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We have undertaken a comprehensive review of the common law, statutory and procedural changes that occurred during 2014 and, in the pages that follow, we summarise some of the most important legal developments and look ahead to changes on the horizon in 2015 and beyond. Our analysis of key insurance law developments includes a short update on the Insurance Bill, which the Special Public Bill Committee (SPBC) considered during December 2014. What emerged out of the evidence the SPBC considered is that the current drafting is far from settled, particularly in relation to the controversial changes proposed in relation to attribution of knowledge in section 4 of the Insurance Bill, which the London Market is seeking to amend. We will keep you closely informed of developments. Our review covers other key developments in relation to professional risks, EL/PL, construction and employment practices liability. We have also summarised important developments in relation to technology, media and telecoms, property damage and business interruption, costs, practice and procedure, and fraud. Finally, in response to various queries we have received over the years in relation to common insurance and legal terms used in the market, we have devised a glossary, which seeks to provide simple definitions of words that can be misunderstood. I hope that you and your teams will find the glossary here useful; we will keep it regularly updated to reflect legal developments. If you would like to know more about any of the topics covered in our review, please feel free to contact me or any of the authors of the articles. Best wishes

Jonathan Newbold

+44 (0)115 976 6581

jonathan.newbold@brownejacobson.com

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Page

Introduction 2

Index 3

Insurance law 4

Professional indemnity: Construction 10

Professional indemnity: Letting and estate agents 12

Corporate and management liability 15

Employment practices liability insurance 18

Medical and care 22

Health and safety, regulatory, environmental 25

Technology, media and telecoms 27

General liability & motor 31

Property damages and business interruption 35

Fraud 37

Costs, practice and procedure 41

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2014 will be remembered as the year that the government, after years of consultation, took the leap towards wholesale insurance law reform. The consultation periods may have been relatively short, but the impact of the reforms, if passed, will have an impact on the insurance industry for years to come. Whether that impact is positive or negative remains to be seen, but the reforms will mean that there is a busy year ahead for the industry. The past year has also seen important court decisions which bring some clarity with respect to ‘follow clauses’, the scope of notifications, fraudulent devices and the impact and breadth of Financial Ombudsman decisions. We have covered all of the above topics within the concise articles below, but if you have any comments on want to know more, please get in touch.

Derek Bambury

+44 (0)20 7337 1006

derek.bambury@brownejacobson.com

In this section

Insurance Bill 2014

The Counter-terrorism and Security Bill

Parent company duty of care towards employees of a subsidiary

VAT bills may increase for financial institutions

What constitutes a fraudulent device?

Alternative Dispute Resolution Directive

Follow clauses

The PRA on general insurers’ approach to reserving

Taxation of damages - summary of proposed changes to HMRC ESC D33

The effect of FOS awards

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Insurance Bill 2014

In July last year, the Insurance Bill (the Bill) was introduced to parliament for consideration. If passed in its current form, the Bill will make significant changes to the law relating to non-disclosure, warranties and fraudulent claims. The most significant proposed changes are: 1. the abolition of basis of contract clauses

2. replacing the obligation to disclose all material circumstances with

an obligation to give a ‘fair presentation of the risk’

3. removing the automatic remedy of avoidance for non-deliberate and

non-reckless misrepresentations

4. downgrading’ warranties to suspensive conditions i.e. policy cover

re-engages as soon as compliance with the warranty is re-

established

5. in the event of a fraudulent claim, insurers’ will no longer be able to avoid the policy from inception and thereby escape liability to indemnify claims made before the fraudulent claim. Insurers will, however, be entitled to terminate the policy from the point when a fraudulent claim is made.

Comment The Bill has received a mixed reaction, with some in the insurance industry holding the view that it goes too far and others saying it does not go far enough. The Bill is currently passing through parliament and may well be subject to amendment. To keep up to date with the latest developments, please follow this link to our dedicated insurance law website, where you can sign up to receive regular mailings.

The Counter-terrorism and Security Bill The Counter-Terrorism and Security Bill was presented by the Home Secretary on 26 November 2014. It proposes to criminalise any insurer (and any consenting, conniving or negligent company officer) which indemnifies an insured for any ‘ransom’ payment made in response to terrorist demands; even if the relevant contract of insurance was entered into before the bill becomes law. Comment Insurers will have to review their policies and wordings, particularly policies written through the London market. A simple solution, already found in many policies, is to include wording to the effect that the insurer shall not be liable to make any payment that would be illegal to make under the laws of the United Kingdom. However, in the absence of such an exclusion, insurers should ensure that their definition of ‘terrorism’ is at least as wide as that found in the relevant legislation.

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Parent company duty of care towards employees of a subsidiary In the case of Thompson v The Renwick Group plc (2014), Mr Thompson brought a claim for damages against the parent company of his former employers as neither had any funds. The question which was decided by way of preliminary issue was whether the parent company owed a direct duty of care to Mr Thompson. At first instance the judge held that the parent company had assumed such a duty to Mr Thompson. However Renwick Group Plc was successful on appeal because there was no evidence that Renwick Group Plc carried out any business which involved warehousing or handling asbestos. Having failed on the first indicia set out below, the rest of the indicia fell away. In deciding the question the court will usually consider whether: a) the businesses of the parent and subsidiary are in a relevant respect

the same b) the parent has, or ought to have, superior knowledge of matters in

issue c) the subsidiary’s system of work is unsafe and the parent knew or

ought to have known d) the parent knew or ought to have known that the subsidiary or its

employee would rely on that superior knowledge. Comment In most instances the policies provide composite cover for parents and subsidiaries and therefore we would not expect the underwriting process to be extended by virtue of this judgment. However if this is not the case, underwriters may wish to obtain more information about the relationship between parent and subsidiary in order to assess the risks.

VAT bills may increase for financial institutions In September 2014, the European Court of Justice (ECJ) handed down a ruling that impacts considerably on banks’ and insurers’ value added tax bills. The case arose from the Swedish tax authority’s decision to charge VAT on the supply of IT services from Skandia America Corporation in the US to its Swedish branch. Previously, European VAT law allowed countries to treat companies and their overseas branches as single entities for VAT purposes. Subsequent to this ruling, services supplied between a group’s headquarters and its branches are set to be subject to VAT. Whilst this case is expected to impact 15 member states, its biggest impact will be on the UK due to its large number of foreign headquartered financial institutions and the widespread use of offshoring. It is predicted that this cost may amount to millions of pounds in the UK alone. Tax authorities across the EU will have to consider how they are to implement this ruling. Despite arguments that existing rules are consistent with EU law, there is little doubt that the UK will implement this ruling. Financial institutions will be forced to review the services they are buying from outside the EU and consider the possibility of restructuring in order to reduce the impact of this change.

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What constitutes a fraudulent device? A fraudulent device is a statement made by an insured that is in support of a claim which it honestly believes to be valid, but that it knows to be untrue, is made recklessly and/or is made without care as to its truth. In the case of Versloot Dredging BV & Others v HDI Gerling Industrie Versicherung AG & Others (2014), the Court of Appeal considered the obiter and non-binding comments of Lord Justice Mance in an earlier decision known as ‘the Aegeon’, when he set down three principles for determining whether a fraudulent device has been employed thereby allowing forfeiture of the entire claim. In the Versloot Dredging case, the insured’s cargo ship suffered water ingress resulting in irreparable damage to the ship’s engine and gearbox. The loss was the result of a number of insured perils. In response to insurers’ factual questions the insured provided a theory in relation to the cause of the loss in such a way that suggested the theory was based upon and supported by the evidence of crew present at the time. In particular the insured’s presentation of the theory suggested it reflected evidence from the ship’s Master, which was later found to be an ‘invention’. The court decided that although the insured honestly believed the theory to be correct and the theory was ultimately supported by witness evidence, the insured had given the inaccurate impression that the theory was supported by witness evidence at the time it was given to insurers. Accordingly the statement was found to be false and misleading and the insured had been reckless as to the truth of the statement when making it. It was therefore held that the statement satisfied the Aegeon principles in that (a) it directly related to the claim; (b) the insured intended to improve its prospects of success by presenting a story of the loss that

would avoid insurers relying on an exclusion in respect of the insured’s knowledge/lack of due diligence; and (c) the statement did tend to improve the insured’s prospects of successfully securing indemnity. Comment The Court of Appeal’s decision does not represent a major departure from the courts’ approach to the question of fraudulent devices. However, it is an important decision as Clarke LJ has expressly elevated the Aegeon principles from being merely authoritative dicta to binding ratio and has indicated that his preference would be for the third Aegeon requirement to be recast as a positive requirement of a ‘significant’ improvement in the insured’s prospects.

Alternative Dispute Resolution Directive Consumer disputes can often become expensive and time consuming to resolve. They are also frequently for modest amounts which swiftly make them uneconomic to fight. EU research has concluded that cross border disputes are rarely pursued and this hampers trade. The Alternative Dispute Resolution Directive and Online Dispute Resolution Regulation require enactment by member states before 9 July 2015 and to be effective from 9 January 2016. These will provide for a quick and cheap platform to resolve disputes between consumers and businesses. The FCA will be appointed to deal with financial service disputes. We anticipate that the FOS will deal with complaints made by consumers in a similar manner to the existing framework. Comment With Solvency II due to be implemented in January 2016, the prospects of unfettered access to European markets supported by a dispute resolution process spanning the continent should provide the UK’s financial services sector with an unrivalled opportunity to penetrate overseas’ consumer markets.

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Follow clauses Two 2014 decisions have served to confirm the liability and obligations of insurers in respect of ‘follow clauses’. The Tokio Marine Europe Insurance Ltd v Novae Corporate Underwriting Ltd (2014) decision involved the defendant insurance company contesting their obligation as reinsurers to help indemnify the applicant insurers following the settlement of a clam on the basis that the applicants failed to adequately investigate the claim and failed to consider additional deductibles available under local policies. The applicants had made an early settlement partly on commercial grounds to prevent the figures claimed increasing in the future. The judge held the investigations made by the applicant insurers were adequate and that the settlement reached was a commercially favourable one. The judge accepted the applicant’s submission that “if the bottom line is that the final settlement figure was a good one, it cannot be said that there was anything improper or un-business-like in not taking points that would not have affected that bottom line.” Therefore, there was ‘no good reason’ why the presumption that the defendant reinsurer will follow the applicant’s settlement should not apply. In San Evans Maritime Inc and others v Aigaion Insurance Co SA (2014), it was decided that a settlement agreement which triggers a follow clause will bind the follow insurers even where they have not been a party to the settlement agreements. A follow clause does not bestow agency rights onto the lead insurers to represent the follow insurers, but the existence of the clause is evidence of an agreement between the parties that the follow insurers will follow the settlement of claims reached by lead insurers. Any references to the lead insurers acting on their own behalf is simply to prevent a claim being made against them directly by the follow insurers rather than to reduce or limit the follow insurers’ obligations under the follow clause.

The PRA on general insurers’ approach to reserving In a ‘Dear CEO’ letter published on 2 December 2014, the Prudential Regulation Authority (PRA), while recognising the commercial claims pressures affecting insurers, reaffirmed its commitment to ensuring that insurers and their directors comply with INSPRU 1.1.12R. To achieve this, the PRA expects insurers to maintain a ‘robust approach’ to the setting and supervision of reserves. Amongst other things, the PRA was explicit in outlining its expectation that insurers:

understand the sources of uncertainty and how these affect reserve setting

implement and monitor a stress-tested reserve setting process

assess whether an unexpired risk provision is required, and

put in place systems to allow discussion between underwriters, claims handlers and those setting reserves.

The PRA stressed that, although not in breach of their obligations under INSPRU 1.1.12R, insurers should not be over-reliant on prior year reserve releases and that, so as to mitigate this tendency, insurers should monitor underwriting, reserving and economic cycles when setting reserves. Because of these market pressures, the PRA is keen to ensure that reserve processes are robust, and that reserve levels themselves are adequate, and have warned insurers to expect ‘regular supervisory interactions’ (which could involve the PRA analysing data reported to it, reviewing internal or external actuarial reports, or instructing specialists to report on the process in place at any particular insurer.

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Taxation of damages - summary of proposed changes to HMRC ESC D33 Position prior to January 2014 Firstly, where a claim related to an underlying asset, the HMRC agreed to treat the cause of action relating to it as a part disposal of the asset, allowing a proportion of the relevant base value to be used in calculating the tax payable on the damages (with the balance of the base value available to be used on the subsequent disposal of the asset itself). Secondly, paragraph 11 of ESC D33 as originally formulated, provided that in the case of claims where there was no underlying asset, the receipt of damages did not give rise to a chargeable gain at all. Subsequent and proposed changes to ESC D33 The changes introduced by HMRC in January 2014 related to the hitherto uncapped relief under paragraph 11, and imposed a prima facie limit of £500,000 to the tax-free element. In the case of awards of damages, or settlements, in excess of £500,000 HMRC stated that it would consider claims for relief for the excess amount on a case-by-case basis. The amendments made to HMRC's CGT manual in June 2014 emphasised the limited nature of their discretion to allow claims for relief over the £500K limit, but nevertheless confirmed that claims would be allowed if each of the four conditions were satisfied. The most relevant conditions were:

that the cause of action must lie against a defendant who incurred the liability in the course of the provision of goods or services supplied in the course of a trade, profession or vocation

the ‘supplied in the course of business’ condition would be presumptively satisfied in the case of mis-selling of financial products by persons regulated by the FCA.

The other two conditions make clear that the relief will be refused if the cause of action has been acquired by some means of transfer or assignment.

On 31 July 2014 HMRC gave notice of its intention to seek a statutory further amendment to the regime relating to the payment of CGT on damages, proposing that there be a fixed exemption of £1 million in the case of claims in relation to which there was no underlying asset. Comment The changes to the CGT treatment of damages that were introduced by HMRC in January 2014 are unlikely to have impacted materially on insurers’ claims exposure, save to the extent that they may have raised the general awareness in the claimant community that damages will very often be taxable, and that accordingly attempts to reduce heads of loss to amounts net of tax, applying the Gourlay principle, should be impermissible. However, the further changes that are proposed, if enacted, are likely to lead to an increase in the cost of those claims which do not relate to loss or damage to an underlying asset, and where the damages paid do not constitute a revenue receipt in the hands of the claimant.

The effect of FOS awards In the case of Clark v In Focus (2014), decided in February 2014, the Court of Appeal reversed the troubling decision made by Mr Justice Cranston at first instance, with the Court of Appeal preferring the approach taken in another, and conflicting, first instance decision, that of HHJ Pelling QC in Andrews v SBJ (2011). In short, the Court of Appeal held that it is impermissible for a claimant to accept a final determination by the Financial Ombudsman Service (which is subject to the statutory cap – now £150,000) and then to commence separate court proceedings for the balance of his claim. There cannot be two bites of the cherry. The Court of Appeal’s decision was undoubtedly a welcome relief to those sectors subject to the Financial Ombudsman Service jurisdiction and their insurers because it confirms the finality of a FOS award.

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2014 has continued to see a steady stream of cases in the Technology and Construction Court dealing with issues including: enforcement of adjudication decisions; dispute resolution obligations; clarification on the accrual of a tortious cause of action and specific performance to provide collateral warranties. Practitioners have taken particular note of the decision in ISG v Seevic as a stark reminder of the requirements for those professional consultants responsible for valuing/certifying payments under construction contracts. The consequences of missing a payment notice could cause the client significant losses and may lead to more claims against those professionals. However it is the important consideration of the impact of a ‘net contribution clause’ to limit professionals’ liability that we focus on in this review. Looking forward 2015 will see the introduction of the new Construction (Design and Management) Regulations 2015 (CDM Regs) that apply to the majority of construction projects including for the first time domestic client projects. This will see the abolishment of the CDM Co-ordinator and the introduction of the concept of the ‘Principal Designer’. Accordingly all those in the industry will need to make sure they are fully aware of their new obligations under the CDM Regs.

Tim Claremont

+44 (0)20 7871 8507

Tim.Claremont @brownejacobson.com

In this section

Net contribution clause is ‘crystal clear’

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Net contribution clause is ‘crystal clear’ A net contribution clause seeks to restrict the liability of a professional to damage for which he can be held justly and equitably responsible when taking others’ responsibility into account. In its absence, where two or more parties are responsible for the same damage the claimant can choose to sue any one of them for the entirety of the damage. In Stephen and Carol West v Ian Finlay & Associates (2014) the contractor had become insolvent before proceedings were issued. As a result, the claimant home owners had commenced proceedings only against the architect. The court at first instance in found that the net contribution clause was ambiguous, meaning that the interpretation most favourable to the consumer had to prevail1. Accordingly, the Court did not reduce the claimants’ damages on account of the fact that the contractor was responsible for some of the loss. The Court of Appeal overturned this decision, finding that the clause was “crystal clear” on its “normal meaning”. The net contribution clause was not found to be an unfair contract term2, on the basis that it was used commonly in standard RIBA forms, it would not be regarded as unusual in a commercial contract and it was right that the claimant homeowners took the risk of the main contractor’s insolvency.

1 Regulation 7(2) of the Unfair Terms in Consumer Contracts Regulations 1999 2 Under the Unfair Terms in Consumer Contracts Regulations 1999 and the Unfair Contract Terms Act 1977

Comment Our experience is that these clauses are not commonly included within agreements as they are often removed during negotiations (particularly in commercial developments where employers are unlikely to accept such terms). This runs contrary to the Court of Appeal’s reasoning for permitting reliance on the term and we therefore anticipate the matter may proceed to the Supreme Court this year. In the absence of an appeal though, this case should give contractors and their insurers confidence when relying on net contribution clauses in order to limit the extent of liability.

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There is no denying that the private-rented sector has been through a turbulent period of late. And the trouble keeps on coming, particularly for agents who have found themselves caught in the cross-fire between landlord clients and tenants. Professional indemnity claims against agents appear to be at an all-time high and this must be due in part, at least, to the phenomenal growth that the sector has experienced. Estimates pointed to by the Residential Landlords Association suggest that as much as £50 billion a year is invested by private landlords in homes to rent. Growth means opportunity, of course, including the small number of rogue operators who would seek to exploit the crisis in the system for their own gain. Accordingly, the calls for tighter regulation of landlords and agents have been loud. 2015 promises no shortage of new legal controls and protections to master and we feature just a few of these in the articles that follow.

Nik Carle

+44 (0)115 976 6143

Nik.Carle@brownejacobson.com

In this section

Immigration Act 2014: right to rent

Stricter requirements for tenancy deposit protection

New ‘redress schemes’ for letting agents and property managers

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Immigration Act 2014: right to rent In September 2014, new measures in the Immigration Act were launched in some parts of the West Midlands which requires private landlords to check the right of prospective tenants to be in the country, or risk being fined up to £3,000 per tenant. Landlords will need to see evidence of a person’s identity and citizenship, for example a passport or biometric residence permit. The launch is part of a phased introduction across the country. Following a review in the spring of 2015, the Home Office expects to continue with the phased introduction of checks across the UK throughout the year. Comment We expect that the new laws will have implications for the insurance industry with respect to letting agents. While fines and punitive damages are generally excluded from insurance cover, there is a real risk that fines levied against the landlord will result in claims being brought against the agent if the agents have been negligent. Agents for the landlord will need to be aware of these changes and be additionally diligent when carrying out references for landlords to ensure that the tenants have the right to stay in the UK for the whole of the tenancy. For instance, student visas or temporary visas may expire during the tenancy leaving the landlord (and the letting agent) liable for these fines, even though the tenant was permitted to be in the UK when the checks were initially carried out. The responsibility of the landlord and agent is not limited to diligent checks at the start of the tenancy. They must also ensure no illegal immigrants move into the property during the tenancy, or they may still face these fines. Where an agent is responsible for conducting inspections, this makes regular and thorough inspections even more important.

Stricter requirements for tenancy deposit protection In Superstrike Ltd v Rodrigues (2014) the Court of Appeal held that the tenancy deposit registration rules apply to a statutory tenancy created following the expiry of a fixed term AST, even when the AST was entered into prior to the deposit registration rules coming into force on 6 April 2007. Landlords are therefore required to protect a deposit and serve prescribed information upon the creation of a statutory tenancy. The question remained as to whether this was also the case where an AST was created post 6 April 2007 (and therefore where the deposit had been protected and prescribed information already provided), it expired and a statutory tenancy created. A recent unreported county court case, Gardner v McCusker (2014), has confirmed that this is the case. The impact of this decision, although only persuasive and not binding, is that a landlord (or a letting agent appointed by a landlord) needs to be on guard when an AST expires and a statutory tenancy is created. If a landlord fails to re-serve the prescribed information, which was the case here, then a court can award a tenant up to three times the deposit. Comment The, relative, clarity provided by these decisions may lead to insurers seeing an increase in claims by landlords against letting agent insureds who fail to re-serve the prescribed information. Further, tenants are likely to use these decisions as a way of remaining in the property and avoiding s.21 notices, leading to claims by landlords against letting agents for any loss caused. Insurers may wish to consider it is necessary to ask letting agents, when underwriting a risk, if they have the appropriate systems in place to identify when a tenancy is due to expire and if prescribed information needs to be re-served.

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New ‘redress schemes’ for letting agents and property managers As of 1 October 2014, it has become a formal legal requirement for all letting agents and property managers to belong to one of the three formal Government-approved redress schemes:

the Property Ombudsman

the Property Redress Scheme, or

the Ombudsman Service Property. The intention is to allow both tenants and landlords the opportunity to appeal to a professional and independent body in the event of any dispute arising about the service they have received. The scope of this new requirement is very wide, and the legislation provides that failure to join such a scheme can result in a fine of up to £5,000.00. Comment This change has many implications on the commercial insurance sector. From a policy perspective, insurers may wish to impose special excesses within in the event of claims being referred to one of these schemes. In terms of claims, their presence may mean that tenants and landlords will be less willing to settle at early stages of a claim in favour of being able to go to an independent body to resolve it if they feel they can secure a more favourable outcome. Tenants and landlords may therefore prove less willing to accept early ‘goodwill’ offers if they feel they can freely appeal to an independent body, which risks increasing the average lifespan of claims, causing the costs of such claims to increase.

Going forward, insurers should take proactive steps to ensure all new and renewing insureds are registered with one of the relevant redress schemes and are aware of the implications that their presence may have when they are presented with future claim. When presented with claims, insurers should prioritise getting definitive quantum figures and undertaking an analysis of the anticipated outcome of a claim. If possible, realistic offers should be made by way of early commercial settlements to reduce the risk of a larger sum being awarded to claimants by the relevant redress body.

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In October 2014 Tesco announced that its previous profits declaration was overstated by £263m. Its share priced collapsed and the Serious Fraud Office is now investigating. Third party litigation funding has been secured for a shareholder class action. This latest debacle follows a long line of high profile corporate scandals; provisions of millions and in some cases billions of pounds have been made in relation to PPI mis-selling, LIBOR fixing and the manipulation of foreign exchange markets. Public awareness of corporate wrong-doing and the right to recourse has never been as high. Perhaps 2015 will start to see the end of the long running soft-market for management liability risks. Only time will tell.

Jonathan Newbold

+44 (0)115 976 6581

jonathan.newbold@brownejacobson.com

In this section

The impact of the Small Business, Enterprise and Employment Bill on directors’ disqualification

A new corporate offence of failure to prevent economic crime?

Liability of brokers

Jurisdiction of FOS over ‘consumers’

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The impact of the Small Business, Enterprise and Employment Bill on directors’ disqualification The Small Business, Enterprise and Employment Bill (the Bill) has recently had its second reading in the House of Lords. The Bill, when enacted, will introduce a new section 5A into the Company Directors Disqualification Act 1986, which enables the Secretary of State to apply to court for a directors disqualification order on the grounds that a director has been convicted of certain offences overseas. Such offences include an offence committed outside of Great Britain that corresponds to an indictable offence under the laws of England and Wales (or Scotland) relating to:

the promotion, formation, management, liquidation or striking off of a company (or any similar procedure)

the receivership of a company’s property (or any similar procedure) or a person being an administrative receiver of a company (or holder of a similar position).

Disqualified directors will also, in certain circumstances, be required to pay compensation. In addition, there will be changes to the factors to be taken into account in considering whether a director is unfit.

A new corporate offence of failure to prevent economic crime? As part of its crackdown on corporate offending, the government is considering the creation of a new corporate offence of failing to prevent economic crime. The Attorney General, Jeremy Wright QC MP, made the announcement on 2 September 2014 and highlighted that the changing nature of economic crime has necessitated new ways of exposing and combatting it. The new offence would mirror and expand the existing corporate offence of failing to prevent bribery under section 7(1) of the Bribery Act 2010, which should make it relatively easy to legislate. However, for companies that are only just coming to terms with the impact of the Bribery Act, it may well involve unwelcome additional expense in terms of compliance and governance.

Liability of brokers In Eurokey Recycling Ltd v Giles Insurance Brokers (2014), the claimant’s premises were destroyed by a fire however their insurers threatened to avoid the subsequent claim on their business interruption insurance policy, due to underinsurance. A without prejudice settlement was reached, and the claimant attempted to recover the £16 million shortfall from their broker. It was alleged that the defendant broker negligently advised how the sums to be insured should be calculated and negligently failed to arrange adequate business interruption insurance cover. The claim was dismissed; the court held that the insured was well-informed about his business and provided information to his broker, on which the broker was entitled to rely. Comment The scope of a brokers’ obligation to their client is dependent upon the facts of each individual case, including the sophistication of their client. It is outside the scope of a broker’s obligation to calculate the sums to be insured under a business interruption policy, or to determine the indemnity period. Brokers do, however, have an obligation to provide sufficient information and take reasonable steps to satisfy themselves that their client understands the terms and concepts of business interruption cover, including the basis on which cover under business interruption policies are calculated.

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Jurisdiction of FOS over ‘consumers’ The decision in R (on the application of Bluefin Insurance Ltd) v Financial Ombudsman Service Ltd (2014) has exposed potential flaws in the drafting of the FOS’s jurisdiction. Mr Lochner had made a complaint to the Financial Ombusman Service (FOS) with regard to the decision by Bluefin Insurance Ltd to decline cover on the Directors and Officers (D&O) insurance policy taken out in respect of both company and personal losses. In May 2013, the Financial Ombudsman Service (FOS) decided that Mr Lochner, the founder and CEO of Betbroker Ltd (Betbroker), was a ‘consumer’ over whose complaint it had jurisdiction. It is the decision on jurisdiction, made by FOS, which Bluefin was given leave to appeal by judicial review. The court concluded that, as “the subject matter of his complaint was wholly concerned with the potential loss arising from a lack of insurance cover in respect of a liability which he had incurred in the course of his trade, business, or profession”, there was “no proper basis on which FOS could have concluded” that Mr Lochner was a “consumer”. The court considered it irrelevant that Mr Lochner was a beneficiary of the D&O policy in respect of his personal loss. Comment The FOS has jurisdiction to investigate a complaint made by a limited company with an annual turnover of €2 million and which employs less than ten people (a ‘micro-enterprise’). However, this case establishes that the FOS does not have jurisdiction to investigate a complaint made by an individual officer of a company who is seeking protection from any personal liability they have incurred as a result of their role.

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As has generally been the case in previous years, there were a number of significant developments in employment law in 2014. Those changes were driven by a variety of factors but not least by the government’s continuing desire to reduce the number of tribunal claims. The changes included the introduction of early conciliation and the cap on unfair dismissal compensation. The tribunal statistics show the significant reduction in the numbers of claims that these changes, and the earlier introduction of tribunal fees, has led to. Looking forward the greatest single factor that will influence the direction of change in employment law is likely to be the outcome of the general election in May. As we get closer to May the detail of each of the parties’ positions and approaches will become clearer. 2015 is likely to see at least as much change as previous years.

Peter Jones

+44 (0)115 976 6180

Peter.Jones@brownejacobson.com

In this section

Holiday pay cases

Tribunal fees – one year on

Cap on unfair dismissal compensation

Early conciliation – a new mandatory procedure

A decline in tribunal claims

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Holiday pay cases There have been numerous cases before the tribunal of late which could result in employers receiving claims for unpaid holiday and other payments. In the recent conjoined cases of Bear Scotland Ltd v Fulton and another, Hertel (UK) Ltd v Woods and others and Amec Group Ltd v Law and others (2014), the Employment Appeal Tribunal (EAT) determined that holiday pay should be based on a worker’s ‘normal remuneration’, which would include both ‘guaranteed’ and ‘non-guaranteed’ overtime (the difference between the two being that guaranteed overtime means the employer must, by contract, offer the work as overtime and so will be liable to pay for the work even if it has none available to offer at the time; non-guaranteed overtime is where the employee is obliged to work overtime if required, but the employer is not obliged to provide overtime or pay in lieu). Simply put, this means that going forward, employers will be required to include such overtime payments and allowances in statutory holiday pay for the first four weeks' of annual leave. This is likely to result in significant increases in payroll costs as the majority of employers do not currently include these variable pay components in holiday pay. By way of example, the manufacturers' organisation, the EEF, has stated that two-thirds of its members estimate that the change to holiday pay calculations will add more than 3% to their current payroll costs, while two out of five anticipate an increase of at least 5%. The EAT determined that claims for arrears of holiday pay would be out of time where there is a break of more than three months between any two deductions in a series of deductions. In most cases (and subject to any appeal by the employers), workers claiming underpaid holiday pay will not be able to bring claims stretching back many years. In addition, the government has introduced new legislation (the Deduction from Wages (Limitation) Regulations 2014) which do two things:

1. limit all unlawful deductions claims to two years before the date the ET1 claim form is lodged (with the exception of certain categories of unlawful deductions claims such as claims for SMP, SSP and guarantee payments, which remain unaffected), and

2. explicitly state that the right to paid holiday is not incorporated as a

term in employment contracts. The effect is to remove any chance employees have of bringing long-term claims for back holiday pay, either in the tribunal or civil courts. But the new Regulations don't apply to claims presented before 1 July 2015.

Comment All current claims for holiday pay lodged with the Employment Tribunal are currently stayed. There is no way of knowing how many claims for holiday pay will be presented in the future and the increased risks for insurers, but in view of the impact of the Deduction from Wages (Limitation) Regulations 2014, limiting claims to two years, is likely that there will be an increased number of claims lodged before 1 July 2015. However, it is apparent that the liability to Insurers will amount to defence costs only as the ‘holiday pay’ sought by the claimants is highly likely to amount to contractual payments. Businesses are likely to be seeking cover moving forward for historical liability to cover the shortfall. It is also worth keeping track of the Lock v British Gas Trading Limited and others appeal, in which the decision (expected in February 2015) will deal with the question of whether a worker, whose pay comprises basic pay and sales-related commission, should receive holiday pay of more than just basic pay.

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Tribunal fees – one year on The controversial introduction of Employment Tribunal Fees became effective on 29 July 2013. On 17 December 2014 The High Court handed down its judgement dismissing UNISON's second challenge to the introduction of employment tribunal fees. It was not satisfied that there was sufficient evidence that the ‘striking’ drop in claims since the introduction of fees was due to claimants' inability to pay. Although the statistics “demonstrate incontrovertibly” that fees have had a marked effect on individuals' willingness to bring claims, the statistics themselves do not prove that any of them are unable, as opposed to merely unwilling, to pay them. The court could not test whether the EU principle of effectiveness had been breached without looking at the income and expenditure of actual individuals to see if the fees did indeed make it "virtually impossible or excessively difficult" for them to bring claims. In any event the scheme was justified. It had three distinct legitimate aims:

transferring part of the system's running costs to those users who benefit from it and can afford it

improving efficiency by discouraging unmeritorious claims, and

encouraging alternative methods of dispute resolution. This was not a case in which cost-saving was the sole or even main aim. The policy of charging a higher fee for certain types of claim which, as a general rule, used up more of the tribunal's time and resources was legitimate. The fees regime as a whole, taken together with the arrangements for remission, was proportionate (R (UNISON) v The Lord Chancellor and another (No 2) (2014)). Leave to appeal was granted and UNISON has announced that they will appeal. We will continue to monitor the progress of this case.

Cap on unfair dismissal compensation Limits on tribunal awards increased from April 2014 Tribunal compensation limits increased on 6 April 2014 under the Employment Rights Order 2014. The maximum compensatory award for unfair dismissal is currently £76,574 or 52 weeks’ gross pay, whichever is the lower. Is the cap discriminatory? On 25 October 2013, Compromise Agreements Ltd, a London employment law firm, applied for judicial review of the statutory cap of one year's salary in unfair dismissal cases arguing the cap is indirectly discriminatory on the ground of age because older workers are more likely to be out of work for a longer period. The High Court dismissed the application on 15 May 2014. The firm applied for permission to appeal this decision and the Court of Appeal heard the application between 25 July and 24 October 2014. No outcome has yet been published. Caps on the limit a claimant can claim limit insurers’ liability. However, it is not uncommon for claimants to plead other claims (in addition to unfair dismissal) where there is no applicable statutory cap (e.g. claims of discrimination or whistleblowing).

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Early conciliation – a new mandatory procedure In May 2014, the government imposed a new legal requirement on those who wish to bring a claim in the Employment Tribunal to contact the Advisory Conciliation and Arbitration Service (ACAS) to attempt to settle employment disputes before it is issued. Tribunal claims will not be accepted unless the complaint has been referred to ACAS and a conciliation certificate issued. A referral to ACAS was mandatory from 6 May 2014. Whilst prospective claimants are required to contact ACAS before making a tribunal claim, they only need to take part in discussing the matter and attempt to resolve it if they want to and either they or the employer can stop the process at any time. Employers will also be able to use early conciliation if they believe there is a workplace dispute which is likely to lead to tribunal proceedings. ACAS reports that for cases notified between April and June 2014, 24% progressed to a tribunal claim and almost a quarter of those went on to be settled by ACAS by the end of October 2014. 18% resulted in a COT3 settlement, and the remaining 58% of cases were taken no further. It is speculated that the high percentage of cases not progressed past this stage could be due to the new Employment Tribunal fee system (rather than the mandatory early conciliation process). Comment Early conciliation is likely to see a rise in claims for Insurers as most claimants will set out what monetary damages or other legal relief they are seeking. It does give policyholders, subject to legal advice, the opportunity to settle a potential claim before a formal claim is issued and costs are incurred in preparing the defence.

A decline in tribunal claims The Ministry of Justice has published tribunal statistics for July to September 2014. The statistics show a continuing decline in the number of employment tribunal claims presented. The employment tribunals received 61% fewer claims than in the same period last year. However, the number of claims received increased by 12% on the previous quarter, April to June. During July to September 2014, employment tribunals disposed of 62% fewer single claims than in the same period in 2013. However, the number of multiple claims disposed of increased by 1%. Of the complaints disposed of by the employment tribunals in the period July to September 2014, 19% were for unauthorised deductions, 13% were for unfair dismissal, 23% were for equal pay and 17% were for sex discrimination.

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2014 saw increasing regulation being introduced to the sector with a view to enhancing the protection of patients and consumers. We see little prospect of that slowing down in what is already a hugely regulated sector. The Health Care and Associated Professions (Indemnity Arrangements) Order 2014 came into force on 16 July 2014 requiring regulated healthcare professionals to have relevant insurance or indemnity to cover their practice and confirm this to their professional body. Then in November the long-awaited Duty of Candour came into force in the NHS. Whilst we are yet to see how this will pan out in practice our experience to date has been that there has been a ‘mixed reception’ to the new statutory Duty of Candour. There are those who feel that the duty is nothing new, in effect adding little to the pre-existing contractual duty in place since 2013, the promises in the NHS Constitution, and the long standing individual professional obligations and there is some scepticism about the effectiveness of an Act of Parliament to change clinical culture. Patients’ lawyers, of course, are also vocal in their disappointment that ‘near misses’ or incidents which cause only minor harm are not caught by the statutory duty, seeing this as, effectively, a ‘licence to cover up’ such incidents.

Ian Long

+44 (0)115 976 6194

ian.long@brownejacobson.com

The impact in practice will largely depend on the way in which implementation is policed and enforced by the CQC, which remains to be seen in reality, notwithstanding their guidance document published when the Health and Social Care Act 2008 (Regulated Activities) Regulations came into effect for NHS bodies. Our expectation is that the key issues will be around the assessment of level of harm, about ‘causation’ of that harm, and about whether in practice some failure in care (equivalent to ‘a breach of duty’) is expected before the duty is triggered. Despite the guidance, there is also real uncertainty about the level of information that will have to be given, and anxiety about the repeated reassurance that an ‘apology’ and explanation is not an admission of liability. It is entirely predictable that in future claims will be more often brought, and sometimes be harder to defend, on the basis of information more often proactively volunteered to patients and families by clinicians at an earlier stage. We foresee significant developments in this area over the next 12 months as NHS bodies come to terms with the new regulations closely followed by challenges for those operating in the private sector as the duty is extended to their organisations in April 2015.

In this section

Duty of candour

Limitation pendulum swinging in defendants’ favour

Vicarious liability and non-delegable duties in foster care

Admissibility of bad character evidence in clinical negligence

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Duty of candour The CQC guidance on duty of candour has now been published following the 2012-13 Francis inquiry into patient care at Mid Staffordshire NHS Foundation Trust. This sits alongside Regulation 20 of the Health and Social Care Act 2008 (Regulated Activities) Regulations 2014 which came into force on 27 November 2014. The inquiry heard the Trust failed to consistently offer full and frank explanations to patients when things had gone wrong. In addressing the issues found, the Regulations now provide for criminal sanctions on NHS bodies where there has been a failure to be open and transparent with patients about the care and treatment they have received including when things go wrong. On conviction, the provider would be liable to a potential fine of £2,500. There are differing schools of thoughts as to whether the Duty of Candour will have an impact on civil matters. The CQC Guidance states that an apology is not an admission of legal liability. However one can see that the patient (and his lawyers) will be encouraged by the presence of an apology. Indeed it is likely that when claimant lawyers are assessing whether to take on a new claim the presence of an apology will be seen as a positive. That said, the Duty of Candour is not novel. There are existing contractual obligations within the NHS Standard Contract for candid disclosures, non-compliance of which could result in liability of some £10,000. The real effect of the Duty of Candour is likely to be a cultural change amongst healthcare staff. Failure to comply could have significant consequences for an individual and their employing organisation. Whether it achieves any improvement in patient safety is another matter. The duty will however extend to independent providers of healthcare and care in April 2015. Comment In anticipation of the new rules extending to the independent sector, insurers should consider whether or not current policies will provide

cover relating to the costs of enforcement action taken by the CQC and also consider how the new duties will impact upon how claims are defended.

Limitation pendulum swinging in defendants’ favour The Court of Appeal in the recent noise-induced hearing loss case of Malone v Relyon Heating Engineering Ltd (2014) held that in cases of ongoing negligent exposure and damage, the limitation clock can start ticking if constructive knowledge is attained before exposure ceases or when the injury is ‘completed’. The court acknowledged that noise exposure is a divisible injury and considered two periods of injury separately in assessing whether their discretion under s.33 Limitation Act 1980 should be exercised. It was not equitable to allow the claim for the first period as the prejudice suffered by the defendant in the first period outweighed the prejudice to the claimant. In terms of the second period, the court refused to disapply the time bar under s.33 on the basis that the apportionment of loss for that period would be exceedingly small. The court reminded us in Malone that issues of proportionality must be considered when dealing with modest claims. The judgment is not limited to divisible disease claims as it provides useful guidance as to factors the court ought to take when deciding whether to exercise their s.33 discretion. It also warns practitioners not to focus merely on post-limitation delay in order to allow the court to consider “all the circumstances” of the case. Comment The limitation pendulum following recent cases seems to be swinging in the defendant’s favour and the courts are requiring a more rigorous search into the explanation of any delay on the part of the claimant. Therefore, insurers and their lawyers may be well advised to take a more robust approach to stale claims – but in doing so, they should remember that they must still come to the court with ‘clean hands’.

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Vicarious liability and non-delegable duties in foster care In the case of NA v Nottinghamshire County Council (2014) the claimant was born in 1977. She lived with her mother until just before her eighth birthday, when she was received into care. Thereafter she spent time at home, in foster care, and in residential placements. She alleged abuse against her mother and mother’s partner, and against two sets of foster parents. The claimant alleged (i) the local authority should be vicariously liable for the tortious acts of foster parents; and (ii) the local authority owed the claimant a non-delegable duty for the period she was in foster care – i.e. the local authority should be liable without fault for the alleged abuse by foster carers following Woodland v Essex County Council (2013). Although the claimant proved some abuse against the foster parents, the court was not satisfied that the relationship between the local authority and foster carers was “akin to employment” so the vicarious liability test in Various Claimants v Catholic Child Welfare Society (2012) was not satisfied. This part of the claim failed. While the court agreed that Lord Sumption’s five principles in Woodland were present, it disagreed that it was ‘fair, just and reasonable’ to impose such a duty on the local authority. Comment This is a welcome judgment for insurers of organisations involved in social care. It reaffirms that to succeed in such a claim a claimant must either pursue the individual(s) direct, or must show negligence on the part of a relevant body in the way it assesses and approves foster carers, or in the way it monitors and supervises a placement. However, claimants will continue to push the boundaries so the arguments are likely to run until we have guidance from an appellate court.

Admissibility of bad character evidence in clinical negligence In the case of Janet Laughton v Salah Eldin Ahmed El Sayed Shalaby (2014) the Court of Appeal was asked to consider, in the context of a clinical negligence claim, the admissibility and extent to which extraneous factors, in particular a lack of probity, should be taken into account when considering whether the alleged negligence occurred. The defendant, a surgeon, had failed to disclose in his witness statement that conditions had been imposed on his registration to practice in the aftermath of the alleged negligence, that he had subsequently been suspended for assault, that he had lied to the General Medical Council’s psychiatrist about the state of his marriage and that he had been treated for stress at the time of the incident. The court held that the defendant’s lack of probity would be relevant to his credibility as a witness but it was, in fact, his competence rather than his credibility that was in issue. At most, any lack of probity that could be proven might show that the defendant would be unlikely to admit incompetence or less likely than he asserted to have followed his standard practice. Crucially, the court held that this would be a slender basis on which to advance a case of negligence. Comment This decision is important as it confirms that when considering a claim against a healthcare provider, evidence relating to probity will only be admissible where it is relevant. Lack of probity and other extraneous factors may well tarnish the credibility of a witness, but it is not indicative or proof that negligence has occurred. It should also be noted that the court deemed the defendant’s lack of probity as ‘not of the most serious kind’ and it remains to be seen what would constitute a ‘serious’ lack of probity and how it would impact the court’s stance in its relevance to an allegation of negligence.

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Although the government are committed to tackling red tape and the ‘compensation’ culture 2014 has seen continued enforcement action against businesses and individuals including a number of corporate manslaughter prosecutions. Of particular note is the regular continued use of FFI notices which is generating significant revenue for HSE. February 2015 will see the end of the consultation period for the new guidance on sentencing health and safety offences and the clear indication is that fines are on the increase. We will be keeping a close eye once the guidelines are issued to see how they in fact impact on day to day sentencing decisions. For further information about any of the above or to discuss any aspect of health and safety please contact me.

Andrew Hopkin

+44 (0)115 976 6030

Andrew.Hopkin@brownejacobson.com

In this section

Fines for health and safety offences set to increase

Fracking activity

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Fines for health and safety offences set to increase The Sentencing Council is currently considering draft sentencing guidelines for health and safety offences and food safety and hygiene offences. The draft guidelines focus sentencing more closely on the financial means of the defendant, with a proposal for increased and turnover linked fines. The current feeling is that fines for health and safety offences have been too low and inconsistent. Previously, courts only had guidance in respect of fatal accidents whereby fines should seldom be less that £100,000. However, the guidelines now suggest 4 steps for sentencers to take into account. Firstly, the court should identify the seriousness of the offence by reference to the risk of harm and culpability. Secondly the court then identifies the size of the organisation, there are five categories which are based on bands of turnover – micro (not more than £2million), small (between £2-10million), medium (between £10-50million), large (£50million plus) and very large (very greatly exceeds the threshold for a large organisation). These two steps will determine the appropriate starting point and ranges for penalties. The third and fourth steps retain the courts discretion to adjust outside of the ranges e.g. mitigation, effect on employment. Comment Organisations who are being prosecuted, as well as their insurers, may well wish to delay pleading guilty before receiving an indication as to where the prosecution might pitch the level of culpability and risk of harm. This also may result in an increase in ‘mini trials’ or legal arguments to determine level of culpability thereby increasing defence and prosecution costs. Some organisations may decide to defend these types of offences where the financial consequences of pleading guilty early justify the risk of doing so. The consultation is open until 18 February 2015 and we will continue to monitor the position.

Fracking activity The fracking industry in the UK is likely to see growth over the coming year which provides risk and opportunity for the insurance industry. Fracking involves high pressure injections of water into underground wells to fracture rock and release shale gas and oil. There are potentially very large reserves of shale across the UK which is attracting investment from around the world. However, the fracking process that has attracted some negative publicity given that a number of the reserves are below densely populated areas of the UK. Common fears include contaminated drinking water and threat of earthquakes, following worries about the chemicals used in the fracking process and two tremors in Blackpool that have been linked to fracking. Comment The growth of any industry leads to opportunities for insurers to cover the associated risks, however the innovative nature of fracking is likely to limit the markets appetite for the time being. Unless specifically excluded, we anticipate that any damage caused by fracking will fall to cover under typical residential and commercial property damage policies. However, thought will have to be given as to whether cover should be afforded for the potential environment impact, including claims arising from subsidence issues and pollution caused by chemicals used in the fracking operation. In addition, as the fracking process tends to include a number of companies working on one project, which party is liable for any damage is likely to be complicated.

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Over the past year a number of high profile cyber-attacks and widely reported court decisions have increased the attention that businesses and the public give to data protection and information security issues. In particular, court decisions relating to Internet Service Providers, the scope of EU law, marketing consents and damages stemming from breaches of data protection regulations have had a major impact upon the regulatory landscape. The data protection team has been on hand to help our existing clients navigate these changes. We have also gained a number of new clients including a major household name corporation. As with previous years technological advancement has furthered businesses’ needs for data protection advice and the team has regularly assisted clients with addressing the data protection issues of adopting new technologies such as mobile devices and applications and cloud servers. Technology is also driving the growth in big data and data mining as businesses attempt to find new ways of monetising the data they hold. This area is likely to see significant growth in 2015, a year which will also see businesses prepare for the enactment of the revised Data Protection Regulations due to come into force in 2016. We hope you find these updates useful. If you would like further advice on any of the issues raised or any other data protection query, please do contact us.

Helena Wootton

+44 (0)115 976 6108

Helena.Wootton@brownejacobson.com

In this section Marketing emails – capturing consents

'Right to be forgotten’

Compensation for damages for breach of the DPA 1998

Defamation update

Cyber Essentials

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Marketing emails – capturing consents The Mansfield v John Lewis Partnership (JLP) (2014) case, successfully brought against John Lewis, concerns the Privacy and Electronic Communications (EC Directive) Regulations 2003 (PECR), which govern the methods by which a business can lawfully send unsolicited marketing and advertising communications to individuals by electronic means (electronic means includes telephone, fax, email, text, picture or video message, or by using an automated calling system). Regulation 22 of the PECR requires that the consent of the individual is obtained prior to sending them marketing communications which are not specifically requested by the individual. Mr Mansfield was sent unsolicited marketing emails by JLP after he provided his contact details whilst signing up to the waitrose.com website in order to determine the cost of the grocery delivery service to his house and he failed to spot a pre-ticked check box giving JLP consent to send him such communications. Mr Mansfield argued that his consent had not been properly gained as leaving the box ticked was an unintentional mistake and meant that JLP was in breach of the PECR entitling him to compensation under regulation 30 of the Regulations. In response JLP attempted to rely on the soft opt-in method of obtaining consent and in the alternative, argued that Mr Mansfield’s consent was properly given by his failure to un-tick the check box. The court held that browsing a website was not enough to be classed as ‘in the course of sale or negotiations’ and that the soft-opt in provisions were therefore not engaged. The court also held that a pre-ticked check box on its own was not enough to indicate an individual’s implied consent and accordingly JLP were in breach of the PECR.

Practical implications This case is not a binding authority, being decided in the County Court, however it is useful as it confirms ICO guidance warning against the use of pre-ticked check boxes as a sole means of gaining individuals’, consent for unsolicited marketing communications. It also suggests that the courts may apply a very strict and limited interpretation of what is meant by ‘in the course of a sale or negotiations’. It highlights the importance of being absolutely certain, if relying on the soft opt-in method for gaining consent, of ensuring that all elements of regulation 22(3) are satisfied. For sectors where large volumes of customer data are captured and used for marketing communications it is important that measures are in place to ensure consent is being gathered properly. Whilst the reported compensation received by Mr Mansfield was extremely low (in the region of a few hundred pounds including costs), the negative publicity caused to JLP was substantial. Furthermore, there is a risk that a company may be barred from using details gained without proper consent, which can be catastrophic given the value of such data.

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‘Right to be forgotten’ In the Google v Agencia Española de Protección de Datos (AEPD) and Mario Costeja González C-131/12 case the European Court of Justice (ECJ) ruled people may request information be removed from search engines if it is "inadequate, irrelevant or no longer relevant.” The ECJ classified Google Spain as a data controller. This meant that Google’s marketing operation in Spain brought the whole of Google under the scope of the Data Protection Directive (the Directive). Whilst this classification has been met with mixed opinion, it is perhaps the ECJ’s broad interpretation of ‘establishment’ in bringing Google under the jurisdictional scope of the Directive that has proven most controversial. The ECJ held that whenever EU citizens are targeted by a company outside the EU territories, if that parent company has a subsidiary situated within an EU member state, then provided there was some connection between the goals of the subsidiary and the targeting of EU citizens by the parent company, EU law may apply to the parent. Practical implications This interpretation of ‘establishment’ may be applied beyond the confines of this case and may therefore apply to any business with European operations, despite their geographical location. This significantly extends the scope of EU law and regulation. Relationships between intra-group companies should be reviewed to determine if any non-EU domiciled entities may be caught by EU law through this decision. The decision increases the risk of data protection claims and liabilities.

Compensation for damages for breach of the DPA 1998 In the CR19 v Chief Constable of the Police Service of Northern Ireland (2014), a former police officer (CR19) in Northern Ireland Special Branch developed post-traumatic stress disorder (PTSD) as a result of his job, which he left in 2001. In 2002, Castlereagh Police Station was broken into by terrorists who stole data and records of police officers, including CR19. CR19 claimed that as a result of this, his PTSD exacerbated. He was awarded around £20,000 damages. CR19 appealed the award and part of this appeal focused on possible damages for breach of the Data Protection Act 1998 (DPA 1998). This had not been dealt with by the previous judge. The court followed previous authorities (Halliday v Creation Consumer Finance Limited (2013) and AB v MOJ (2014)) for damages for distress being awarded under s.13 DPA 1998. However, the court concluded that the damages arising from breach of the DPA 1998 were ‘subsumed’ by the damages awarded already. Practical implications Organisations should be wary of assuming that there is little court redress for data subjects whose rights have been infringed through breaches of the DPA 1998. This case shows that in some instances substantial damages can be awarded for breach of the DPA 1998.

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Defamation update The Defamation Act 2103 (the Act), which came into force in January 2014 brings a number of reforms the most significant being the laws regarding the nature of damage that must be shown by the complainant and the defences open to a defendant in relation to defamation. The Act also creates specific rules governing the handling of potentially defamatory comments posted online which are built upon by the Defamation (Operators of Website) Regulations 2013 (the Regulations). A summary of some of the key provisions is below. Requirement to show serious harm An individual claimant must be able to demonstrate that the statement complained of has caused or is likely to cause serious harm to their reputation which is a higher threshold than the previous position of ‘substantial harm’. Furthermore, if the claimant is a ‘body that trades for profit’ then in order to establish serious harm, that body must show that the statement has caused or is likely to cause serious financial loss. Defences The Act replaces a number of common law defences with statutory equivalents. These include ‘truth’ (which replaces ‘justification’) and ‘honest opinion’ (which replaces ‘honest comment’) and a ‘statutory public interest defence’ (which replaces the ‘Reynolds defence’ Provisions for operators of websites The Act and Regulations create a process which can be followed by both the complainant and the website operator if a potentially defamatory statement is posted online. This process involves the complainant notifying the website operator of the material and their objection to it. The website operator must then attempt to contact the poster of the materials to see if they consent to removal of the materials. By following the process website operators can escape liability for the materials and the complainant can potentially obtain a quick solution.

Single publication rule A complainant is prevented from bringing an action in relation to publication of the same material by the same publisher after the expiry of a one-year limitation period from the date of the first publication of that material to the public, or a section of the public.

Cyber Essentials Cyber Essentials is a new government scheme that guides businesses in protecting against cyber threats. The scheme offers an accreditation to demonstrate compliance. There are two programmes, Cyber Essentials and Cyber Essentials Plus. The former consists of an assessment questionnaire that can be downloaded for free from www.cyberstreetwise.com. The completed questionnaire can then be sent off to an external certification body for review (subject to a charge). The latter involves an external certification body carrying out tests for system vulnerability. Whilst the scheme is aimed at helping businesses improve their cyber security credentials and systems, the government has made it mandatory for central government contracts from 1 October 2014 involving handling of personal information and provision of certain ICT products and services. Practical implications The scheme has obvious implications for those businesses which tender for central government contracts although it is likely that businesses already accredited under the ISO27001 standard would not need to be accredited under the scheme. For cyber liability insurers, the accreditation scheme could be a useful method for ensuring policyholders are adhering to a minimum standard of cyber security.

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Previously billed as the year in which we would see the fruits of litigation reforms in liability claims, insurers could be forgiven for thinking 2014 has been something of an anti-climax. There is little sign of claims numbers decreasing, and claims fraud remains a market wide problem. Against that background, it feels that the agenda has shifted to a strategy of marginal gains through steps such as whiplash medical reporting reforms which, though welcome, are far from game-changing. However, the behind the scenes change has been dramatic. Claim volumes have been maintained because of the rapid evolution of the industry claims market, a process in which liability insurers have also had a role. In this update we have captured a few highlights of a busy year. If you want to explore these or other developments with us then please get in touch.

James Arrowsmith

+44 (0)121 237 3981

james.arrowsmith@brownejacobson.com

In this section

Trends in PI claims

Mesothelioma Act 2014

Whiplash reforms - fixed cost medical reports

Extending the bounds of compulsory motor insurance

Credit hire - is impecuniosity just a question of rate?

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Trends in PI claims

2014 was another busy year in the personal injury market, with the dust settling on some aspects of the Jackson reforms, while other changes came into effect. In the low value, high volume claims arena, there is little evidence of a decrease in claims following fixed costs and portal reforms, with RTA claims in the 12 months to November 2014 at levels consistent with the previous year and over 150,000 claims having entered the EL and PL portal since they opened for business. There is evidence of behavioural change within the process however; with the number of motor stage 3 packs submitted almost doubling. It is likely this reflects decisions by claimant solicitors to maximise fee income through the process, following the squeeze of reduced fixed costs. Also associated with that pressure, we are seeing market changes. Many small injury practices have exited the sector, with large firms buying up their claims. The general view among remaining practices appears to be that survival relies either on size or specialisation, resulting in mergers and acquisition of smaller practices, as well as rebranding and changes in marketing. However, Quindell’s recent poor market performance should be a sobering warning to any who assume that the ABS regime is a panacea. A knock on effect of the market readjustment has been claims moving between firms and departments, and practices attempting to break into new areas of work that are more profitable, such as disease, medical negligence and non-injury claims. That can leave defendants and their insurers attempting to deal with non-specialists on the other side, with potential to increase frictional costs. A slow but steady increase in litigants in person has similar consequences.

Profit has also been a driver in terms of the types of claims being presented. Noise-induced hearing loss (and disease more generally) has remained significant source of claims, many of which are presented outside of the EL portal. Following Jimmy Saville, abuse has once more come to the fore. As these claims can be slow to emerge, marketing activity in 2014 may not yet be reflected in claims numbers, and as further scandals emerge more claims will result.

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Mesothelioma Act 2014 The Mesothelioma Act 2014 permits victims of diffuse mesothelioma to obtain damages through the Diffuse Mesothelioma Payment Scheme where an employer or insurer cannot be traced. To qualify, a claimant will have been diagnosed after 25 July 2012, be able to show they were negligently exposed to asbestos and that they have been unable to trace the negligent employer or insurer. The creation of the Employers’ Liability Tracing Office in 2011 has seen the number of claimants unable to trace their previous employer or insurer fall. In 2013, 137,000 enquires were made to the Office and 77% of these resulted in successful tracing of employers. Funded by insurers writing EL business, the new scheme permits remaining claimants to recover according to a tariff reflecting roughly 80% of the damages in equivalent civil claims. The average pay-out is expected to be around £123,000, with the highest award £216,896. The current levy on premiums is 2.74% which converts to approximately £35,000,000 per annum. The Scheme is anticipated to last for 10 years with an overall cost to the market of £380,000,000. The tariff includes a £7,000 payment in relation to claimant’s costs, but if that sum is exceeded then additional costs will have to be met from damages. The actual cost of claims under the scheme is not well documented. As civil claims for the disease are costly and continue to be run with recoverable success fees and ATE premiums (following review of the decision to ban recovery) there is likely to be a substantial discrepancy in the recoverable costs compared to civil claims. The levy will be reviewed in 2018 and may increase if the Scheme attracts more claimants than anticipated, or damages or costs recovery is increased. The government is also under pressure to operate similar schemes for other diseases caused by exposure to asbestos (and potentially more widely) including pleural plaques, effusions, thickening and asbestosis.

Whiplash reforms - fixed cost medical reports Rule changes aimed at reforming RTA whiplash claims came into force on 1 October 2014. The rules apply to soft tissue injury claims started under the Pre-Action Protocol for Low Value Personal Injury Claims in RTAs where the claims notification form is sent on or after 1 October 2014. Though often described as whiplash reform, the changes apply to motor vehicle occupant claims wherever the primary physical injury is a soft tissue injury, including where there is more minor psychological injury. Therefore the changes are not limited to neck and upper back injuries. The new rules fix the costs of obtaining medical reports in whiplash claims and prevent instruction of an expert who is also providing treatment. A fixed fee of £180 applies to initial reports, which will generally be from a GP. Further reports are permitted, though for experts in key disciplines the costs are also fixed. At the upper end of the scale, an orthopaedic surgeon’s report would cost £420. Where other experts (such as psychologists) are used, ‘use of that expert and the costs must be justified’. The rules also amend Part 36 with a view to discouraging pre-medical offers buy preventing them having the usual costs consequences. In relation to soft tissue injury claims, Part 36 offers only attract the normal costs consequences when accepted 21 days after the fixed cost report is received by the defendant. The reforms are part of a larger piece of work to reduce the financial burden of low value claims, and improve the detection of RTA fraud. Further changes will be introduced in 2015-16, including accreditation and instruction of experts via the MedCo portal. However, pending accreditation, fixed fees may pose a risk to the detail and quality of reports, and may encourage referral to further experts.

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Extending the bounds of compulsory motor insurance The Court of Justice of the EU (CJEU) ruling in Vnuk v Zavarovalnica Triglav C-162/13 will mean significant changes to UK compulsory motor insurance law. Vnuk, was knocked off a ladder in a farm yard by a reversing tractor and trailer. The case was dismissed by the Slovenian courts on the basis that, under Slovenian law, compulsory insurance only extends to a vehicle being used as a form of transport, not use as a ‘machine or propulsion device’. Vnuk took the matter to the CJEU on the basis that Slovenian law was inconsistent with the Motor Insurance Directive. The CJEU found that the directive required compulsory motor insurance to cover any use ‘consistent with the normal function’ of a vehicle. UK law requires compulsory motor insurance to cover use of motor vehicles on a ‘road or other public place’, however the Vnuk judgment makes it clear this restriction on the required scope of insurance is not permitted, and the UK motor insurance scheme will require amendment. Preliminary talks are underway between industry organisations, to identify options for reform, and a consultation is expected in 2015. One possible impact will be an increase in the number of claims handled by MIB to include incidents taking place on private land, with a consequent increase in the levy on motor insurer members. Reform to the Road Traffic Act may also mean that vehicles which are currently not covered by motor insurance (such as quad bikes and ride on mowers used on private land) will require cover in the future. While current home insurance policies may extend to some such vehicles, these policies may not be compliant with compulsory motor insurance requirements. Corresponding adjustment in other areas of liability insurance, such as EL cover, may be required if it is not to overlap with motor insurance.

Credit hire - is impecuniosity just a question of rate? The Court of Appeal in Zurich Insurance PIc v Umerji (2014) has confirmed that a claimant’s ability to afford an alternative to credit hire is relevant to all issues in credit hire, not just the rate. The claimant’s car, which was worth less than £8,000, was written off in an accident for which the defendant was liable. Following the accident the claimant entered into a series of credit hire agreements over a year and half, incurring fees in excess of £90,000.00. Having missed a court deadline, the claimant was debarred from pleading impecuniosity. The defendant relied on this to argue the claimant could and should have mitigated his loss by replacing his vehicle sooner. The claimant averred that impecuniosity was relevant only to the credit hire rate. The Court of Appeal concluded “If impecuniosity is to be off the table it must be for all purposes.” Impecuniosity was relevant to both the rate of hire and period of hire. In this case, the claimant should have purchased a replacement vehicle two weeks after disposal of the damaged one, and damages should reflect that, meaning a significant discount. The claimant’s failure to use his comprehensive insurance was noted as a point of interest which may require consideration in a subsequent case. However it had not been pleaded by the defendant at first instance and so the Court of Appeal declined to consider it further. The Competition and Markets Authority has identified the problem of spiralling credit hire costs in some cases, but concluded that the steps it could take were limited, so restricted its recommendations to further voluntary measures between hire providers and insurers. It therefore remains essential for insurers to challenge hire claims if these are to be kept under control, and this case demonstrates the courts will scrutinise cases where hire costs are excessive.

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2014 has seen the government react to the riots of 2011 and the significant flooding that occurred in 2012 and the winter of 2013/2014, by seeking to reform how the industry approaches these losses. In respect of the riots, proposals are afoot which will limit the recoverability of consequential trading loss from the police. There are concerns that the changes will have a significant impact on premiums and/or lead to restricted cover being offered to business in certain areas. The outcome of the consultation is expected this year. The insurance available for flooding damage to domestic property has been a hot topic for a number of years and 2014 will be remembered as the year the Flood Re scheme came into being. The scheme is intended to ensure that domestic household property insurance remains affordable for those who are at the highest risk of suffering from flooding and is expected to be a long-term solution. We will continue to monitor how these reforms take effect and anticipate the general election in 2015 will see further reforms being considered.

Andrew Pieri

+44 (0)20 7337 1027

Andrew.Pieri@brownejacobson.com

In this section

Proposed changes to the Riot (Damages) Act 1886

Flood Re

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Proposed changes to the Riot (Damages) Act 1886 Following the widespread rioting that took place in the summer of 2011, issues were raised that the Riot (Damages) Act 1886 (the Act) was out of date and lacked clarity in several areas. The government responded and commissioned an independent review of the Act. Under the Act, compensation is paid by the police to homeowners and businesses that suffer damage to their property during a riot and either have no insurance or are under-insured. There is also no limit to the amount of compensation payable. Insurers are able to claim for any property damage claims that they pay out which has meant that riot cover has not been reflected in premiums. The proposed changes to the Act place strict limits on who can claim. Some of the proposed changes are: 1. to limit businesses who can claim to those with an annual turnover

of less than £2 million, and 2. removing the right to claim for consequential trading losses, such as

loss of trade or rent. Interestingly, in the recent case of Mitsui [2014], the Court of Appeal ruled that compensation for consequential losses is recoverable. The impact that the proposed changes will have on this decision remains to be seen and, in any event, an appeal to the Supreme Court is likely. The proposed changes will have a significant impact and, as Huw Evans of the ABI put it, "such drastic change could significantly impact on premiums, lead to the incorporation of excesses for riot into business insurance policies, or the exclusion of riot from insurance cover in certain areas".

Flood Re

The Flood Re scheme was set up by the insurance industry in 2014, in co-operation with the UK government. It will be enable insurers to continue to cover losses resulting from damage caused by flooding to domestic property. Flood Re is seen as a long-term flood insurance solution. The Flood Re scheme will be a not-for-profit flood reinsurance fund, owned and managed by the insurance industry aimed at those in the UK at highest risk of flooding to ensure they can receive affordable cover for the flood element of their domestic household property insurance. The insurance industry is paying the £10m set up costs to get Flood Re up and running. Thereafter the Flood Re pool will have two sources of income. The first is the flood element of the policies which are passed into it and the second is an additional levy on the industry, equivalent to the existing cross-subsidy that exists in the market. A comparable, albeit different scheme, is Pool Re which covers insurers for loss incurred by terrorism and where some insurers choose to reinsure policies sold in case the losses are very high. This was set up in the early 1990s after the IRA bombing of the City of London made insuring commercial risk prohibitively expensive.

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It is easy to set hares running when fraud statistics show increases in fraud in money terms rather than volume in the past 12 months. While there have been some notable developments across the fraud arena, the growing willingness of government, local authority and insurance industry to co-operate to counter fraud is a significant step change. The key weapon will no doubt be the government’s proposed Criminal Justice and Courts Bill which will spearhead the judicial approach to dishonest PI claims and the Fraud Taskforce, headed by Law Commissioner David Hertzell, will consider and challenge the perception of insurance claims fraud as ‘fair game’. From the industry side, the IFB has broadened its remit to areas such as EL/PL fraud, and will with its specialist task force put the emphasis on organised crime, and intelligence sharing. Stretched by resource reallocation, local authorities are collaborating in new and innovative ways, allowing greater detection capability across all sectors.

Paul Wainwright

+44 (0)121 237 4577

paul.wainwright@brownejacobson.com

More broadly, the introduction of Medco should introduce greater transparency and objectivity in medico legal reporting; and the punitive steps regarding inducements under the Criminal Justice Bill should clear up the rogue operators It will still be a year of challenges but we are moving in the right direction.

In this section

Criminal Justice and Courts Bill 2014-2015

‘Fundamental dishonesty’

Committal for contempt for grossly exaggerated claim

The first known private prosecution under the Fraud Act 2006

Government establishes taskforce to consider insurance claims fraud

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Criminal Justice and Courts Bill 2014-2015 This bill is currently with the House of Commons for consideration before Royal Assent is expected in the Spring of 2015. The bill follows many significant decisions relating to fraudulent personal injury claims, including the Supreme Court’s landmark decision Summers v Fairclough Homes Ltd (2012). In that ruling, the Supreme Court confirmed the power to strike out claims which have been tainted by fraud, as an abuse of process, in ‘exceptional circumstances’. Clause 56 crystallises the law in this regard and proposes that it will be mandatory for a court to dismiss a claim for personal injury, where a court is satisfied that, on balance, the injury, or a related aspect to the claim, is fundamentally dishonest. The section comes with a caveat, however, tempering the use of the power in those cases where there would be substantial injustice (as yet undefined) to the claimant. Comment Whilst it is expected that dishonest claims will be dismissed under the new bill, it is unlikely that there will be a sea change in the approach of insurers to fraudulent claims, save perhaps that there may be higher prospects of success for early applications to strike out. Strike out under the Bill will no doubt entitle insurers to their costs of defending the claim as if a court accepts there where the claimant is currently protected under QOCS in the absence of fundamental dishonesty.

‘Fundamental dishonesty’ Gosling v Hailo & Screwfix (2014) was the first notable case to tackle ‘fundamental dishonesty’ in the context of qualified one-way costs shifting (QOCS). It has been much publicised for the determination of liability for costs post discontinuance in a claim where the claimant sought the protection of QOCS after accepting an offer from one of the defendants. Of significance was the finding of ‘fundamental dishonesty’ in relation to damages. The claimant had valued these at £80,000 of which over was due to PSLA, and future losses based on the claimant’s apparent disability due to ‘serious ongoing’ knee pain. Surveillance evidence combined with expert doctors’ opinion exposed the claim of ongoing pain as demonstrably false and exaggerated to the extent that it could be characterised as ‘fundamentally dishonest’. In light of this conduct, which could only be explained as intended to deceive, the court granted the defendant’s application under CPR44.16 for their costs. Comment The Jackson reforms of 2013 introduced for the first time the power to penalise claimants in costs where a claim is tainted by fundamental dishonesty. The findings of HH Judge Moloney QC set out a clear explanation of the process of how fundamental dishonesty can be determined. As such, insurers are becoming more aware of their ability to recover costs. This has had the effect of moving the battlefield into the most complex and challenging arena of exaggeration. This decision should be a warning to all claimants adopting an unreasonable stance on the valuation of their cases, and will hopefully moderate claims values in future.

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Committal for contempt for grossly exaggerated claim Surface Systems Ltd v Wykes (2014) involved the highest reported damages claim arising out of an accident at work which came before the court for committal for contempt as a result of the claimant’s exaggeration. His injury was genuine but the claim was dishonestly fabricated on the basis of alleged continuing disability of a virtually useless right arm. Experts were hoodwinked by the claimant leading to a general diagnosis of complex regional pain syndrome and a valuation of £1.9m. The claimant made many false statements evidenced by statements of truth about his disability relating to restrictions in his daily life, handicap on the labour market and sever loss of function. On the defendant’s case this was far from a true representation of the claimant’s position as it could possibly be and in a novel move following surveillance, the defence pleaded deliberate exaggeration and a counterclaim to strike out. Discontinuance followed a change of representation, and the company issued proceedings under CPR 32.14 for committal for contempt. Comment The imposition of sanctions is now being used more often as underlined by this case. The opinion of LJ Moses in South Wales Fire & Rescue Service V Smith (2011) still holds true for claims where the justice system is undermined by dishonest claimants and the courts will entertain custodial sentences for false claims. Despite the challenges of the psychiatric factors which Mr Wykes sought to plead in mitigation, the original defendants were able to successfully defend the original claim in exposing the lie through surveillance and expert evidence. By taking proceedings for contempt in the right cases insurers can deliver a strong message to would be claimants, offering valuable deterrence in future claims.

The first known private prosecution under the Fraud Act 2006 In Axa v Gustar (2014) (unreported), the insurers for the employer decided not to pursue a prosecution for contempt after the claim was dropped. A private prosecution was opted for after permission for contempt was refused in the first instance. The claimant was found guilty on two charges under the Fraud Act. Judge Clarke who tried the matter is reported to have found that insurers had “acted entirely properly in bringing the prosecution”. The claimant was given a suspended three year jail sentence at Truro Crown Court. The case is unreported but what is known is that the claimant brought a claim for £100,000 for an alleged workplace accident. The claimant’s case was based on an alleged back injury after slipping on a wet floor of a lorry bed. Medical records showed evidence of a pre-existing back problem suggested to be related to earlier repetitive injury but investigations uncovered text messages which implied that the injury was caused by pushing his girlfriend’s car. Comment The significance of this case is that it adopts a new approach to combatting fraud and offers a stark warning to anyone considering attempting to defraud insurers. More criminal prosecutions are likely in the private sector as a result in the coming years. There are many means by which insurers can take a stand on fraudulent cases, and private prosecutions should not be ruled out. With the likely implementation of changes to the Pre-Action Protocols in 2015, requiring further checks on claimants by their representatives, and the Criminal Justice and Courts Bill, there are likely to be positive developments in this field, leading to significant savings and less exposure in future.

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Government establishes taskforce to consider insurance claims fraud

On 2 December 2014, the Association of British Insurers (ABI) published a speech given by Chris Grayling, Secretary of State for Justice, on fraudulent insurance claims. One of the things that Mr Grayling focussed on was clamping down on fraudulent claims beyond the scope of motor insurance. According to Mr Grayling, there are three main areas to be addressed: 1. The common perception that insurance is ‘fair game’ and that

making a fraudulent claim is a legitimate way to make money. 2. Whether there are any practices of those involved in the claims

process (including insurers, lawyers, claims management companies and other intermediaries) that fail to deter insurance fraud.

3. Whether there are any aspects of the current legal framework that

could be strengthened to prevent claims fraud. The Law Commission Commissioner is to chair a taskforce to consider these issues. Representatives from the insurance industry and the legal profession will be invited to provide their views and interim findings will be reported by March 2015.

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2014 should have been the year that the Jackson reforms became firmly bedded in and with the reforms having the desired effect of proving certainty and reducing the cost of claims. The year began with legal practitioners coming to terms with the Mitchell decision and the costs wars that the judgment provoked. The courts became clogged up with applications and appeals arising from the case. The good news is that the judgment in Denton goes quite some way to deal with that uncertainty by encouraging practitioners to be sensible and to cease ‘point scoring’ on small technical points. The Rules Committee also assisted by bringing in measures allowing practitioners to agree 28 day extensions between themselves. The big curveball came in the form of Coventry v Lawrence, a nuisance case, where the costs appear to have got out of hand. This led to Lord Neuberger commenting that the pre 2013 cost regime may be incompatible with European law. We will find out shortly after the end of the two day hearing on 9 and 10 February whether the seven judge tribunal agrees with that point of view. If they do then there may well be significant consequences and these are set out in our review.

John Appleyard / Nichola Evans

+44 (0)115 976 6028 / +44 (0)161 300 8021

john.appleyard@brownejacobson.com / nichola.evans@brownejacobson.com

2015 looks as if it will be a lively year. In addition to Coventry being decided we have a general election with Andy Slaughter suggesting that a Labour government would seek to unpick some of the Jackson reforms. If you have and comments or queries on the articles, please get in touch.

In this section

Coventry v Lawrence – do success fees breach human rights?

Proportionality

Members of the armed forces are not employees

A ‘Part 36’ turn for the worse

Denton – some clarity

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Coventry v Lawrence – do success fees breach Human Rights? On the 9 and 10 February 2015 the Supreme Court will hear submissions on whether or not the pre-April 2013 costs regime permitting recovery of additional liabilities between parties (success fees and after the event insurance premiums) constitutes a breach of European Convention on Human Rights. Coventry was a case brought by the claimants in nuisance against the defendants for noise arising from motor and speedway events at a stadium near the claimants’ house. In finding for the claimants in the Supreme Court the defendants were ordered to pay 60% of the claimant’s costs, quantified (even with the reduction) in a sum exceeding £640,000. The value of the nuisance was only circa £74,000. Lord Justice Neuberger, describing the costs as “deeply disturbing” concluded that it was open to the Supreme Court to consider whether these disproportionate costs impact on the defendant to the extent that they impinge on the Art 6 right of access to justice or the Protocol 1 right to enjoyment of property. In the case of Callery v Gray (2002) the House of Lords (as it then was) concluded that the regime was one legitimate answer to the question of who should bear the cost of claims. However, in MGN v UK (2011) it was established that the costs associated with CFAs in defamation could have a cooling effect on freedom of speech sufficient to breach the Convention. It is this which has opened up the question of success fees once more. In order to consider the issues, the hearing has been adjourned to allow for representations from government and other interested bodies. A number of representative bodies, particularly those representing groups who continue to have an exemption from LASPOA, have now lodged skeleton arguments with the court. The tribunal will consist of seven judges which demonstrates how important the court considers this case to be and the possible implications of the judgment.

Comment The significant interest which the case has attracted is related to the extent of the potential impact. Large, recoverable success fees and ATE premiums were the norm in many areas of litigation prior to April 2013, after which recovery was prohibited. They were entered into in accordance with the prevailing statutory regime, but Coventry brings into question the compatibility of that regime with human rights law. Therefore a finding of incompatibility would have implications for a vast number of historic agreements, and may open up the government to damages claims from those who made payments of success fees under the old regime. Neuberger has long been a critic of the costs incurred in the British legal system and others in the Supreme Court hearing the case may take a different view of the issue and in particular that excessive costs ought to be challenged as part of the assessment process. It can only be hoped that whatever the outcome of the hearing that we have certainty and that the judgment does not open up any route to further cost wars.

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Proportionality The recent case of Savoye and Savoye Ltd v Spicers Ltd (2015) saw the Technology and Construction Court lead the way on what the new test of proportionality means and how it should operate. After enforcing an adjudicator’s decision worth nearly £900,000 in its favour, with the only issue at trial revolving around the meaning of a term in the Housing Grants, Construction and Regeneration Act 1996, the claimant sought just over £200,000 in costs. The main elements of the claim were 111 hours of partner time at £520 per hour; 223 hours of associate time at £370, and counsel’s fees of nearly £30,000. In outline of what could soon become a new ‘five stage test’, Mr Justice Akenhead considered that, in light of CPR 44 and the purposes of costs assessment, the court should have regard to the following: a) the relationship between the amount of costs and the amount in

issue b) the amount of time spent in relation to the total length of the

case/trial c) the extent to which time has been incurred outside of the litigation d) whether the case is just a case, or a test case e) the importance of the case to the parties – although the example

given was if an individual or company were being sued ‘for all that they are worth’.

Having determined that the above case did not sufficiently fulfil any of the criteria, the judge considered that the costs should have been ‘relatively modest’ and thus the only conclusion he could reach was that the costs were therefore disproportionate. The judge then went on to reduce the costs, on what appears to be a global basis in terms of the times spent by the respective fee earners, to £96,465.

Members of the armed forces are not employees In the recent case of Broni and Ors v Ministry of Defence (2015) the court was invited to determine the scope of part of the wording contained within section 2(1) of the Employers Liability (Compulsory Insurance) Act 1969, in particular whether members of the armed forces fell within the definition of “an individual who has entered into or works under a contract of service or apprenticeship with an employer… whether such contract is expressed or implied, oral or in writing” – albeit for the purpose of costs and whether this fell within CPR 45.20 and, consequently, whether the fixed employer’s liabilities success fee of 25% was to apply. Overturning two decisions of Master O’Hare and one of Deputy Master James, and adopting a strict interpretation of the Act, Mr Justice Supperstone found that they did not. Consequently, a fixed success fee did not apply. The good news is, hopefully, very few claims will survive the old regime of recoverable success fees between the parties. The bad news, however, is that this may mean that such claims can be pursued outside of the EL/PL portals. We will continue to monitor developments.

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A ‘Part 36’ turn for the worse In a disappointing decision from Sir David Eady it would seem that a change of heart from an expert is not sufficient to justify a departure from the costs sanctions imposed when the claimant betters their own Part 36 offer. In Downing v Peterborough & Stamford Hospitals NHS Foundation Trust (2014), the claimant made a £1.2m part 36 offer in his clinical negligence action and eventually won £1.5m at trial. The reason for the difference, it was argued by the defendant, was because one of their experts “appeared in the witness box to take a less optimistic view of the claimant's prospects of recovery than that expressed in earlier written evidence”. While, refreshingly, the judge did not proceed to criticise the defendant’s advisors for making a ‘judgement call’ when advising their client to proceed to trial, he did not consider that their reasoning was sufficient to justify a departure from the rule. In taking great steps to discourage his legal brethren from considering the implications of Part 36 as punitive, he concluded: “A decision was taken, as a matter of public policy, to impose sanctions in order to encourage and facilitate the settlement of litigation and, correspondingly, to avoid parties incurring the costs involved in going to trial and also to save court time. Indemnity costs are, therefore, bound sometimes to be payable under CPR 36.14(3)(b) because an assessment of the merits proves not to have been justified or simply because an informed guess as to the outcome turns out to be wrong. “It is elementary that a judge who is asked to depart from the norm, on the ground that it would be ‘unjust’ not to do so, should not be tempted to make an exception merely because he or she thinks the regime itself harsh or unjust. There must be something about the particular circumstances of the case which takes it out of the norm”

In considering what circumstances may call for such a departure, the judge said a court might well think it unjust to order indemnity costs if the individual defendant has rejected a Part 36 offer on the basis of inaccurate information through no fault of his own and, especially, where he has been misled by the claimant or his advisers through, say, non-disclosure of a material fact or document. Comment The judge’s list of reasons to depart from the normal consequences is very narrow and there appears to be very little a party can do to argue against the usual costs sanctions.

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Denton – some clarity Whilst technically not a decision on costs the Court of Appeal in Denton & Others v TH White Ltd & Another (2014) revisited the guidance given in Mitchell on when relief from sanction ought to be granted. The Mitchell decision, where a cost budget had not been filed and the court took a hard line view on whether relief from sanction should be granted led to a level of litigiousness not seen for a number of years with there being talk of another ‘cost war’. Reforms which were meant to reduce the level of costs incurred in litigation were having the opposite effect as satellite litigation increased, with different courts taking a different line on applications. In Greater Manchester, for example, there was a 20% rise in applications for permission to appeal was predicted in 2014 purely as a result of the Mitchell decision. The Court of Appeal in Denton has given guidance by setting out a three stage test for applications for relief from sanction: “A judge should address an application for relief from sanctions in three stages. The first stage is to identify and assess the seriousness and significance of the “failure to comply with any rule, practice direction or court order” which engages rule 3.9(1). If the breach is neither serious nor significant, the court is unlikely to need to spend much time on the second and third stages. The second stage is to consider why the default occurred. The third stage is to evaluate “all the circumstances of the case, so as to enable [the court] to deal justly with the application including [factors (a) and (b)].” Stage 1 The court said that the word ‘trivial’ had given rise to ‘some difficulty’ and said “…it has given rise to arguments as to whether a substantial delay in complying with the terms of a rule or order which has no effect on the efficient running of the litigation is or is not to be regarded as trivial.” Going forward rather than looking at the triviality of a breach the courts are to look at whether a breach is ‘serious or significant’ and that when

considering the first stage the court should not look at previous breaches and that this should be done at Stage 3 (see below). Stage 2 The court should then look at the reason for the delay. The court declined to give a list of ‘excuses’ that may allow an application for relief from sanctions. However it did refer to paragraph 41 of the Court of Appeal judgment in Mitchell where it was suggested that a debilitating illness might constitute a good reason but that being over-worked or over-looking a deadline would not. Stage 3 The courts need to consider the effect of the breach but weigh it up against the need for the parties to abide by the Rules, Practice Directions and Orders. This is perhaps not the definitive guidance we were after but the three stage test does clarify matters somewhat and we are now seeing greater consistency between the courts. The Court of Appeal also makes it very clear that it does not expect to see ‘opportunism’ from lawyers and that if needs be that kind of behaviour would be penalised. Hopefully we will see less satellite litigation going forward. Comment It is anticipated that following this Judgment that contested hearings for relief from sanction will be rare. The cost warnings given are enough to put off most lawyers: who wants unnecessary cost wars? However the Court of Appeal has not set out in clear terms, save for a few examples from the Mitchell case, what set of facts would allow relief from sanction. Since Denton there have been examples of courts taking a more lenient view and the courts are reporting that fewer cases are coming before the courts on this issue. This is hopefully an indication that a far more pragmatic view is being taken on this issue.