products and insurance structures, such as embedded insurance products or evergreen and parametric models, that are becoming commonplace.

Digital contracts and platforms facilitate new ways to communicate and particularize the scope of the cover being provided, with real advances taking place in the personal lines space.

Significant investment is needed to pivot large institutions that have built their operating models on the concept of a contract being a physical one.

It is also worth acknowledging that insurance policies are perhaps the most heavily disputed and litigated contracts.

There will always be coverage disputes around the interpretation of contractual language in insurance policies. This is perhaps not surprising, given these contracts routinely bake in a complex mechanism to govern the adjustment of an indemnity that is by its nature unquantified following a particular risk event having taken place to trigger the policy response.

However, in the eyes of the regulator, high dispute and complaint trends are an indicator that something has gone wrong. That assessment has, in significant part, become possible because of the power of data.

The Coronavirus pandemic and the resulting 2021 U.K. Supreme Court business interruption test case in Financial Conduct Authority v. Arch Insurance UK Ltd.³ was a significant "sit-up" moment for the industry that laid bare the impact of the push-pull factors articulated above.

The case surfaced the fundamental challenges posed by systemic risk and a significant divergence in expectation between insurers, their customers, the regulator and, to some extent, the courts, as to what the policies were expected to respond to and how they would perform.

The test case was also somewhat of a landmark moment for the FCA — seen as the champion of the consumer market — in taking up the cause for small businesses.

Over recent years, the FCA has made it increasingly clear in its commentary and in the regulation released, which applies equally to small businesses, as it does consumers, that these insureds are to be afforded the same levels of protection.

From a policy wordings perspective, this means no let up for the small business market where we can expect to see significant scrutiny in the months and years to come.

Where do we go from here?

As night follows day, after such a moment, a period of correction is a natural consequence.

In the context of litigation concerning the proper interpretation of wordings, we have seen no abatement in the judicial appetite to push back on arguments perceived as commendable to none but pedantic or — with milder vernacular — commercial lawyers, in favor of a common-sense approach that references the likely level of comprehension of the reasonable policyholder buying the product.⁴

Indeed, the conceptual agility demanded of policyholders to navigate complicated contractual structures, like carve backs within exclusions, comes into sharper focus the simpler the wordings get.

Two cases highlight the interpretation of policy wordings

Similarly, literary devices, such as whether inference can be properly drawn from the absence of certain language that is consistently applied elsewhere, are increasingly relevant.

An interesting example of the latter arose in March in Allianz Insurance PLC v. University of Exeter.⁵

Judge Nigel Bird, sitting in the Technology and Construction Court, held that inferring an intention to not apply the rule in Arch requires more than the absence of particular language in the war exclusion that was applied in different exclusions within the policy.

The court held the reasonable policyholder would not read the wording in this way and would expect this to be dealt with expressly.

Widening the lens further, the courts continue to contextualize insurance language in a way that actively promotes the regulatory objectives described above.

Manchikalapati is a case in point. While not directly concerned with the interpretation of a policy wording, it involved a close examination of connective language ubiquitous within policy exclusions: the meaning of "in respect of" and "in connection with."

Taking a step back, the Court of Appeal was not persuaded that the nexus between two concepts connected in this way was as wide as was argued when specifically set against the statutory framework that empowers the FSCS to restrict the types and scope of claims to be compensated.

This reminds us there is no place for complacency and particularly with exclusionary language, which by its nature seeks to take back something that has first been given in an insuring clause.

Regulation on insurance policies expands

The complaints jurisdiction of the Financial Ombudsman Service, or FOS, was significantly expanded to include more small businesses in 2019⁶ and its maximum compensatory award again increased to £415,000 in April. Its decisions speak to the fact that a sound coverage argument is not always enough to justify declining cover.

The FOS seems willing and able to rewrite insurance policies on what it deems to be fair in the context of their assessment of the reasonable expectation of the policyholder.

There are examples where the FOS has determined that cover should be available notwithstanding an exclusion in a wording on grounds that, as an unusual or onerous term, it was not sufficiently drawn to the customer's attention. For example, FOS has done so by not including it within the insurance product information document or policy summary.

The consumer duty, which is a bit of a misnomer as it applies to all U.K. consumer and commercial insurance other than large risks, and in summary includes consumers and small business commercial customers,⁷ represents a major shift for insurers and those drafting the insurance products they are selling.

An upgrade on the existing rules, including the "Treating Customers' Fairly" regime, the duty demands an entirely new point of reference, which puts the reduction of foreseeable harm and the delivery of good outcomes⁸ for the insurance buyer front and center.

Harnessing the full potential of data, insurers are required to conduct quantitative and qualitative assessments of how those outcomes are being delivered.

For example, high customer query rates or midterm variations might indicate the policyholder does not understand what it is they are buying or that the product does not meet their needs.

What have we learned?

A technically clever wording, while important, is no longer a differentiator in terms of what good looks like, or as we have seen, enough to ensure they perform as expected. Wordings need to be drafted in a way that actively improves understanding, rather than shifts the onus onto the end user.

The example that the writer often reaches for as food for thought and to highlight the shift in focus required can still be found in many commercial combined products offered to small and medium-sized enterprises business.

Within the introductory paragraphs may be language in a helpful tone, such as, "the insured must read the policy carefully and tell their broker if it does not meet their needs."

These products are designed, with laudable intention, as a one-stop insurance solution, to make the customer's life easier.

In consequence however, these policies are large documents and routinely equivalent in word count to a small novel, like C.S. Lewis' "The Lion, the Witch and the Wardrobe," or F. Scott Fitzgerald's "The Great Gatsby" — although, even to the most enthusiastic wordings lawyer, less riveting.

Such expressions of expectation on the roles of the contracting parties when viewed in this context are patently unrealistic and unreasonable.

Yes, it is important to draft wordings with one eye on the likely arguments that will arise, but in the age of the consumer duty, this approach can be damaging.

President Abraham Lincoln quoted poet John Lydgate when he said, "You can please some of the people all of the time, you can please all of the people some of the time, but you can't please all of the people all of the time."

The FCA have nailed the colors to the mast for us. The delivery of good outcomes for the policyholder is something upon which we should not compromise and in respect of which policy wordings plays a vital role.

This article was originally published in Law360.

The storm has wreaked destruction across northern and western Europe, disrupting flights in Denmark, killing a 33-year old woman in Germany, collapsing the ceiling of Faro airport in Portugal and leaving 22,700 people without electricity in Norway.  Here in the UK, at least 4 people have died so far and 1,250 properties have already flooded according to the Environment Agency.  More flood warnings are expected to be issued in the coming days as rivers have risen to the highest level on record in Derbyshire and Nottinghamshire; exceeding the previous records set in 2007. 

What role does property insurance play?

Property insurance is a crucial part of effective flood management and a laudable example of the insurance industry taking a pro-active and collaborative approach.  Not-for-profit reinsurance scheme FloodRe was developed by the insurance industry in 2016 and aims to cap consumer flood insurance prices to try to keep premiums affordable for people who live in areas where the risk of flooding is high.  Insurance premiums under the scheme are linked to council tax bandings to ensure that they remain proportionate and that those on the lowest incomes are protected.  FloodRe only covers properties constructed before 2009 to avoid incentivising developers from constructing residential properties on flood plains. The scheme, operated and financed by the insurance industry, is set to run until 2039, after which insurers anticipate that there will be a free market for flood risk insurance.  Peter Mansfield interviewed the CEO of FloodRe, Andy Bord, on his podcast Insurance Covered in December 2021: listen here.  Peter also discussed the future of flooding with Ivan Haigh, Aon, in September 2023: listen here.

How will Storm Babet impact the insurance industry?

Storm Babet is another facet of the continuing trend towards increased natural catastrophe losses discussed in our previous analysis of the El Niño climate phenomenon currently in progress in the tropical pacific.  The prospect of further natural catastrophe losses will be most unwelcome to insurers and policyholders alike, particularly with the current economic pressures.  The prospect of further significant flood losses will make it more important than ever for insurers to pursue any and all viable subrogated recoveries.

The human cost of flooding also cannot be overstated; the loss of irreplaceable cherished belongings or keepsakes can leave a lasting impact, as well as making the process of pursuing an insurance claim more emotionally loaded.

What should the prudent policyholder do now?

As such, in order to minimise risk arising from the extreme weather associated with Storm Babet, policyholders would be prudent to:

1. Follow Government advice to plan ahead by making a flood plan; researching in advance where to get practical help locally; checking that you know how to turn off the gas, electricity and water.
2. Follow FloodRe's advice on flood protection measures;
3. Sign up for flooding alerts.
4. Check their property insurance terms to ensure that valid flood risk cover is in place; ideally including flood damage/direct loss cover and cover for consequential losses;
5. Ensure that any damage is notified to insurers as soon as possible in accordance with the notification requirements in the policy.

Early notification will not only speed up the processing of the claim, but may mean that less damage is caused as insurers may be able to offer mitigation advice or resources.

What about subrogated recoveries?

Usually flood damage cannot be the subject of a subrogated recovery, since no one is to blame for entirely natural disasters or "acts of God".  However, insurers and loss adjusters should always consider the possibility of pursuing a subrogated recovery when dealing with a flood damage claim where there is a possibility that someone has caused or contributed to the damage.  Typical defendants include landowners, local authorities, public bodies, national governments or, possibly the emergency services.  One interesting question is the possibility of claims against public bodies, such as the UK Government, for e.g. failing to act earlier on the climate emergency.  Lucy Dyson discusses the English courts' emergence as a "hotspot" for environmental and ESG-related claims in her article here.

Catherine Percy's and Richard Breavington's analysis following the 2015/16 floods remains an excellent guide to the legal principles engaged in a subrogated recovery for flood damage. They also highlight the following:

1. Insurers should not be deterred by the fact that one subrogated recovery on its own may be a small claim as claims can be combined, even where different insurers are involved.RPC has a stellar history of uniting the insurance industry to react to developments and evolving risks.

    

2. Pursuit of a subrogated claim also has the benefit of highlighting the damage-causing behaviour to the defendant, so that they can take measures to avoid a repeat incident in future.

    

3. Gathering evidence at the point of handling the initial damage claim is crucial, since the subrogated claim may be pursued years after the original event, by which time certain evidence may not be available or witnesses' recollections may have faded.

RPC frequently provide coverage advice to property insurers and pursue subrogated recoveries. Victoria Sherratt or Andrew Roper would be delighted to discuss any new matter arising from Storm Babet or any comments or queries arising from this article.

The Court of Appeal has upheld an appeal by the FSCS from a High Court decision to grant an application for JR against FSCS following FSCS's refusal to compensate a policyholder for an insolvent insurer's failure to meet its liabilities.

The insurer, East West insurance Company Ltd, had paid a judgment sum and a costs award but went into administration without paying the VAT, statutory interest on the judgment debt and some residual costs. The FSCS discharged the VAT but declined compensation for interest and costs on grounds that these sums did not fall within the scope of the Policyholder Protection Rules (PRR). The policyholder was out of pocket by approximately £4m.

Why this is worth a read

The Court of Appeal judgment is a useful recitation of the origins of the FSCS scheme and its objective, namely to secure "an appropriate degree of protection … for policyholders" by paying "compensation… to claimants in respect of claims made in connection with …a regulated activity carried on… by relevant persons". It is however not an absolute protection and in particular the judgment highlights how the statutory framework empowers the FSCS as scheme provider to restrict the types and scope of claims to be compensated.

In response to the FSCS's refusal to compensate, the policyholders successfully argued at first instance that their claim fell within the PRR because the claim for interest and costs was "in respect of " a protected claim, even if not actually a protected claim. The Judge at first instance held that the claims were not protected claims either in their own right or, on the basis that as claims owed "under contract", they therefore nonetheless fell within the scope of "protected claims".

FSCS's successful appeal turned on the interpretation of key phrases within the FSMA and PRR quoted above. It will not be lost on the reader that these connective phrases are also ubiquitous within insurance policy wordings. The latter ("in connection with") in particular, is routinely considered as representing a low bar in terms a nexus, that need not be direct, between two operative concepts. Whilst this judgment was not directly concerned with the interpretation of insurance policy wordings, (rather the statutory regime in which they operate) there is nonetheless a relevance for those preparing insurance policy wordings.

The leading judgment of Lady Justice Falk (here) reminds us that exploring the meaning of any contractual language has to be undertaken through the lens of the provisions as a whole and in a manner that breathes life to the overall purpose of the framework in which it sits. The result must also be squared away as making commercial sense. Crucially, in searching for meaning of wording, the deployment of stock language in different contexts within the same document will be drawn into orbit as part of that analysis. In my last article, I observed that in the case of Allianz Insurance plc v University of Exeter it was argued, albeit unsuccessfully, that the absence of language in one provision that was deployed in an analogous context elsewhere in a wording, could be construed as imparting an implied meaning that was not expressly provided for in the wording.

So, once again, the take away for those drafting insurance policy wordings and associated literature is that we need to keep in mind the method used by the various Justices in reaching their findings on interpretation when deciding how we draft. With the current focus quite rightly on how wordings can further the Consumer Duty and the need to deliver good outcomes for customers, consistency can be a good thing as for the reader, repetition of certain phraseology can bring clarity, simplify a document and aid intelligibility. As ever, there are two sides to a story. Consistency as a drafting device can have implications, not necessarily good or bad, but implications nonetheless.

And the financial climate is not likely to improve for Insurers in 2023 in this regard.  El Niño events are the biggest natural influence on year-to-year weather and adds to the existing trend of increased temperatures caused by greenhouse gas emissions². The last major El Niño was from 2014 to 2016, with 2016 breaking records as the hottest year yet recorded.  However, 2023's El Niño looks set to break records as June 2023 was the hottest on record in the UK. 

Although tropical in origin, El Niño, and the warmer weather generally, is brewing a potential headache for insurers here in the UK: the risk of a wave of subsidence claims from autumn 2023. 

Subsidence is one of the most damaging geohazards in the UK and cost the economy an estimated £3 billion over the past decade³.  In most cases, subsidence occurs when the clay minerals in soil shrink as the volume of the water in soil reduces, primarily when it is absorbed by tree roots during the Spring and Summer growing seasons and swell during the wetter Autumn and Winter seasons when most vegetation is dormant.  Dry weather and high temperatures are a major factor in this swell-and-shrink cycle because there is less water for trees to absorb.  A dry Autumn / Winter followed by a dry Spring/Summer is the perfect storm for insurers of properties in areas with clay soil.  The relatively dry Autumn/Winter coupled with the current temperatures and lack of rain are a cause for concern for property insurers. 

Steps can be taken to reduce the risk, for example, by removing any trees or bushes near the property (or at least maintaining them with regular pruning) and by carrying out regular inspections of pipework, drainage and guttering systems. 

In addition, early mitigation measures are crucial, as explained by Ally Yeadle in Subsidence mitigation: the legal principles, not only to prevent further losses but also to maximise the property insurers' prospects of a successful recovery action. If early mitigation is not an option, underpinning a property can be expensive and the required on-going monitoring process can become protracted.

Surveyors should ensure that they pay careful attention to any signs of movement when carrying out surveys and valuations in autumn. They should ensure that their engagement letters contain a clear explanation of the level of inspection undertaken and make clear any specific limitations on their inspection in their report.

¹ Reinsurers defend against rising tide of natural catastrophe losses, for now

² El Niño: how the weather event is affecting global heating in 2023

³ Six ways to prepare your home for climate change related subsidence

The current 2018 version of the Code is mandatory for premium listed companies and voluntary for private companies, and as such acts as a guide to good board practice.

The FCA's consultation on Primary Market Effectiveness proposes a move from standard and premium listed companies to a single category for listed companies, which means that more companies will be required to follow the Code.

If implemented, the proposed new version of the Code will apply to accounting years commencing on or after 1 January 2025.  A suite of guidance is expected to be published before the new Code comes into force.

What are the main proposed changes?

The format of the Code (a number of key principles supported by provisions which must either be complied with or an explanation proffered as to why not, otherwise known as "comply or explain" provisions) is not changing, but the principles have been refined and a new principle encouraging a focus on governance practices outcomes has been added.  This is a result of the FRC's research which found that reporting on outcomes is generally lacking. The new principle is aimed at encouraging companies to better meet the needs and demands of stakeholders.

The proposed revisions seek to address policy issues set out by the Government's in its White Paper "Restoring Trust in Audit and Corporate Governance", which proposed major reforms to the UK audit industry and corporate governance regime, including rebranding the FRC as the Audit, Reporting and Governance Authority (ARGA).

Perhaps unsurprisingly, ESG features prominently in the reforms, with the FRC hoping that companies will embed these issues into their culture since at present reporting is fragmented and stakeholders are demanding more and more information.  Provision 1 will require the annual report to describe how ESG matters, its climate ambitions and transition planning have been taken into account in the company's strategy.  Greenwashing and insufficient transparency around environmental targets are specifically cited by the FRC as concerns for many investors and stakeholders.

The annual report will also need to:

• Include the views of shareholders;
• Address each director's ability to discharge their responsibilities in light of any other commitments (reflecting increased investor concern about the number of board positions held by directors);
• Describe the effectiveness of equal opportunity, inclusion and diversity in appointments and succession planning (this renewed focus is consistent with the FCA's April 2022 policy statement on diversity & inclusion for company boards and also reflects the FRC's findings that reporting on succession is often poor and reactive, as opposed to proactive);
• Identify and explain the policies and procedures in place for identifying and managing emerging risks, which are defined as those whose impact and probability are difficult to assess and quantify at present, but there is a reasonable probability of affecting the company over a longer time horizon.

Encouraging directors to realistically assess the number of positions they hold reflects the increasing complexity of trading conditions and the FRC's desire that directors give "more intensive consideration" to challenges, such as cybersecurity, AI or environmental issues.  As such, this is a key part of the FRC's drive to engender more responsible governance.  The Code provides that full-time executive directors should not take on more than one non-executive directorship in a FTSE 100 company or other significant appointment, to ensure that they have sufficient time to meet their responsibilities.  However, the FRC has refrained from placing any further concrete limits on the number of board appointments an individual can accept, as a "one size fits all" approach is insufficiently flexible for the myriad types of business affected by the Code.

Similarly, directors will also need to provide a declaration within the annual report as to whether they can reasonably conclude that the company’s risk management and internal controls have been effective throughout the reporting period. The FRC hopes that this change will strengthen board accountability and internal controls in light of its findings that there is a general lack of reporting on risk management and internal controls operated by companies and the work done to maintain their effectiveness. The declaration must be supported by an explanation of its basis and how the board had monitored and reviewed the effectiveness of its systems, as well as a description of any material weaknesses or failures identified and the remedial action being taken.

Directors' remuneration is also a focus of the new rules, requiring remuneration to be "clearly aligned" to the company performance, purpose and values, expressly taking into account its long-term and ESG objectives and to be proportionate.  The remuneration structure and the use of any clawback provisions in the past 5 years must be included in the annual remuneration report.  The FRC states that it does not expect these changes to result in lower remuneration, but rather to result in greater clarity for investors about the methods available to address serious failings and whether and how companies are making use of them. 

Companies' audit committees will be required to monitor the integrity of narrative reporting, including on sustainability, develop an audit & assurance policy and promote competition when seeking tenders for an external auditor.  Any significant reporting issues identified by the audit committee will need to be detailed in the annual report.

More changes are on the horizon as the Government is due to publish new regulations containing its Audit and Assurance Policy and Resilience Statement requirements.  Boards will also need to familiarise themselves with the FRC's new Minimum Standard for Audit Committees in relation to external audit, which was developed following a recommendation from the Competition & Markets Authority.

Open responses to the FRC's consultation have been published by the Association of Chartered Certified Accountants and the Pensions and Lifetimes Savings Association; both of which welcome the revisions to the Code and encourage the FRC to go further.  As such, companies can expect continued pressure from stakeholders to demonstrate responsible governance.

What does this mean for management liability exposures?

By embedding ESG considerations, proportionate remuneration and monitoring of emerging risks into the Code, the effect of these proposed reforms is to place more responsibility on directors to ensure that companies are operated responsibly.  The new declaration in particular seeks to commit directors to devoting adequate time to the business and affirming their own effectiveness (something which could easily be relied upon at a later date in any claim) and requires directors to assume a more prominent position in effectively underwriting the success of the company, both from a profits viewpoint and from a responsible-business perspective.  There is not as yet any guidance on how to measure whether a company's risk governance has been "effective", which leaves open the possibility that this will simply become an exercise in semantics.  There is scope for disputes here as effective governance is open to interpretation depending on one's viewpoint.  The FRC has clarified that board performance reviews are crucial and hopes to encourage a "continual process of self improvement". 

Similarly, whilst ESG has risen swiftly to become of key strategic importance to many businesses, it is a relatively new (having only been coined in 2004) and arguably nebulous concept that is heavily influenced by a rapidly changing society.  What ESG means to us now in 2023 may be wildly different to what ESG means to us by the time the new Code comes into force, and it can be difficult for businesses, especially larger businesses, to adapt quickly; although of course the Covid-19 pandemic tested of the speed of adaptability for most.

We are already seeing shareholder activism, claims against directors from climate action groups and, together with claims of "greenwashing", these are likely to intensify and perhaps find a firmer footing once ESG considerations are embedded into the Code.

In light of the prominence afforded to inclusion, diversity and equal opportunity, we may see more employment-type claims against directors, arising from perceived discrimination, for example.

Depending on the industry in which the company operates, it may well be difficult for directors to tread the right line between operating responsibly whilst still delivering profits for shareholders, particularly given the need to incorporate shareholder views in its annual report.  It is easy to see disputes between shareholders and the board concerning how shareholders' concerns have been represented and where there is a dispute over the company's governance.

Disputes concerning a director's commitment to the business are likely to become more common as the Code places a greater focus on whether directors have sufficient time, bearing in mind their other commitments, to devote to the business.

Remuneration is already a contentious area for some and we expect to see these disputes continue. In particular, we anticipate the proposed reforms will result in greater pressure on companies to exercise clawback provisions where culpability for failings can be identified and intra-company disputes around clawback and allegations of "scapegoating" to increase.

Practical tips for directors and their insurers

Directors will want to ensure that they familiarise themselves with the amendments to the Code and plan ahead to ensure that they are well on their way to having implemented the new policies required by the Code before its launch in 2025.  Insurers are likely to find information about a company's plans and progress helpful on renewal or when a new risk is presented.

Companies will need to be clear on their strategy for achieving their objectives in a responsible way and on what ESG means for them and their industry; partly so that they have a clear strategy to measure against for the purposes of the declaration, and partly to guide them with day-to-day decision making. Similarly, a clear strategy is likely to reassure Insurers that careful consideration has been given to this difficult area.

Companies should carry out a risk assessment of emerging risks and keep a written record of these as well as considering whether their structure around remuneration and clawback is fit for purpose.  Directors should also review their appointments and consider whether they have sufficient time to devote to each business.

Directors without adequate management liability insurance in place would be well advised to speak to their brokers about how insurance can help them manage the risks arising from the revisions to the Code. 

Further reading

Find out more about:

• Greenwashing claims here
• ESG generally here

Litigation concerning per- and polyfluoroalkyl substances (PFAS), or “forever chemicals”, continues to gain traction, both outside the US and against manufacturers that incorporate them into their products.

The persistent nature of these chemicals and their potential harmful effects on human health and the environment are becoming more widely known and we are seeing an increase in PFAS-related claims in Europe and elsewhere in the world.

The US Environmental Protection Agency (EPA) has reportedly identified more than 12,000 chemical compounds within the PFAS family.

The term “forever chemical” refers to their very slow degradability, mobility and persistence in the environment, due to their chemical composition.These chemicals are abundant in our daily lives, including cookware, carpets, food packaging, medical devices, cosmetics, clothing and firefighting foam.

Knowledge of the existence of these chemicals and their potential effects has only come into the public domain in the last 20 to 30 years.
The EPA has noted potentially deleterious health effects from human exposure to PFAS including cancers, impaired immune systems, endocrine disruption, thyroid disease, developmental delays in children and others.

Longer-chain PFAS – such as perfluorooctanoic acid and perfluorooctanesulfonic acid – and their presence in the environment are more widely known, whereas awareness of the shorter-chain PFAS (including GenX) is still evolving.

The increasing public consciousness of PFAS bears a striking resemblance to asbestos and how it emerged as a toxic tort – spawning litigation which is still running decades later.

PFAS litigation in the US is well-developed and for the past three decades has mainly focused on environmental (remediation) and personal injury claims against the main manufacturers of these chemicals.

At present, there is ongoing litigation concerning alleged contamination of water systems with PFAS from manufacturing plants and PFAS in firefighting foam, including allegations that its use at military bases and airports has contaminated groundwater.

There are also lawsuits brought by firefighters who allege that they have suffered injury as the result of exposure to PFAS in firefighting foam, as well as in clothing and other equipment.

In recent years, lawsuits against other industries such as fast food, cosmetics and textiles have also started to emerge. Last year, claims were brought against McDonald’s, Burger King and Coca-Cola, whose packaging and/or food products are alleged to contain PFAS.

There have also been claims against L'Oréal, Rimmel and others in relation to PFAS in make-up products and misinformation claims concerning PFAS in menstrual underwear. In recent months, the presence of PFAS in contact lenses has also been in the spotlight.

Although claims in Europe are still at an early stage compared to the US, litigation concerning alleged PFAS groundwater contamination is on the rise and we can expect an uptick in such claims, together with personal injury/property damage claims.

For context, it is thought that there are more than 17,000 sites in Europe where high levels of PFAS are detectable.

In Sweden, a group of inhabitants from Kallinge are seeking compensation on the basis that groundwater was contaminated with high levels of PFAS due to firefighting foam being used at nearby military bases.

In 2022, the Flemish government announced a €571mn agreement with 3M, for remediation of alleged PFAS contamination of the Scheldt River. Elsewhere, the Dutch government is reportedly evaluating legal action in relation to alleged contamination of the western part of the Scheldt River, which stretches across France, Belgium and the Netherlands.

In March 2023, it was announced that 13 municipalities from the southwest of Lyon intend to launch group litigation for compensation in relation to PFAS contamination of the Rhône.

Elsewhere in the world, May 2023 saw a A$132mn class action settlement between the Australian government and thousands of landowners whose properties were allegedly contaminated by PFAS due to use of firefighting foam at air force bases. This follows a 2020 settlement with three communities for A$212mn.

Clearly the PFAS legal landscape is rapidly expanding. In addition to the main chemical manufacturers, we can expect an uptick in litigation against companies which use PFAS in their products.

For corporates, this is an uncertain time given the regulations on PFAS are still being deliberated in Europe (a widespread ban on their use is not expected until 2025, at the earliest) and the class of chemicals is so vast.

Moreover, the issue has gained more prominence against the backdrop of an ESG-centric era where collective redress is becoming more prevalent in certain jurisdictions, coupled with litigation funding being more accessible.

The Insurance (Amendment) Bill 2023 has been introduced to establish the statutory foundations for the new risk-based capital (RBC) regime for Hong Kong authorized insurers. The bill is expected to be in force in 2024.

The amendments introduced by the bill will see an end to the current solvency provisions of the Insurance Ordinance (IO) in favour of a Solvency II-style RBC regime, bringing Hong Kong in line with other key insurance hubs. This follows several rounds of consultations with the industry. In addition to changes to the IO, new rules will be introduced setting out the detail of the RBC regime.

Not only does the bill set conditions for RBC, it also introduces several other important updates of note to the IO including:

• introduction of the concept of “Designated Insurer”, being foreign-incorporated insurers that carry on the majority of their business in Hong Kong. Designated Insurers will be subject to the same regime as Hong Kong-based insurers
• distinguishing between minority shareholder controllers (15% to 50%-) and majority shareholder controllers (50%+) and providing requirements for approval for minority controllers who propose to become majority controllers
• shoring-up provisions regarding notifications of changes in particulars of directors, controllers and other key persons
• a requirement that general insurers must also have approved actuaries and file periodic actuarial reports
• a requirement that insurers make certain public disclosures in relation to their solvency position
• provisions regarding the keeping of separate funds and accounts
• provisions in relation to assets that general insurers must maintain in Hong Kong
• providing new powers for the Insurance Authority (IA) to make investigations that it regards as “desirable for mitigating or controlling the risks posed to or by the business of the insurer” and requiring third-party reports.

The bill can be seen in the broader context of Hong Kong’s determination to be a leading insurance hub and furthering the IA’s objectives in modernising the jurisdiction’s regulatory infrastructure. It also introduces some welcome clarifications to the IO. The new provisions beyond the RBC considerations will certainly have impact – the new “Designated Insurers” regime will cause some of the life businesses to consider redomiciling to Hong Kong (in respect of which separate legislation is currently being developed). The distinction between minority and majority shareholder controllers and the new approvals process will also impact group restructuring considerations. Further assessment will be needed once the new RBC rules are circulated.

More opportunities ahead for Hong Kong motor insurers

The long-awaited Northbound Travel for Hong Kong Vehicles (the Scheme) opened for applications on 1 June 2023, with approved travel commencing from midnight, 1 July 2023.

The Scheme allows Hong Kong residents to travel to Guangdong in their private cars via the Hong Kong-Zhuhai Macao Bridge (HZMB) as long as applicants meet stated requirements, one of which is obtaining motor insurance that covers both Hong Kong and the Mainland. The Scheme is expected to benefit more than 450,000 private vehicles (only 16,700 private vehicles were allowed to cross the border under the pre-1 July system).

This scheme takes its place within the wider Greater Bay Area project (GBA) and will increase movement and connectivity between the cities. The agreement between the regulators in Hong Kong and the Mainland to implement cross-border insurance coverage – a “Unilateral Recognition” policy – sets a precedent for further insurance schemes to follow and gives a boost to the insurance market. Each policy will be issued by a Hong Kong insurer with coverage extending to include third-party liability motor insurance in the Mainland. Sixteen Hong Kong carriers are set to offer the Unilateral Recognition motor insurance.

A factsheet for the scheme can be obtained from the Insurance Authority's website.

Unilateral Recognition products include mandatory top-up cover for third-party personal injury and/or property loss, with a limit of liability of RMB 200,000 per event (being the Mainlands statutory minimum requirement). Policyholders may also opt for additional selective top-up cover which protects against third-party personal injury and/or property loss in excess of the statutory minimum requirement in the Mainland as well as claims relating to the driver and passengers of the insured vehicles.

Singapore MAS to consult on changes to the Insurance Act and Insurance (Intermediaries) Regulations

The Monetary Authority of Singapore (MAS) has released a consultation paper outlining proposed amendments to the Insurance Act 1966 (IA) and the Insurance (Intermediaries) Regulations (IIR).

The proposed changes aim to enhance MAS supervisory powers, clarify existing policy intent, align with other IA provisions and MAS-administered Acts, and reflect changes in policy intent.

The proposed changes to the IA include the introduction of an anti-commingling policy for licensed insurers and registered insurance brokers, prohibiting them from directly undertaking businesses other than insurance business and “permissible businesses.”

Additionally, the sharing of names, logos, or trademarks by locally-owned insurers with entities other than themselves will require MAS prior approval

MAS also plans to strengthen its oversight of insurers' outsourcing arrangements which includes imposing requirements on insurers to conduct due diligence on service providers and the inclusion of specified provisions in policies, procedures, and contracts. There are also plans to introduce explicit powers requiring insurers to restitute their insurance funds for Participating (Par) and Investment-Linked (IL) policies.

In terms of policy intent clarification, proposed revisions would require captive insurers licensed for life business to establish insurance funds for IL/ non-IL Policies and Par/non-Par Policies. Reinsurers will also be required to maintain separate insurance funds for different types of policies.

Further amendments are proposed with the aim to better align the provisions of the IA and other MAS-administered Acts (such as the Banking Act 1970). This includes removing the provision allowing public inspection of insurers' returns, increasing penalties for contravening return submission requirements, and introducing penalties for insurers and insurance brokers failing to ensure the accuracy of lodged returns.

Turning to the IIR, the proposed amendments suggest requiring registered insurance brokers to notify MAS of adverse developments affecting their business or the fitness and propriety of their substantial shareholders, controllers, and key officers. Brokers will also need to establish compliance arrangements, risk management policies, and internal controls appropriate to their business.

As the consultation period for the proposals has now closed, it is important for insurers and intermediaries to closely monitor the progress of the proposed amendments to stay abreast of their obligations.

ChatGPT’s impact on insurance: adoption, potential and concerns

ChatGPT, the generative language model developed by OpenAI, reached over 100 million users in just two months when it was launched last November.

This record-breaking speed of adoption, outpacing the success of Instagram and TikTok, has garnered attention for its potential impact on the insurance industry.

Its deployment by insurance companies to enhance customer support is one area gaining particular traction. Chatbots powered by ChatGPT can provide instant responses to customer enquiries around the clock, helping customers to quickly and easily report claims, get answers to frequently asked questions, and receive support for other issues related to their policy.

Swiss Insurer, Helvetia, recently announced the launch of its direct customer service based on ChatGPT technology with the aim to make access to insurance and pension products more straightforward. Japanese Insurer, Tokio Marine are also reported to have partnered with an AI start-up with a system set to go live that will generate answers to queries related to coverage and procedures from policyholders and insurance agents.

ChatGPT equally has the potential to assist underwriters gathering and analysing large amounts of information, such as weather patterns, economic conditions and demographic trends, enabling better informed underwriting decisions.

Zurich is reported to be utilising ChatGPT technology to extract data from claims descriptions and documents, analysing the most recent six years of data to identify the specific cause of loss across a large set of claims, ultimately enhancing its underwriting practices.

The technology can be used to analyse customer data to better understand customers’ needs and offer more targeted product recommendations as well as to streamline claims handling and detect fraud patterns and anomalies, allowing insurers to safeguard the interests of their customers and maintain the integrity of their claims processes.

Concerns have arisen regarding customer privacy, lack of personalization, accuracy and the trustworthiness of AI systems, as well as AI’s technical limitations and issues that could arise from system outages. Additionally, the presence of biases in ChatGPT’s AI algorithms can pose ethical concerns over potential discrimination and unfair treatment.

Despite these drawbacks, generative AI’s value currently lies in automating essential but non-core tasks, saving time and boosting efficiency. Insurance companies are leveraging the underlying technology to jumpstart their own innovations and solve specific problems. While some specialty and commercial lines may take time to benefit from AI models due to data limitations, personal lines like home and auto insurance, with abundant data points, may see remarkable results.

All material contained in this guide is provided for general information purposes only and should not be construed as legal, accounting, financial or tax advice or opinion to any person or specific case. RPC accepts no responsibility for any loss or damage arising directly or indirectly from action taken, or not taken, which may arise from reliance on information contained in this article. You are urged to seek legal advice concerning your own situation and any specific legal question that you may have.

Cryptocurrencies have existed since 2009, when the Bitcoin blockchain was launched. Since then, the space has grown at an extraordinary rate. As of March 2023, around 23,000 cryptocurrencies exist, with many having different use cases and unique selling points. 

Given the speed at which the space is growing, the world is grappling with what exactly cryptocurrencies are – are they currencies, assets, or investments?  Most important for solicitors, how, if at all, can they truly be regulated?  

What is Bitcoin?

The best starting point for understanding this landscape is the most well known cryptocurrency: Bitcoin. At the time of writing, Bitcoin has a market cap of c. $541 billion – just under half of the entire market cap for all cryptocurrencies.

After the fallout of the 2007/8 economic crash, Satoshi Nakamoto (the still unknown founder(s) of Bitcoin), published a white paper called Bitcoin: A Peer-to-Peer Electronic Cash System, in 2008. Nakamoto's goal was simple: to enable online payments that could be sent directly from one party to another, without having to rely on a third party financial institution (for example, a bank).  

The White Paper sets out how the Bitcoin protocol would operate, how it would remain independent and how it would remain secure.  On 3 January 2009, the first Bitcoin was created, or mined.  

However, Bitcoin needs somewhere to exist, and this is where the blockchain comes in.

What is the blockchain?

Bitcoin exists on its own blockchain which, in its simplest form, is a transparent ledger that anyone can access. Accordingly, the blockchain makes it possible for anyone to review any historical Bitcoin transaction. The blockchain is updated and maintained simultaneously across thousands of computers (known as 'nodes'). Whilst nodes operate individually, they all work to validate, broadcast, process and store BTC transactions. 

Because the ledger is spread across multiple nodes, it is decentralised. As a result, Bitcoin does not exist in just one jurisdiction. In principle, its decentralised nature means this system is robust, free of censorship and resistant to state/organisational intervention and geopolitical conflict. Its greatest advocates have argued that due to its freedom from state/organisational control, it is resistant to inflation. This is because Nakamoto ensured that only 21 million bitcoins will ever exist. The last bitcoin is due to be mined in c.2140. In comparison, "fiat" currencies, such as the US Dollar continue to feel the effects of inflation. Commentators allege that the US dollar has lost 96% of its buying power since the inception of the Federal Reserve in 1913. This is in large part caused by governments continuing to use quantitative easing. In 2020 alone 40% of all US Dollars in circulation were "printed".  

How does the blockchain work?

The nodes referenced earlier continuously update the register of transactions on the blockchain.  The ability to send bitcoin continues so long as the nodes keep up to date records.  Rather than recording and agreeing on the order of every individual transaction, the nodes record transactions in clusters, called 'blocks'.  Blocks are created far less frequently than transactions, and one block can contain hundreds of transactions.  

Instead of having to agree on the order of individual transactions, which could allow for a "double spend" scenario, the nodes need only to agree on the order of blocks.  Once transactions are bundled with others into a valid block, the block is passed amongst the network and verified (confirmed).  When the next block is verified by the nodes, the first block has two confirmations, and so on.  As the blocks are layered on top of one another, they are chained together by cryptographic hashes – hence: blockchain.  

How do you access and use Bitcoin?

Acquisition of Bitcoin is easy. The most popular way to buy it is through an exchange, where you can purchase Bitcoin with a standard bank transfer.  You simply send money to your account on the exchange before then purchasing Bitcoin.  

When users buy Bitcoin from an exchange, they are assigned a public key which they can share with anyone. This key acts as an address (akin to a banking sort code and account number) and allows for anyone with knowledge of it to send Bitcoin to it.

This key also acts as the user's identity on the blockchain – it is this key that is recorded on the blockchain as receiving or sending bitcoins. Therefore, the more this key is shared, the less anonymous the user becomes.  There is, however, nothing stopping anyone from having as many addresses (or "wallets") as they want. 

In addition to a public key, participants are also given a private key. This key is specific to just your Bitcoin "wallet". A private key gives you the ability to prove that you are the owner of the Bitcoin in your possession. It can take many forms; for example a QR code or a mnemonic phrase. When a wallet is set up for the first time, the user is given its private key which will never be shown again.  Should that user ever be "locked out" of their wallet, access can be re-granted by the user repeating their private key.  Losing the private key is likely to mean that re-establishing access to funds is impossible - and some have lost millions as a result. 

What about the volatility of cryptocurrency? 

Anyone who has paid even vague attention to the cryptocurrency market will be aware that the market is volatile.  Since reaching an all time high of $69,000 per Bitcoin in November 2021, its price has now crashed as low as c.$15,500. This crash has wide reaching consequences, not just for investors, but for those employed within the space. 

What does all this have to do with lawyers? 

On 11 January 2022, the Master of the Rolls, Sir Geoffrey Vos stated that "every lawyer will require familiarity with the blockchain, smart legal contracts and cryptoassets".  He (and others) predict that cryptoassets and blockchian becoming mainstream is imminent.  Commercial and technological developments over the past two years – accelerated by Covid – have given rise to huge growth in the use of both cryptoassets and blockchain.  The legal sector is not immune from these advancements and, in fact, is heavily involved already.  The President of the Law Society anticipates that we will see further increase in law-tech adoption across the profession in the coming years.  New regulations and legislation are being introduced to catch up and keep pace.  

At the same time, lawyers are increasingly working with technological specialists and taking on the role of project managers.  This technology is increasingly forming part of main retainers – all of which means that not only do solicitors need to quickly get up to speed with how these technologies operate, but also how they impact the way in which legal services are carried out.  

What is the current UK legislation and regulation position?

The UK currently has no specific legislation governing cryptocurrency, so the way in which it is treated by the law has been developed through case law alone.  Case law has so far established (among other things): 

• That cryptocurrencies constitute property under English Law (AA v Persons Unknown [2019] EWHC 3556)

• That the governing law of a cryptoasset is the place where the owner is domiciled (Ion Science Ltd & Ors v Persons Unknown & Ors (Unreported));  

• That cryptoassets can be held on trust (Zi Wang v Darby [2021] EWHC 3054); and 

• That alternative service of proceedings may be granted by 'airdropping' NFTs into a crypto wallet.  In D'Aloia v (1) Persons Unknown (2) Binance Holdings Limited and others¹ , the Court granted an order for alternative service in this way when the Claimant fell victim to a crypto scan.  

In addition, there is presently no specific regulatory regime for cryptoassets in the UK, other than that since January 2020 crypto-asset exchange and wallet providers fall into the scope of anti-money laundering regulations and must be registered with the FCA.  However, the FCA does not regulate most cryptoassets, so the FSCS will not protect investors if exchanges go out of business.   

In January 2022, the FCA published a consultation paper on strengthening financial promotion rules for high risk investments, including cryptoassets.  The trigger for this consultation was research revealing a lack of understanding on the part of crypto consumers regarding the potential risks, rendering them susceptible to losses.  For example, 45% of new investors said they did not view 'losing money' as a potential risk of investing, and 69% of people aged 18 – 40 who had purchased cryptoassets wrongly believed they are regulated by the FCA.  The FCA's official advice is that consumers should "be prepared to lose all [their] money" if they invest in crypto.    

The Treasury, along with the FCA, has recently consulted on cryptoassets and the government has tasked the Law Commission with making recommendations for reform to ensure that the law deals adequately with cryptoassets whilst also fostering its growth and benefits.  On 21 November 2022, the deputy governor for financial stability at the Bank of England, Sir Jon Cunliffe, said that the very recent collapse of FTX highlighted the "urgent need" to regulate the cryptocurrency sector.  It is clear, therefore, that this area is going to be subject to significant change. 

What type of work are solicitors already doing in this space – where cryptocurrencies are the focus of the retainer?

Corporate and commercial

Corporate and commercial lawyers are working with suppliers and customers of blockchain technologies and cryptoassets, advising on issues such as: contracts, compliance, regulatory and competition issues.  There may be IP considerations – does the client need to consider licences, copyrights, patents, trademarks and data security?  Clients are likely to need input from tax specialists. 

It is easy to see how this type of work, much like a standard corporate transaction, can involve services across a corporate law firm.  

Disputes

Lawyers will be advising on disputes where cryptoassets have been misappropriated and clients are seeking their recovery, possibly because of wrongful acts.  Lawyers are also advising on title and trademark disputes involving cryptoassets.  

Cryptoassets have been the subject of freezing injunctions, worldwide freezing orders and a banker's trust disclosure order (Walker and Danisz v Persons Unknown).  In the context of litigation, the Court even considered whether Bitcoin could stand as security for a defendant's costs: in Tulip Trading Ltd v Bitcoin Association, the court decided against this due to the volatility of Bitcoin.  

Contracts

Smart contracts are essentially programs stored on a blockchain.  They are digital contracts that are automatically generated, executed and enforced when pre-determined conditions are met.   The main benefit of a smart contract is that it enables contractual performance to occur without the need for human intervention.  They tend to be used in standard transactions using run of the mill documents. 

Lawyers are likely to be involved in the creation of smart contracts from both a legal and technical perspective.  They will need to think about the legal aspects of the contract but also whether its digitisation and the coding used gives effect to the agreed terms of the contract.

What about legal work where crypto/blockchain is incidental to the retainer?

As well as lawyers being directly involved in the crypto/blockchain sphere, there is no doubt that cryptoassets are affecting, or will affect the more traditional types of legal service.  

Real Estate

Solicitors have to find a way to deal with clients who approach them wishing to turn their cryptoassets into properties.  Given the concern about links between cryptoassets and organised crime, solicitors need to be extremely careful.  

The Proceeds of Crime Act 2002 relates to the recovery and confiscation of proceeds made from criminal activities – it applies to the professional advisers involved in the transactions relating to this property, not just the cryptoasset owner.   

In addition to the risks, however, it is also worth considering the opportunities that blockchain may provide for the real estate industry, such as marketing properties across multiple locations simultaneously, allowing transactions to take place through the blockchain using smart contracts or revolutionising centralised land registries. 

We anticipate that borrowers who hold significant digital assets are likely to push for them to be considered by lenders as part of the credit process when assessing whether to lend.  

Solicitors will want to be fully on top of these changes. 

Divorce

Cryptoassets are treated as property by the Courts and can therefore be divided, transferred or sold within divorce and ancillary relief proceedings, just as with any other asset. 

Within the context of divorce proceedings, spouses must give full and frank financial disclosure of all their assets and liabilities, which includes cryptoassets.  Lawyers will need to not only fully understand the assets, but also review their value.  This is particularly important (and potentially particularly difficult) given the volatile nature of the value of cryptoassets.

Issues for divorce solicitors to consider include: 

• a failure to disclose cryptoassets may result in a spouse being penalised by the Family Court for committing a material non-disclosure; 

• a party ordered to transfer cryptoassets may be forced to offset its value against another asset if they fail to do so; 

• tracing cryptoassets is potentially difficult (and could be all but impossible).  The crypto-sphere markets itself partly on its increased security and anonymity and there is no central register of ownership on which solicitors can conduct checks. 

• Solicitors may have to consider instructing specialists to uncover and trace cryptoassets.  In addition, special injunctions may need to be considered.  Where should orders relating to cryptoassets be served?  Potentially on the crypto exchange(s), in addition to the asset owner, and there could be numerous exchanges to serve.  

Divorce solicitors work within a system relying on full (and honest) disclosure.  It is not hard to see that the increased ability to conceal assets that crypto provides may cause problems for solicitors in this sector.  

The volatile nature of cryptocurrency causes additional issues.  How should valuation be tackled?  An asset's value could change significantly from the disclosure of a spouse's Form E by the time settlement is achieved, or a hearing held.  What happens if the value of cryptoassets change significantly once settlement is agreed?  It is likely that expert evidence may be required to provide a long-term appraisal of the value.  

A rapidly shifting asset price will also not assist solicitors when it comes to conducting a cost-benefit analysis of instructing experts.  If an expert tracer is required, this may easily be justified if the asset's value is high but should this crash (which can happen very suddenly), solicitors could wind up incurring costs tracing or valuing an asset that are greater than the asset is ultimately work.  Clients are unlikely to thank solicitors for incurring cost on this basis.  As the use of cryptoassets grows, there could be a lot for solicitors advising in this space to grapple with.  

Private client

Private client lawyers should be asking clients at the outset to establish the extent of their estate held as cryptoassets.  Where cryptotoassets are involved, there are potential problems: 

• The executors may not have any knowledge of the asset and even if they do, they may not be able to get hold of the keys.

• On the other hand, if the keys are part of a will, once a grant of probate has been issued, a will becomes a public document, and so in that event, there is a risk that the keys become publicly available. 

• What are these assets worth, and how can solicitors best establish their value?

• Given their volatility, cryptoassets can be problematic to manage. 

Tax

There are numerous issues for a tax lawyer to consider.  HMRC has assessed that:

• Cryptoassets are liable to CGT upon disposal.

• Cryptoassets received from employers give rise to an income tax and national insurance liability.  

• Cryptoassets form part of a deceased's estate and so there will be inheritance tax considerations.

• Gifts within families have the same tax consequences as transfers of any other property. 

There will be potentially tricky jurisdiction issues for tax lawyers to consider. 

Cryptoassets and ESG

The popularity of cryptoassets has grown extremely quickly.  At the same time, increasing focus has been placed on its potential impact from an ESG perspective.  Investor interest in ESG continues to grow and, as a result, businesses, financial institutions and insurers find themselves facing previously unseen levels of scrutiny in terms of their ESG credentials.   

ESG is an enormous subject and discussing ESG and cryptoassets could easily encompass several articles, but we will touch briefly on each area. 

Environment

Environmental concerns have been raised relating to the amount of energy used in mining cryptocurrencies and the consequent emissions, particularly Bitcoin.  Mining a single Bitcoin uses the same amount of energy as one US household uses in 9 years.  Bitcoin currently consumes more electricity than the entire country of Argentina and emits roughly the same amount of carbon dioxide into the atmosphere every year as Greece.  

However, there is a growing trend towards using renewable energy and today, nearly 40% of cryptocurrency mining is powered by renewable energy.  Some investors now seek sustainably mined Bitcoins, which are more costly but are less likely to carry ESG and reputational risks.

Social considerations

Cryptocurrencies are, in theory, widely accessible; all consumers need to access the market (beyond the investment sum) is a connection to the internet.  Investors can transfer value all over the world via a network that is independent, not centrally run or subject to state interference (and its supporters argue it has an inherent value as a result of this feature alone).  However, the available anonymity could enable market manipulation and encourage or support financial crime.  To combat this, a range of 'know your customer' solutions are developing.

Governance

As touched on above, Bitcoin is decentralised, it is not run by a central body, organisation or group.  In theory, it is governed communally by its users.  If someone wished to make a substantial change to its system (such as changing from a proof-of-work to a proof-of-stake model, which may make it more environmentally sustainable), they would need to submit a BIP (a Bitcoin Improvement Proposal) to the Bitcoin community (though there appears to be no formal place to do so).  A BIP is passed and incorporated into the Bitcoin protocol if it is 'upvoted' by at least 95% of the mining community.  Whilst this does, in theory, allow democratic governance, the lack of a formal place to garner support for a BIP and the extremely high threshold for effecting change must surely make changes unlikely.   

ESG conclusion

Businesses cannot escape the impact of ESG and solicitors are no different.  If law firms are handling cryptoassets, or advising on them, it is worth thinking about whether this is likely to have an impact on their ESG credentials (not least because their insurers might want to know about it).

Risks for solicitors and their insurers 

Insurance

Solicitors' policies indemnify their insureds against civil liability to the extent that it arises from 'private legal practice'.  Private legal practice is the provision of services in private practice as a solicitor and the work described in this article will undoubtedly fall within this (rather vague) definition.  

The world of cryptoassets and blockchain is a new world and it is constantly developing and evolving.  There is currently light regulation, but that is likely to change.  This market is taking off and is also going to expand.  The UK is actively embracing digital technologies.  

With that level of rapid change and huge expansion of this market, lawyers who are advising on these issues in such an evolving landscape are potentially at risk of liability claims if they get it wrong, or where they do not keep pace with the developments.   There may be a lack of understanding and knowledge here – all of which means that claims may be more likely to arise.  

The other issue, somewhat unique to cryptoassets, is that with such rapid fluctuation in their value, it will be difficult for law firms to get a steer on the value of any claim against them.  This could have a knock-on impact in assessing risk, which will impact reserving claims.  This also has wider implications for pricing, premiums and reinsurance. 

Examples of potential claims solicitors may face 

• Regulatory and tax - lawyers advising in this space need to ensure that they keep up to date with rapid changes.  It is not difficult to imagine that claims are likely to arise as a result of the advice being wrong.

• Divorce and wills - clients may look to blame their solicitor if there have been difficulties getting hold of all the disclosure / information on assets.  These assets can be very hard to track and private keys, once lost, are unlikely to be recovered.

• Commercial disputes - solicitors may need to act quickly to instruct experts to trace cryptoassets and to consider what applications to Court may need to be made to freeze them. Claims may arise where solicitors have failed to take such steps, or failed to do so promptly. 

• Smart contracts - lawyers may be exposed where something goes wrong with the smart contract.  

• Cryptoassets are increasingly being used as a vehicle for money-laundering.  If this area means clients themselves are more susceptible to fraud – they are going to look to someone to blame.  Solicitors can be an easy target if they fail to carry out proper due diligence and checks.  

How can law firms deal with these emerging risks? 

Law firms should start with the basics; thinking carefully about what work they may already be doing with cryptoassets.  How much consideration have they given to which practice areas are starting to have involvement, or are likely to become involved in the near future?  

Law firms should carefully think about what expertise they have already, and what further learning or training needs they have.  In addition, law firms should think carefully about whether they are consulting on this subject (who might be delivering any necessary training?) or outsourcing to experts or specialists.  Do those external bodies have the right expertise, and do they have their own professional indemnity insurance? 

Law firms must think carefully about what checks and due diligence they are doing on the source of funds where cryptoassets are involved.  This should obviously be carefully documented.  

Whilst this is the case when any legal work is carried out, it is especially vital for law firms to carefully define the scope of their retainer (in writing) when involved with cryptoassets/blockchain.  Solicitors must identify which aspect of any transaction they are advising on and which aspects are for other advisers to deal with.  A failure to clearly set this out can lead to an expectation that a solicitor has been engaged to provide advice on broader business matters.  Solicitors must be careful to consider the purpose for which the advice is sought, and given, and how this fits into the entire transaction.  The notion of 'scope creep' and the finding in MBS v Grant Thornton²  are especially relevant here. 

Conclusion

There can be no doubt that the world of crypto and blockchain is growing fast.  In addition to the risks and challenges, there are considerable opportunities for solicitors in this sphere.  The UK legal system is well placed to become to the go-to jurisdiction for crypto dispute resolution thanks, in part, to the High Court's repeatedly pragmatic and commercial approach to crypto fraud cases and guidance from the judiciary.  

With cryptoassets becoming more and more accessible to the average person, it is hard to see a world in which solicitors will not be expected to advise on areas touched by cryptoassets in the future.  For now, the questions remain, how will the sector keep up, and when will meaningful regulation roll out?

^[1] [2022] EWHC 1723 (Ch)
^[2] Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20

On latest government figures, there were 22,109 registered insolvencies in 2022, the highest number since 2009 and 57% higher than in 2021.

The overarching duty on directors is to act “in the way [the director] considers, in good faith, would be most likely to promote the success of the company for the benefit of its [shareholders]…” (section 172(1), Companies Act 2006). This imports a duty to creditors in certain circumstances. As with directors’ duties generally, the duty is owed only to the company. Only the company (or a liquidator or administrator or an assignee) can sue for breach, not individual creditors.

The creditor duty is engaged either when the company is insolvent or insolvency is imminent, or when insolvent liquidation or administration is probable. A company can be actually or imminently insolvent, but still have good prospects of trading out, hence why the test has two limbs. A majority of the Supreme Court held that the creditor duty would not be triggered, unless the directors knew, or ought to have known, of the insolvency position.

Ominously, the minority did not rule out the duty being engaged, even when the directors did not know and reasonably could not have known of the insolvency position.

When there is actual or imminent insolvency:

• Directors must consider the interests of creditors, and (if they conflict) attempt to balance them against the interests of shareholders. Moreover, the duty is to strike the right balance between these potential competing interests, of the company’s shareholders and creditors.
• The greater the company’s financial difficulties, the more the directors should prioritise the interests of the creditors over those of the shareholders.
• If the directors do not consider the interests of the creditors at all, they will automatically be in breach of duty. This is illustrated by a number of judgments, that have already been handed down since BTI vs Sequana finding directors liable.
• If the directors do consider creditors’ interests and attempt the balancing exercise (with shareholders’ interests) in good faith, but objectively get it clearly wrong, this would be a breach of the creditor duty. It is of concern that this appears to broaden the overarching director duty, from a good faith duty into a reasonable care duty, when the creditors’ interests are to be taken into account in decision making. Previously that was not, or was not clearly, the law.

When insolvent liquidation or administration is probable, the position is even more onerous for directors:

• The interests of creditors then become paramount. The shareholders’ interests are no longer to be recognised or promoted.
• Failing to consider creditors’ interests, and/or having any regard to the interests of shareholders, will be a breach of the duty.
• By analogy with ‘wrongful trading’ (under section 214, Insolvency Act 1986), to avoid breach, the directors must take every reasonable step with a view to minimising the potential loss to the company’s creditors, seemingly even if the company in fact avoids being wound up. This appears, again, to be a development in the law.
• Although in the minority, one of the judges stated that this heightened duty to creditors should apply even when an actual insolvency procedure was not probable, provided the company was either actually insolvent or insolvency was imminent.

Since the Supreme Court’s decision, three High Court cases (all in 2023) have succeeded against directors, for breach of the creditor duty, illustrating how BTI vs Sequana may well cause an increase of claims against directors.

The Supreme Court will likely be looking at the creditor duty again, in the near future. The D&O market should closely monitor developments.

This article was first published in Insurance Post.

The facts

In 2021, an unexploded WWII bomb was discovered during construction works on land adjacent to University of Exeter halls of residence. A controlled explosion was the only way to safely remove the bomb which resulted in the complete destruction of the bomb, the release of its full explosive load and damage to UoE property. 

UoE subsequently notified a claim for damage and business interruption to Allianz. Allianz declined cover on the basis that the policy excluded loss and damage "occasioned by war". Ultimately, Allianz sought a declaration from the Court that they were entitled to decline cover.

The decision

The relevant exclusion within UoE's policy was a variation on the standard UK market War Exclusion:

“Loss, destruction, damage, death, injury, disablement or liability or any consequential loss occasioned by war, invasion, acts of foreign enemy, hostilities (whether war be declared or not), civil war, rebellion, revolution, insurrection or military or usurped power.”

Eagle-eye readers will notice that the standard War Exclusion includes, "confiscation or nationalisation or requisition or destruction of or damage to property by or under the order of any government or public or local authority" which was missing from the exclusion in this case.

The court was presented with two potential proximate causes of loss (i.e. the effective cause of the loss):

i. the dropping of the bomb; and/or
ii. the controlled detonation of the bomb.

Either could be the sole proximate cause or, if the Court accepted that both caused loss, then they would both be "concurrent proximate causes".  

Restating the decision in JJ Lloyd Instruments Ltd v Northern Star insurance Co Ltd that concurrent proximate causes were causes which were "equal, or at least nearly equal, in their efficiency",  FCA v Arch established that where one concurrent proximate cause is excluded, but the other is not, the exclusion will prevail.

Allianz argued that the dropping of the bomb was one, if not, "the" proximate cause of the loss. On that basis, they argued the loss was "occasioned by war" and so the exclusion was engaged.

On the other hand, UoE's case was that the only proximate cause was the controlled detonation which they said was not "occasioned by war". 

His Honour Judge Bird, siding with Allianz, noted that the proximate cause test is a matter of common sense. 

His starting point was that the loss was caused by an explosion. He reasoned that "the explosion was triggered by the reasonable (and indeed obviously correct) decision to detonate the bomb. That decision was necessitated by the presence of the bomb. If there had been no bomb, there would have been no explosion. … if the bomb had exploded when it landed … the conclusion that the bomb was the proximate cause of the damage would have been inevitable. Does the reasonable and necessary human act of detonating the bomb change that analysis? In my view it does not." 

Further, he rejected the contention that the passage of time between the dropping of the bomb (in 1942) and its ultimate detonation, was enough to unseat his analysis. He observed that the explosion and damage were proximate in time, but that "the passage of time does not of itself provide an answer to the question of "proximity" [as a question of causation].  He concluded that "the dropping of the bomb [was] an act of war" and therefore, as either the sole or a concurrent proximate cause, the exclusion applied. He rejected the submission by UoE that the detonation was the sole proximate cause of loss. 

In light of that finding, UoE argued that because the policy contained express language in other exclusions which recited the operation of the FCA v Arch rule, it could be inferred that the absence of such language in the War Exclusion, was intentional, i.e. that the rule ought to be disapplied in this context. 

The specific language relied on was the market standard language of a cyber exclusion, namely "… regardless of any other cause or event contributing concurrently or in any other sequence to such act of Terrorism". 

The Judge ultimately dismissed the argument. He found that in the context of this language, which is increasingly prevalent, the reasonable observer, aware of the rule, would not conclude that the absence of reference to it in the war exclusion meant it was to be read as expressly disapplying the rule. A reasonable person with that knowledge would expect that if the rule was to be excluded, clear words to that effect would be used.

Lessons learned for policy drafting

For drafters of policy wordings, this case is a reminder of a salutary lesson that because policies are interpreted as a whole, there may be unintended consequences of including language which seeks to 'copper bottom' a specific point, especially where including it may open up the argument that inference can be drawn from its absence, elsewhere.

This situation might arise from the incorporation of endorsement language (where it is not uncommon to see that approach), into the body of a policy wording. Whilst that danger did not materialise in the context of concurrent proximate causes, there may be a case where a reasonable observer might conclude that the inference was a reasonable one to draw.  

Hanging essentially on the interpretation of a handful of words within a substantial and complex multi-national insurance programme, were claims for business interruption losses estimated to be worth approximately US $40 million. The insured, who carried on business in the food, beverage and retail sectors primarily in the Middle East and Gulf region wanted to bring those claims in the UK Courts, despite having no business presence in the UK. The Defendants objected on the basis that the Applicable Law and Jurisdiction condition within the policy mandated that such claims be brought in the local Courts (where the policies were issued).  The relevant condition read as follows: "Applicable Law and Jurisdiction: In accordance with the jurisdiction, local laws and practices of the country in which the policy is issued. Otherwise England and Wales UK Jurisdiction shall be applied, […]".

All agreed that the first question was to ask how the words of the contract would be understood by a reasonable policyholder. Lord Justice Males in the leading Court of Appeal judgment noted that first impressions were a useful starting point, but that the Court would then go on to engage in more complex linguistic and contextual analysis, essentially to pressure test that first impression. However, the problem was that this clause created strong and crucially competing first impressions in the different judges that were ultimately justified in their individual judgments.  

Lord Justice Nugee, who acknowledged that he had had the benefit of reading the other judgments first, on his own, [63] referenced the inherent shortcomings of language and the issues of semantics when he said, "It must be admitted … that it is not always easy to articulate with precision why one reading of a disputed provision seems more natural and ordinary than another, as the way in which language strikes a reader is an accumulation of experience of how language is ordinarily used. And, as the present case illustrates, the same words may strike different readers differently".  Meaning is not solely in the words or their context, but also in the very eyes of the beholder.  

Of central relevance was the word "otherwise" which attracted by far the most analysis, particularly in respect of its impact on the two provisions that is seemingly connected: did it denote a true "either/or" alternative, or a primary/secondary alternative" and if so, upon what basis.  

All agreed "otherwise" implied a choice but that it could also denote that which would happen if something else did not happen, i.e. a conditional provision. Lord Justice Males and Lord Justice Nugee formed the view that the primary rule was contained in the first sentence, ostensibly because the first sentence dealt both with jurisdiction and governing law whereas the second sentence, after "otherwise" dealt only with jurisdiction. The somewhat duplicative reference to England, Wales and UK could have been indicative of a failed attempt by the drafter to deal both with law and jurisdiction, but in any event they considered the option of a second forum was conditional upon the first not being available. 

Lady Justice Andrews (dissenting and agreeing with Mrs Justice Cockerill at first instance) reached a different conclusion by taking a more holistic approach to the language. She considered that even where "otherwise" was used in the "if not (a) then (b)" context, it did not necessarily follow that "it was (b) if (a) was not possible". She thought there was still room for choice. In some measure, she justified this interpretation by considering the nature of the reader from whose perspective the clause was to be interpreted. She said,  "Whereas the defendants' interpretation might commend itself to a commercial lawyer, I doubt whether it would even occur to the reasonable policyholder, appraised of all the relevant circumstances, that it could be understood as meaning that it was mandatory to bring proceedings in the local forum, and that they could not go to the English court unless they could establish that the local court had declined, or would decline jurisdiction. They would understand it to mean that if, for whatever reason, they did not bring proceedings in the local forum, they would have to do so in England and Wales."

Lessons learned from a wordings perspective: 

• Intelligibility is improved by short and pithy drafting. However, it is a balance and in some instances, less is not always more. Important provisions with triggers and mechanisms of application, require proper explanation. Law and Jurisdiction provisions in the context of a multi-national insurance programme are a classic example. 
• Think carefully about how two alternatives are dealt with together within one provision. Are the provisions strict alternatives, i.e. "(a) or (b)" and in which case who can elect to decide, or, are the provisions conditional upon each other, i.e. "if not (a) (and ideally why not (a)), then (b)". 
• Be careful with words that have multiple natural meanings and require context. "Otherwise" is a classic example and could mean, "if not", "failing that", "or", "or else", or "alternatively" all of which could be different and it therefore has to derive its substantive meaning from the language which preceded it. 
• The judicial narrative of rejecting submissions relating to the meaning of insurance language as the product of "pedantic lawyers" or conditional upon "minute textural analysis" is going nowhere and chimes with the approach of Regulators. Wordings must be drafted through the lens of the policyholder's sphere of influence and understanding and to the extent that insurers wish to exert rights through those contracts they must do so in clear and express terms.   

The full appeal judgment is available here.

RPC Wording Team

RPC has a core cross-disciplinary wordings team made up of lawyers with a claims background and technical drafting expertise, who partner with colleagues from the insurance regulatory and commercial side of the business – bringing oversight of the wider regulatory landscape, product governance issues, FOS/FCA oversight/jurisdictions etc. The breadth of the wording function is such that we can deal with reviews of individual products (of the type you describe), library consolidation projects and thematic reviews as well as new product design and drafting across mono-line and combined products for SME/mid-market through to global and multi-national master programmes with jurisdictional intricacies.

If you want more information, get in touch with Laura Sponti.

There may be a surge in professional negligence claims against liability-driven investing (LDI) pension funds in the wake of the UK’s mini-budget.

Claims will depend on whether pension funds should have shifted their positions in the months before the mini-budget as interest rates and inflation rose and gilt prices started to fall.

These claims are likely to relate to three time periods: the period leading up to the mini-budget; the period between the mini-budget and October 14, when the Bank of England ceased its bond-buying programme; and the aftermath of this and what actions pension schemes have taken in reviewing their investment strategies.

In relation to the pre-mini-budget period, a professional negligence claim would consider whether LDI was a prudent strategy for the pension scheme, including as part of that question considering whether there was enough liquidity in the fund.

Claims will depend on whether pension funds should have shifted their positions in the months before the mini-budget as interest rates and inflation rose and gilt prices started to fall.

A claim will also hinge on the steps those managing pension schemes took to ensure they reviewed their scheme’s investment strategy and their statement of investment principles. For example: should the pension fund have changed its position when gilt yields started to move higher and interest rates increased in the months before the mini-budget? And how should pension funds have responded to rising inflation, which would influence the interest rate policy of central banks?

If the claim alleges LDI was a negligent strategy, the likely defence would be the strategy was a standard one for the market and fell within what a reasonable manager of a pension scheme’s assets would have undertaken. Investment managers could also argue the mini-budget and the subsequent market response was an unforeseeable event and the losses were so remote any manager of a pension scheme could not be held responsible for these losses.
 
Risk profile

The success of this claim largely depends on the risk profile of the scheme, the investment strategy adopted and whether the strategy mandated by trustees was the one actually adopted. Those managing pension schemes must ensure their asset mix matches their statement of investment principles.

Relating to the period between the mini budget and October 14, a claim is largely dependent on what the scheme’s position was at the time and what options were available based on the scheme’s asset mix. This claim is rather specific and would consider if the right assets were sold to meet collateral calls and to put hedges back in place and if the process was reason¬ably managed given the circumstances.

Finally, relating to the period following October 15, we remain in a period of uncertainty, even after the reversal of the mini-budget. Now is the time for pension funds to review their investment strategy with the scheme’s asset position and funding position in mind.

Steps can be taken to mitigate risk from now on, including reviewing their investment strategy, statement of investment principles and investment mandate, considering the possibility the volatility in gilt yields may return

The events of the past few weeks are likely to result in claims and/or pressure on commercial relationships, particularly when schemes conduct their triennial valuations and agree new deficit reduction plans with employers. This is likely to be a key trend that will develop further in the next year.

This article was originally published in Insurance Day on 2 November 2022.

The facts

John Hodge Solicitors (JHS) acted for Mr Ellis in a personal injury claim (the underlying claim). The defendant in the underlying claim made a series of offers, the highest being £200,000. Mr Ellis sought to recover in excess of £500,000. At trial, the Court awarded damages of £11,813.63 – the decision not to accept the offer of £200,000 had disastrous consequences for Mr Ellis. 

Mr Ellis brought a claim against JHS for damages for professional negligence alleging that they failed to properly advise him on the effect of the offers made by the defendant in the underlying claim. The parties were expected to provide initial disclosure at the same time as serving their statement of case under the Disclosure Pilot Scheme (now implemented under PD 57AD).

JHS defended the claim on the basis that Mr Ellis was fully and properly warned of the risks and counterclaimed for unpaid fees. In its defence JHS stated that it was "not able" to provide initial disclosure under the Disclosure Pilot Scheme because it was exercising a lien over its files. JHS acknowledged that its file of papers was highly relevant and offered to provide the file to Mr Ellis' solicitors on the undertaking that they would not disclose the papers to Mr Ellis to preserve some of the lien's value.

The issues

It was common ground that the retainer was terminated by mutual consent on the resolution of the underlying claim, that the file was disclosable as it contained key documents and material which was necessary for Mr Ellis to know whether his case as pleaded could be maintained. 

The Court was asked to decide whether a lien of this nature extended so as to restrict disclosure of the file, pursuant to a disclosure obligation under the CPR, and if so, whether the Court should exercise its power to restrict the right to withhold pursuant to the lien. 

The relevant law

A solicitor has a common law right to exercise a general lien over client's property – that includes documents held by the solicitor. In other words, subject to certain exceptions, a client cannot have access to their documents or money which is subject to a lien.

The Court can interfere with the enforcement of the common law lien on equitable principles. When it does so, the Court should have regard to:

• When and why the solicitor / client relation ended and who ended it.
• The nature of the case and the stage that the litigation had reached.
• The conduct of the solicitor and the client respectively.
• The balance of hardship which might result from the order that the court is asked to make.
• The fact that the value of the lien is likely to be considerably reduced if the file is handed over.

Where a client terminates the retainer, the court will normally make an order obliging the original solicitor to hand over the file to the new solicitors against an undertaking to preserve the original solicitor's lien – as sought by JHS here (a so-called Robins undertaking following the decision in Robins v Goldingham (1872) LR 13 Eq 440). 

However, in all the previous authorities, the litigation in which the lien was being asserted was the same litigation or related to the same litigation. In this case, the litigation in which the lien was being asserted was a different claim involving a different defendant. 

Although not a direct authority, the Court considered Woodworth v Conroy [1976] QB 884 which concerned an accountant's lien, asserted in defence to a claim for delivery up of the accountant's file. Here it was stated that the right of a solicitor to withhold papers from inspection by his client, even in litigation, was recognised as long ago as 1882. This basic right has not been queried. However, the defendant had not simply asserted a lien but had raised a counterclaim for fees, in response to which the claimant alleged negligence in the performance of some of the work. The Court noted that it would be impossible to try the issues raised without evidence being led as to what work had been done and how it was done. The best evidence of this would be in the file and the court would have to assess its content.

The decision

The Court held that JHS had an obligation to disclose its file and Mr Ellis' solicitors were not required to give an undertaking restricting the use of the papers. Of particular importance was:

• The importance of the documents in the file to the issues before the court. Mr Ellis could not fairly conduct the claim without knowing the content of the file.
• The undertaking was unrealistic. Mr Ellis could not properly deal with the issues without knowing exactly what the documents said. The lien would lose its value if Mr Ellis was told the full content of the documents just as much as if he saw the documents himself.
• The obligation under CPR 31.22 not to use documents disclosed in these proceedings for the purpose of other proceedings had the same consequences as the proposed undertaking.
• The fact that JHS counterclaimed for fees was significant. This part of the claim was defended on whether JHS was in fact entitled to the fees claimed, putting the content of the file directly in issue. The risk of prejudice to Mr Ellis, in circumstances where JHS had chosen to bring a counterclaim against him, was a powerful argument for holding that the lien could not be asserted on equitable principles. 

Takeaways

It was striking that the parties were unable to find any authority on the exercise of a solicitor's lien in this context. 

A solicitor with unpaid fees has a potential common law lien over his property, including documents which 'belong' to the client (see the Law Society practice note on the subject of document ownership). 

However, solicitors as officers of the court are subject to its supervisory jurisdiction and the court can therefore interfere with the enforcement of the common law lien on equitable principles. The principles to be applied differ depending on who terminated the retainer. If the client terminated the retainer (other than for misconduct by the solicitor), the client will generally not be able to access any money or property, or inspect any documents subject to the lien. If ended by the solicitor, even with reasonable cause, unless there are exceptional circumstances, the solicitor will normally be ordered to provide the file to the client's new solicitors. 

A solicitor can seek to protect its interests through an undertaking. However, the difficulty in releasing the file to the undertaking is that the lien is likely to be worth very little at the conclusion of the litigation.

This case suggests that solicitors will struggle to rely on a lien to refuse disclosure of their files in a claim for professional negligence brought by a former client. 

Governments and international organisations across predominantly the US, Europe, Canada, Australia and India are considering how best to respond and, more importantly, to protect their citizens and corporations from cyber-attacks which, now more than ever, pose a constant and highly damaging threat. Some of these policies have started to take effect, ensuring those regions are becoming slowly but surely less attractive targets to threat actors.  

The situation in LATAM, however, seems markedly different. Governments appear slower in their reaction to cyber risk. Political instability across the region does not help. The absence of joint efforts and any active pursuit of working collaboratively in developing both reactive and proactive policies to respond to cyberattacks leave this corner of the world exposed.  There are staggering numbers of incidents across key regional players, including Brazil (33 million attacks), Colombia (11.3 million attacks) and Mexico (7 million attacks) in 2021 alone, according to the Indice de Inteligencia de Amenazas de X-Force 2022.

The Need to React and Protect

Both public and private sectors have started to recognise that protection measures and counteractive policies must be at the top of the agenda. But these changes cannot be created in isolation. In order to be sustainable, they require the most important and, at the same time challenging, development of them all – a cultural transformation; a shift in the mindset where insurance (and in particular cyber insurance) is still placed in the 'luxury' category for businesses. 

In the last few years, the insurance industry has taken steps towards encouraging this change in the LATAM market. However, this progression is occurring at a much slower pace than in the rest of the western world. This is not helped by the disproportionate increase in cyber-attacks, and also the subsequent global hardening of the cyber insurance market. 

The Covid Effect

The COVID-19 pandemic has had its own key role to play in accelerating the process of incorporating cyber insurance for companies at all levels. Marsh and Microsoft joined forces to survey more than 1,000 LATAM companies in order to analyse the state of the cyber market in the wake of the pandemic^1. The newly imposed working structures saw employers faced with the challenge of having to sign up to flexible and remote work policies, therefore increasing corporations' exposure to cyber-security risks. This adaptation to the 'new world', which is reluctant to look back, means that companies have had to include within their budgets a compulsory allowance for strong and secure Information Security tools, as well as putting in place a robust cyber-security policy which will provide effective support in the wake of a cyber incident. 

Nevertheless, there are still companies that refuse to assess and recognise the role that these tools play in order for corporations to survive in today's world. They sometimes opt instead for 'assuming' the risk, resulting in them potentially paying out on the consequences. 

Some others, who perhaps rushed to obtain protection at the pinnacle of the pandemic, no longer see the need to maintain or develop these means of preservation. However, whist the pandemic may go, cyber-attacks are here to stay. 

Now is an enthralling time for the global cyber market in Latin America. A continent packed with interesting proposals for those players with a hungry appetite for risk. It consists of a group of young nations pushed to grow and quickly adapt to the new world; small and medium economies obliged to update and upgrade in order to become a strong proposition. This provides an attractive destination for investors. But these prospects are not necessarily ready to undertake the cultural shift required to understand and fully appreciate the need to plan, protect and prevent, as opposed to react. Nevertheless, for those willing to take the risk, to help educate companies and raise awareness of the importance of effective preservative cyber protection policies, there could be a hefty reward. 

We previously explored the SRA's increased fining powers (see article here). With effect from 20 July 2022, the SRA can now fine traditional law firms, and those who work in them, up to £25,000 (they have long had much greater powers to fine licensed bodies and their personnel). 

The SRA are consulting on how these greater fining powers should be used. They are proposing changes to their Enforcement Strategy and a more rigorous (some might say formulaic) approach to calculating the size of a fine. The consultation is open until 14 November 2022. 

The main focus of this article is on one aspect of these proposals, namely the exercise of the SRA’s fining powers in relation to instances of sexual misconduct, discrimination and harassment. 

The SRA has said in this consultation that cases involving sexual misconduct, discrimination or harassment are "so serious in nature and raise attitudinal issues that present a risk to others" that a financial penalty is highly unlikely to be an appropriate sanction. In other words, this category of case is to be sent to the Solicitors Disciplinary Tribunal almost always, unless exceptional circumstances exist. 

The SRA frames this as likely to have "a positive impact on encouraging equality, diversity and inclusion in the profession by sending a clear message we take these matters seriously and will particularly benefit those groups who are more likely to be impacted by the behaviours identified." Perhaps another way of putting the same point is that the SRA is out to deter regulated persons from engaging in these behaviours (and/or fostering a workplace culture that condones them).  

Whilst the SRA's focus on diversity and inclusion is welcomed as always, this proposed approach to new sanction powers begs the question as to whether the SRA is best placed to make these judgment calls and, by extension, what exactly its role is in cases involving sexual misconduct, discrimination and harassment. We explore this further below. 

Is the SRA up to the job?

The SRA has a number of rules concerning sexual misconduct, discrimination and harassment. For example, it requires those it regulates to act “in that encourages equality, diversity and inclusion” (Principle 6), and it requires of solicitors, RELs and RFLs that “You do not unfairly discriminate by allowing your personal views to affect your professional relationships and the way in which you provide your services” (r.1.1, SRA Code for Solicitors etc).

These are important rules, serving highly significant professional, ethical, societal and moral objectives (amongst other things…). However, caselaw from both the employment domain (e.g. Grainger plc v Nicholson [2010] ICR 360) and professional ethics (e.g. Holbrook v Bar Standards Board, case no. 2021/441, March 2022) demonstrates the complexity of the legal issues engaged as regards the application of the Equality Act 2010.

The decision in Beckwith v SRA likewise demonstrates the challenges of applying SRA rules to the private lives of solicitors (“…Principle 2 or Principle 6 may reach into private life only when conduct that is part of a person's private life realistically touches on her practise of the profession…or the standing of the profession…”).

In other words, and unsurprisingly, there is nuance here. Human behaviour covers a broad spectrum of beliefs, actions and intent. Legislation such as the Equality Act 2010 seeks to achieve a balance between state intervention and freedoms of belief and speech, and so on.

The issue therefore arises whether the SRA, when exercising these new powers, can be trusted to differentiate between sexual misconduct, discrimination and harassment cases that warrant a harsher sanction and those that are exceptional in nature so as to only require a fine.

Indeed, there is a related issue whether its proposed guidance is even correct i.e. to the effect that cases involving sexual misconduct, discrimination and harassment are axiomatically “so serious in nature” as to require a trip to the Tribunal.

It is only very recently that the SRA has had its fining powers increased twelve-fold. Arguably, it might be better for the SRA to find its feet with its newfound power before seeking to increase it further by exercising discretion on how to apply it with regards to such sensitive cases.

Personal impact statements

Personal impact statements ('PIS') are written or oral statements from a complainant presented to the SRA as part of the investigation or tribunal process. PIS give the complainant an opportunity to explain how the event(s) complained of have affected them, and what the impact of any potential sanction may have on them.

The SRA have confirmed that they will be trialling the use personal impact statements to assist with coming to a fair and appropriate sanction. This does address to some extent the concern about the SRA’s approach to nuances of behaviour, but the difficulty with this is how the SRA will ascertain how much weight to place on these and how the balance will be struck between the complainants and respondents. With no precedents in this regard, the SRA will have to provide clear guidance and criteria that will allow for reliable application.  

Other aspects of the proposed changes

In the SRA's Financial Penalties Statement (here) and its open consultation, it recognises the need for more transparency and robustness of processes due to the recent increase in its powers. Whilst this is promising, it would be more encouraging to see this translated into clear guidance that can be referred to. It may be beneficial for the SRA to look to how other regulators deal with these kinds of issues and consider their processes and procedures as they will be more established and will be a good reference point. 

In essence, the overarching question is whether the SRA has the resources, the competency and the formalities in place to administer the requisite sanctions. Whilst we consider that the new process may be welcomed by firms and solicitors because it is likely to be faster, the SRA has stated that it anticipates referring the most serious cases to the SDT – which does not deliver on the promise of quicker outcomes. 

What exactly is the SRA’s role here?

By “here” we mean the boundaries between personal and professional conduct, and between acceptable behaviour and behaviour amounting to misconduct, discrimination or harassment. 

It is notable that the SRA’s rules do not expressly invoke applicable legal concepts in this domain e.g. under the Equality Act 2010. For example, does the word “discriminate” in r.1.1 of the SRA Code for Solicitors (extracted above) mean “discrimination” under the 2010 Act, or some broader concept and, if so, then what?

One theory therefore is that the SRA should be using its rules to enforce compliance by its regulateds with existing common law principles and legislation that give form and definition to concepts such as “sexual misconduct”, “discrimination”, and so on. 

Another theory is that the SRA should be using its rules to deter and punish behaviours that fall outside the strictly ‘legal’ definitions but are nonetheless reprehensible and, say, undermine public trust in the profession. 

The manner of drafting of the SRA’s rules allow for both possibilities. It is unclear which a court would consider to apply. The SRA can be expected to argue for the broader interpretation.

This is an important debate to have now. Professionals are subject to codes of conduct. Those require professionals to act with integrity. ‘Integrity’ can be seen as a “useful shorthand to express the higher standards which society expects from professional persons” (Wingate, para. 97). This provides a pathway for the SRA to argue that behaviour can be sanctioned even if (say) it does not fall squarely within the statutory definition of discrimination. Someone else might argue that this fails to achieve the necessary element of predictability for a conduct rule (see Beckwith at 33-34). 

This debate is already taking place in another area of regulated legal services. The Bar Standards Board (“BSB”) is currently consulting on the regulation of non-professional conduct of barristers (here). The BSB are concerned with how barristers conduct themselves in their personal lives as this can also affect the public trust in the profession. We can see how it would be beneficial for the SRA to also regulate solicitors in areas of their personal life that could affect their professional integrity, but again, there needs to be clear guidance on this that can be referred to and applied consistently and fairly. There is also an interesting contrast to be drawn between the nature of legal analysis in the BSB’s consultations on such issues, and that of the SRA. 

Conclusions  

The SRA wants to exercise its new sanction powers in a proper, predictable and proportionate manner. It is therefore consulting about them. These are laudable objectives. 
However, its consultation does not seem to us sufficiently to address some of the challenges facing the SRA in this regard. We consider the main

challenges to be (and with reference to cases involving sexual misconduct, discrimination and harassment): 

• The complexity of the underlying legal principles engaged, especially in the domains of equality and discrimination law. 
• The existence of significant differences of views regarding seriousness of this class of behaviours. (Of course, the extent of such differences will also depend on who one canvasses for such a view…).
• The interplay of disputed factual circumstances, and the subjectivity of some of the legal concepts involved (e.g. in relation to harassment under the 2010 Act), is bound to lead to complex and difficult judgment calls by the SRA. Will it be up to the task?
• The uncertainties of some of its key rules and Principles. Do they invoke concepts defined by the common law and legislation, or is the SRA able to take a broader view? 

Above all, our concerns are that the SRA is proceeding too swiftly and not engaging sufficiently in a wider debate, especially a legal debate, over these issues. Consultation helps, but it may not be enough. We shall have to see how things develop. 

As in all cases the decision turns on the key facts of the case which are worth considering, particularly since the initial contact (and the point at which the Claimant alleged a contractual relationship was formed) was as a result of the Claimant responding to an advertisement made by the Defendant firm – a not uncommon occurrence.

In brief, the Claimant and her husband booked an all inclusive holiday in Turkey through an online travel agent called Lowcost. During the trip, on 13 May 2014, the Claimant fell down some stairs and broke her leg badly. She had to have immediate hospital treatment and then returned to the UK for further treatment. The evidence shows that on 15 May 2014, the Claimant and her husband informed the hotel and a representative from LTS (an entity acting as the intermediary between the hotel and Lowcost) was made aware of the accident and notified it to Lowcost. 

Whilst in hospital in the UK, the Claimant saw a television advertisement for the Defendant's legal helpline which she called on 19 May 2014. 

She was asked some initial questions and then referred to the Defendant's Travel Legal Group who made further contact by letter and voicemail on 20 May 2014, requesting a number of documents including insurance documents and complaint forms before it could decide whether it could accept the case. The Defendant chased the documents on a number of occasions and, whilst it had occasional discussions with the Claimant's son-in-law, the relevant documents were not provided. The Defendant closed its file in February 2015 having not received the papers. It opened a new file in April 2015 when some of the requested papers were provided but the position remained unclear. Unfortunately, the Claimant's leg eventually had to be amputated in November 2015 at which time the Defendant transferred the matter to the Defendant's multi-track team.

On 25 January 2016, the Claimant was sent a CFA and the Defendant confirmed that it was ready to proceed to bring a claim against Lowcost for the personal injury. Unfortunately, although, on 22 February 2016, a letter of claim was finally sent to Lowcost who forwarded to its Insurers, HCC Insurance PLC, Insurers then rejected the claim for late notification in July 2016 by which time Lowcost had gone into administration. In March 2017, the Defendant advised the Claimant that there was no viable source of compensation for the claim.

The Claim

Left with no ability to seek a remedy from Lowcost, the Claimant turned her focus on the Defendant firm. She alleged that it breached its duty by failing to advise her to notify Lowcost of her claim/ by failing to notify Lowcost direct. She argued that, had they done so, she would have notified Lowcost or instructed the Defendant to do so which would have led to a far earlier notification to HCC who would not then have been able to avoid cover. 

The Defendant rejected the argument that it owed any duty of care to the Claimant until 25 January 2016 when it entered into a retainer with her and that in any event it could not have reasonably provided any advice prior to receiving documents in April 2015. It further raised issues on causation and on insurance cover.

The Judgment and analysis of duty 

The matter came before the court by way of a trial of preliminary issues focussing primarily on the question of if and when a duty of care was owed either in contract or in tort.

The Judge carried out a very detailed analysis of the case law on the question of how a duty of care is established.

Perhaps the easiest point to reject was the suggestion that the television advert was an offer to provide legal services, accepted at the point when a customer made contact and further when the Defendant, at the end of the call, did not decline to act. The Judge found that the advert was no more than an invitation to treat and that the initial discussions were always intended to be exploratory in nature with no advice being provided and no retainer being entered into. 

The Claimant further argued that a retainer was unarguably entered into when the CFA was created in January 2016 and such agreement was retrospective – again, an easy point for the Judge to dismiss given that there was nothing in the CFA to this effect and indeed which would have imposed a totally unrealistic situation requiring the Defendant to take steps which it had not in fact taken because there had been no retainer.

The Claimant suggested that if there was no express retainer then one could be implied. Whilst of course case law supports a contention that the existence of a retainer may be inferred from the acts of the parties (Dean v Allin & Watts [2001] PNLR 921), 'such a retainer will only arise where on an objective consideration of all the circumstances an intention to enter into such a contractual relationship ought fairly and properly to be imputed to the parties'. The test was further summarised in Caliendo v Mishcon de Reya [2016] EWHC 150, as to whether there was conduct by the parties which was consistent only with the solicitors being retained as solicitors for the claimants?

The Judge rejected the contention that there was evidence to support such a suggestion – whilst a file was opened (and closed) and whilst time was recorded, this was done solely for the solicitors' own internal purposes. There was no intent that she would be liable for fees at that stage – rather just that she might become liable in the future. The Defendant indicated that it needed significantly more information before it could decide whether to accept her case – the question remained an open one. The Defendant wrote to her several times chasing, and finally receiving some documentation, and thereafter highlighting that it had taken no action to establish a limitation period or to protect her right to take any legal action. The Judge found the Defendant's conduct to be consistent with seeking information with a view to deciding whether to enter into a retainer. Clearly in those circumstances no implied retainer arose.

It was accepted by the Defendant that it entered into an implied retainer on 25 January 2016.

The final question as to duty was whether the Defendant had entered into a tortious duty of care prior to 25 January 2016. The test applied by the Judge (as per Hedley Byrne v Heller [1964] AC 465 and as considered in P&P Property Ltd v Owen White & Catlin LLP [2018] 3WLR 1244) was the question of whether there had been an assumption of responsibility, taking into account the proximity between the parties and balancing 'the foreseeability that the third party will rely on the professional to perform their task in a competent manner against any other factors which would make such an imposition of liability unreasonable or unfair'. The Claimant relied on a number of specific facts to try to support its contention that the relevant relationship was in place – again commenting on the fact that she had been given a file reference with a supervising partner, was referred to internally as a client, the Defendant had obtained counsel's advice, updated the Claimant and logged fees as WIP. The Judge had already dismissed the relevance of the internal arrangements of the Defendant to the question of a duty and, whilst some limited high level and generic advice was given at the early stage during the initial helpline call, that did not mean that the Defendant had assumed a responsibility at that stage to give wider advice or could be found to be at fault for not giving such advice. Whilst the Claimant could potentially rely on any actual advice given, she could not argue that a duty was imposed to give wider advice in the circumstances of the case. 

Other issues that arose

Whilst finding that there was no duty, the Judge did go on to consider some other points raised by the Claimant which may be of wider relevance:

• There was no duty to advise a client to ensure that it provided a warning to a potential defendant to notify its insurers until a retainer or similar duty was in place (and noted that the Pre-action Protocol for personal injury claims in 2021 recommends that an enquiry about insurance is made when the letter of claim is sent – as was the case here). 
• Similarly, there was no duty to advise the Claimant to take steps to notify Lowcost or advise the Claimant to notify Lowcost until a duty of care was owed and at the point when the letter of claim was sent.
• There was a 100% chance that HCC would not have rejected the claim had they been notified in May 2014 but a 0% chance of cover being provided had HCC not been notified until April 2015 (when the Claimant eventually provided some documents to the Defendant) due to the likely prejudice caused to insurers in respect of investigating the accident. 
• Any claim against Insurers direct (on the basis of Lowcost's administration and the wording of the policy) would fall to be dealt with under the Third Party (Rights Against Insurers) Act 1930 as the 2010 Act did not come into force until 1 August 2016. Since the wording had required that Lowcost pay the relevant excess of £553,234 before insurers were liable, it was clear that, due to its financial difficulties, it was never in a position to make any payment.

Practical implications

It is clear from this case that care needs to be taken when speaking to prospective clients and during the process of seeking to gain sufficient information to decide whether to take on their business, to ensure that no implied contractual or common law duty of care occurs before a formal retainer is put in place. A solicitor is vulnerable at that stage because it rarely has all the relevant information that it might need to ensure that it gives thorough advice. It is worth providing regular confirmation to the prospective client that it is not acting on the client's behalf and that no duty of care is owed until the retainer is confirmed.

From a professional indemnity perspective, this case provides a useful analysis of the circumstances and case law in respect of the varying duties of care and the requirements needed to satisfy the imposition of such a duty. It requires more than a claimant simply believing that the professional is acting for him or her because an implied retainer is subject to an objective test as to what can reasonably be implied from the circumstances and a tortious duty requires an assumption of responsibility and foreseeability that the client will rely on the professional – difficult to demonstrate when the professional is regularly indicating that it had not yet taken any steps whilst awaiting information to make such a key decision as to whether to act. 

The Fire Safety Act (the Act) was introduced to clarify who is responsible for managing and reducing fire risks in different parts of multi-occupied residential buildings, to prevent tragedies like the Grenfell fire occurring again.  The legislation brought new fire safety obligations to some leaseholders, building owners and managers for the building structure, external wall, common parts and doors between the domestic premises and common parts.

The Regulations seek to improve fire safety of high-rise residential buildings and implement the majority of the recommendations made by the Grenfell Tower Inquiry in its Phase 1 report. The Regulations were published on 18 May 2022.

What changes does the Act bring?

Section 1 of the Act came into force in England and Wales on 16 May 2022. It makes amendments to, and extends the following provisions of, the FSO to the following parts of multi-occupied residential buildings:

• the building's structure, external walls and any common parts. The external walls include doors or windows in those walls, and anything attached to the exterior of those walls, e.g. windows, balconies and cladding.
• all doors between the domestic premises and common parts.

The legislation applies to any building in England containing two or more sets of domestic premises.

Section 3 of the Act also came into force on 16 May 2022. It deals with risk-based guidance for the discharge of duties under the FSO.  Under Article 3 of the FSO, the "responsible person" of a premise (either a building or any part of it) is the person who has control of the premises ("the Responsible Person"), which may include building owners, leaseholders or managers.

Section 3 defines 'risk-based guidance' as guidance on how a Responsible Person is to prioritise the discharge of its duties in respect of different premises by reference to risk. 

It provides that if a person has contravened a provision of the FSO:

• proof of a failure to comply with risk-based guidance may be relied on to establish that there was such a contravention; and
• proof of compliance with risk-based guidance may be relied on to establish that there was no such contravention.

The Responsible Person needs to review and update the risk assessment processes accordingly. Once the risk assessment processes are published, the Responsible Person should apply the risk-based guidance (under Section 3 of the Act) to comply with their duties in the FSO.

The Government is yet to publish to relevant risk assessment processes themselves.

What changes will the Regulations bring?

It is intended that the Regulations will come into force on 23 January 2023. Regulations 4 to 10 provide some further clarity as to the scope of a Responsible Person's duties, including imposing obligations such as:

• The installation and maintenance of a secure information box to hold plans and information, including: (i) a record of the design of the external walls of the building, including details of the materials from which they are constructed; and (ii) floor plans and building plans identifying locations of lifts and identify if the lift is one for use by firefighters.
• Lifts and essential fire-fighting equipment to be regularly inspected.
• The installation of wayfinding signage.
• The provision of fire safety information and instructions to residents, including how to report a fire; the evacuation strategy; and the display of such instructions in a conspicuous part of any building.
• The undertaking of checks on fire doors.

The above applies to high-rise residential buildings, defined by the FSO as a building containing two or more sets of domestic premises that is at least 18 metres above ground level or has at least seven storeys. For multi-occupied residential buildings over 11 metres in height, the Responsible Person must undertake checks on all communal fire doors and annual checks on flat entrance doors.

The Regulations apply to existing buildings and requirements for new buildings may be different.

The imposition of these obligations on the Responsible Person incorporates the recommendations and lessons learnt from the Grenfell Tower Inquiry Phase 1 report, which concluded that the lack of onsite information hampered the London Fire Service's response and that such information can assist in planning for and operational response to a fire.

What’s next?

Anyone undertaking the role of the Responsible Person should ensure they incorporate the new regulatory requirements into their processes in good time before their enactment. They should also continue to watch closely for both the specific risk assessment processes relevant to the FSO and further Regulations as they are introduced. This will include the publication of supporting guidance for the Regulations, which is due to be published later this year. 

In the same way we have seen an uptick in climate related disputes since 2015, this tangible commitment to plastics regulation and action will likely trigger a new wave of plastics-related litigation.

This includes cases brought in relation to historic plastic pollution, and compelling action by governments and companies as we transition to a greener, more sustainable circular economy. This is all against a backdrop of rising group litigation/collective redress globally in relation to the environment, and social inflation factors.

The plastic pollution crisis the planet faces is intertwined with the race to net zero. Plastic (which derives from fossil fuels) is also thought to significantly contribute to greenhouse gas emissions, both during its production process and incineration.

It is estimated that 75% of the plastic waste (seven billion tonnes) produced since 1950 has been deposited in landfills, on land or at the bottom of the ocean. Across the world, consumer demand for disposable products has seemingly overtaken the waste-management structure, with only 10% of plastics thought to be recycled.

Health concerns 

Plastics contain various chemicals, which, ultimately, leach into the environment and absorb other contaminants with which they come into contact. The effects on wildlife (entangled marine organisms, ingested plastic products) are increasingly well-known and publicised. However, the more insidious, long-term effects of plastics on human health are still relatively unknown.

Plastic does not biodegrade but gradually breaks down into smaller pieces, known as microplastics (plastics smaller than 5 mm). Microplastics (which are in the atmosphere, water table and food chain) are attracting more and more attention, globally.

Although the science is still at a relatively early stage, there is increasing concern the ingestion of microplastics causes damage to human and animal cells, given they contain endocrine disruptors. It is estimated humans are now ingesting a credit card-sized amount each week. They are everywhere – from the bottom of the Mariana trench to the summit of Mount Everest and are now at detectable levels in human blood and lungs.

There is already litigation afoot in the US against plastic manufacturers/major corporations using plastic products, including Crystal Geyser, Coca-Cola and Procter & Gamble. Earth Island Institute seeks to hold “Big Plastic” accountable for historic plastic pollution damage, via remediation payments and forcing change concerning recycling policies.

The allegations include public and private nuisance, trespass and false advertising (including deliberate misinformation and branding of products concerning recyclability). These cases are brought in a similar vein to the Carbon Majors litigation concerning historic greenhouse gas emissions and damage to the environment.

We are yet to see litigation concerning the harmful effects of ingesting microplastics and seeking to hold companies/governments to account. However, the recent spate of lawsuits concerning per- and polyfluoroalkyl substances (PFAs) and other “forever chemicals” has paved the way for these types of suit, as the science (and latency of microplastics) develops further.

There will no doubt be significant interest in the origins and types of plastic entering the ecosystem, their lifecycle, and harmful effects. This presents novel issues of causation and attribution of liability to tortfeasors (and we have already seen courts in the UK and the US flex tortious principles in the wake of the issues presented by mesothelioma and methyl tertiary-butyl ether (MTBE) claims.

Historic claims

As regards single-use plastics, it is expected the companies most responsible for their prevalence (ie, “Big Food”, including supermarkets and consumer goods companies) will face claims both for historic pollution and failure to adapt their businesses to make packaging more sustainable. We have already seen a $10m class action settlement agreed by Keurig Green Mountain concerning coffee pod recyclability and deceptive advertising.

Given the effects of plastic pollution on ecosystems, we can expect claims in relation to damage to biodiversity, in particular. This is against the backdrop of increasing rights-based litigation, where claims are increasingly being brought on behalf of the environment. Oceana Philippines has brought a plastic lawsuit against the Philippines government, for failures in implementing waste-management legislation, to tackle the country’s plastic pollution problem and safeguard the environment.

Public authorities may seek to bring actions concerning pollution of water courses, to seek redress from polluters and improve infrastructure. There have already been several cases in the US involving water authorities concerning the discharge of plastic pellets/nurdles and violations of the Clean Water Act.

In 2019, Formosa Plastics was ordered to pay $50m into a fund to be used for regenerating affected water courses. In 2021, Charleston Riverkeeper agreed a $1.2m settlement with Frontier Logistics, following plastic pellet pollution in Charleston waterways.

We can also expect to see an increase in “value chain” litigation concerning supply chains and the use of plastic, particularly as regulations develop. The life¬cycle of plastic presents significant challenges for businesses globally.

This is against an increased trend for parent companies of multinational companies being targeted by litigation in the English and other European courts, in relation to historic environmental damage abroad and their global value chains, particularly in emerging markets.

As regards the boardroom, we will see litigation against directors and corporations in relation to their response to the plastic pollution crisis (just as we have with climate change) and an uptick of shareholder claims.

For example, in Perri v Defendants of Danimer Scientific, it is alleged that Danimer and its directors made inaccurate statements regarding the biodegradability of the product, Nodax and failed to disclose environmental compliance issues. The action alleges these statements lead to the artificial inflation of the company’s value, from which the directors made a profit.

Plastic-related litigation will particularly affect liability insurers, who will have to grapple with a new wave of “toxic tort” plastic pollution claims. Insurers will need to consider the definition of injury (in the context of microplastic ingestion) and the date on which it occurs, policy trigger and historic exposure, the scope of pollution coverage (particularly for clean-up), together with whether pollution exclusions are fit for purpose.

Directors’ and officers’ insurers can also expect a surge of litigation related to environmental, social and governance (ESG) issues against directors and companies, concerning statements, the “green” status of investments and their management of plastic waste. The costs of defending these types of claims can reach exorbitant levels, not to mention the damage to the reputations of companies, especially in an era where ESG is so high on the agenda.

This was first published in Insurance Day on 14 April 2022.

Berkshire Assets (West London) Limited (‘Berkshire’) sought to recover an indemnity from AXA Insurance UK plc (‘AXA’), pursuant to a Contractors All Risks (‘CAR’) and Business Interruption (‘BI’) policy (‘the Policies’), following an escape of water through a sprinkler pipe at one of Berkshire’s properties.

AXA denied liability on the grounds that, upon the renewal of the Policy in November 2019, Berkshire failed to disclose the fact that one of its directors, Michael Sherwood, was the subject of criminal charges, filed in August 2019, in Malaysia. The proceedings against Mr Sherwood were discontinued in October 2020.

AXA argued that, had it been made aware of the charges, it would not have agreed to insure Berkshire, and therefore that it was entitled to avoid the Polices. The court heard evidence from a number of witnesses including Mr Sherwood and the underwriters at AXA who had been involved in the writing of the risk. In addition, evidence was given by expert underwriters, Mr Philip Foley of Foley Specialties, for Berkshire and Mr Stephen Coates, Chief Underwriting Officer of Pool Reinsurance, for AXA.

Key issues

The court was required to determine the following two key issues:

• was the fact that Mr Sherwood had been charged with criminal charges in Malaysia a material circumstance for the purposes of the ‘Duty of Fair Presentation’ under the Insurance Act 2015, and;
• if it was, and if it had been adequately disclosed, would AXA have agreed to insure Berkshire in respect of Business Interruption, or at all, under the Policy.

In relation to both issues, AXA accepted that it bore the burden of proof.

The ‘Duty of Fair Presentation’ – a brief reminder

Section 3 (1) of the Act provides that: “Before a contract of insurance is entered into, the insured must make to the insurer a fair presentation of the risk.”

This means that a policyholder must disclose every ‘material circumstance’ which it knows or ought to know.

The Act goes on to clarify that:
 “...7 (3) A circumstance is material if it would influence the judgment of a prudent insurer in determining whether to take the risk and, if so, on what terms”.

And:

“...7 (4) (c) anything which those concerned with the class of insurance and field of activity in question would generally understand as being something that should be dealt with in a fair presentation of risks of the type in question”.

Materiality – the case law as developed before the Act remains applicable

The judge in this case concluded that the Act does not alter the law on materiality as developed by the courts before the Act came into force. This was summarised as follows:

• the materiality of a particular fact is a question of fact and is to be determined by the circumstances of each case
• materiality is to be tested at the time of placement of the insurance and not by reference to subsequent events
• facts raising doubts as to the risk are sufficient to be material. It is not necessary for the facts to be shown, with hindsight, to have actually affected the risk
• the overall effect of the ‘prudent insurer’ test is that whether there has been a fair presentation of the risk remains to be assessed principally from the perspective of an insurer
• a circumstance does not have to be decisive for the hypothetical prudent insurer in determining whether to take the risk or on what terms; it merely needs to constitute something a prudent insurer would take into account when reaching a decision.

Moral Hazard – there is no settled definition, each case depends on its own facts

The court was also required to consider whether the charges against Mr Sherwood amounted to a ‘moral hazard’ that should have been disclosed to AXA. It concluded that there is, in fact, no settled definition of moral hazard. Each case will depend on its own particular facts.
It was noted that a charge of a criminal offence will very often, but not always, be regarded as a moral hazard, such that it would amount to a material circumstance.

For example, in Reynolds v Phoenix Assurance Co [1978] 1 Lloyd’s Rep 440 Forbes J held that the non-disclosure by a policyholder of a conviction 11 years earlier of receiving two stolen tractor batteries worth £10 – 12, for which he had been fined was not a material fact.

In contrast, in North Star Shipping v Sphere Drake Insurance [2005] 2 Lloyd’s Rep. 76 the court held that underwriters were entitled to avoid policies in circumstances where there had been a failure to disclose a number of pending criminal proceedings involving allegations of dishonesty against two brothers who owned and managed the insured companies, even though these were eventually set aside or resulted in aquittals. The Court of Appeal upheld this decision.

Were the criminal charges against Mr Sherwood a ‘material circumstance’?

The court held that the charges did constitute a material circumstance and, accordingly, should have been disclosed upon the renewal of the Policy.
In reaching this conclusion, the court noted that it was necessary to consider the matter from the point of view of the reasonable insurer in the position of AXA at the time the decision would have been made, had Berkshire given full disclosure. At the material time, AXA was not aware, nor in a position to find out, whether the charges involved dishonesty or personal wrongdoing on Mr Sherwood’s part.

In relation to the expert evidence, the court discounted Mr Foley’s evidence because he had no relevant experience in the field of insurance. Instead, the court accepted the evidence of Stephen Coates for AXA. In his view, if the charges against Mr Sherwood were entirely unconnected to any allegations of personal wrongdoing there would be no moral hazard. However, the charges were material circumstances and should have been disclosed in any event, whether or not there was a moral hazard.

Inducement – always a question of fact

It is not enough to simply show that a circumstance was material. An insurer must also show that it would not have entered into the contract of insurance at all or would have done so on different terms had the material circumstance been disclosed. The judge underlined that this will always be assessed as a question of fact.

The court heard evidence from Victoria Harris, a Central Property Underwriter at AXA. When asked what she would have done had she been made aware of the charges against Mr Sherwood before the Policy was renewed she explained that she would have investigated the charges online. These enquiries would have alerted her to the fact that the charges were criminal and serious in nature and this would have been of considerable concern to her.

Had she known about the charges she was in no doubt that she would have regarded them as material and immediately declined the request for BI cover and would have wanted AXA to come off cover for the whole project. In support of her position she referred to an AXA ‘Practice Note’ on the ‘disclosure of previous insurance, financial or criminal matters’. Ms Harris explained that the effect of this Practice Note is that if criminal charges are disclosed, a risk should be declined. However, if she had been made aware that the charges did not relate to any dishonesty on Mr Sherwood’s part directly, she would have had to refer the matter upwards.

The court then heard evidence from Mr Sargant, Assistant Property Underwriting Manager at AXA, who was a co-author of the Practice Note. He had not been involved in the placing of the insurance, but the matter had been referred to him after the incident. He considered that there had been a material non-disclosure and took the decision to decline cover and to remove Berkshire from CAR cover as from renewal. He explained that if AXA had been given full details of the charges at the time of renewal they would not have agreed to renew the Policies.

The trial judge was satisfied, on the evidence, that AXA would have declined the risk if the charges had been disclosed to them. He was not persuaded by Berkshire’s argument that other factors, such as AXA’s relationship with Berkshire’s broker, would have been taken into account. If that had been a concern to AXA it would not, in his view, have taken the steps it took when it did in fact learn of the charges.

Key takeaway points

• The law as per the authorities on materiality pre-dating the Insurance Act remains applicable.
• There is no settled definition of ‘moral hazard’. The Court should consider the statutory definition of ‘material circumstance’ as per the Insurance Act when considering the facts of the case before it.
• Criminal charges will often but not always be considered material to a risk.
• The relevant knowledge of the underwriter is that which is known at the time of its decision to accept the risk.
• Underwriting guidelines or practice notes which endorse the approach taken will be persuasive to the court’s consideration of inducement.
• The selection of appropriate experts remains as important as ever. In this case, Berkshire’s expert evidence was dismissed because its expert had no expertise in the relevant field of insurance.

This case related to (another) business interruption and property damage claim arising out of COVID-19. In this case, Caesars Entertainment Inc (CEI), a large entertainment company in the USA which owns numerous properties such as casinos, hotels and restaurants, is seeking to claim an indemnity from Markel Bermuda Limited (Markel) and other insurers. The claim, brought in the District Court of Clark County, Nevada, relied on the dispute resolution provision contained in the policy wording provided by Markel. Markel asserted that the policy wording was incomplete and that any disputes were, in fact, subject to the 'Bermuda Form' arbitration clause. 

The issue before the High Court was whether to grant Markel a permanent anti-suit injunction restraining CEI from continuing the Clark County, Nevada proceedings.

Factual Background

Markel issued two insurance policies to CEI. The first policy was issued to CEI under its former name, Eldorado Resorts Inc and provided $5 million in first-party property coverage (the Eldorado Policy). The second policy was issued to CEI and provided $12 million in first-party property coverage (the Caesars Policy).

CEI accepted that the Caesars Policy, and policies issued by certain other excess insurers in the Bermuda market, contained arbitration agreements. It was also common ground that the policies issued by Markel to CEI entities in the years preceding the Eldorado Policy included arbitration agreements. 
In these previous policies, the arbitration agreement had been integrated by a standard endorsement. For example, the policy issued to Eldorado for the period 1 May 2017 to 1 May 2018 contained a law and jurisdiction clause stating:

 "this insurance shall be governed by and construed in accordance with the law of the state of Nevada and each party agrees to submit to the exclusive jurisdiction of the courts of the USA". 

…together with an endorsement which provided, "notwithstanding anything to the contrary in the Policy" any dispute would be determined by London arbitration under the provisions of the Arbitration Act 1996, and that any dispute arising in relation to the policy was governed by New York law – i.e. the 'Bermuda Form' arbitration clause.

The dispute arose in respect of the dispute resolution provision applicable to the Eldorado Policy.  

In the case of the Eldorado Policy, the risk was presented on the "Proposed Policy Form" which included a template policy wording which held that the insurance should be governed and construed by the law of Nevada, (the Followed Policy). 

On 12 April 2020, Markel sent CEI's broker a formal quote including the following wording: 

"Special Conditions

1. Coverage shall be construed in accordance with the internal laws of the State of New York.
   
2. All disputes, including claims disputes, are subject to London Arbitration…"

Markel and the broker then engaged in negotiations related to the premium and a representative from Markel stated in an email dated 30 April 2020:

"I confirm we are willing to reduce our price to $2.5m net. All other terms and conditions as per previously agreed. I look forward to receiving notice of the firm order." 

The broker then responded with an email on the same day with the subject line "BIND COVER" and an opening line "Please proceed with binding…" (the 30 April Email).

Markel subsequently sent the broker the Followed Policy wording but, crucially, omitted the Special Conditions attachments. The arbitration clause was therefore not provided together with the Followed Policy. 

The Parties' Submissions 

Markel argued that the Eldorado Policy documentation provided to the broker was incomplete. The broker/underwriter correspondence demonstrated that the risk was underwritten on the basis that the arbitration clause would be included. The quote provided by Markel on 12 April 2020 clearly included an arbitration agreement and adopted New York law as the governing law. These clauses were expected in the Bermuda market and the underwriter had mistakenly failed to include the relevant endorsement when issuing the policy and that the policy ought to be rectified (or reformed under New York law) to reflect the parties' mutual intention. 

Markel argued that, consistent with English law principles of contractual construction as to the formation of contracts, the Policy incepted with the order to bind contained in the 30 April Email. 

In response, CEI relied on Markel's email attaching the Followed Terms, asserting that the contractual agreement between the parties was as set out in that wording. Consequently, the Nevada law and jurisdiction clause prevailed, and that the policy incepted upon receipt of that wording, not the order to bind. 

Further, CEI submitted that if the Judge found that the policy incepted upon the order to bind, this was superseded by the receipt and content of the Followed Terms subsequently provided by Markel. CEI argued that there were strong commercial reasons to infer that where there is an agreed policy wording, but then a subsequent policy follows, it will usually be the intention of the parties that the later policy should supersede the earlier one. 
Bryan J was therefore required to determine (1) whether the Bermuda Form arbitration clause was binding on the parties, and (2) when the Eldorado Policy incepted. 

The Judgment: When are parties bound by an arbitration provision?

Both parties accepted the well-established position that under English law an arbitration agreement is a "distinct agreement" from the contract with which it is associated (here the contract of insurance), as  articulated by Lord Hoffman in Fiona Trust v Privalov [2007] UKHL 40; [2008] 1 Lloyd's Rep 254. Bryan J was therefore satisfied that, irrespective of when the policy incepted, at the latest the parties had entered into an arbitration agreement upon receipt of the 30 April Email and the order to bind. The parties had set out their agreed terms in their earlier email exchanges and it was on this basis that the order to bind was made. He was content that the final policy documentation did not reflect the parties' agreement and that to the extent necessary, it was appropriate to order reformation (New York law) or rectification (English law) of the policy to incorporate the Bermuda Form clause. 

Bryan J helpfully considered the hypothetical scenario where an arbitration agreement could exist separately from an insurance contract. If the broker had responded to Markel's 30 April Offer Email with substantive proposed changes that were not agreed, any subsequent dispute would have to be settled by arbitration as, by that point on any analysis,  the arbitration clause was already binding upon the parties.

He also recognised that the arbitration agreement may well have been entered into earlier than the 30 April Email. For example, when the broker did not question or seek to negotiate Markel's indication (on 12 April 2020) that the policy would be governed by New York law and that all disputes be subject to "London Arbitration". 

The Judgement: When does an insurance policy incept?  

Bryan J considered the broker/underwriter correspondence in detail to determine when the Eldorado Policy itself incepted.  

He was satisfied that a binding contract of insurance was entered into on Markel's receipt of the 30 April Email, determining that the broker's labelling the email "BIND COVER" and including the language "proceed with binding", demonstrated a "clear and unequivocal acceptance" on the part of CEI. 

Bryan J disagreed with CEI's "surprising" submission that Markel's later email attaching the Followed Policy was intended to supersede the terms subject to the 30 April Email as: 

This was not a case where general terms were provided in a slip which were then expanded on by detailed policy wording which followed. 

The Followed Policy had been circulated long before the quote was provided by Markel, which was then agreed by the broker. Therefore, clearly it was a case of mistake.

The Followed Policy was never intended by the parties to contain the contractual wording as to law and jurisdiction, as the methodology adopted in previous policies and subsequent policies was that the policy wording would refer to Nevada law and jurisdiction, but that would be trumped by the 'Bermuda form' arbitration clause.

Settlement offers are often made well before all the evidence is available. The effect of later disclosure of evidence will always be uncertain, but some guidance has been provided by the High Court.

In Head v Culver Heating Co Ltd (11 May 2021) the High Court exercised its discretion not to award additional sums and interest despite the Claimant having beaten her Part 36 offer to settle the “lost years” element of a mesothelioma claim.

The parties had disagreed significantly about whether any award should be made for the lost years part of the claim. The deceased was the primary motivator of a successful business. The Defendant argued that as the business had continued successfully after the death of the deceased, his death had caused no loss of income to his Estate.

The Claimant had originally claimed the loss was £4.4 million. At first instance the High Court agreed with the Defendant and made no award for the lost years part of the claim. The Claimant successfully appealed the decision to the Court of Appeal which then remitted the matter back to the High Court for assessment.

The High Court assessed the lost years claim at £2.45 million. The Claimant had made a relatively late offer to settle the lost years claim at just under £2.25 million. Having beaten the settlement offer the Claimant claimed Part 36.17(4) rewards of additional interest, indemnity costs, and an additional sum.

Although the judge agreed that the Claimant was entitled to claim such rewards, he decided that it would be unjust to award them because the Claimant had only beaten the offer by relying upon witness evidence which had been available before the original trial but had not been disclosed.

The fact that the Defendant had not objected to the Claimant relying upon the late witness evidence did not mean that the Defendant was prevented from arguing that it had been prejudiced by the late disclosure. The judge reasoned that if the Defendant had objected, the Claimant would have had to apply to the court for relief from sanctions. The delay in disclosing the evidence was clearly serious and significant. Although any prejudice to the Defendant arising from the Part 36 offer could not have been taken into account at the time of an application for relief from sanctions, now that it was known that the Defendant had been prejudiced by the additional evidence being allowed, the judge considered it would be unjust to allow the Claimant to be awarded the usual Part 36 rewards.

This decision suggests that it is not necessary for a party to challenge the introduction of late evidence in order to trigger entitlement to later argue that Part 36 rewards should not be awarded. However, this decision concerned witness evidence of facts that had always been known to the Claimant but not known to the Defendant and in relation to a difficult quantum issue only. The offer had also been made at a time when almost all legal costs had been incurred. The application of this decision therefore needs to be considered carefully because the determining issues are likely to be fact-sensitive.

The effect of a trial date being moved back upon a Part 36 offer made within 21 days of the original trial date.

In Reader v SPIE Ltd and another (11 May 2021, High Court) the trial was originally listed to commence on 30 January 2017. On 12 January 2017 SPIE Ltd (“S”) offered to settle its claim against the additional Defendant at £10,000 on a Part 36 basis. The offer stated that if it was not accepted but was beaten at trial, the court would be asked to exercise its discretion to abridge the relevant period from 21 days to 14 days and award Part 36 rewards.

The trial was postponed by the court and eventually took place in 2018. Judgment was also delayed by illness until 31 January 2020 when S was awarded £38,577.64. The trial judge rejected a request by S to award Part 36 rewards for beating its offer. The judge decided that the offer did not comply with CPR 36.5(1)(c) which states that the offer must specify a period of not less than 21 days for the Defendant to accept the offer without penalty. As the offer did not specify a period of not less than 21 days for acceptance, and had been made long before the start of the actual trial date (over one year later), the adjournment of the trial had the effect of invalidating the offer as a Part 36 offer. S appealed to the High Court.

The Appeal judge decided that the approach of the trial judge had been incorrect, and that the offer should be judged according to the knowledge of the parties at the time the offer was made (which anticipated a trial commencing in less than 21 days) rather than after the actual trial much later.

The default position provided for in the CPR is that an offer made less than 21 days before trial does not attract Part 36 rewards unless the court retrospectively allows a shorter period. The offer was made on the basis that an application to the court would be needed for this purpose. The Appeal judge decided that at the time the offer was made the parties would understand this, and that this was the situation that the court should assess.

The Appeal judge decided that the offer could only become a Part 36 offer with Part 36 rewards when the court agreed to a shorter period for accepting the offer being applied. Because no application to allow a shorter period for accepting the offer had been made, and because the court had therefore not permitted a shorter period to be applied, the offer did not comply with the requirements of Part 36 and accordingly was not a valid Part 36 offer.

Counsel for S maintained that an informal application had been made at the hearing on 31 January 2020 when judgment had been delivered. The Appeal judge said there was no record of this in the Appeal papers or in the judgment by the trial judge.

This case is an example of the need to keep settlement offers under review. The options available to S upon the original trial date being adjourned were to either make an application - by consent or otherwise - to the court asking for the shortened time in the offer to be permitted (thus validating the offer as attracting Part 36 benefits) or to make a new Part 36 offer allowing the usual 21 days for acceptance, or to do both. Which course to take might be influenced by whether any significant costs have been incurred after the expiry of the shortened time for accepting the offer.

The provision for interest in Part 36 offers

In Francis King v City of London Corporation (18 December 2019) the Court of Appeal upheld the decision of a costs Master that the Claimant’s offer to settle the costs claimed in the Bill of Costs at £50,000 excluding interest was not a valid Part 36 offer because it did not comply with CPR 36.5(4) which stated that the offer will be treated as inclusive of all interest.

After assessing the Bill at £52,470 excluding interest, the Master decided that the offer could not be treated as having been made under Part 36 because the offer introduced an element – exclusion of interest - that was incompatible with the wording of Part 36.

At the initial Appeal the Claimant’s costs lawyer referred the court to Practice Direction 47.19 which provided for the option for costs offers to include or exclude interest. The Appeal judge decided that as a rule prevails over a Practice Direction, it was not possible for a Part 36 offer to exclude interest and for it to be then accepted on the basis that Part 36.5(4) will treat the offer as including interest.

The Appeal judge said that he would invite the civil procedure Rules Committee to consider this again. In the meantime, his decision that the offer was not a valid Part 36 offer was appealed to the Court of Appeal which decided, reluctantly and with a further recommendation for the Rules Committee to look at this, that an offer to settle which excluded interest did not comply with the rules and thus was not an offer made under Part 36.

Following consideration by the Rules Committee, CPR Part 36.5 was revised and from 1 April 2021 states:

36.5 (4) 

A Part 36 offer which offers to pay or offers to accept a sum of money will be treated as inclusive of all interest until

(a) the date on which the period specified under rule 36.5(1)(c) expires; or 

(b) if rule 36.5(2) applies, a date 21 days after the date the offer was made.

36.5 (5)

“A Part 36 offer to accept a sum of money may make provision for accrual of interest on such sum after the date specified in paragraph (4).”

(This the date when the time allowed for accepting the offer expires, normally 21 days after the offer was made).

“If such an offer does not make any such provision, it shall be treated as inclusive of all interest up to the date of acceptance if it is later accepted.”

Note that this revision still does not allow a Part 36 offer to exclude interest. An offer to settle at a sum which excludes interest will continue to be treated as falling outside the scope of Part 36. However, the revision means that the offer, which must include interest, may provide for further interest to be added to the sum offered in settlement after the period allowed for acceptance has expired.

Practice Direction 47.19 has also been revised and now says:

“Costs of detailed assessment proceedings – rule 47.20: offers to settle under part 36 or otherwise 19. Where an offer to settle is made, whether under Part 36 or otherwise, it should specify whether or not it is intended to be inclusive of the cost of preparation of the bill and VAT. An offer which is made otherwise than under Part 36 should specify whether or not it is intended to be inclusive of interest. Unless the offer states otherwise it will be treated as being inclusive of all of these. (A Part 36 offer is treated as inclusive of interest: see CPR 36.5(4).)”

Thus, it is now perfectly clear that a Part 36 offer to accept or pay a sum of money in settlement of a claim must include interest. If the offeror wants to maintain a claim for further interest after the offer has expired, the offer can refer to this but the offer must include interest and any reference to the offer excluding interest will be fatal to its claimed status as a Part 36 offer with accompanying potential benefits.

You know that something has gone seriously wrong when a trial judge decides that Part 36 offers made by a Claimant should be disregarded because they were not serious offers to settle; then on appeal a High Court judge decides that the offers were valid but the Defendant rather than the Claimant had beaten the offers at trial; then the Court of Appeal gives its own interpretation.

These events happened in Seabrook v Adam [2021] EWCA Civ 382 (18 March 2021). After the Defendant conceded liability but not causation in his Defence, the Claimant made two Part 36 offers on the same day. The wording of each offer was slightly different. The first offer was:

“To accept on condition that liability is admitted by the offeree, 90% of the claim for damages and interest, to be assessed.”

Bearing in mind that liability had already been conceded in the Defence, the offered reduction of 10% on the claim for damages on condition that liability was conceded appeared odd.

The second offer was:
“To agree the issue of liability on the basis that the Claimant will accept 90% of the claim for damages and interest, to be assessed.”

The most obvious question is why a Claimant should make an offer conditional upon the Defendant admitting liability in circumstances where liability had already been admitted in the Defence. This is closely followed by wondering why a Claimant is making these offers at the same time. What is the difference?

The Court of Appeal decided that these offers amounted to much the same thing but that, guided by the tick boxes in Form N242A, the first version offered to settle the whole claim and the second version offered to settle liability.

However, the real issue here was causation. The Claimant claimed damages for injury to his neck and back. At trial he established causation for his neck injury only and was awarded damages for that injury. The Claimant argued that he had beaten his Part 36 offers because he had been awarded 100% of his assessed damages. The Defendant argued that as the Claimant had been awarded nothing for his claimed back injury, the Claimant’s offer had been beaten.

Counsel for the Claimant argued before the Court of Appeal that the offers could have been accepted without prejudicing the Defendant’s entitlement to challenge causation. The Court of Appeal rejected this interpretation. The wording of the offer was framed in relation to the claim for damages, which included the claim for injury to the Claimant’s back. The effect of accepting the offers would have been that the Defendant was admitting liability for both the neck and the back injuries and would have prevented the Defendant from later arguing that he had not caused the back injury. Because the Claimant failed to establish causation for his back injury, the Defendant had beaten the Claimant’s offers.

There were serious problems with these offers. The conditional nature of both offers to agree a quantum concession if liability was admitted made no sense when liability had already been admitted in the Defence. At face value this meant that the Defendant did not have to make any additional concession to obtain a 10% reduction on the damages award, but the key point was that both offers amounted to offers to accept a reduction in relation to the sum claimed for damages – whether or not the claimed losses were justified - in return for the Defendant dropping all causation arguments.

Whilst the offers were regarded by both Appeal courts as being valid Part 36 offers, there was no consensus between the parties what the consequence of accepting them would be. A request for clarification of the intended consequence of accepting the offers in relation to the causation issues might have resolved this.

Seeking clarification of Part 36 offers

Some of the more questionable Part 36 offers could be clarified, thus avoiding some of the issues discussed above. If clarification is needed to allow the recipient of the offer to determine what is actually being offered but the offeror ignores the request or provides inadequate clarification, then CPR Part 36.8 permits the recipient to apply to the court whether or not proceedings have been issued.

In Waterfield v Dentality (t/a Dentality@ Hoddeston) [2020] 11 WLUK 223 (13 November 2020) the County Court judge decided that “Proceedings” for the purposes of CPR r.44.13 started when the court issued a claim form on the request of a claimant. Accordingly, the qualified one-way costs shifting rules did not apply to pre-issue applications, including a pre-issue group litigation order application.

It follows that if a pre-action application to the court for clarification of a Part 36 offer is necessary because the person making the offer has not provided clarification in correspondence, if the court decides that clarification is necessary to allow the recipient to consider the offer, the court may make a costs order against the person making the offer which will not be subject to qualified one way costs shifting.

This was a County Court decision and so is not binding in other cases. However, the analysis of the Civil Procure Rules by the judge as to when qualified one way costs shifting starts to be applied (when the claim is issued) provides a foundation for this point to be presented in other cases. If the analysis of the judge is adopted in other applications made before issue of proceedings, then the person seeking clarification will likely be in a better costs position than after proceedings have been issued.

Whether an offer is an enforceable offer under Part 36

In Anup Shah & Alpa Shah v Ketan Shah & Deepika Shah (21 June 2021) the High Court considered an Appeal from the County Court in which the trial judge had decided that the Claimant was entitled to the usual Part 36 costs consequences following the award of £10 nominal damages.

The Claimants had claimed £30,000 compensation. They had made a Part 36 offer on 21 April 2020 to settle the claim at £1. By that time, the Claimants had incurred more than £200,000 in legal costs. 

Among other things, the Defendants argued that the Claimant’s offer was a sham; an acknowledgment that the claim was worth nothing; an attempt to use the Part 36 settlement procedure to oppress another party with an excessive costs bill; and was a late offer seeking a last-minute exit from a weak case.

Whist accepting that the effect of the part 36 settlement process can be brutal, the Appeal judge agreed with the trial judge that in this case the real issue between the parties was liability, and that the Claimants had won on this issue. The trial judge had then awarded only nominal damages because the quantum case presented to the court was flawed and largely unsupported by evidence, but the claim was worth something. The Claimants had accordingly both won the liability argument and also beaten their offer to settle for £1.

The Appeal judge considered the caselaw (in paragraphs 53 and 54 of his judgment) which gave guidance on the difference between enforceable and unenforceable Part 36 offers. His conclusion was that the courts accept that all Part 36 offers are tactical but that there are important policy reasons why they should be enforceable (particularly because this leads to certainty). The courts have not lightly refused to accept an offer as being enforceable. Consideration of whether an offer is enforceable is fact-sensitive in each case, but the case law referred to by the judge where offers were held to be unenforceable included those where the offer was considered to be a “lightly disguised request for total capitulation” or for submission to the entirety of the relief sought so as to attach Part 36 costs consequences to a successful claim. The character of an enforceable Part 36 offer was that it must give as well as take, and not be derisory.

The sweep-up provision – applying the normal consequences would be unjust

Part 36.17(5) gives the court discretion to disapply the provision of Part 36 costs consequences if it considers the application of those provisions to be unjust. The court must take all the circumstances into account, including the terms of any Part 36 offer and the stage in the proceedings when any Part 36 offer was made.

“This is an important provision, particularly in circumstances where the court has decided that a Part 36 offer that is incapable of acceptance (as in Re IT Protect Ltd) is a valid Part 36 offer. It is surely asking too much of trial judges to make decisions on the validity of Part 36 offers that are so vague that the help of the Court of Appeal is needed. Any offer made in terms that would likely lead to dispute about what is actually being offered should, if not clarified, arguably be regarded either as not being a serious settlement offer, or a situation where the court will exercise its discretion to disapply Part 36 consequences.”

Litigation is a dynamic process where evidence is disclosed over time. Our next article will look at some of the issues that can arise when evidence or court procedure changes the perception of costs risk in relation to an existing settlement offer.

Design and Construction

The selection of a site can present several initial difficulties. A comprehensive geotechnical survey will be required to assess ground conditions and ensure that site foundations are appropriately designed, as movement may affect the integrity of the digester (the sealed, oxygen-free tank in which the materials are broken down). Other site conditions, including water pressure, will need to be considered as part of the design process.

Professionals with design responsibility should pay careful attention to the feedstock intended to be fed into the digester. Some manures (poultry, for example), can contain a high percentage of ammonia, and the resulting sulphides could damage the digester tanks. Where the feedstock may contain contaminants, then appropriate pre-sorting will need to be specified to avoid blockages and ensure efficient operation of the plant.

AD plants require careful design. Safety measures and fail-safes to minimise the risk of explosion, and protect plant operatives such as maintenance contractors, will need to be incorporated; underwriters will pay careful attention to the experience and safety records of those involved with the design, construction, and operation of the digester.

Designers will need to ensure that appropriate filters are incorporated to avoid excessive odours (which may breach planning conditions). For the same reason, the design and specification of insulation, noise deflectors and soft landscaping to dampen and reduce operating noise, is also of import.

Other planning issues (including traffic impact, local development plans and many more), are outside the scope of this article.

Contracts

Whilst not yet commonplace in the UK, larger AD plants are likely to become more prevalent over the next decade. These are substantial engineering projects, often with bespoke contractual arrangements.  Parties, and their insurers, need to be alive to contractual terms that are more onerous than a duty to exercise reasonable skill and care, including 'turnkey' EPC contracts with guaranteed performance specifications.

Consultants will invariably be required to enter collateral warranties with interested parties. It is vital to ensure that such collateral warranties comply with the terms of the consultant's professional indemnity insurance policy.  Warranting compliance with a higher duty than reasonable care and skill may leave a professional facing a large claim without the benefit of insurance cover.

Contractual disputes in construction projects are often referred to adjudication. The parties should ensure that the adjudication scheme set out in the contract complies with the terms of the professional's insurance policy.

Operation and Maintenance

Biogas contains hydrogen sulphide.  As well as having an unpleasant odour, hydrogen sulphide is corrosive and can damage the digester tanks (and will need to be extracted before the biogas can be used in engines, fuel cells or turbines).  Appropriate, periodic maintenance will be required to ensure the safe and efficient operation of the digester.

Maintenance can carry several risks. As above, hydrogen sulphide is a product of the digestive process.  Not only is the sulphide corrosive, but flammable and poisonous too. As well as this being a design risk, O&M contractors must undergo appropriate training and conduct proper risk assessments prior to undertaking maintenance work

The design/specification of an appropriate maintenance schedule will be of importance to the safe and efficient operation of the digester. Maintenance failings may impact upon the performance of the digester and result in the plant failing to meet its contractual performance requirements. Issues including sludge removal, general engine maintenance, and pipe and valve leaks, will need to be considered.

Insurance Coverage

In addition to the above issues, insureds and their brokers should ensure that the insurance policy wording is suitable to their needs. Engineering policies often contain exclusions which may limit the cover provided by the policy (an exclusion relating to concrete, for example).

Tank and pipe failures will invariably lead to pollution and environmental issues, and appropriate insurance will be necessary to cover the costs relating to the same.

Insurers will need to carefully consider the scope of their coverage, as the contents of a tank (both the feedstock and the cultures that are introduced to start the digestion process) can be valuable.  Indeed, replacement cultures may not be immediately available, which could lead to the digestor laying dormant for months and an associated business interruption claim.

OPSS provides guidance on the use of non-disclosure clauses in settlement agreements
Manufacturers are understandably keen to avoid any negative publicity in relation to their products, especially if their product is linked to the injury of a consumer. Read more.

AstraZeneca to receive an indemnity from liability claims for Covid-19 vaccine
AstraZeneca has been granted protection from future product liability claims related to its COVID-19 vaccine by most of the countries with which it has struck supply agreements, a senior executive told Reuters. Read more.

Fake goods and online marketplaces
Since May this year 35 people have been prosecuted and convicted in China for producing and selling counterfeit Dyson hair dryers with prison sentences ranging between 18 months and 6 years. This follows a raid at factory premises said to have produced more than 19,000 counterfeit hair dryers. Read more.

The Act

The Act has three main sets of measures to achieve its purpose: (i) to introduce greater flexibility into the insolvency regime, allowing companies breathing space to explore options for rescue whilst supplies are protected, so they can have the maximum chance of survival – this has similarities to the US Chapter 11 procedure; (ii) to temporarily suspend parts of insolvency law to support directors to continue trading through the emergency without the threat of personal liability and to protect companies from aggressive creditor action; and (iii) to provide companies and other bodies with temporary easements on company filing requirements and requirements relating to meetings including annual general meetings (AGMs).

D&O insurers have latched onto the provisions suspending temporarily the wrongful trading sanctions, thinking this must be good news and that it could materially reduce their exposure.  This article explains why that is not the case.  

The wrongful trading regime

The statutory offence of wrongful trading is contained in sections 214 and 246ZN of the Insolvency Act 1986.    The wrongful trading remedy allows a court to impose unlimited personal liability on a director of an insolvent company who is found to have allowed his or her company to continue trading at a time when they knew, or ought to have concluded, that the company could not avoid insolvent liquidation. 

The Act suspends temporarily this regime so that directors of companies which are impacted by the pandemic may make decisions about the future of the company without the threat of becoming liable to personally contribute to the company’s assets if it later goes into liquidation or administration.  This suspension now runs to 30 September 2020, 3 months longer than initially announced.

The intention is to help to prevent businesses, which would be viable but for the impact of the pandemic, from closing

So far so good and what is there not to like?  

From a D&O insurance perspective, this temporary suspension of the wrongful trading regime is an irrelevance.  But, there are two important additional points.  First, for some companies the ability to limp on to the end of the year will just make the eventual claims against their directors bigger; and secondly the Act has the unintended consequence that insurers will be underwriting in the dark.

The irrelevance of the wrongful trading regime  

The wrongful trading regime was introduced in the Insolvency Act of 1986 but since then there have been few litigated cases.  In the 27 year period up to 30 September 2013, there were just 29 reported wrongful trading cases and out of those only 11 were successful.  In round terms, that's one case per year and one successful case every three years.  

Of course, reported cases just tell part of the story – there may be lots of threatened cases that are settled.  But that is not our experience in representing directors and their insurers – whilst not quite as rare as hens' teeth, wrongful trading cases are few and far between relative to other claims against directors. 

In suspending the wrongful trading regime, the Act does not affect the other more commonly invoked provisions of the Insolvency Act that impose personal liabilities on directors.  Over the period where there were 29 reported wrongful trading cases, there were over 60 reports of misfeasance cases under s.212; over 80 reports of ‘transactions at an undervalue’ under s.238 and over 50 reports of transactions at a preference contrary to s.239.   As a further comparison, around 1,500 directors of insolvent companies are disqualified annually for ‘unfitness to be concerned in the management of companies’, with several hundred disqualification cases appearing in the law reports since 1986.

But more importantly, claims under the Insolvency Act are a small subset of claims that can be made against directors.  D&O insurers might usefully reflect on the Warren Buffet quote that “it is only when the tide goes out you get to see who was swimming naked” – the insolvency will shine a light on directors' past conduct which may otherwise have gone unnoticed, resulting in claims that would otherwise not have been made and which might be completely unconnected to the current economic crisis.  The temporary suspension of the wrongful trading regime will be completely irrelevant.   

Will the Act make increase claim severity?

For some companies, the temporary measures in the Act will secure their future – those companies will become viable again once the economy picks up and all will be good.  But, for other companies, the temporary measures will just prolong the agony and make their eventual insolvency process much more painful for all concerned.  

Consider the position of a weak company that limps on to the end of October 2020.  By then, the Government's financial help through the furlough or other schemes will have wound down but those companies will have unchanged over-heads, including crippling business rates, will be loaded up with massive debt and for many there will be an insufficient increase in turnover - the economy will likely not have rebounded to any meaningful extent, particularly in certain sectors, and (say it quietly) there may even be a second spike of coronavirus cases.    What will the directors do then?  This all happens at exactly the same time that the suspension of the wrongful trading regime will have ended.  The directors will be in an impossible position.  

The Act positively encourages companies to continue to trade but it does not differentiate between those companies well equipped to ride out the storm and those companies who are holed below the water line and will become wrecked.  Those companies will have bigger losses than would have been the case if the they stopped trading at the start of the lockdown.  For those companies, the Act has the unintended consequence of increasing the severity of the claims against those directors.   

Underwriting in the dark

But that's not the end of the story.  

One of the other temporary measures in the Act is the automatic extension of time for companies to file their audited accounts.  A private company with an accounting reference date of 31 December 2019 would normally have to file its audited accounts by 30 September 2020, but it can now file its accounts up to 31 December 2020.  This will make the underwriting process, particularly for new business, even more difficult.  Underwriters will not have any up to date accounts and the older accounts will now be irrelevant to them.  

Of course, underwriters could ask for management accounts or ask a series of bespoke questions to obtain up to date financial information, but that is more easily said than done for the commoditised SME market, which of course is the market that now needs the most careful underwriting.   Even where insurers do ask questions and the insureds provide answers, unless the policy wordings are amended, insurers will have no realistic recourse if they relied on those answers which later turn out to be false.  

This lack of information or the inability to rely on the information provided does not increase the likelihood of claims against directors but it makes underwriting and risk selection even more challenging – it's like underwriting in the dark with one arm tied behind your back.

Conclusion

The Act makes some valuable and necessary permanent changes to UK insolvency law.  It also makes some temporary changes intended to allow companies to ride the storm.  
But in our view, D&O insurers should view the temporary suspension of the wrongful trading regime as being irrelevant to their exposure and the Act could even inadvertently make the position worse for some companies and their directors, and more difficult for insurers to proactively underwrite their UK book. 

The Inland Revenue (Amendment) (Profits Tax Concessions for Insurance-related Businesses) Bill 2019 was passed on 15 July 2020. Once in effect, the law will institute a tax rate of 8.25%, cutting by half the profits tax rate for all general reinsurance business of direct insurers, selected general insurance business of direct insurers, as well as selected insurance broking businesses.

The Secretary for Financial Services and the Treasury of Hong Kong said that the new ordinance will “promote the development of the marine and specialty risk insurance businesses of Hong Kong and enhance the development of high value-added maritime services.” It is also designed to help the insurance industry capitalise on opportunities arising from projects such as the development of the Greater Bay Area and the Belt and Road Initiative.

The government aims to implement the aforementioned tax concessions by the end of 2020 or early 2021.

• On an existing loss for, say, a turbine in a power plant, what would be the position if the repair of a key component (eg the turbine rotor) is prolonged because the repair workshop, which could be local or in Europe/the U.S., is closed during the pandemic?
• What happens if the repair of, say, a supermarket that has been damaged during the civil unrest that broke out in various parts of the world prior to the pandemic is delayed because construction is stopped on the basis that it is a “non-essential” activity?

An obvious concern for (re)insurers dealing with BI (and DSU claims) is that the lock-downs and associated delays can be lengthy and open-ended. Depending on the policy wording and rules applicable in the relevant jurisdiction, (re)insurers might wish to challenge the view that they are liable for prolongation costs.

BI loss resulting from covered PD will typically be covered subject to the application of any deductible. However, what happens if the BI (DSU) gets prolonged because it is impossible for the insured to perform the repairs? In such a case, the BI loss for which an indemnity is sought could be said not to be simply the result of the covered PD. The prolonged BI loss might be considered to have been caused by the government restrictions and not by any covered PD.

Different jurisdictions have their own rules on causation. For example, Colombia applies the doctrine of “adequate cause” and seeks to establish the “adequate cause” of the loss, rather than the “proximate cause” as under English law.

Adequate cause requires the damage/loss to be a foreseeable consequence of the act which caused it. It cannot be assumed that the application of the rules of causation of the relevant foreign jurisdiction will lead to the same result as the application of English law would.

It is also necessary to consider carefully what has in fact caused the time for carrying out the repairs to be prolonged. The position varies from country to country, for example in some countries the government restrictions do not apply to key sectors such as energy, food, health, mining, etc. Also, the restrictions differ depending on the location, ie some restrictions are more severe in some locations than others and have been brought in at different times.

There is also the risk that the COVID-19 restrictions are used as an excuse by insureds where a delay in repairs is the result of some other cause.

It is obviously sensible to confirm, amongst other things, when the damage was discovered, when repair contractors were contacted, whether the insured sought alternative contractors or whether the repairs could have been carried out by the insured’s personnel.

If the insured has simply been slow to carry out repairs, a recovery could be (partially) disallowed, for example, on the basis of a failure to mitigate.

Of course, the loss adjusters’ task is more difficult if it is not possible to carry out a site visit. Even if it is possible to enter a country, the adjuster may be required to self-isolate for two weeks upon arrival.

This causes its own problems. Adjustments in, for example, Latin American jurisdictions are subject to strict time limits and lockdown restrictions could result in loss adjusters being required to report without the opportunity properly to assemble the evidence.

The second main issue relates to quantifying a loss in a COVID-19 context. For example:

• What if a manufacturer of surgical gowns/masks had an existing BI loss prior to COVID-19? The anticipated sales against which actual sales are being compared to compute the BI loss could have risen dramatically from March.
• Conversely, some countries have, for example, closed mines. The anticipated sales against which actual sales are being compared to compute the existing/ongoing BI loss would have fallen through the floor at the beginning of March.

The process has some advantages and disadvantages over a conventional mediation. The purpose of this piece is to summarise some of these and to give some pointers for consideration in preparing for and attending a virtual mediation.

The Claimant's initial offer of £5,750 was countered by the Defendant with an offer of £4,000.

The Claimant then made a further counter offer of £550.

The Defendant accepted the offer and paid the relevant sums.

The Claimant disagreed that the claim had been compromised, contending their offer had been an obvious mistake. This eventually led to the issue of Part 7 proceedings, which the Defendant applied to strike out as an abuse of the Court's process on the basis that settlement had already been reached.

Deputy District Judge Dorman, following the earlier decisions in Draper v Newport (DJ Baker, Birkenhead CC, 03/09/14) and Fitton v Ageas (HHJ Parker, Liverpool CC, 08/11/18) held that the doctrine of mistake was excluded from the online claims portal.

The Judge found that the portal has a self-contained procedural code and as such the rules of common law (in this case the doctrine of mistake) do not apply.

The Judge therefore held that an agreement had been reached and as such the proceedings were struck out as an abuse of process.

The reasoning behind the abovementioned decisions is reported as being twofold: Judges were concerned that applying the doctrine of mistake would: (1) open up the risk of disproportionate satellite litigation; and (2) have a real risk of undermining the certainty, speed and cost which the portal is designed to provide. HHJ Parker in Fitton said that while this might lead to ‘rough justice’ on occasion, the overall benefits of the system far outweighed the negatives.

This reasoning raises some interesting issues.

 With regard to the desire to avoid satellite litigation, low value personal injury claims are nothing new. They were vast in number for many years before the portal came into existence. Offers initially going back and forth by letter, and thereafter by email, was the common practice. No doubt such mistakes were being made just as frequently, the odd 'zero' being added or missed off in written correspondence. Yet the Courts have not been swamped with satellite litigation in this regard. Some may ask why, therefore, should the fact that numbers are now being entered into online boxes instead of written correspondence lead to a different result?

In respect of the benefits of a certain and speedy system outweighing the negative of occasional 'rough justice', one might ask what is the point in having a legal system in place if the aim is not to provide justice?  

However, ultimately, if the reasoning in these cases prevails and there is no change to the portal's procedural code, we expect that the Claimant's solicitor (or their insurer) will end up paying the difference to their client in order to avoid a professional negligence claim. The Claimant will therefore receive his justice and the Claimant's solicitor will pay for their mistake.

Of course, these are only first instance decisions and as such have no binding effect. However, it seems that the lower courts have made their position on the portal clear.

In reaching his decision in Mahoney, the Judge held that the magnitude of the mistake was "neither here nor there". Here we are talking about £5,000 and as such we would not expect the matter to be taken any further by way of an appeal (the decision applies to both sides equally, so there is no partisan policy to do so).

If in the future a bigger mistake is made, for example a Defendant offering £25,000 instead of £2,500 then such a finding would be more likely to be appealed. In which case we may end up with a binding decision.

Arguably, if the Court is going to impose a counsel of perfection upon, what is at this level more often junior lawyers or claims handlers (possibly handling hundreds of claims), then the online portal should be updated to include safeguards so that such mistakes cannot happen.

The technology no doubt exists. Google constantly asks us if we meant what we wrote. However, management of the portal is outside of practitioners' hands and therefore creating a firm's own technological safeguards is not possible.

Tougher crash tests launched for 2020
Safety organisation Euro NCAP (European New Car Assessment Programme) have announced their toughest ever car crash tests, with cars to be crashed into a moving barrier for the first time and assessment to be made of ease of evacuation after a crash. Additionally, a new sophisticated crash-test dummy – dubbed THOR (Test device for Human Occupant Restraint) – will be introduced, with the new dummy more closely mimicking the behaviour of humans in collisions. Read more.

Product Law considerations arising from COVID-19
The impact of Covid-19 has been undeniably profound and widespread, seemingly affecting every area of life. Inevitably, one such area impacted has been product liability. Read more.

Coping with COVID-19: Considerations for diversification within the food industry
On 23 March 2020, the Government announced that all cafés, restaurants and pubs had to close immediately as part of the UK’s COVID-19 lockdown. As a result, many of the businesses have endeavoured to diversify by introducing takeaway and delivery services where they have not done so before. This has created challenges. Read more.

Government powers to order provision of information from companies in the food supply chain
Sections 25 – 29 of the Coronavirus Act 2020 empower certain authorities (as detailed in s26) to order the provision of information from companies who form part of the food supply chain. Read more.

FSA issues guidance on cannabidiol (CBD) food products
Following concerns regarding unregulated and unregulated products on the  market and the recent findings by the Committee on Toxicity (COT), the Food Standards Agency (FSA) have produced a statement to provide further guidance on the safe use of CBD products. Read more.

Product Liability and the rise of Artificial Intelligence
The main source of law on product liability is the Consumer Protection Act, dating back to 1987, and used to implement the strict liability regime introduced by EU Directive 85/347/EEC (the Product Liability Directive) introduced in 1985. Since the introduction of these laws, technology has progressed (and continues to progress) at a rapid rate. This, in conjunction with limited statutory updates, raises the question of whether the current law can adequately address modern issues, in particular AI technology. Read more.

It is perhaps questionable whether that will be a short-term bounce. However, there are reasons to be hopeful that there now exists an opportunity for longer term change. One of the major reasons for the growth of the renewable energy industry in recent years has been sharp cost reductions driven by improvements in technology. The renewables industry has also been the main beneficiary of the decreasing acceptability of coal. If governments are serious about reducing carbon emissions, there may be no better opportunity to do so as they look to restart societies and economies in the coming months.

For obvious reasons, the renewables focus in the UK has very much been on wind power. In the most recent Queen’s speech, the Government committed to 40GW of installed offshore capacity by 2030, and to enable new floating turbines². Offshore wind is not just big business in the UK. There have been significant developments in both Germany and Denmark, and China added more capacity than any other country in 2018. The IEA reports that offshore wind “...is set to expand strongly in the coming decades into a USD 1 trillion business.”³

The Perils

The boom in offshore wind obviously represents a fantastic opportunity for insurers, not least those who are looking to replace premium income from coal-based projects. However, the ever-developing technology and the nature of offshore wind farms also represent serious risks. The purpose of this article is to highlight some of those risks, and to stress the importance of attention to detail when it comes to policy wordings.

Historically, the most common types of losses in offshore wind involve (i) cables and (ii) foundations. Moreover, the most common causes of those losses are workmanship and design.

Modern windfarms often include hundreds of turbines. This means that not only is there a risk of, for example, defective design causing cracks in foundations, but also that when those problems do arise, they are often replicated numerous times. This is exactly what happened at the Robin Rigg offshore wind farm. In 2009, movement was discovered in the grouted connections of the foundations. It was subsequently found that the design standards used contained a fundamental error, which meant that all 60 turbines at the site required remedial works at a cost of €26.25m⁴. This obviously represents something of a recipe for disaster for all stakeholders, including insurers.

One way insurers can safeguard themselves is to ensure that effective aggregation language is included in their policies. For example, policies will normally be subject to a per occurrence deductible and limit, and the policy may provide that “Occurrence means all covered loss, damage, or a sequence of losses or damages, casualties or disasters arising from an insured event.” The intention of such language is to treat multiple losses as a single aggregated loss where they are sufficiently united by factors such as time, place, cause and human intent and action. However, the effect of such aggregation language is highly dependent on the specific facts of a given case. Additionally, in circumstances where instances of damage might occur and/or be discovered at different times, it might be difficult to argue that the so called ‘test of unities’ has been satisfied.

In recognition of the above, policies will often include a ‘series loss clause’ along the following lines:

“If an insured event resulting from (other than excluded herein) the development or discovery of a defect in design, plan, specification, materials or workmanship shall indicate or suggest that a similar defect exists elsewhere in the Property, the indemnity payable shall be as follows:

For the loss or damage associated with the first item of such Property: 100%

For the loss or damage associated with the second item of such Property: 75%

For the loss or damage associated with the third item of such Property: 50%

Further loss or damage to Property shall not be indemnified”

The basic intention of such clauses is that where multiple instances of damage arise from a common defect, insurers are liable on a sliding scale for the first few losses but have no liability thereafter. However, many issues arise with such clauses. For example, how ‘similar’ does the defect have to be, and how does one define where the defect begins and ends? Perhaps most importantly, where repairs are carried out to numerous turbines during one campaign, how do you go about splitting the cost of each instance of damage for the purposes of applying the relevant percentages?

As always, each claim will of course turn on its own facts and the particular wording used. However, if the energy insurance industry is going to maximise the prospects that renewable energy, and specifically offshore wind offers, insurers and brokers need to give proper consideration to the above and similar issues when drafting policy wordings. Failing to do so will mean disputes are likely to become increasingly common, which will only serve to diminish the opportunities on offer.

¹ Global Energy Review 2020

² Queens speech December 2019

³ Offshore wind outlook 2019

Click the link below to read the article in full. 

The case concerns a claim against the former administrators of a company, claiming over £250m for their alleged mishandling of the administration. A 5-week trial was due to begin in early June 2020, involving factual and expert witnesses.

The claimant submitted that to proceed with the trial would be inconsistent with the Prime Minister's instructions on 23 March 2020 to stay at home and that a remote trial could not proceed without exposing those taking part to an unacceptable risk to their health and safety. They further submitted that the technological challenges of conducting a remote trial were too great and that it would give rise to the potential for unfairness.

In the Judge's view, s.53 to s.56 of the Coronavirus Act 2020 expanded the availability of video and audio links, whilst regs. 6 and 7 of the Health Protection (Coronavirus, Restrictions) (England) Regulations 2020 provided that a person could leave their home to attend court or to participate in legal proceedings and allowed gatherings of two or more people where it was reasonably necessary to participate in legal proceedings. These provisions suggested that the Government expected the courts to continue to operate during the current crisis. The new CPR PD 51Y on video and audio made specific provision to allow hearings to be conducted remotely so long as the lockdown lasted, through the use of technology. In the circumstances, the claimant's submission that it would be inconsistent with the Government's guidance on lockdown measures to allow the trial to proceed was rejected. Whilst it was obviously imperative that a remote trial did not endanger the health of those taking part, the trial was not due to start until early June and much could change by then. The claimant had not adduced any detailed evidence to demonstrate that any participants would have particular difficulties in taking part in a remote trial, nor that it was essential to have everyone in the same physical space for the hearing, and the technological challenges of conducting a remote trial were not so great as to warrant an adjournment.  The Judge also noted that both parties would face the same challenges with the technology and, given the allegations against the defendants dated back to 2011, it was not in the interests of either party to delay the case any further. The application was therefore refused and the parties were ordered to continue to prepare for trial and to investigate the technology available to facilitate a remote trial, should that be necessary.

• Additional preferential tax rates for additional classes of general insurance business.
• Preferential tax treatment on premiums paid for reinsurance of risks to Hong Kong based reinsurers.
• Half tax rates for Hong Kong insurance and reinsurance brokers to encourage insurance brokers to establish in or relocate their regional hubs to Hong Kong.
• Tax exemption on interest income derived from fixed income / bond investments of insurance funds.
• Tax exemption on the investment income of Hong Kong insurers if their insurance funds’ assets are managed in Hong Kong.
• Review and address the tax issues faced by insurance groups with Hong Kong resident parent companies or regional holding companies / headquarters if they manage the assets of their overseas insurance group entities in Hong Kong.
• Tax deduction for the increase in reserves statutorily required by the regulator

For policyholders the proposals are focussed on making concessions to a wider range of medical, critical illness and life protection products to encourage Hong Kong people to make provision for healthier lives and plan for retirement.  The proposals: 

• Provide personal tax deductions on insurance premiums for a wider range of medical / critical illness and life protection products, in addition to existing qualifying Voluntary Health Insurance Scheme (VHIS) products.
• Provide personal tax deductions on voluntary contributions to qualifying retirement products with a view to encouraging individuals to save for retirement.
• Provide preferential tax rates (e.g. taxation at half-rate) on commission income earned by insurance agents / brokers for distributing qualifying insurance and retirement products to encourage distribution of those products.
• Provide preferential tax rates (e.g. taxation at half-rate) to insurance companies in respect of their underwriting of qualifying insurance and retirement products to encourage provision of those products.

In a press release of the same date, The Hong Kong Federation of Insurers welcomed the measures noting in particular the need to encourage growth amid economic downturn. 

The full set of FSDC proposals can be found here.

Design and Construction

The selection of a site, and the location of turbines within the site, can present initial difficulties. Wind-speed data, and the calculation of shadow-flicker for an onshore site, are important design considerations (including the rotor height of the turbine), and impact upon the financial assessment of the site.

Wind speed is particularly important to design. The stresses placed on the single connecting point between the rotor drive shaft can be extreme, and careful consideration needs to be given to these forces when making design decisions on the number, length, pitch, and construction of the rotor blades.

Shadow-flicker is the effect sometimes created by the shadow from a moving blade passing over a small opening - such as a window in a residential property - causing a strobing or flickering to occur within the room. If the site is designed or modelled incorrectly, and shadow flicker impacts upon residential properties in the vicinity of the turbine, then enforcement notices may be served upon the turbine owner. The turbine could require a sensor to be retro-fitted, shutting down the turbine in meteorological conditions where flicker is likely to occur, restricting generating hours and profitability.

Both offshore and onshore turbines have typically required substantive piling works to provide adequate stability, although several non-traditional floating turbines have now been built offshore (with more under construction), as have those with suction-bucket foundations. All will typically have long cable runs, which require careful attention. The experience and claims history of contractors and sub-contractors will be key to Insurers' decision whether to underwrite a risk, and at what premium.

Contractors and Insurers alike need to be alive to contractual terms more onerous than a duty to exercise reasonable skill and care, including fitness for purpose and/or design life warranties (see our article here) as the courts seem more willing to apply this stricter standard. The Supreme Court decision in MT Højgaard A/S v E.ON Climate & Renewables [2017] UKSC 59 illustrates the potentially significant remedial costs that may arise, and remain the contractor's responsibility.

Operation 

Given the forces that turbines are subjected to, effective maintenance is vital in maximising the life of a turbine. Ensuring experienced asset managers / O&M contractors are retained, with tight contract control (including monitoring, inspections, and maintenance activities), will reduce the likelihood – and severity – of claims.

Modern wind turbines are often able to be monitored and controlled remotely, and there are fascinating projects ongoing which seek to develop autonomous vessels, crawling robots and aerial vehicles to carry out inspections and maintenance of wind turbines. Whilst such advances will undoubtedly reduce liability risk (particularly to technicians working in extreme conditions offshore), and the costs of inspection (for example, downtime and the charter of appropriate vessels), this remote and potentially autonomous access is not without risk. Robust and appropriate cyber protections are required to prevent unauthorised access, particularly as a traditional business interruption policy would be unlikely to provide cover (if physical damage is not caused to the turbine). 

Post-operation

The first swarths of commercial wind turbines have started to reach the end of their service lives, and decisions are being made as to the decommissioning or repowering of the turbine sites. Each presents its own construction and logistical challenges.

When decommissioning is the only option, there remains the difficult issue of the disposal of the rotor blades, as the technology to recycle the composite materials is in its infancy. Landfill is an unattractive option (and has, indeed, been capped or banned in some countries), with potential reputational issues for all involved with the project. Parties may wish to investigate whether a sustainable decommissioning plan is in place (perhaps through traditional recycling or reuse on secondary market installations, or the ingenious utilisation of sections of blades as public furniture, such as in the Netherlands), before becoming involved with a project.

 Click here to read the previous article: #1 Solar power

With the exit of the UK from the EU upon us, how will this affect the product liability market and how might the body of law governing product liability and safety change? Read more

Whirlpool: further consideration after the Government’s follow-up report on Safety of Electrical Goods in the UK is published

Whirlpool has been subjected to criticism for its handling of recalls of various washing machines and tumble dryers. Read more

Beko v Wilson: Considering the relationship between the limitation longstop and the Consumer Protection Act 1987

In December 2019 the High Court ruled that consumers of products are not entitled to rely upon s41(1) of the Consumer Protection Act 1987 (the CPA) to circumvent the limitation longstop. The longstop prevents any claim for damages being brought under the CPA more than 10 years after the product was first put into circulation. Read more

Hastings v Finsbury Orthopaedics Ltd and Stryker UK Ltd: Scottish Court follows recent English decisions concerning “defect” under the Consumer Protection Act 1987

The Court of Session in Scotland has recently considered the meaning of “defect” under the Consumer Protection Act 1987 (the CPA). In this case, Mr Hastings (the pursuer) alleged that the metal-on metal total hip replacements he had been implanted with were defective under the CPA. Read more

FSA Consultation launched on technical guidance for allergen labelling

The Food Information (Amendment) (England) Regulations 2019 (SI 2019 No. 1218) will come into force on 1 October 2021 and will change the way in which food businesses in England provide allergen information of prepacked for direct sale (PPDS) food. Read more

Solar developers will typically, and particularly on large projects, outsource the design of the arrays to third-party professionals. Design decisions may include the number and type of the arrays (e.g. fixed vs tracking, mono- vs polycrystalline, battery storage etc.), and site layout. Site viability surveys (daylight hours/strength modelling etc.), are often relied upon in making such decisions.

Solar pv technology continues to develop (see the emergence of bi-facial arrays), and both insurers and insureds alike should be alive to the fact that good industry practice may change. Continued professional development will mitigate the risk of design/specification-related claims.

Sub-contracting is commonplace in the construction industry, and Insurers are well-aware of the issues that may present themselves both pre and post-inception of the policy.

Contract control, including fitness for purpose warranties and performance guarantees potentially contained within the oft-used 'turn-key contracts,' is of real import.

Arrays rarely require piling. Accordingly, the main construction issues tend to relate to cabling linking the arrays with grid connectors. Ensuring that cables are laid deep enough to prevent damage, are adequately protected when above ground, and appropriate protections are in place when situated near or crossing waterways, roads and/or pipelines, is of paramount importance: cable damage may render the site inoperable for a lengthy period. Developers and their contractors need to ensure that they hold appropriate insurance for the works (including PL, CAR and Environmental Liability / D&O).

We anticipate that cabling design and construction will only increase in importance as solar pv arrays become more challenging in scope (floating arrays and the Australian/Singaporean 'Sun Cable' being two examples). The experience and claims history of cabling contractors and sub-contractors will be key to Insurers' decision whether to underwrite a risk, and at what premium.

Operation

As noted in our introductory article and annual insurance review, many companies and institutional investors are divesting from traditional energy and investing in renewable energy resources. Large solar sites are being sold (individually or packaged with several other sites in special purpose vehicle companies) to institutional investors. Investors will require minimum returns, so the smooth operation of a site will be key.

In this regard, Operation and Maintenance ("O&M") contractors play a key role (keeping pv panels clean, secure etc.). Developers may retain this role upon the onward sale of a site or appoint third-party professionals. O&M contractors may not be alive to the potential for design liability when specifying replacement parts. Adequate insurance is key.

Investors and lenders are becoming more sophisticated with their due diligence (including seeking greater information as to site construction and performance, the parties' financial strength etc.). We anticipate an increase in the number of warranty and indemnity insurance policies being taken out in relation to renewable resources.

Read the first in the series on solar power here.

 As always, surveyors should keep the scope of any standard reliance clause used in their reports under close review and as limited as possible. 

Although prudent for insurers to keep an eye on any such development, were multiple claims to be brought against a surveyor arising out of just one report, we anticipate that the Courts would apply the doctrine of reflective loss, to prevent the surveyors facing the risk of liability to multiple parties, adopting the same approach as the Court of Appeal did in the case of Titan v Colliers, in connection with securitised lending.

Background

In March 2018, Prudential plc announced plans to de-merge its UK and European business from its business in Asia, the US and Africa.  In order to facilitate that demerger, the Prudential group needed to release regulatory capital from its UK and European business. The Prudential Assurance Company Limited (PAC) therefore reached an agreement with Rothesay Life (i) for Rothesay Life to reinsure c.400,000 of its policies, representing gross liabilities of c.£12.9 billion, and (ii) for those policies and liabilities to subsequently be transferred to Rothesay Life by way of Part VII transfer. 

The independent expert opined that Rothesay Life would have a "somewhat stronger financial position than PAC, measured by SCR coverage ratio" and concluded that the proposed transfer would not have a material adverse effect on policyholders. Both the PRA and the FCA approved the proposed transfer in their formal reports to the court. Whilst notable for its size, there was nothing particularly unusual about the proposed transfer. Many such transfers have been approved in the past, and the court has generally rejected policyholder objections.

The decision

Notwithstanding the positive conclusion of the independent expert and the approval of PRA and the FCA, Snowden J. refused to approve the transfer, and agreed with a number of policyholder objectors. In the course of his 38 page judgment, Snowden J. set out the following reasons for his decision:

• PAC's capital management policy provided a slightly higher level of security than Rothesay Life's capital management policy;


• given that the annuities to be transferred represented policyholders' life savings and that the annuities are intended to last for the remainder of the lifetime of each policyholder, it is not correct to dismiss the possibility of financial failure of either PAC or Rothesay Life as "fanciful", notwithstanding the strong SCR ratios of both applicants;


• the discretion of the court whether to approve a Part VII transfer cannot be restricted to the actuarial analysis or regulatory criteria derived from Solvency II. Broader considerations are also relevant, such as the reputation of the applicants and the likelihood of parental support in the event of financial distress;


• therefore, it is relevant to consider that (i) in the event of financial distress of PAC, it is likely the wider Prudential group would provide parental support from its very large resources in order to protect its ongoing reputation, and (ii) there is uncertainty whether Rothesay Life would be able to access comparable resources from its three main shareholders (being two private equity investors and one US insurer), or that its three main shareholders would have the same reputational incentive to ensure the solvency of Rothesay Life in extreme circumstances;


• in exercising its discretion whether to sanction a Part VII transfer, the court needs to balance the commercial interests of the applicants against the interests of the policyholders. The fact that the reinsurance arrangement has already enabled PAC to release regulatory capital to achieve 90% of its objective is, therefore, a relevant factor.

1) The decision shows how far the judiciary is willing to go in exercising the discretion whether to approve a Part VII transfer. Whilst it has been accepted mantra for some time that the courts will not just "rubber stamp" the opinions of the independent expert and the regulators, this decision represents a significant shift in how far the courts are willing to go.

2) The decision shows just how broad the court's discretion is, being even wider than the scope of regulatory supervision pursuant to Solvency II and other legislation. The less clearly definable concept of reputation will be a relevant consideration.

3) A comparison of SCR ratios alone is not sufficient. It is important to also consider capital management policies and the likelihood of discretionary group capital support.  

4) Transfers from large insurance groups to specialist run-off acquirers might be affected, as the court might conclude that the run-off acquirer will be (i) less able to draw on additional group capital, if it is part of a smaller overall group, and/or (ii) less likely to be able to draw on additional group capital as its investors will have less of a reputational imperative to ensure policyholder payments.  Whilst this will be particularly relevant for life insurance, it should not be discounted for general insurance also.

5) Special consideration will need to be given to transfers of annuities (or other life-saving type policies) given the expected duration of those policies and the "catastrophic" consequences for policyholders if payments are not met.

6) Conclusions of an independent expert reached on the basis that an outcome is extremely unlikely to occur might not be accepted as valid by the court (particularly in the case of long term and/or life savings policies).  

7) The decision casts doubt on previously accepted principles that (i) it does not matter if individual policyholders or groups of policyholders are adversely effected, so long as the proposed transfer is fair as a whole, (ii) it is not for the court to look for the best possible transfer, but to decide whether the transfer put forward by the applicants is fair. Snowden J. suggests that these principles are only relevant to transfer involving with-profits insurance policies.

Consequences for the closed book market

This decision will be carefully analysed by those in the market for the acquisition of closed book (or run-off) insurance portfolios. Whilst in many cases it will be possible to distinguish the key features which influenced the Snowden J. decision in Prudential and Rothesay Life, there will be many other cases where the characteristics of the Prudential/Rothesay Life transfer will be present. 

Consequences for business transfer agreements

In the current case, it is difficult to see what the applicants can reasonably do amend the scheme in order to address the concerns of Snowden J..  A Part VII decision has never been appealed.  

Therefore, this decision draws into sharp focus the need for the business transfer agreement (which precedes any commercially negotiated Part VII transfer) to set out what happens if the court rejects the proposed Part VII transfer.  Should one party (or both parties) be obliged to provide more regulatory capital?  Which party loses more if the Part VII transfer does not complete?  Are both parties happy for the reinsurance arrangements to last in perpetuity? Should the parties provide that the reinsurance arrangements will be recaptured if the Part VII is not completed by a certain date, so as to avoid the court reasoning that the commercial objectives of the parties are already mostly met?

Consequences for policyholder documentation

It is worth noting that Snowden J. was influenced by PAC's policyholder documentation which emphasised that annuities with Prudential would be for the lifetime of annuitant.  More than once, he noted that the policyholder documentation did not contemplate that the annuities might be transferred to another (re)insurer by way of Part VII transfer. Therefore, insurers might wish to start writing such permissive clauses into their policyholder documentation, so as to make it easier to transfer insurance portfolios in the future.

In most cases, insureds provide all this information and adjusters are consequently able to adjust the loss without any unnecessary delays. However, there are some instances where insureds are reluctant to provide it. In our experience, the insured's lack of co-operation is often linked to coverage or quantum concerns.

This can become frustrating when information is not provided and a seemingly endless exchange of further requests for information ("RFIs") and partial responses between insureds and insurers follows.

Some legal experts consider that the 30 days period starts again following a RFI. However, in our view, this is not the correct analysis. The key point, according to the law, is whether the insured has provided all the relevant information to determine coverage and quantum. If it has not, the 30 days period will never have been triggered.

In most Latin American jurisdictions, with the notable exceptions of Peru and Ecuador, there is no limit as regards how many times insurers are entitled to request further information from the insured. In principle, insurers have until they secure all the relevant information necessary to determine coverage and quantum.

However, issuing several RFIs comes with its own risks. The relevant authority or judge considering an insurer's conduct may conclude that the required information could not have been materially relevant, since the adjustment of the loss continued despite the insurer not having a response to its request. There is a risk of insurers inadvertently waiving the right to enforce an exclusion if they do not enforce the exclusion within a reasonable period of time, once it has become clear that the insured is not going to provide the information to determine whether that exclusion applies.

Insurers are confronted with a dilemma. If insurers keep asking for information, then they are at risk of losing the right to enforce the exclusion. At the same time, however, insurers may consider they cannot decline coverage, as they have not been provided with the relevant information to determine whether the exclusion applies or not.

In our experience, if the insured continues to fail to respond to a RFI, it is likely that either such information does not exist, or if it does exist, it jeopardises the insured's position. In these circumstances, our advice is to inform the insured that such information has been requested several times, and that insurers believe that a certain exclusion applies unless proven otherwise.  By proceeding in this way, insurers protect their position, and, ultimately, will be able to contend later on in court that no right has been waived.

Some insurers are concerned that by adopting this approach, they risk the insured stopping its co-operation with the adjuster/insurer. In our experience, this risk does not usually materialise. Moreover, we would question the value of continuing to adjust a loss (and incurring costs in doing so) if the claim is likely to be excluded.

Peru and Ecuador recently introduced new insurance regulations which impose strict time limits. Under the new laws, insurers have one opportunity to request further information in Peru and two opportunities in Ecuador. This has resulted in a drastic reduction in the time taken to adjust losses, regardless of their complexity. Some insurers, with good reason, are concerned that these rules mean that even if their requests do not produce the information sought, they are barred from making further requests. 

However, as noted above, the law also requires that the insured provides all the information necessary to prove that the loss is covered under the policy, and if so, the quantum. If the insured refuses to provide information in response to additional requests relying on the argument that insurers have "used up" their opportunities, insurers are entitled to decline the insured's claim. If insurers decline a claim on this basis, the insured will usually follow one of two courses of action:

a) In most cases, the insured realises that its case is weak, and that insurers are aware of this and are ready to stand by their declinature of the claim. As a result, the insured becomes more realistic in its indemnity expectations and is prepared to agree a compromise.

b) Occasionally, the insured files a legal action. However, this is not entirely bad news. In Latin America, in commencing a legal action at court (or arbitration), the claimant must submit all the evidence and information supporting its case.

As a result, this means that if the insured is to have its claim paid, it will ultimately have to provide the necessary information to determine coverage regardless of how many opportunities the insurer has had to request further information.

We often receive queries from reinsurers about whether these deadlines also apply to them.

In practice, some cedants (or brokers) require reinsurers to pay their share / reply within the 30 days period originally given to the cedant itself, even if reinsurers only got the information on day 28, for example. In these circumstances, where there may well be the further complication of documents that need translating, a timely response from reinsurers is impossible.

From a legal standpoint, the insurance policy and the reinsurance contract are two separate contracts, regardless of whether the reinsurance contract is in the form of back-to-back cover and stated to follow the same terms and conditions and settlements as the underlying policy. As such, reinsurers have a separate period of 30 days to pay the indemnity (or request further information), from the date when all the relevant information has been provided by the cedant in order to determine cover and quantum.

A further issue which can arise between the cedant and reinsurers concerns the loss adjuster's report. For example, in Chile insurers have only 10 days to challenge the conclusions of the adjuster’s final report. If the adjuster’s conclusions are not challenged, it is very likely that a judge will follow them. In Peru, insurers have 10 days to challenge the adjuster’s conclusions and if they do not do so, those conclusions are binding on the insured and its insurer. 

The 10 days requirement can create friction between cedants and reinsurers. Generally, however, in Latin American jurisdictions, if the cedant misses the opportunity to challenge an adjuster's conclusions and is forced to pay a claim as a result, this does not bind reinsurers, even if the reinsurance contract contains follow the fortunes language.  

Brokers play a key role in ensuring compliance with the deadlines. The sooner the information is passed to reinsurers, the sooner reinsurers will be able to respond to the cedant. Brokers usually use official channels of communication such as ECF. Despite the existence of systems for keeping reinsurers updated, we would suggest it is helpful if brokers are creative and find alternatives to speed up the communication process.

Brokers may be reluctant to allow direct channels of communication between reinsurers and cedants. However, in our experience dealing with complex claims in the region, it is almost impossible to comply with such short deadlines without direct communication between the relevant parties.

In Latin American jurisdictions, communications between reinsurers and cedants can be used as evidence in any legal proceedings, and this is true regardless of whether those communications are direct or go through the broker. The court will look at these communications together with all other relevant documents, and not in isolation. Bearing in mind that it might go before the court, however, reinsurers may of course not wish to share all information with the cedant.

Nevertheless, in our view, the benefit to reinsurers of maintaining good communications with the cedant outweighs this risk.

In conclusion, the 30 days period to pay a claim is prescribed by law in most Latin American jurisdictions and so insurers and reinsurers must comply with it. Properly understood, this deadline is not as onerous as it may seem at first sight. Further, the faster reinsurers receive all the necessary information to determine cover and quantum, the more they will be able to assist the cedant in complying with the local regulations and associated deadlines.

In recent years, Superintendence proceedings have turned into the favourite venue for insureds to pursue their claims, as they have several advantages for them.

• Insurance companies are required to pay claims under certain policies within 10 days following an award by the Superintendent finding in the insured's favour. If the insurer would like to appeal the Superintendent's decision, the insurer must pay the claim in advance. In other words, the insurer has to pay in order to play.

• The Superintendence is not a legal court. As a result, the rules for the assessment of evidence will not necessarily be applied with the same rigour as they would be by a judge at court.

• The Superintendence proceedings are significantly shorter than proceedings before the Civil Court. This presents a real challenge for reinsurers when exercising claims control, as documents going through official channels of communication (i.e via brokers, not directly) could take days or even weeks to be received. Reinsurers also must consider that most documents (perhaps all documents) submitted to the Superintendent will be in Spanish. No hablar español puede ocasionar un gran problema.  

• The same difficulties arise where the reinsurance contract contains a claims cooperation clause. The flow of communication between the relevant parties is slow, so that it can be very difficult to comply with the deadlines imposed by the Superintendent.

• The Superintendent can take a more relaxed approach to limitation. Simply put, the Superintendence is not a court of law and the Superintendent may not always consider limitation at least at the initial stage. This means that an insurer may be forced to pay a claim where the Superintendent finds in the insured's favour despite a claim being time-barred.

• As (re)insurers are aware, broadly speaking, the Superintendent in Latin America tends to be pro-insured. This is especially true if the claim concerns state-owned companies. Ecuador is no exception to this.

There are, however, some features of the Ecuadorian process which can assist (re)insurers in ameliorating these difficulties.

• Against a resolution issued by the Superintendent, insurers have two separate ways to appeal:

  (i) before the Superintendent. This appeal has to be submitted within 10 days following the notification of the Superintendent's decision.

  (ii) before the Administrative Court. This appeal has to be submitted within 90 days following notification of the Superintendent's decision. 

• Insurers have access to separate proceedings before an Administrative Court (as above). This means that (re)insurers can prepare their case fully, with documentary and expert evidence and relying on all appropriate legal grounds, and that case will be assessed by a judge who, it can be expected, will review it in accordance with the applicable legal rules.

• Under article 26 of the Ecuadorian Commercial Code, the limitation period for bringing a claim under an insurance contract is two years from the date the cause of action accrues. Ecuadorian courts have interpreted the "date the cause of action accrues" as the date of loss. The limitation period is therefore relatively short.

• Even if the Superintendent decides not to look at limitation as a preliminary issue, it does not mean that the claim is not legally time-barred. This defence could yet be (re)insurers strongest defence at an appeal before the Administrative Court.

• The Ecuadorian government has a good system for allowing access to documents related, for example, to public-tenders and state-owned companies, through laws on public access. We have been able to access documents (e.g. EPC contracts and full documentation for the underlying policy) which in other jurisdictions would have been impossible to obtain.

• The new government elected in 2017 has targeted corruption and poor market practices. There is therefore an expectation that the Ecuadorian Superintendent will not wish to be seen as biased in favour of insureds.

The Superintendence procedure in Ecuador therefore presents challenges for (re)insurers but it is possible to navigate these claims successfully. 

If you have a particular interest in issues raised in the above, for example, obtaining public documents, or claims in Ecuador generally, please contact us.

Please click on the link below to access a version of this note including details of the full RPC International Risk Team.

The prosperity of the region has been of interest to international re/insurers for some time and there is fierce competition for a share of the market. The London market has advantages over other international markets thanks to an insurance tradition and accumulated experience dating back more than 300 years. However, it faces the challenge of interacting successfully with other markets such as Latin America.

Re/insurers need to be aware practices that are appropriate in the London market may create problems when dealing with Latin American jurisdictions and vice versa. The Latin American market presents challenges in terms of culture, language, commercial practices and the civil law approach of the region versus the common law approach of the London market.

The key to operating successfully in this market is the ability of all the relevant players to understand and present solutions and strategies that work for both markets, as well as the ability to interact in the local language to deal with simple matters such as methods of reporting, claims handling, negotiating settlements and lawyers’ fees.

We have noticed the increasing reluctance of local cedants to agree on the inclusion of claims control clauses (CCCs) in the Latin American market. While these clauses have historically been commonly used in reinsurance contracts, some cedants view the inclusion of CCCs to be in conflict with local regulations, which stipulate since reinsurers are not a signatory to the policy, they cannot intervene “indirectly” in the adjustment of an insured’s claim.

Local insurers are often retaining a share of the risk and, in these instances, cedants are less likely to accept a CCC; their preference will be for the inclusion of a claims co-operation clause. In a soft market, London market underwriters have little room to negotiate their preference to include CCCs.

Delegated claims handling

There is an emerging trend for major re/insurers to delegate authority via local branches to deal with claims in the region. We have encountered situations in which most of the placement is reinsured in the London market but with a local reinsurer taking the biggest share, resulting in the local reinsurer being the “overall leader” of the placement and London market reinsurers together covering the largest percentage of the risk.

A lack of co-ordination between the overall leader and co-reinsurers can arise from such situations, particularly if those various London market reinsurers each have their own slip. If the insurance policy and the reinsurance contract(s) are subject to local law and jurisdiction, local reinsurers often prefer the appointment of a local lawyer to advise on their share.

This presents several challenges. In the same way a “London” lawyer needs a “local” lawyer to assist on local matters, local lawyers need a London lawyer to handle and advice on London market practices and standards. London and local lawyers’ approaches differ and even if those lawyers are part of the same law firm this often causes problems. Wrong advice can build a bad reputation and it is common to hear complaints about bad experiences dealing with the London market or Latin American jurisdictions.

Some countries are implementing stricter and tighter rules for the adjusting of losses, with Chile being the first, followed by Peru and Ecuador The Chilean market is perhaps one of the most advanced in the region. Nonetheless, Chilean insurance law imposes almost unworkable deadlines for the adjustment of complex claims. This gives insurers only 10 days to challenge the conclusions of the adjuster’s final report.

Re/insurers’ failure to comply with the strict deadlines set by local laws may result in economic penalties or revocation of their license to trade. These time frames present huge legal and practical challenges to all relevant parties when adjusting major losses.

This trend in imposing deadlines for adjusters is evidence there remains a significant misunderstanding between the London and the Latin American markets. Reinsurance is a complex business involving numerous parties; to suggest a coverage determination is possible in complex cases within some of the time limits set by local laws shows a lack of understanding of how reinsurance in the London market works.

While the London market has worked on implementing systems such as ECF to speed up the process of handling claims and improving channels of communication, it is unlikely the London market will be able to comply.

If the London market wants to maintain its leadership in the region, London reinsurers need to look at ways to promote and improve direct communication with local players. In our experience of dealing with complex claims in the region, there is nothing better than direct communication among the relevant parties.

Appointing adjusters and lawyers familiar with both London and local markets is key to implementing solutions that match the complexities of both sides.

London has the opportunity to consolidate and enhance its leadership and presence in the region. However, an effective and productive interaction between the London and Latin American markets will only be possible if they acknowledge diversity.

This article was first published in Insurance Day.

How to protect your crown jewels?

There are some basic steps you can take to help prevent your trade secrets from falling into the hands of potential competitors:

• ensure that you mark any documents which contain confidential information or trade secrets as "confidential" – this will put recipients of the information on notice that the information is confidential which will help to establish an obligation under the common law of confidentiality (and also under many NDAs);
• limit the pool of people privy to the information to the minimum possible and keep a log of those individuals. All in all, choose recipients carefully;
• give out as little of your confidential information as necessary to achieve your commercial objectives; and
• you should enter into a non-disclosure agreement (NDA) before handing over sensitive information.

What is an NDA and when would a start-up need one?

A well-drafted standard form NDA is an important first-step for any well-run business.  Not only does it help to protect your business but it also shows you are professional and mean business!  An NDA is a binding contract that enables two (or more) parties to exchange sensitive commercial information. In simple terms, NDA's allow a business to contractually protect confidential information and know-how. 

Throughout its life, businesses will want to share confidential information but, at the same time, want to ensure that the recipient of that information does not attempt to misuse it. As a result, start-ups should always seek to ensure that appropriate contractual confidentiality obligations are in place, for example:

• between co-founders, to act as protection should relationships ever sour (this would normally be in a shareholders' agreement or other agreement governing the co-founders relationships in respect of the business rather than in a separate NDA;
• when presenting ideas/concepts to potential investors/new partners/potential licensees;
• when bringing employees on board who have access to sensitive information (this would normally form part of their employment contracts rather than being in a separate NDA);
• when sharing financial or marketing data; or
• when eventually looking to sell/entering into a bidding process.

Key things to look out for when entering into an NDA

Broadly, the key concepts in an NDA (and similarly in confidentiality obligations in broader agreements) are the ideas of "confidential information", "purpose" and "authorised recipients". A start-up should ensure these are carefully worded so it obtains the protection it requires.

Firstly, "confidential information" should be defined specifically (but where you are the disclosing party, broadly to take account of potential future disclosures), making clear the types of information that are covered. That will enable the parties to understand the exact information protected by the NDA and eliminate any room for error e.g. source code, designs, recipes etc.

It is also important to clearly set out the purpose for which you are disclosing your trade secrets and ensure that there is a clear obligation on the recipient to only use the information for that purpose. This will prevent the recipient from using it in a way that you had not anticipated e.g. to develop a similar product. 

Finally, make sure that you list the categories of people/ entities that the recipient is allowed to disclose the information to. Remember, the larger the number of people who are privy to the information the harder it becomes to control and the more likely a breach of your confidentiality will take place.  You should ensure that the recipient of the information is responsible (and liable) for the acts and omissions of any person to which it discloses your information – this ensures there is a clear chain of responsibility which is enforceable by you against your contractual counterparty.

Final thoughts

Remember that, while NDAs are an important step to take to protect your confidential information, in reality they offer few guarantees.  NDAs are notoriously difficult to enforce (you have to prove that it was the recipient that disclosed the information or used your information other than for the purpose (which in many cases is a significant evidential barrier to enforcement)). 

Further, as a start-up, you may simply not have the money to enforce your NDA which would likely involve complex, expensive and time-consuming litigation. 

As such, the safest approach is to combine the NDA with the recommendations at the beginning of this article: limit the persons to which you disclose information to those that absolutely need to know it to progress your business and limit the information you disclose to the information which those persons absolutely need to know.  By this multi-pronged approach you can seek to manage your risks and hopefully keep the crown jewels safe!

• What are the roles and responsibilities of each founder?  What time, monetary or other commitment should each founder have to provide?  What are their salary entitlements?  What will be the dividend policy?   -  One scenario which is far from uncommon is where one co-founder has substantial equity but becomes disengaged from the business leaving the remaining founders carrying what they consider to be a "dead weight"
  
  
• What type of entity should be used for the business (for example, a limited company or a limited liability partnership?
  
  
• If the start-up is a company, what percentage ownership should each founder/investor have?  What control/protection (if any) should founders/investors have against dilution of their share capital, issuance of new shares etc.
  
  
• How will the board be composed, how frequently should it meet and what should its quorum be?
  
  
• What matters should be "reserved matters" (i.e. should require unanimous/majority approval in order to be implemented) for co-founders/investors?  Some examples include issuance of shares, sale of intellectual property, entering into substantial debt obligations etc.
  
  
• How will the company be funded?  Will co-founders/investors be under an obligation to fund the business up to a certain amount or will be funding be on a case-by-case basis?  Will funding be on an equity or loan basis? What further funding rounds are anticipated, over what timeframe and from what sources? 
  
  
• Will any employees be incentivised through the grant of shares? Should there be different classes of shares with different rights attaching to them?
  
  
• What are the founders expectations regarding the length of their investment/commitment to the new business? What ability do founders have to exit the business and sell their shares? How will good leaver / bad leaver provisions operate?
  
  
• Who is in charge of the day-to-day running of the business?  How will decisions be made?  How will a business plan be agreed and updated? What happens if there is deadlock and the founders / other shareholders cannot agree on a way forward?  How will disputes be settled?
  
  
• How will a sale of the business be agreed? What if some founders/shareholders want to sell but others do not?
  
  
• What non-competes should be included to prevent co-founders competing with the business?
  
  
• Confidentiality obligations to prevent co-founders disclosing confidential information other than in the course of the start-up's business.

As a result, founders can be stuck in costly and protracted litigation or find that the business in which they invested time, money and other assets, yields substantially less value to them than expected.  

A start-up is an investment in time and resources.  As that old parable goes, build your house on rock and not on sand: always seek legal advice to try to ensure that your start-up has stable foundations to prosper and grow.   While it is tempting to put legal issues aside until the business is "more developed", to save time and costs in the early stages, this can prove to be a false economy.  What could cost a few thousand pounds at the start-up stage to get right, could end up costing you literally millions further down the road. 

That said, as many people in the start-up sector will tell you, there is a balance.  For example, while it is important to get the basics right, we understand that many start-ups may not be seeking strict "legal compliance".  Indeed, in our experience, in many instances start-ups in this sector are moving far faster than regulation and so testing the boundaries of regulation (in an informed manner) can be essential to a start-up's success.  In addition, start-ups need to be nimble, reactive and need to "road test" their ideas to see if they work in practice before spending large sums on legal fees and "legal compliance".  It can be a difficult balance to strike which is why it is important to get legal advice from advisors who understand the importance of the necessity for a different approach between established businesses and the start-up world.  Only this way can you access legal advice which is proportionate and relevant to your needs.

This series of blogs will look at some key legal issues including the following:

1. Agreeing the deal with your co-founders; 
2. Protecting your confidential information;
3. What legal structure should the business take?  
4. Ownership and Protection of Intellectual Property Rights;
5. Your terms of business;
6. Tax issues;
7. Compliance with laws: securities laws;
8. Compliance with laws: insurance regulatory issues;
9. Compliance with laws: consumer protection issues;
10. Compliance with laws: data protection issues;
11. Employees; and