From 1^st April 2022, restrictions were lifted on issuing Winding Up petitions. As a result, creditors are now able return to issuing petitions for debts over £750 against insolvent businesses.

Due to the Covid-19 pandemic, the Corporate Insolvency and Governance Act 2020 (CIGA 2020) was introduced in June 2020. This prevented creditors issuing Winding Up petitions unless they could show that Covid-19 was not the reason why the business was insolvent.

There were further restrictions placed on Winding Up petitions on 1^st October 2021. Whereby, creditors were only be able to issue Winding Up petitions for debts over £10,000 and  were required to give a 21 day notice period to debtors before issuing a petition.

However, these restrictions have now ended meaning creditors are able to once again issue Winding Up petitions against insolvent businesses providing the debt is over £750 and it is not disputed.

Prior to issuing a Winding Up petition, the creditor must be able to evidence that the business is insolvent. This is typically done by showing a demand for payment was made to its customer but payment was not forthcoming.

Lovetts Solicitors achieves this by sending a draft Winding Up petition on behalf of creditors. This is where we draft the winding up but hold off on serving it formally. It will be sent only to the debtor with an accompanying letter warning them that if they do not settle the debt within a set time period (usually seven days) then the petition will be submitted at Court. The debtor is often motivated to avoid Court and liquidation, and Lovetts have found that 81% of draft Winding Up petitions result in full payment of the debt. 

If a draft Winding Up petition does not achieve the desired effect, the next step is to go to Court. This is the process followed in that situation:

1. The petition is presented (i.e. sent to Court for a hearing date to be given).

2. The petition is served on the company’s registered office.

3. After at least 7 days has passed (but at least 7 days before the hearing is due), the Winding Up is advertised in the London Gazette.

4. Once the Winding Up has been advertised, the debtor’s bank will freeze all company accounts. This effectively prevents them from continuing to trade.

5. At the hearing, the Judge will hear the petition and make a Winding Up Order against the debtor unless they provide a defence or prove they can pay the debt.

6. Once the Order has been made, the official receiver will start the process of liquidating the company and distributing the assets to the creditors.

7. The directors of the company being wound up will be investigated for any wrongful trading. If they are found to have been accepting credit with no expectation of being able to pay it back, they may be found personally liable for certain debts.

As mentioned previously, it is important to establish that the debt is not disputed prior to issuing a Winding Up petition. If the debt is disputed, this may result in an injunction against the petitioner, the petition being thrown out of Court and the creditor being ordered to pay the other side’s legal costs.

However, it is important to act as quickly as possible if you suspect a customer is struggling with cash flow. It is often the creditors that shout the loudest that secure payment first. If you have concerns or you are seeking to take robust action in the form of a draft Winding Up petition, contact us today.

The natural reaction of many policyholders faced with a potential catastrophe is to seek to avoid or minimise potential problems of which they become aware.  It seems sensible to attempt to remedy a situation which is otherwise likely to cause loss and damage, rather than do nothing and allow the damage to occur.  A proactive response to looming problems can also be a regulatory expectation, as well as saving expense in the long run and protecting reputation. 

Express wording required covering mitigation expenses – However, even though action to mitigate loss may well save insurers money, in the absence of express wording, cover cannot be implied into an insurance policy for costs to mitigate a loss that insurers might have to meet at a future date. An express provision is needed in the policy wording. Such wordings often require any mitigation expenses to satisfy a strict test of being ‘reasonably and necessarily’ incurred.

Many property insurance wordings do contain some form of loss mitigation or ‘sue and labour’ provision, although there is a notable variety of wordings providing for the expense of loss mitigation. By contrast, such provisions have been less common in liability policies.

Insurers must be notified in advance – In liability policies, the point of departure for claiming the cost of mitigating a potential loss is the provision for notifying circumstances which might reasonably be expected to give rise to a Claim by a third party against the insured.  In this briefing note, third party Claims are referred to with a capital ‘C’, to distinguish them from claims (with a lower case ‘c’) under an insurance policy.

Once notified, any Claim subsequently arising from such circumstances will be deemed to have been made in the period of insurance in which the notification was given. The cost and expense incurred will attach to the policy year in which the notification is given and will therefore be subject to the limit of cover applying to that year of cover. Later policies are likely to contain an exclusion of claims arising as the consequence of any circumstance notified under an earlier policy.

Restrictions on the circumstances that can be notified  – “Circumstances” is a broad term. Sometimes the insured will be able to specify precisely what it is that gives rise to the possibility of a Claim.  However, the notification does not need to refer to a specific transaction from which a Claim may arise. Nor does it need to identify a specific defect in relation to the handling of the insured’s client as likely to give rise to a Claim. On some occasions, the insured may be able to do little more than point to the fact that something is not working for a reason which has yet to be ascertained, this sometimes being referred to as a ‘can of worms’ or a ‘hornet’s nest’ type of notification. Nor is it a question of whether the characterisation of a circumstance as one which may give rise to a claim can be made subjectively by the insured or must be assessed objectively. Provided that the circumstance notified may reasonably be regarded in itself as a matter which may give rise to a Claim for which the insurer may (but not necessarily will) be liable under the policy, the notification will be effective.

Whether any subsequent Claim must be of the nature anticipated – The approach of the courts is to avoid characterising notifications in unduly narrow terms. The issue of whether a Claim arises out of circumstance notified is assessed objectively but the test here is not demanding. Some causal link is required. Provided that there was a reasonable expectation that the circumstance in question may produce a Claim insured under the policy, it does not matter if it later transpires that the problem is something which is not covered under the policy.

Entitlement to recover the expense of mitigating loss expected to arise from a potential Claim – As discussed above, the insured may decide not to wait for a Claim to materialise but instead to incur costs and expenses in avoiding, circumventing or reducing the loss that may otherwise arise from a Claim and form the subject of a claim under the insurance. 

The claim for recovery of the cost of mitigating a loss becomes a claim in its own right under the policy. Subject to the precise terms of the policy wording, the insured will be entitled to an indemnity for costs and expenses necessarily incurred in such mitigating action, provided that (a) the insurer has agreed to the course of action proposed and (b) the claim under the policy is for cost and expenses incurred in order to mitigate or avoid a Claim which might reasonably be expected to arise from the circumstances notified.

Examples of cases on mitigation of loss:

• In Standard Life v ACE (2012, Ct of Appeal), Standard Life (‘SL’) operated a fund which reduced in value following changes to its asset valuation methodology. Following complaints, SL investigated and found that a majority of investors would have valid claims as a result of misleading statements in some versions of the fund’s marketing literature, comparing investment in the fund in terms of risk to cash on deposit.  SL made a cash injection in excess of £100m to restore the value of the fund.  SL also compensated investors who had sold their units since the drop in value.  When SL sought to recover these payments under the mitigation clause in its professional indemnity policy, insurers argued that the cash injection was a windfall insofar as concerned those investors who had received adequate marketing literature.  However, the court held that the expense was reasonably and necessarily incurred and the fact that it produced a windfall for some investors was irrelevant. Nor would the claim be reduced to reflect that SL’s motivation in making the cash injection had included protecting its brand, or that SL’s total exposure had exceeded the sum insured.

• In Euro Pools v RSA (2019, Ct of Appeal), the insured designed and installed swimming pool booms that were supposed to be capable of being raised and lowered.  The air drive mechanism for raising and lowering the booms failed in several of their installations, due to what was believed to be a design fault. The insured obtained the insurers’ agreement to modify the system by lining the booms with inflatable air bags.  However, by the following policy year, it was clear that the air drive system would not work however it was modified and the insured obtained insurers’ agreement to replace it with a hydraulic mechanism.  The insured claimed that the cost associated with installing the hydraulic system fell into the second year of the policy, but the court held that all the expense arose out of the original notification and was to be allocated to the first year of the policy in which, unfortunately for the insured, the limits of cover had already been exhausted.

For advice on insurance matters or further information on mitigation of loss clauses, please contact Wendy Miles, Chris Earl or William Sturge at Lovetts.

On 31^st January 2022, the Government published a consultation paper called Reforming aviation consumer policy: protecting air passenger rights. This Government consultation should be a concern for anyone that travels by air. Lovetts Solicitors  looks at how the proposed reforms could have a devastating impact on passengers and reduce consumer rights.

Background to Flight Compensation Regulations

The Flight Compensation Regulation EC 261/2004 was introduced to ensure there was a high level of protection for passengers and it enhanced consumer protection. Denied boarding, cancellation or long delays of flights causes serious trouble and inconvenience to passengers.

The number of passengers that had to suffer from delays or denied boarding against their will was too high, as were cancellations of flights at short notice. As a result, regulations were introduced that protected consumers and allowed them to claim between €250 – €600 for flights delayed by more than 3 hours and cancellations where notice of cancellation was served less than 2 weeks before the flight.

This was subsequently introduced into UK law under The Air Passenger Rights and Air Travel Organisers’ Licensing (Amendment) (EU Exit) Regulations 2019 which under Part 4, section 8 and allows passengers to claim compensation ranging from £220 – £520.

The introduction of the regulations resulted in a significant improvement in airlines getting passengers to their destinations on time and a reduction of airlines cancelling flights for commercial reasons.

As identified in the consultation and impact assessments, airlines do not have to pay compensation for every delayed or cancelled flight. Where there has been extraordinary circumstances and reasonable measures have been taken by the airline, compensation is not payable.

Comments on the Executive Summary

We were concerned to see reference to the pandemic and the impact on the aviation industry in this consultation. This should not be the basis of considering legislation change which could last for the next 20 – 30+ years and be applicable to airlines that aren’t even in existence yet. The main focus should be on consumer protection and enhancing consumer rights rather than diminishing them.

Paragraph 2 of the executive summary also says “We have seen industry step up to respond more flexibly, and to work collaboratively with the Civil Aviation Authority (CAA) to ensure they are protecting consumers.” It is not correct that the airlines are working with and protecting consumers for the reasons we will illustrate in the response. You only have to look at the recent case of CAA v RyanAir DAC (022) EWCA Civ 76 as an example of airlines failing to work collaboratively with the CAA. The CAA had to go all the way to the Court of Appeal because RyanAir did not agree with the CAA’s view that passengers should receive compensation for flights cancelled due to strike action in 2018.

Proposals would damage consumer protections

The proposal to reduce compensation for passengers to £16 – £65 in compensation compared to £220 – £520 they would receive under the current regulations should be a concern for anyone that travels by air. Airlines will benefit but passengers will not.

It doesn’t seem right that an airline could cancel your flight for commercial reasons (for example the aircraft is half empty) and place you on a flight the next day to fill the aircraft. Passengers will be booking flights uncertain whether an airline will cancel or delay their flight for commercial reasons. For example if a full to capacity aircraft would generate £100,000 of revenue for an airline but a flight was only half full, under the proposed reforms it increases the likelihood that an airline will delay the flight and put passengers on a later flight to ensure maximum capacity because they would only have to pay a maximum of 50% compensation (£25,000). Therefore, they operate the flight at £75,000 (£100,000 less £25,000 compensation) which is significantly better commercially than operating a half full aircraft at £50,000. Even if the flight was cancelled and 100% of a ticket price is still commercially beneficial to airlines because they will save costs by operating one flight instead of two. Profits will be maximised for the airline to the significant inconvenience and detriment to the passengers. The compensation amount would not sufficiently compensate them for the distress and lost memories of time spent on holiday with their family.   

The executive summary also states that the consultation is to “…consider what reforms could be made to reinforce consumer confidence to fly and thereby help to strengthen our critical aviation industry.” The proposed reforms increases the likelihood of more delays and cancellations which will reduce consumer confidence and damage the UK’s reputation with passengers around the world.

Cost to consumers

The impact assessment (IA No:DfT00435) figures at Table 2 are wrong. As seen below, it adds up all the figures to create a total benefit.

However, the reduction of compensation should be a minus figure and displayed as follows:

Therefore, Table 2 is misleading as there is no financial benefit to passengers. There are multiple statements made in the impact assessment that somehow this will be fairer to the passenger. However, as seen from the impact assessment, passengers will lose between £2 – £4.7 million a year if not more. That is not fair on passengers and reduces the rights they currently enjoy.

Average time of flight delays

Delays that the passengers suffer can be significant. One of the largest low cost airlines has an average delay time of 16 hours 54 minutes (based on 14,000 flights we have handled) and another large low cost airline has an average delay time of 9 hours 35 minutes (based on 1,200 flights). The impact assessment states that the average ticket price is £65, leading to compensation values of £16.25, £32.50, and £65 for delays of 1-2 hours, 2-3 hour and 3 hours. The current level of compensation starting from £220 adequately compensates consumers that have to suffer the inconvenience and in some instances the distress of being in an airport for 16 hours and missing a day of a family holiday whereas £65 would not be sufficient.

Current Regulations have a minimal impact on Airlines

The Impact Assessment states that the EC261/2004 Regulations “have not kept up with the growth in low-cost airlines and the rates are not representative of the costs of travel.” However, that is not correct. Low cost airlines were already prevalent and were considered prior to the introduction of the regulations. For example RyanAir and easyJet were formed in 1984 and 1995 respectively. These are decades before the EC261 regulations were introduced.

The concept of changing the compensation is explained in the Impact Assessment which states “The policy objective is to ensure that paid compensation for delayed flights is more representative of the costs of travel and to reflect the newer ways consumers are choosing to travel by air (e.g. flying with low cost airlines). Linking compensation to the price of travel, and providing partial compensation for shorter duration delays, would increase fairness for both businesses and consumers. More closely aligning domestic aviation compensation with other domestic modes of travel (e.g. rail and maritime) is intended to increase clarity for consumers.” Catching a train is incomparable with a flight. There are often a number of trains that can be caught in the same hour. There will also be alternative options to get to your destination such as bus replacement services or catching a taxi. These are not viable options for a passenger travelling by air. They are beholden to the airline as to the flight they catch and they cannot travel to their holiday destination overseas by bus or taxi.

The impact assessment does not appear to have consulted consumer rights protection groups. Instead it is heavily focused on the impact on airlines. Airlines will of course be motivated to pay less compensation to passengers. There has been no evidence to the airline’s assertion that compensation paid to passenger equates to 3% of an airline’s turnover and that is because it is unlikely to be true. The impact assessment calculates total compensation amounting to £10.6 million of compensation paid out of a possible £16.3 million each year. An example would be to compare this to the turnover of easyJet up to 30^th September 2019 which was £6.3 billion. Even if easyJet were liable for all compensation, which it wouldn’t and paid 100% of £16.3 million to passengers, it would only amount to less than 0.3% of turnover.

Equally if we look at the impact assessment calculations of there being 230,000 flights with an average of 83 passengers per flight. This is a total of 19 million passengers (19,090,000). Even if 100% of 16.3 million was paid out it is the equivalent of 85p on every flight ticket. It is therefore not a significant impact on airlines and probably something they factor into the price of the ticket.

Alternative Dispute Resolution

Airlines have already incorporated into their terms a requirement for passengers to submit their claims through their own online portals. In most cases, it gives the airlines at least 1 month to respond or resolve the claims. Airlines are actually taking longer to respond to passenger’s claims and pay outs are low. For example, of the claims submitted directly through online portals of the two largest low cost airlines, on average only 15% of cases were paid directly to passengers.

When Lovetts first started assisting passengers with flight compensation claims in 2015, one low cost airline would only resolve 1% of cases at pre-action cases. We were able to support passengers and issue Court proceedings on these claims. However, it is apparent that some airlines spuriously dispute claims in the hope passengers will not pursue their claims any further.

If the reforms are introduced, the average of 15% of payments direct to passengers referred to above is likely to decrease even further because airlines will anticipate that passengers appetite to pursue a compensation for £16 will be low and they will reject most claims again like they did in 2015.

The Impact Assessment states that the Court process can be an expensive and lengthy process. However, Claims Companies have mitigated this by ensuring that the stress and expense of claiming from airlines is no longer a problem for consumers. The Claims Company will fund the claim and manage the litigation process for them. A fee is only payable if the claim is successful. Often the fee will be as little as £55 which is extremely reasonable considering that the consumer receives a stress free experience and does not have to fund the claim but receives compensation of £220 – £520 (less the fee) at the end of a successful claim.

Although we are advocates of ADR in settling most disputed litigation matters, we do not believe it will have a significant impact on flight compensation claims. For example, mediation is a positive way of resolving disputes in most cases. However, it requires both parties to have some form of leverage to secure a negotiated settlement. Passengers do not have any leverage over their airline and because the compensation sum due is fixed, it would not be right or fair for the passenger to accept a reduced sum in full and final settlement. The compensation amount is either due or it isn’t.

Expert determination was referenced as being binding on the airlines. However, airlines will not necessarily pay out as a result of that decision. As referenced earlier on, the CAA had to go all the way to the Court of Appeal in CAA v RyanAir DAC (022) EWCA Civ 76 because RyanAir did not agree with the CAA’s view that passengers should receive compensation for flights cancelled due to strike action in 2018. Therefore, expert determination decisions will often still require passengers to enforce these through issuing Court proceedings.

Although we do not have an objection to requiring airlines to join ADR schemes, it should not be mandatory for passengers to use the ADR scheme. It simply adds another layer of red tape and delay in securing payment of compensation.

Passengers certainly should not be required to pay for access to an ADR scheme should they opt to use one. It would certainly put passengers off making a claim especially if the compensation they are seeking would have been reduced to £16 – £65 under this current proposal.

Costs to the Government not considered

The impact assessment did not consider the loss to the tax payer and Government in a reduction of Court claims. On average a flight compensation claim will generate £50 in Court fees for HMCTS. A freedom of information request was made prior to the response to this consultation asking how many flight compensation claims HMCTS receive each year but a reply was not received.

On average 14% cases will result in Court proceedings being issued. The impact assessment states that it assumes 87,150 passengers potentially can make a claim for flight compensation each year. On that basis, 14% of these cases (12,201 claims) would theoretically go through the Courts generating a total of £610,050 of revenue each year for HMCTS.

The majority of this revenue will be lost under the current proposals because it is unlikely to be cost effective for passengers to issue claims for such low amounts especially as the Court fees will be double the amount they can claim in most cases. This essentially denies passenger’s access to justice. It is also assumed that the tax payer would be required to plug this £600k shortfall.

In cases where a passenger can claim under either EC261 regulations or under UK law, the passengers will simply opt for the larger sums under EC261 legislation and pass claims through the Courts of Europe rather than through UK Courts with the assistance of Companies such as Flightright.

Summary

In summary, although reducing the delay threshold to 1 hour would enhance passenger rights, the reduction in the proposed compensation to on average £16 – £65 would have devastating impact on consumer rights. Currently passengers have the right to claim between £220 – £520 which means if the proposed reduction in compensation was enforced, passengers would lose out on £4.7 million a year.

Cancellations and significant flight delays, for some airlines averaging over 16 hours, cause considerable distress to passengers and results in them often losing time on holiday and creating memories with their families. £16 would not sufficiently compensate them for that distress.

Low budget airlines were already in operation and thriving at the time EC261 regulations came into force. Legislators were fully aware that the compensation values may exceed ticket prices however, airlines needed that threat of a penalty to ensure they focused getting passengers to their destination on time because at the time the regulations were introduced flight delays and cancellations were too high.

If compensation is reduced, airlines will be able return to the days of making commercial decisions to delay and cancel flights that aren’t full to capacity to maximise sales and profits to the detriment of consumers. This would damage the UK’s reputation with passengers across the world.

Airlines are not significantly impacted by the current flight compensation regulations. If all claims were paid out, which they are not, it would only equate to the equivalent of 85p per flight ticket.

Compensation for such low amounts will also put passengers off claiming and deny them access to justice. The impact assessment does not consider the potential loss of £600k revenue to HMCTS and the Government through the drop in claims.

Overall, we believe that the current proposals are extremely harmful to consumer rights and that no change should be made to current compensation levels that passengers can claim.

Notes to Editors

Lovetts Solicitors are a specialist debt recovery law firm based in Guildford, Surrey that has been operating since 1994. It is one of the leading law firms in the field of flight compensation claims. If further comment is required, please contact Michael Higgins, Managing Director of Lovetts Solicitors by calling 01483 457500 or emailing [email protected]

Adjudication is an alternative procedure to County Court proceedings for resolving disputed debts. It can often be a quick way of resolving disputes but it can only be used if adjudication is stated as a term within a contract or the dispute relates to a construction contract as detailed below.

Section 108 of the Housing Grants, Construction and Regeneration Act 1996 (“the Construction Act”) provides that parties to a construction contract, as defined by section 104 of the Construction Act, have the right to refer a dispute under the contract to adjudication.

The process is set out in the Scheme for Construction Contracts (England and Wales) Regulations 1998 (as amended) (“the Scheme”).

Before starting the adjudication process it is important to establish that there is a right to adjudicate either under a construction contract or as implied by the Scheme.

Assuming that there is a right to adjudicate, a dispute must have arisen in order for the same to be referred to an adjudicator. Typically this will have been established in correspondence between the parties.

Once a right to adjudicate has been established and a dispute has arisen either party may refer the matter to adjudication for a decision to be made.

The process

1. Notice of intention to refer to adjudication must be provided – Day 1

2. An adjudicator should be appointed either by agreement between the parties, in accordance with the terms of the contract or by referral to an adjudicator nominating body – Day 2-5

3. Within seven days of the notice of intention to refer to adjudication the referral notice must be served. This should only be issued once the adjudicator has accepted the appointment. The adjudicator has two days from receiving the request to accept or reject the request.

4. The responding party must then respond to the referral notice – by Day 14

5. If new evidence has been raised in the response to the referral notice, the referring party will usually be given the opportunity to respond to the same – typically this will be within a reasonably short time frame between Day 14 and 21

6. The responding party may also be given an opportunity to respond to the referring party’s response – typically this will be within a reasonably short time frame which mirrors the length of time provided to the referring party to provide their response

7. Adjudicators decision – Day 28

*The time frames can be extended by agreement between the parties.

How can Lovetts help?

If you have a construction dispute our Commercial Litigation team can assist. We offer a fixed fee review of your case, an assessment of the strengths and weaknesses or your claim and advice as to your options.

Our fixed fees for advice start from £500 plus VAT for claims under £10,000 and from £800 plus VAT for claims over £10,000.

Our advice will provide you with the following:

• An estimate of your chance of success;

• Set out your legal position;

• Set out the strategy, tactics and options available to you; and

• Set out the likely costs for each of the options.

As specialists in debt recovery, we have successfully assisted construction companies in taking action through the adjudication process and can offer support and advice throughout.

Should you wish to proceed with an adjudication and are successful we can also assist you with the enforcement of an adjudicator’s decision.

Contact our Litigation team for more information [email protected]

ABN Amro Bank v RSA and Others (Court of Appeal, 2021)

One of the less attractive features of insurance from the policyholder’s point of view is that, when it comes to making a claim, insurers can raise the defence of misrepresentation of the risk or breach of a ‘warranty’.

However, it is possible, when buying insurance, to gain greater protection against claims being declined, by inserting a so-called non-avoidance clause (‘NAC’) into the terms and conditions of cover.  When the insurance market is soft (i.e. hungry for business), this may not be expensive to obtain.

Duties on the purchaser of insurance –  To explain, the law used to be that an insurance was a contract of utmost good faith, which insurers could avoid (i.e. rescind the contract) on the grounds of non-disclosure or misrepresentation of any matter material to the underwriter’s evaluation of the risk.  Meanwhile, a breach of a warranty either suspended or actually terminated cover.

Consumer insurance – In recent years, certain protections have been introduced by statute.  Thus, individuals who buy insurance for purposes mainly unrelated to their business now have the benefit of the Consumer Insurance (Disclosure and Representations) Act 2012.  Put very broadly, in the area of providing information to the insurer this Act modifies the law such that the consumer’s duty is to take reasonable care not to make a misrepresentation (for example, when completing a proposal form) before the contract is entered into or varied.

Non-consumer insurance – Other types of insured, i.e. those taking out commercial non-consumer policies, have the benefit of the Insurance Act 2015 (which covers consumer insurance as well).  For both types of insureds, the  characterisation of utmost good faith has been removed.  However, and again put very broadly, here the pre-contractual duty to provide information is re-cast as a duty of fair presentation, requiring the insured to disclose every material circumstance which the insured knows or ought to know; failing that, the insurer must be provided with sufficient information to put a prudent insurer on notice that it needs to make further enquiry for the purpose of revealing those material circumstances. 

Although the legislation is intended to ensure a better balance of interests between policyholders and insurers, the provisions in the 2015 Act specifying what an insured is taken to know, or ought to know in the sense of what should have been revealed by a reasonable search of information available to the insured, could provide insurers with a basis for declining a claim.  It may not be easy for an insured to be confident that a reasonable search of available information has been made, as such a search could involve having to seek information from employees or third parties and an evaluation of what circumstances are material in the context of the proposed insurance.

Under both statutory regimes, new remedies are available to the insurer in the event of the insured’s breach of duty, such as a lower level of indemnity or amended terms of cover.

Non-avoidance clauses (‘NAC’s) – Given these potential difficulties, various forms of clause have been developed for policyholders to insert into the insurance, to the effect that insurers will not seek to avoid, or seek damages, for non-disclosure or misrepresentation or to rely on breach of warranty, this being subject to a proviso permitting insurers to use their remedies in the case of deliberate or fraudulent misrepresentation or non-disclosure. 

Such clauses are effective in accordance with their terms.  However, they are in the nature of exclusion clauses.  Accordingly they will be construed strictly against those they protect. 

In particular, in order to be effective under judicial scrutiny, the drafting of such clauses needs to match the statutory regime now operating. For example, it may be prudent to provide specifically in a NAC that insurers will not decline cover on the grounds of (a non-fraudulent) failure to undertake a reasonable search of available information.  Also, to provide that insurers’ waiver includes all of the various alternative remedies now available to them and not just avoidance.

Cases on non-avoidance clauses

The caselaw is building up to clarify the meaning and effect of NACs.  For example,

• A NAC which at best contained the insurer’s general agreement not to raise ‘defences’ (but not referring specifically to breach of warranty) was insufficient, given the terms of the NAC as a whole, to prevent insurers from relying on breach of a warranty (HIH v New Hampshire (2001, Ct of Appeal).

• The proviso to the NAC, whereby the insurer was not bound by the NAC in the event of the insured’s  own deliberate or fraudulent non-disclosure could, in the context of the policy as a whole, only be relied upon by the insurer in the case of a deliberate decision not to disclose a matter which the insured knew should be disclosed: the term ‘deliberate’ did not permit the insurer to rely on the proviso in the case of a merely honest mistake by the insured (Mutual Energy v Starr (2016, TCC).

• A broker informed two following underwriters that the renewal of an insurance was ‘as expiry’.  In fact, because these underwriters had not been shown or agreed an endorsement adding certain additional clauses during the previous year of the cover, the renewal was not as expiring insofar as these two underwriters were concerned.  When a claim was made under the additional clauses, the two underwriters argued that the insured was estopped from relying on the clauses because the broker had acquiesced in the underwriters’ understanding that the cover was as expiring.  However, the court held that the brokers had simply made a misrepresentation as to the terms of the renewal.  The two underwriters could not rely on this as a defence to a claim because the NAC in the policy was not confined to the remedy of avoidance but also  prevented them from seeking to ‘reject a claim’ for loss on the grounds of misrepresentation, which words covered an argument based on estoppel by representation (ABN Amro v RSA and Others (2021 Ct of Appeal).

Lovetts’ comment

This note is intended to provide guidance of a practical nature but should not be taken as containing legal advice or any recommendation as to any course of action. 

However, Wendy Miles, Chris Earl and William Sturge will be pleased to provide such advice should you require assistance in drafting any specific policy wording.

The use of mediation has grown significantly in recent years.  Any party facing the prospect of, or already involved in, legal proceedings and who is willing to contemplate settlement will nowadays wish to consider mediation as part of the process of resolving the dispute. Other possible options may include simply making a Without Prejudice offer of settlement, lodging a claim via the Financial Ombudsman Service prior to proceedings, appointing an expert to make a non-binding appraisal, a judicial appraisal or, in the small claims track, a dispute resolution hearing conducted by a judge.

Features of mediation – Court proceedings, arbitration proceedings and expert determinations result in binding decisions (subject to the ability to appeal them).  Mediation is not an alternative to these in the sense of inevitably producing a binding decision, but rather a voluntary process worth considering prior to or during the course of the formal proceedings.  The crucial point is that mediation can prompt settlement where settlement might only be achieved much later, or not at all. 

Advantages – Advantages of the mediation process can include speeding up resolution of the dispute, bringing all the parties who should be involved into a single set of negotiations, saving cost, confidentiality, a greater role and more control for the parties themselves, a more equal environment for the discussion of issues, preservation of relationships and solutions that benefit all parties.

Standard requirement to consider mediation – The Rules of Civil Procedure now require the parties to proceedings not to refuse alternative dispute resolution unreasonably, with possible adverse costs consequences if they fail to act reasonably in relation to the process. Accordingly, it should no longer be regarded as a sign of weakness for a party to propose mediation.

The process – Prior to the day of the mediation, a mediator will usually be appointed jointly by the parties. The parties and the mediator then usually enter into an agreement providing that communications in the course of the mediation will be Without Prejudice and therefore protected from being referred to in the proceedings if these have to continue because the matter cannot be resolved at the mediation. 

The issues in dispute will usually be defined in the parties’ Mediation Statements, and a set of the key documents compiled.  The mediator will read the documents and usually discusses the dispute separately with each party, in confidence. The mediator also clarifies with the parties who exactly will be attending the mediation. 

On the mediation day, a representative authorised to settle must be available on behalf of each party. Representatives of each party will also usually be in the same building, in different rooms. The mediator presides over any plenary meetings of the parties and holds confidential discussions with each of the parties in turn, the objective being to identify the real issues of disagreement and the points that are most important to the parties.  The mediator seeks to achieve agreement by carrying between the parties such messages as he or she is authorised to convey.  

Mediators can suggest solutions to the parties but cannot impose one. It is simply a question of whether the mediator can bring the parties to agree between themselves. 

The parties may or may not prefer to have their legal advisers present.  However, it may be advantageous to have a legal adviser available to record the terms of any settlement agreement reached, to be signed before the parties disperse.

Choice of mediator – The choice of mediator is important for achieving a successful outcome. A number of organisations have grown up to provide training and accreditation, for example the Centre for Effective Dispute Resolution (CEDR). The mediator must be trusted by each party to do the job properly, for example, by acting impartially and saying no more to the other side about a party’s position than they have been authorised to say.  The mediator needs to be a good communicator and it will assist hugely if each party believes that the mediator can provide an accurate assessment of the prospects of their case. Thus it is likely to assist if the mediator is a qualified professional, for example, a barrister specialising in the area of law in dispute, a chartered surveyor, or a qualified accountant, depending on the subject-matter of the dispute.   

Mediation strategies – The flexibility of the mediation process is one of its strengths. For example, in one case, settlement may be facilitated by a plenary session of all parties at the start of the day, at which a party might apologise for what the other has suffered. Alternatively, the purpose of a plenary session might be to confront a recalcitrant defendant, albeit that an overly aggressive stance can set back the prospect of settlement and it may not be advantageous to be represented by counsel at a mediation.   In another case, it may facilitate settlement for the parties not to set eyes on each other until a settlement can be reached.  Logjams in the discussions might be eased by the mediator suggesting that just the parties’ professional advisers break out for a discussion, or just the decision-makers from each side.  The timing for a proposal to mediate is also important. Too early, and the issues may not be sufficiently clear. Too late, and the costs already incurred may have become a barrier to settlement.

A party can withdraw from a mediation at any time.  Parties often use the threat of departure to move along the negotiations. Even if the parties do not settle on the day, they often settle shortly afterwards, because they appreciate more vividly any difficulties with their own case and what would be involved in terms of time, effort, depth of investigation and expense in pursuing the proceedings to a conclusion.

Government schemes to reduce the cost of mediation – Various schemes operate to reduce the cost of mediation. If the dispute is over a money claim for less than £10,000, it may be possible to use the government’s free small claims mediation service (where the procedure may be slightly different to that described above). There is also a free rental mediation service for house possession cases. For claims under £50,000 in value, the Civil Mediation Council hosts a fixed fee mediation scheme.

Lovetts’ comment

It is worth considering mediation as it may be a quicker, cheaper and more controllable process than formal proceedings. It would only be in specific cases, such as where a party is seeking an injunction, or to establish their rights, or considers that there is no genuine dispute, that mediation may not be appropriate.

When drafting commercial agreements, it may be worth including a provision requiring the parties to consider mediation prior to submitting a claim to court proceedings or arbitration.

For more information, please contact Wendy Miles, Chris Earl or William Sturge at Lovetts.

About the Author

The author of this article is William Sturge a Consultant Solicitor at Lovetts Solicitors. William is a leading lawyer in the insurance industry. He has advised on insurance and reinsurance claims on behalf of reinsurers, reinsureds and their insureds, both in the UK and worldwide. He has conducted insurance and reinsurance litigation and arbitration, acted in professional indemnity and financial lines business and in shipping and international trade disputes. William has also provided non-contentious insurance and reinsurance advice, usually with an international context.

For further information or advice please feel free to contact William by emailing [email protected] or calling 01483 457500.

In this briefing note, William Sturge delves into Cover For Covid-Related Loses Under Business Interruption Insurances.

Financial Conduct Authority v Arch (2021, Supreme Court (“SC”))

Cover for business interruption (“BI”) insurance, or lost turnover, originated as an extension to property insurance.  The cover provides an indemnity for financial results that would have been achieved but for the damage. 

Modern policy wordings extend cover to certain circumstances where the business suffers loss unrelated to physical damage.  One example is cover for losses resulting from the occurrence of a notifiable disease such as COVID-19 within a specified radius of the business premises.  Another example is cover for loss resulting from intervention by a public authority, hindering access to the premises.

How are BI claims calculated? 

Usually, BI claims are calculated by taking an earlier period of trading for comparison purposes.  In most policies this is the calendar year preceding the operation of the insured peril.   This “standard turnover” is then compared with the actual turnover during the indemnity period, as reduced by operation of the insured peril (extra expense caused by the insured peril is also often covered in addition).  

While the basic comparison will enable a rough calculation of the lost revenue to be made, there may be specific reasons why a higher figure would have been expected in the indemnity period, for example, because the business was growing, or alternatively a lower figure was expected because a labour strike was scheduled.  The purpose of the “trends” clause in the policy wording is to provide for adjustments to reflect such circumstances.

Insurers have in the past relied on the trends clause to argue that the claim should be reduced because the trend in turnover would have been downward in any event due to the wider operation of the insured peril.  Thus, in Orient-Express Hotels v Generali (2010) a hotel in New Orleans was damaged by wind and water as a result of Hurricanes Katrina and Rita.  The surrounding area of New Orleans was also devastated by the two hurricanes and there was a mandatory evacuation of the city.  The insurers argued that the hotel could only recover for loss of turnover that it would not have suffered but for the damage to the hotel and could not recover loss of turnover arising from the wider devastation, which loss it would have suffered even if the insured peril had not operated directly on its own business.

Turning to the COVID-19 pandemic, in proceedings initiated under the Financial Markets Test Case Scheme, the Supreme Court has given guidance as to the operation of various BI policy wordings covering policyholders (for example shops and restaurants) against financial loss to their businesses arising out of the occurrence of a notifiable disease such as COVID-19 within a specified radius of their premises.

Here too, the insurers argued that they were not liable to indemnify for losses which would have arisen anyway, regardless of the operation of the insured peril on the business itself, by reason of the wider consequences of the COVID-19 pandemic, such as the Government’s closure of businesses generally and mandatory instruction to the public to stay at home.

In FCA v Arch the SC rejected this argument and decided that insurers must indemnify policyholders on the basis that the insurance protects against the wider consequences of the insured peril.  The court’s reasoning was as follows:

• Standard disease-based BI clauses provide cover for BI caused by any cases of illness resulting from a notifiable disease occurring within the radius specified.

• As to the causal link that must be shown between any such cases of the disease and the BI loss, the issue is whether what occurred, being an insured peril, was the “proximate”, or efficient, cause of the loss within the causal requirements specified in the policy.  

• In the present case, even if there would not have been sufficient numbers of occurrences of COVID-19 within the specified radius to cause the insured’s financial loss, all the cases of COVID-19 across the country were equal causes of the imposition of the national restrictions and indivisible in their effect via the measures taken by the government on any insured business. The clause does not cover interruption caused by cases of illness resulting from COVID-19 outside the radius.  However, unless expressly excluded, causation can be established when an insured peril, in combination with concurrent uninsured events, brings about a loss with a sufficient degree of inevitability to be regarded as the proximate cause of the loss.

• The commercial purpose of a trends clause is to arrive at the financial results that would have been achieved but for the insured peril and circumstances arising out of the same underlying, or originating, cause.  This means that only circumstances unrelated to the originating cause, being the pandemic, can be taken into account to cut down the amount of a claim. 

Thus, in the hotel case referred to above, the correct approach was that the BI claim was not confined to the operation of the insured peril on the insured business itself and extended to the reduced turnover attributable to the rest of the city being devastated by the same originating cause.  In the COVID-19 examples of shops and restaurants, the BI claim was not confined to the operation of the insured peril on the insured business but extended to the reduced turnover attributable to the wider government measures responding to the underlying originating cause of the insured peril, being the COVID-19 pandemic.

“Inability to use” clauses – The SC held that clauses providing cover for the inability to use business premises may include a policyholder’s inability to use either the whole or a discrete part of its premises, for either the whole or a discrete part of its business activities.

Impact

BI insurance should now provide greater cover. It is also worth policyholders checking the extent to which they have BI cover for financial loss unrelated to physical damage.

The SC’s identification of the COVID-19 pandemic as an originating cause for disease losses may be significant when issues of aggregation come to be considered in the context of reinsurance.

About the Author

The author of this article is William Sturge a Consultant Solicitor at Lovetts Solicitors. William is a leading lawyer in the insurance industry. He has advised on insurance and reinsurance claims on behalf of reinsurers, reinsureds and their insureds, both in the UK and worldwide. He has conducted insurance and reinsurance litigation and arbitration, acted in professional indemnity and financial lines business and in shipping and international trade disputes. William has also provided non-contentious insurance and reinsurance advice, usually with an international context.

For further information or advice please feel free to contact William by emailing [email protected] or calling 01483 457500.

Lovetts Solicitors has been shortlisted for the category of ‘Giving Back’ at this year’s Chartered Institute of Credit Management (CICM) British Credit Awards.

The CICM Awards recognise the stand out achievements of the most deserving individuals, teams and organisations in the international credit industry. The programme is seen as one of the most important in the credit management industry, a sector that makes up a significant proportion of the Lovetts client base.

Lovetts Solicitors specialises in UK & International debt recovery and commercial litigation. Being in debt can create significant pressures on individuals and business owners. This can often impact on mental health. According to the Royal College of Psychiatrists, 1 in 4 people that have a mental health problem are also in debt. Accordingly, Lovetts Solicitors has sought to give back through their support of Oakleaf, a mental health charity based in Guildford which supports adults throughout Surrey aged 16-67 who are struggling with their mental health.

Lovetts have supported Oakleaf for a number of years and is a founding member of the Mental Health Leaders Network which is a group of businesses that are committed to improving mental health in the community. Lovetts support has extended to staff volunteering and being involved in charitable fundraising events ranging from quiz nights, golf days and even walking over hot coals! At Christmas, Lovetts staff helped create care packages and hampers for the Oakleaf clients.

When the pandemic hit Lovetts anticipated that people would need mental health support. In particular, Lovetts were concerned that individuals may struggle with debt, should they lose their job or if they were placed on furlough. In addition, the NHS was under considerable pressure. A&E was often at full capacity with long waiting times. This was causing significant problems for individuals suffering from a mental health crisis. Oakleaf stepped in and created a Safe Haven which operates as a drop in service between the hours of 6pm – 11pm for those suffering a mental health crisis. Safe Haven was critical in relieving the pressures on the NHS. Oakleaf would often have Ambulances turn up and drop off individuals that were suffering a mental health crisis because A&E was full.

All Charities suffered financially during the pandemic because they were unable to raise funds through events. Charities like Oakleaf were facing the prospect of closing or cutting services. To avoid this, Lovetts trebled their financial contributions to Oakleaf. It was important to us, at Lovetts, that we provided as much support as we could. Mental Health services are already underfunded and any cuts in services would have had a significant impact on the community. Lovetts funding helped with:

• 48 weeks of bi-weekly fitness classes using a blended model of online and face-to-face classes, which are available to all clients. At Oakleaf we see that people who have suffered from mental illness are often lack the confidence and motivation to engage in physical fitness in mainstream setting, so we create a relaxed atmosphere where people can start to develop their physical fitness at their own pace, in a moderate way. We have also seen that the physical health of many of our clients has deteriorated during the pandemic, coinciding with worsening mental health. These fitness classes are part of our programme of helping clients to increase their confidence, make friends and ultimately rebuild their lives with a stronger sense of wellbeing.
• 24 weeks of BACP-accredited counselling sessions for 50 clients
• Weekly one-to-one support, either over the phone or in-person, for 28 clients over a period of 8 weeks.
• The creation of a Youth Support Group for a year and a half, which is a group designed specifically to support the mental health of young people aged 16-25.

In addition to this, Lovetts have ensured staff were trained in Mental Health First Aid trained to ensure they could identify and assist vulnerable debtors.

Michael Higgins, Managing Director of Lovetts, says:

“It has been a difficult time for everyone during the pandemic and it has highlighted how important mental health is. I’m delighted that Lovetts have been shortlisted for the CICM Giving Back Award. As a business we wanted to provide as much support to those suffering with their mental health however, we play a small part and credit goes to Oakleaf for all the work they do. They are a fantastic charity and we are honoured to be partnered with them.”

The 2022 ceremony will take place on Thursday 24^th March at the Royal Lancaster Hotel in London. You can view all the CICM British Credit Awards finalist here.

In this article, William Sturge looks in detail at when damages are recoverable from a negligent professional adviser.

In order to recover damages for negligent advice, a claimant has to satisfy two separate requirements:

1. Prove that they have suffered loss; and

2. Establish that the loss falls within the scope of the duty they were owed.

The first of these steps requires the claimant to establish what the courts call a “basic loss”, by comparing their actual position (financial or otherwise) against the position she would have been in if the adviser had performed its duty.

The second step then involves determining what part of this basic loss falls within the adviser’s duty.  Here the court focuses on establishing the scope of the professional’s duty in such situations.  Various recently reported cases reflect the courts’ approach, as follows.

Negligent valuations

In SAAMCO v York Montague (1997, House of Lords (“HL”)) a negligent valuer was held liable only for the shortfall between the actual value of various properties and the higher value that it had wrongly attributed to the properties.  The valuer was not held liable for the entirety of the client’s losses when the client sold the properties for much less, after a subsequent fall in property prices. 

To reach this conclusion, the HL distinguished between cases where the professional advised the client on whether or not to enter into the transaction in its entirety, and cases where the professional merely provided information on one aspect of the decision whether to proceed.  In the latter type of case, the scope of the duty and the damages for which the professional was liable in the event of negligence was limited.  The court also adopted the use of “counter-factuals”, to hypothesise as to whether the claimant would still have suffered the loss even if the professional had given correct advice.

In later cases, the question arose as to the legal basis on which the professional’s liability had been held to be limited in SAAMCO. One answer was that the scope of a professional’s duty should be limited to the specific consequences of the information it provides being wrong pursuant to the policy of achieving a fair and reasonable allocation of risk between the parties.  It would not be fair and reasonable to protect the claimant against loss that would have been incurred even if the professional had given correct advice.  The risk of that loss should be borne by the claimant.

Negligent legal advice

In Hughes Holland v BPE (2017, Supreme Court (“SC”)) a solicitor negligently informed his client that a loan the client proposed to make to a third party would be used to develop a property, whereas he knew that the third party was going to use the advance to pay off another debt.  The client would not have advanced the loan if he had known the true position. When the loan was not repaid, the client sued the solicitor.  The court held that the solicitor was not liable to pay any damages because there was no causal link between the fact which made the professional’s advice incorrect and the loss, which loss would have occurred anyway because the transaction was always doomed to fail for reasons unrelated to the use that the builder was going to make of the loan. 

Thus, even though the client would not have proceeded if the solicitor had provided the correct information, the solicitor was only liable to the extent of the responsibility undertaken by him.  To put it another way, it is not sufficient to establish that, but for the negligence, the losses would not have occurred. It was necessary to go further and find that the losses arose from the matter which made the professional’s advice incorrect.

Accountants’ negligence

In the landmark case of Manchester Building Society v Grant Thornton (2021, heard by seven judges of the SC), a firm of accountants (“GT”) advised a building society (“MBS”) that it could within the regulatory framework prepare its accounts on the basis that there was an effective hedging relationship between, on the one hand, losses it could suffer in funding its portfolio of fixed rate mortgages from variable rate borrowings and, on the other hand, the potential protection from such exposure provided by certain swap transactions.  After MBS had proceeded on this basis for some seven years, GT concluded that their original advice had been wrong, there was no effective hedging relationship and MBS’ accounts could not be prepared on a hedging account basis.  Therefore, MBS re-stated its accounts and terminated its swap transactions, which it was only able to do at a cost of many millions as the market had at that point moved against its swap positions.

Contrary to what might have been expected from the decision in SAAMCO, the SC concluded that MBS was entitled to recover from GT the full cost of unwinding the swaps (less 50% for contributory negligence).  It was not to the point that this award of damages in effect compensated MBS for trading losses on the swap transactions.

The crucial fact for the SC was that GT had negligently failed to advise of the ineffectiveness of the hedging arrangements. The scope of GT’s duty, determinable from the purpose for which GT undertook the duty, included advising as to the risks of such harm to MBS.  There was a sufficient nexus between the responsibility assumed in the subject matter of the duty and the claimant’s loss.  Another approach was to say simply that the loss flowed from the matter that made GT’s advice wrong, being the negligent failure to advise as to the ineffectiveness of the hedging arrangements, which led to the emergence of a value gap.  It was reasonably foreseeable that MBS would have to incur loss unwinding the transactions.  Therefore, GT could recover the whole of the loss arising.

In passing, the court held that counter-factuals were merely a tool that might or might not be useful as a cross-check and that, rather than categorising professionals as providing either advice or information, the focus should be on the purpose of the duties and responsibility taken on by the professional.

Impact

The scope of the duty owed by a negligent professional may be found to be narrower in future, in that it is determined by the purpose for which the advice is given. Moreover, damages are recoverable only to the extent that they flow specifically from the professional’s negligent act or omission.  That said, where damages are recoverable, these may be higher than was previously envisaged as they encompass all loss reasonably foreseeable from the breach of duty.

About the Author

The author of this article is William Sturge a Consultant Solicitor at Lovetts Solicitors. William is a leading lawyer in the insurance industry. He has advised on insurance and reinsurance claims on behalf of reinsurers, reinsureds and their insureds, both in the UK and worldwide. He has conducted insurance and reinsurance litigation and arbitration, acted in professional indemnity and financial lines business and in shipping and international trade disputes. William has also provided non-contentious insurance and reinsurance advice, usually with an international context.

For further information or advice please feel free to contact William by emailing [email protected] or calling 01483 457500.

UK & International debt recovery specialists, Lovetts Solicitors, have been appointed to Crown Commercial Service’s Debt Resolution Services framework.

Crown Commercial Service (CCS) supports the public sector to achieve maximum commercial value when procuring common goods and services. In 2020/21 CCS helped the public sector to achieve commercial benefits equal to £2.04bn – supporting world-class public services that offer best value for taxpayers.

The appointment will see Lovetts join a panel with 4 other law firms who can offer litigation services (lot 6) to UK central government departments and other public sector bodies.

As part of the contract, Lovetts will assist with effective collection of debt by applying litigation activities ranging from pre-litigation correspondence through to enforcement including insolvency action such as winding up proceedings.

Managing Director, Michael Higgins says:

“To be appointed on to CCS’s Debt Resolution Services framework is a fantastic achievement for the business. Only businesses with the highest level of accreditation were able to qualify for the framework. Protection of data and cyber security were rightly prioritised and we were able to meet those requirements through our Cyber Essentials Plus and ISO27001 certifications.

Lovetts has specialised in debt recovery for over 25 years and we have taken great pride in providing a high level of service for our clients. We look forward to assisting CCS, UK central government departments and other public sector bodies in respect of recovering their debt.”

If you require assistance in recovering your debt, sign up here or alternatively email us at [email protected].

Notes to Editors

Crown Commercial Service (CCS) is an Executive Agency of the Cabinet Office, supporting the public sector to achieve maximum commercial value when procuring common goods and services.

To find out more about CCS, visit: www.crowncommercial.gov.uk Follow them on Twitter: @gov_procurement or LinkedIn: www.linkedin.com/company/2827044