A recent decision in the Commercial Court is the latest chapter in the fallout from the "miners' claims" concerning wrongful deductions made from compensation awarded to them. The Judgment sheds light on several issues that may arise when an ATE backed claim does not go according to plan. The case concerned a failed application for a Group Litigation Order to facilitate claims being made by a group of miners against a trade union, its claims handling company, and various firms of solicitors who had allegedly made wrongful deductions from compensation received by the miners under British Coal Compensation Schemes. When a substantial costs order was made against the miners following the failed application, their ATE Insurer, Templeton Insurance Ltd, purported to avoid the policy and refused to indemnify the miners. The GLO application was the subject of savage criticism by the Judge, Sir Michael Turner, and wasted costs applications were pursued against GWM, solicitors for the miners. GWM had given the miners a guarantee, assuring them that they would incur "no fee, no risk, no cost." Accordingly, in the absence of any indemnity advanced by Templeton, GWM was "on the hook" and was obliged, through their PI insurer, QBE, to settle the costs claims made by the Respondents to the GLO application.

This subsequent Commercial Court case saw QBE successfully bring a subrogated claim, in the name of GWM, against Templeton who was held liable, both under the Civil Liability (Contribution) Act 1978 and in restitution, to pay to GWM the full amount that the miners were entitled to under the ATE policy, up to the £1 million policy limit.

The Judgment contains some important lessons and implications for both ATE insurers and solicitors.

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The decision of Cooke J handed down on 26 October 2010 brought to an end this protracted litigation, which had its origins in a seemingly routine application for a Group Litigation Order made in October 2005 by a number of former coal miners against a trade union, its claims handling company and various firms of solicitors. It represents the latest development in the long running saga concerning deductions made from the personal injury compensation of hundreds of thousands of miners.

The GLO application

The GLO arose out of the allegedly wrongful deductions made by the GLO Respondents from compensation paid to the miners under the British Coal Compensation Schemes. The GLO application was fiercely contested by all the Respondents and was ultimately dismissed by Sir Michael Turner in May 2006, but not before the Respondents had run up costs in excess of £1.2 million. The Claimant in the present action ("GWM") had acted on behalf of the miners in the GLO application under Conditional Fee Agreements backed by an ATE policy issued by Templeton (a company registered in the Isle of Man), which covered costs and disbursements with a policy limit of £1 million. In dismissing the GLO application the Judge was extremely critical of the manner in which it had been made and pursued, and indeed of the decision to make the application at all – which he described as "misconceived and...a gross abuse of the system which has been devised for the pursuit of group litigation where there is a valid group litigation issue". He therefore ordered the miners to pay the Respondents' costs on an indemnity basis, with an interim order in the sum of £600,000.

Templeton's response was to notify the GLO Respondents' solicitors that it was avoiding the policy and not to respond to letters from GWM seeking clarification of whether Templeton did or did not intend to honour its policy obligations. This resulted in some of the GLO Respondents applying for charging orders against the homes of 27 miners, and all of them applying for wasted costs orders against GWM. Many of the miners instructed new solicitors who immediately notified claims against GWM for damages and/or wasted costs.

The GWM Guarantee

Leaving aside the allegation that GWM had been negligent (which Cooke J rejected) GWM faced an unanswerable claim for breach of warranty by the miners pursuant to a document which it had issued to them entitled "The GWM Guarantee to clients". This made it clear that the basis of their retainer was, as the document stated, "No win, no fee, no risk, no cost!" Because they took the view (correctly) that the miners had a cast iron case against GWM based on the GWM Guarantee, GWM's PI insurers, QBE, proceeded to settle the costs claims of the GLO Respondents, paying to them £1 million in settlement of their claims for indemnity costs. In addition QBE made payments in respect the Respondents' costs of their wasted costs applications, GWM's defence costs, compensation to the miners for distress and inconvenience following regulatory complaints and the costs of the miners' own solicitors. These other items totalled around £480,000.

The prospects of appealing Sir Michael Turner's decision

An appellate court may only interfere with the exercise of discretion by a Judge below where it can be shown that the lower court has exceeded the generous ambit within which a reasonable disagreement is possible. The prospect of an appeal against the decision of Sir Michael Turner was considered but rejected on the basis that an appeal against the Judge's discretion was unlikely to succeed. Cooke J found that an appeal would, indeed, have faced difficulties but that was not relevant to the issue of
whether GWM and Counsel were negligent in pursuing the application.

Arbitration

The ATE insurance policy contained an arbitration clause. GWM commenced an arbitration (having taken an assignment from the miners of their policy rights as part of settlement agreements). Templeton successfully argued that, since the policy contained a prohibition against assignment, GWM had no entitlement to arbitrate. The result was that the arbitration had to proceed in the names of two of the miners. Templeton then argued that because the miners' liability for the costs of the GLO Respondents had been satisfied by GWM, they no longer had any claim under the policy in respect of those costs (relying on Colonia Versicherung AG v Amoco Oil Co [1997] 1 Lloyd's Rep 261). This argument succeeded, and the arbitration proceeded solely in relation to a claim for indemnity for disbursements (Counsels' fees). Templeton no longer purported to rely upon policy avoidance but, on the contrary, relied upon alleged breaches of policy conditions. All of these arguments failed and the miners were awarded £152,127 plus interest in respect of disbursements.

The present Commercial Court action

GWM's claim

Fortified by the finding of the arbitrator that Templeton was liable under the policy, GWM began the present action against Templeton seeking to recover the sums its insurers had paid to the GLO Respondents (£1 million) together with its additional outlay of £480,000. Templeton's response was, first, to challenge service out of the jurisdiction. This challenge was resolved against Templeton, both at first instance and in the Court of Appeal (Greene Wood & McLean v Templeton Insurance Limited [2009] EWCA Civ 65). For more information please click here

The action then proceeded to trial. GWM put its claim against Templeton in three ways:

  1. that there was an implied term in its contract with Templeton that the latter would honour valid claims for indemnity by the miners;
  2. that the miners' liability for the costs of the GLO Respondents was payable by both Templeton (under the policy) and by GWM (pursuant to the GWM Guarantee), so that GWM was entitled to a contribution under the Civil Liability (Contribution) Act 1978 – which in the circumstances should be 100%; and
  3. that having discharged Templeton's liability to the miners, GWM was entitled, by way of restitution, to recover from Templeton the amount which Templeton would have been liable to pay (in accordance with the principles set out in Moule v Garrett (1872) LR 7 Ex 101 and Owen v Tate (1976) QB 402).

Templeton's cross claims

Templeton denied liability under all of the above bases. It also counterclaimed against GWM (for breach of contract, negligence or under the 1978 Act) to recover the £152,127 that the arbitrator had awarded in respect of disbursements. Templeton also claimed damages (for breach of contract, negligence or under the 1978 Act) against Leading and Junior Counsel who had represented the miners on the GLO application. As well as cross claims in its own name, Templeton brought claims in the name of the miners who had succeeded in the arbitration on the basis of subrogation, having indemnified them for disbursements.

The decision

GWM's claims against Templeton succeeded, both under the Civil Liability (Contribution) Act (on the basis that the miners' liability for costs was the "same damage" for which both GWM and Templeton were liable) and in restitution. However, the claim based on the existence of an implied contractual term was rejected; although there undoubtedly was a contract between GWM and Templeton, neither the "business efficacy" nor the "officious bystander" test required the implication of the term contended for by GWM.

Accordingly, GWM was entitled to recover the £1 million it had paid (less the £152,127 already recovered in the arbitration). In both the 1978 Act and restitution claims, Templeton's liability was limited to the policy limit (plus, of course, interest). Had the implied term argument succeeded, damages would have been at large and GWM could have recovered its additional losses.

Templeton's cross claims against GWM and the barristers were all dismissed. Cooke J held that GWM's duties in relation to the conduct of the GLO application were owed to its clients, the miners, and that if there were duties also owed to the ATE insurers, then, plainly, there would be the possibility of a conflict of interest. It would not, therefore, be fair, just or reasonable to impose the duty of care for which Templeton contended. For similar reasons, the Judge held that the barristers owed no duty of care to Templeton. Nor was there any room for an implied contractual term giving rise to any such duty.

Even if GWM or Counsel owed a duty of care to the miners, the Judge held, after close scrutiny of all of the criticisms that Sir Michael Turner had made, that neither GWM nor the barristers had been negligent. Indeed, in spite of the very serious criticisms and negative observations that had been made by Sir Michael Turner, the Judge went so far as to say that "Not only could competent solicitors and Counsel have taken the view that they did but it can be seen now, arguably, to have been a correct view." Cooke J could find no basis for criticism of GWM (who were entitled to rely upon Counsel, as they had done) or of Counsel in their handling of the GLO application.

The judgment represents a complete vindication of GWM's position in relation to the GLO and the Judge found the firm's principal witness, Wynne Edwards, a former partner, to be "an honest, accurate and compelling witness".

GWM had made a very early Part 36 offer to Templeton (to which there had been no response at all), with the result that GWM was awarded costs on the indemnity basis from the date of that offer, together with penalty interest (at 8% p.a.). Templeton were also ordered to pay the barristers' costs on the indemnity basis.

Templeton were refused leave to appeal by Cooke J and have not sought permission from the Court of Appeal.

Criticisms were made in the judgment of Templeton's due diligence and underwriting practices at the time the policy was entered into. The Judge noted that Mr Wells, the Managing Director of Templeton, had effectively accepted that the underwriting approach of those involved at the company involved "flying by the seat of the pants". Cooke J was also critical of Templeton's failure to respond to several letters from GWM (as the miners' appointed representatives) for a period of six months. For his part, Mr Wells conceded that the purported (and wrongful) letter of avoidance to one of the Respondents' solicitors was "not Templeton's finest hour" (an observation which the Judge regarded as something of an understatement).

Implications for ATE insurers

Many ATE insurers are already in the practice of engaging independent lawyers to assess the risks which they underwrite. Clearly, the findings of Cooke J reinforce the importance of obtaining such independent legal advice as part of the due diligence undertaken when assessing the risk at the outset. The likelihood is that, in the absence of an agreement or a clear nexus between the ATE insurers and the solicitors acting for the beneficiary of the ATE insurance policy, the courts will not find that the solicitors, or Counsel, owed a duty of care to the ATE insurer.

ATE insurers must ensure that they provide adequately clear information on the level and basis of cover provided, together with the appropriate policy documentation. One factor implicated in the failure of the GLO application before Sir Michael Turner was the lack of clarity surrounding the ATE insurance policy. Templeton had failed to provide a policy wording and to clarify the level and basis of cover that they were providing. The Respondents to the GLO application were able to make much of this and this failure on Templeton's part was a major factor in Sir Michael Turner's decision to reject the miners' application.

Where the litigation does not go to plan, a prompt and consistent response on the part of insurers is important. In the present case, Templeton refused to state what their policy position was for six months, in the knowledge that miners were facing large costs orders and that there were charging orders on many of the miners' homes.

When litigating on policy coverage, consideration should be given by ATE insurers (and, indeed, any party) to the reputational consequences of adverse findings and judicial scrutiny.

In short this was an unhappy tale, which does little to enhance the reputation of the ATE insurance market, particularly in the light of the recommendations of Lord Justice Jackson that ATE insurance premiums and success fees should no longer be recoverable from the losing side.

Implications for solicitors

The findings of Cooke J. in relation to the absence of a duty of care owed by GWM to Templeton are welcome and provide a further degree of clarity in this area. In this case, Templeton did not seek the advice of Counsel or GWM on the prospects of success of the GLO application, nor did Templeton retain GWM or Counsel to advise on the merits of the application or the underlying claims. Cooke J recognised that the interests of the GLO Applicants and Templeton could plainly become adverse and that, given the absence of any express agreement between GWM and Templeton, it would be unjust to impose a duty of care upon the solicitors.

This type of case contrasts with others, such as the TAG litigation and Axa Insurance v Akther & Darby [2009] EWCA Civ 1166, where defendant firms of solicitors were appointed by ATE insurers to advise specifically on the merits and prospects of success of claims.

It is not uncommon for solicitors to give guarantees to their clients, especially given the difficulties in funding litigation. The outcome of this case reinforces the fact that great care must be taken when entering into any such guarantee as solicitors are likely to find themselves liable in the event that there are problems regarding any ATE policy put in place to support the guarantee.

10 December 2010

CMS Cameron McKenna LLP acted for GWM and QBE in this litigation.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 10/12/2010.