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Court of Appeal reins in Kidsons on circumstantial notifications

6 November 2008

Court of Appeal reins in Kidsons on circumstantial notifications 6 November 2008 The decision last year in H L B Kidsons-v-Lloyds Underwriters and Others, made unhappy reading for policyholders and imposed a very strict approach to complying with notification provisions in claims made PI policies. This week, however, the Court of Appeal has swung the law back in favour of insureds, as Nik Carle now reports.

A reminder of the facts in Kidsons

Kidsons ran a specialist business that marketed tax avoidance schemes to clients. In 2001, a Kidsons employee signalled some worries about the merits and implementation of these tax schemes and in response, in August of that year, Kidsons wrote to their broker saying: "…the Inland Revenue, if minded, could be critical of some procedures followed in certain cases…".

There were then two follow-up communications to Underwriters. The first, at the beginning of October 2001, enclosed a claims bordereau report and then, at the end of March 2002, Kidsons next letter warned: "…in some instances there might be procedural difficulties involving…each scheme and this might lead to the possibility of criticism in the future."

The notification provision at the heart of this case was General Condition 4 ("GC4"), which is largely standard - of course - in these sorts of PI wordings:

"…The Assured shall give to the Underwriters notice in writing as soon as practicable of any circumstance of which they shall become aware during the [policy period]…which may give rise to a claim or loss against them. Such notice having been given any loss or claim to which that circumstance has given rise which is subsequently made after the expiration of the [policy period] shall be deemed for the purpose of this Insurance to have been made during the subsistence thereof."

In the High Court, Mrs Justice Gloster had held that strict compliance with GC4 was required if notifications were to be effective, notwithstanding that this provision was not explicitly described as a condition precedent.

Further, the August and October communications could not amount to valid notifications - the Judge said - because they were "insufficiently clear and unambiguous to constitute notice of a circumstance giving rise to a claim under GC4", as "…far too vague and nebulous…" and further, they did not include an identification of any error, act or omission or possibility of any claim nor did they identify any specific products or procedures in question.

Finally, whilst the March 2002 letter was a proper notification in principle, it could not be viewed as having been given "as soon as practicable" coming - as it did - some four months after Kidsons first awareness of the matter and three months after their PI policy had expired.

The Court of Appeals ruling

The Court of Appeal found that the October 2001 presentation was an effective notification for the purposes of GC4 and rejected the Judges reasoning on this footing:

"The question for present purposes is what the letter said, not what the letter did not say. It was presented as a matter of the claims side of things. The letter did not say that any claim had been made, indeed it said that no claim had been made, and therefore the essence of it must, at any rate in theory, have been to provide information of a circumstance which might give rise to a claim. That is what the bordereau confirmed, when it was headed Claim circumstance notification bordereaux."

"GC4 says nothing about how a notification is to be made, other than that it must be in writing and given as soon as practicable after awareness of circumstances which may give rise to a claim. That is, on the face of it, a fairly loose and undemanding test. It is quite unlike other possible notice requirements which might specify more precisely what a notice must contain and/or when it must be given. Both the requirement of awareness, and the test that a claim may arise, are open-textured. Moreover, if circumstances arise where notification should be given, the Assured is required to give notice…: it is not in his option, as many contractual notices might be. The Assured is thus put in danger of either being required to give notice at a time when the circumstance of which he is aware require investigation before he can speak precisely about them, or of being told that he has failed to give notice at all as soon as practicable. Moreover, the authorities on such clauses do not seem to demand great specificity…".

Scope of notification

However, the scope of that October notification was limited: the Court of Appeal did not accept Kidsons case that the entirety of the business fiscal engineering work was included but rather, only those matters relating to the implementation of certain products. This was what a reasonable person would have been given to understand on receipt of the notification.

Awareness: subjective and objective elements

As to establishing awareness for the purposes of GC4, the Court looked at the process of deciding about what "may give rise to a loss or claim …" in this context. Whilst accepting that this was an entirely objective question (and not dependent on the insureds subjective thoughts at all), Underwriters argued that the concept of awareness still necessitated (on the insureds part) some subjective element of belief in the possibility of a loss or claim in relation to relevant circumstances.

Underwriters position, namely, that Kidsons were not aware for these purposes of the relevant circumstances, was rebuffed by the Court of Appeal. All the parties were prepared to treat the original concerns expressed by the employee as being the circumstances in question - and as Kidsons were clearly aware of these concerns - the analysis could readily end abruptly there.

As soon as practicable …: condition precedent effect and interplay with institute anti-avoidance provisions

The Court of Appeal supported the Judge on this front: in the judgment, there is a lengthy and useful exploration of the interaction between the compulsory "General Institute Conditions" in the wording and the effect of the condition precedent features in GC4.

In short, the as soon as practicable component in GC4 was to be afforded condition precedent status and nothing in the General Institute Conditions served to affect that conclusion.

Comment

The first instance decision in Kidsons set the odds against policyholders in a significant way and it is perhaps no surprise that the Court of Appeal has trimmed some of the extremes here.

This latest review (the Judgment runs to 48 pages), following on from Kajima UK Engineering v The Underwriter Insurance Co earlier this year, is surely going to be an important blueprint for PI insurers aiming to adopt robust and sustainable protocols when considering notifications generally.

There is still plenty to draw from Kidsons that is helpful for insurers but they will not be able to take notification points with quite the same confidence in future.

"The final result of this litigation is such that (when costs are taken into account) neither party has gained any significant financial benefit." HH Mr Justice Jackson

The results of the long running dispute between Multiplex Construction (UK) Limited (Multiplex) and Cleveland Bridge UK Limited (Cleveland) are finally in! HH Mr Justice Jackson handed down a 226 page judgement on 29 September 2008. The bottom line is that Cleveland is to pay Multiplex circa £6m in damages. But with the costs of the litigation amounting to circa £14m since the preliminary issue hearings in 2006 (the costs of photocopying alone approaching £1m) they have far exceeded the sums seriously in dispute between the parties. So, with the disproportionate balance between damages recovered and legal costs incurred, could and should the parties have prevented the dispute running to final trial?

To recap on the history, Multiplex is the main contractor who constructed the new stadium at Wembley. Cleveland was the steelwork subcontractor. The two companies never appeared to see eye to eye and their relationship came to an end with an acrimonious split in August 2004. Litigation followed soon after. Multiplexs ensuing claim for damages arising out of alleged defects and repudiation of contract and Clevelands cross claim for sums due for work done and materials supplied were consolidated into one action at the end of 2004.

At a Case Management Conference on 5 December 2005, the Judge had what he described as a "constructive discussion" with leading counsel as to how the disputes might most economically be resolved. Nine preliminary issues were formulated (latterly increased to 11), the answers to which it was hoped and expected would enable the parties to resolve their differences.

In his judgement of the preliminary issues in 2006, HH Mr Justice Jackson made it clear in an address to the parties that:

"with the assistance of this courts decision on the [preliminary issues], it may now be possible for both parties to arrive at an overall settlement of their disputes, either through negotiation or else with the help of a mediator, who is unconnected with this court".

He went on to strongly recommend settlement to the parties in order to save costs and management time. He gave the clear message that although the court would determine any remaining issues that the parties wished to litigate, the court was encouraging the parties to enter into a sensible commercial settlement.

Whilst stopping short or requiring the parties to settle the dispute instead of going to trial (to do so may be a breach of Article 6 of the European Convention of Human Rights: the Right to a Fair Trial), the message from the court to the parties to settle the dispute could hardly have been stronger. Regardless, the parties proceeded to serve pleadings, witness statements and evidence in readiness for the main trial, due to start in March 2008; aside from a failed attempt at mediation along the way, it was full steam ahead.

The Judge, seemingly unimpressed with the parties behaviour commented that:

"Whilst the parties were battling out the 11 preliminary issues at all levels, their enthusiasm for the main fray never wavered. All thoughts of reaching a sensible settlement after resolution of the preliminary issues…were seemingly jettisoned…both parties have brushed aside repeated judicial observations on the wisdom of settling this particular litigation"

The matter indeed proceeded to a lengthy three month trial (and it could have been considerably longer had much of the evidence not been left to the Judges private reading). Judgment was made in favour of Multiplex in the sum of £6,154,246.79 in respect of overpayments previously handed down by Multiplex to Cleveland, damages for breach of contract and interest. Such was the Judges strength of feeling that the parties could and should have reached a sensible settlement rather than proceeding to trial, he thought fit to include an unusual section in his judgement entitled "The Lesson to be Drawn from this Litigation". Unsurprisingly, the "lesson" does not relate to the issues in dispute between the parties, but is a commentary emphasising the role of the court in assisting parties to resolve disputes at proportionate costs before trial. Rather succinctly, the Judge remarked:

"The lesson for the future which may be drawn from this litigation is that parties would be well advised to use the dispute resolution service offered by the Technology and Construction Court in a more conventional and commercial manner than has been adopted in this case. Once the court has decided questions of principle, the parties can save themselves and their shareholders many millions of pounds by instructing their advisers to agree reasonable figures for quantum, if necessary with the assistance of a mediator unconnected with the court. If one party is not prepared to negotiate then the other. party can protect its position by making a timely and realistic offer under Part 36. The courts decision on preliminary issues should be used by both parties as a basis for sensible discussion or at least as a basis for sensible assessment."

Parties to litigation would do well to remember that the modern day courts approach to disputes is to encourage commercial settlement in a number of ways including: setting pre-action requirements, using active case management and the provision of and judicial recommendation towards an alternative dispute resolution. To resolve matters sensibly, parties should consider using the court to decide disputed questions of principle to enable them to then sort out the financial consequences themselves. Such an approach often leads to the resolution of multi-million pound disputes at proportionate cost, and enables the parties to focus their efforts and funds on their real business.

With Cleveland indicating they are keen to lodge an appeal and liability for the circa £14m million litigation costs still to be carved up, it will be interesting to see if the parties heed this advice going forward.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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