Palmer v The Estate of Kevin Palmer Deceased & Ors

This is an appeal by Royal & Sun Alliance Insurance PLC (“RSA”) against an order made on 2 February 2007 by His Honour Judge McKenna sitting as a judge of the Queen’s Bench Division. The judge thereby exercised his jurisdiction under section 51 of the Supreme Court Act 1981 to order RSA personally to pay the costs that on 3 May 2006 he had earlier ordered the third defendant, PZ Products Limited (“PZP”), to pay to (i) the claimant (Kylie Palmer), (ii) the first defendant (the estate of Kevin Palmer deceased) and (iii) the second defendant (the Motor Insurers’ Bureau), those costs being incurred in a claim and Part 20 claims against PZP. The judge’s order was limited to the costs incurred by the receiving parties after 1 September 2003.

RSA was not an original party to the proceedings. Its interest in them was that PZP was its insured and it had financed PZP’s unsuccessful defence of the claims. The judge’s order followed an application that RSA should pay those costs, RSA being added as the fourth defendant for the purposes of that application. The judge’s assessment was that RSA had financed the defence of the claims against PZP in its own exclusive interest so that it would be just to make the order sought. On this appeal, brought with the permission of Dyson LJ, RSA asserts that, contrary to the judge’s findings, it was defending the case in the mutual interests of both itself and PZP and that there was nothing exceptional about the case to justify the exercise by the judge of the exceptional jurisdiction under section 51.

The tragic background facts can be stated shortly. On 6 January 1996 the claimant, Kylie Palmer, then aged six, was travelling in the front passenger seat of a Nissan Micra driven by her father, Kevin, an unmedicated epileptic. He died at the wheel, the car crashed and Kylie suffered devastating injuries. She sued her father’s estate (“the estate”) for damages for negligence, but his motor insurers successfully avoided liability under his policy on the grounds that the policyholder, his wife, had failed to disclose her own medical condition of epilepsy to them.

This led to the joining of the Motor Insurers’ Bureau (“the MIB”) as second defendant to Kylie’s claim under the Uninsured Drivers’ Agreement (“the UDA”). The MIB raised no issue that the estate was liable to Kylie. But, as was its right under the UDA, it required Kylie (upon indemnifying her against costs) also to sue PZP, against which the MIB also wished to bring Part 20 proceedings. PZP was the manufacturer of a “Klunk-Klip” device that had been fitted to Kylie’s seat belt and was designed to prevent inappropriate tightening of the belt by the operation of the inertia reel. The MIB’s allegations were that PZP had been in breach of statutory duty and negligent on the basis that (a) the device’s design was unsafe, (b) it had been in use by Kylie at the time of the accident, (c) but for its use and the design defects, Kylie would not have suffered her injuries, and so (d) PZP was liable to her for those injuries. Kylie joined PZP as the third defendant and Part 20 proceedings were brought against it by both the estate and the MIB.

The inclusion of PZP in the proceedings was of potential importance to the MIB. If PZP were liable to Kylie, its liability share under any normal apportionment of damage as between it and the estate might well be modest. As, however, the MIB is only an “insurer of last resort”, if PZP were liable to Kylie, it would have to pay the judgment against it first and in full; and the MIB would be liable to pay out under the UDA only to the extent that that judgment remained unsatisfied, that is to the extent that PZP was unable to fund its payment, whether by insurance or otherwise.

Kylie’s claim proceeded to trial on liability alone on 30 January 2006. As the estate had admitted liability, the only issue was whether PZP was also liable. This raised two questions: (i) was the Klunk-Klip device unsafe; and (ii) did it cause Kylie’s injuries? Judge McKenna’s answers to both questions were that the device was unsafe and had substantially contributed to Kylie’s injuries sustained in the accident. Her claim is now proceeding to an assessment of damages. They are likely to exceed £2m.

PZP had a product liability policy with RSA. It had been in force for many years, including at the time of the accident. The limit of RSA’s liability under the policy as regards payment to claimants (including Part 20 claimants) for damages and costs was £500,000. It was common ground at the trial that if the claim against PZP succeeded, the full £500,000 would be exhausted; that under the policy RSA’s exposure for damages and costs was limited to that sum; and that the MIB faced an exposure to the extent of the full excess of Kylie’s recoverable damages and costs. When, therefore, it was held that the claim against PZP did succeed, the MIB sought to minimise its own potential exposure by seeking an order for the payment by RSA personally of the costs incurred by Kylie, the estate and the MIB itself in establishing liability against PZP. If such an order were made, it would mean that the whole of the £500,000 would be available to be applied towards Kylie’s damages, and RSA would be liable for costs on top. The result would be that, to the extent that the RSA were so liable in costs, it would pro tanto reduce the MIB’s exposure. I make plain that whatever the outcome of the MIB’s application against RSA, it would have no impact upon the recovery by Kylie of the full amount of the damages and costs she may be entitled to. The application went only to the incidence of costs as between insurers, namely the MIB and RSA.

The judge ordered RSA to pay the claimed costs from 1 September 2003. It was not in question that the section 51 jurisdiction could be exercised in relation to liability insurers who had funded the unsuccessful defence of litigation in circumstances in which there was a costs inclusive policy limit that would be exceeded by the award of damages and costs. What was in question was whether such an order should be made in this case.

The evidence before the judge consisted of a witness statement from Andrew Oxley, a director of PZP and the prime mover behind its operations. Mr Oxley was not cross-examined and his statement was read unchallenged. In addition, there were witness statements from Nicholas Connolly, a solicitor with Barlow Lyde & Gilbert (“BLG”), solicitors for the estate and the MIB; and from Gary Spence, a team manager of RSA with day to day handling of the claim from 2003 onwards. Mr Connelly and Mr Spence were cross-examined, although the former’s evidence played little part in the argument before the judge or us.

The judge reviewed the evidence, essentially as follows. He explained that Mr Oxley received notification of a claim from BLG in July 1998, following which the matter was referred to RSA and its loss adjusters. The matter then went quiet until a Part 20 claim was served on PZP in March 2003 and PZP was told by Kylie’s solicitors that the MIB had required Kylie to join it as a defendant. Mr Spence of RSA instructed Berrymans Lace Mawer (“BLM”), solicitors, to act on PZP’s behalf. He received a report on liability, procedures and quantum in June 2003, following which he made the decision that there was a strong defence on liability and so he reserved solely for costs. There was a meeting in August 2003 with an expert. At [22] of his judgment the judge found that at that meeting:

The proceedings then went quiet again until January 2004 when further information was provided to BLM and a witness statement was taken. In April 2004 Mr Oxley asked for, and was provided with, a procedural update. In May 2004 he told BLM he was considering closing PZP down, but was concerned as to the effect it would have on the claim. Mr Oxley’s evidence was that, despite the intermittent periods of quiet, he was satisfied that BLM and RSA were taking his interests seriously.

By March 2005, with the outcome of the case still uncertain, Mr Oxley’s evidence was that it was increasingly difficult to make plans for PZP. Sales of the Klunk-Klip had almost completely died away and he had no option but seriously to consider closing PZP down. Any decision to do so was, however, deferred following the provision to him of a review of the expert evidence from which it was clear that BLM believed the claim could be defended.

In August 2005 Mr Oxley needed to know whether to place a parts order for PZP from Taiwan. This would require a considerable investment from him which, if made, would keep PZP going for some time. He wanted to know if it was worth making the investment and asked BLM for advice. The advice was that the chances were good, but more accurate advice would be given when counsel had considered the papers. On that basis, Mr Oxley decided to place a small order so as to keep PZP going until trial. Mr Oxley’s evidence did not identify the nature of the parts so ordered, and one possible inference is that they were for the Klunk-Klip business. As the evidence was that by then that side of PZP’s business had virtually died, that was, however, unlikely and I understood it to be accepted at the hearing before us is that the correct inference is that the parts were for the other aspect of PZP’s business, an unrelated igniter business.

There was a conference with counsel and the experts in November 2005, which Mr Oxley attended and to which he contributed. He came away very encouraged since the view was that PZP had good prospects of a successful defence. On 6 January 2006 BLG made an offer under CPR Parts 36 and 44. It was that, if PZP paid the MIB £300,000, the MIB would meet the whole of Kylie’s claim against the estate and her costs. PZP would bear its own costs. BLG recorded their understanding that PZP had limited assets and would not be able to meet a judgment for the full amount of the damages likely to be recovered. It was on that basis that the offer was made, bearing in mind the £500,000 limit in the RSA policy. If it was not accepted, BLG expressly reserved the right to make an application for a costs order against RSA personally.

That offer was rejected on 10 January 2006, BLM explaining that a resolution had been made at the conference with counsel the previous month to fight the claim. Mr Oxley was not a party to the rejection of the offer but was told of it on 13 January 2006 and agreed with it. Following the judge’s judgment on liability, he decided to close PZP down. Over the previous year manufacturing conditions had become difficult and promised orders had not materialised.

The judge summarised the evidence of Mr Spence as being that, had BLM advised him that PZP’s position on liability was weak and that settlement should be considered, he would have taken that advice. That was not, however, the advice that was given. Equally, had PZP not been happy with any aspect of the advice, Mr Spence would have ensured that it was reviewed, but again PZP expressed no such concern. His position was that the strength of the evidence, and therefore the belief that liability would not attach to PZP, was the reason the case was fought. The specific nature of RSA’s financial risk was not such a reason. In his oral evidence, Mr Spence explained that he regarded it as in PZP’s best interests to defend the claim because of the implications to PZP if it had to make a payment for damages and the fact that it might have to close. Mr Spence accepted that if the claim had been settled in January 2006, there would have been no risk to PZP. He discussed that with the legal team – although not with Mr Oxley – and the decision was made to reject the offer because the advice was that PZP had a strong case and RSA should not be paying out £300,000. Mr Spence denied that he knew of PZP’s “dire” financial circumstances or that prior to the trial Mr Oxley was thinking of closing it down. He made no inquiry as to PZP’s financial position. He in fact only once had direct contact with PZP, at a conference with counsel; otherwise his contact was via BLM.

Having reviewed the evidence, the judge made his findings of fact. He found that throughout the material period PZP was in a difficult financial position and that by March 2005 sales of the Kluk-Klip had so plummeted that they had almost completely died. He found that by then PZP had no ongoing reputation in the Klunk-Klip to defend and that all that it still had was its unrelated igniter business. Mr Oxley had kept BLM informed of the financial and commercial position throughout and the judge inferred that RSA had also known of that position since August 2003, holding that it was inconceivable that BLM would have withheld such information from RSA. Mr Oxley was involved in the decision-making process throughout and approved the action taken on PZP’s behalf throughout. The claim was fought on the basis of the lawyers’ advice that the case would be won. The rejection of the £300,000 offer was one that could only benefit RSA. That was because, had it been accepted, PZP would not have had to fund anything and would have been saved from any further commercial risk.

Having made those findings, the judge expressed his conclusions as follows. Given the “parlous state” of PZP’s finances and the collapse of its Klunk-Klip business, the real interest being protected in the litigation from August 2003 onwards was that of RSA. By then PZP was almost insolvent. The judge regarded this as underlined by the way the litigation was managed and by RSA’s (not PZP’s) decision to reject the Part 36 offer in January 2006. RSA was “on notice” of PZP’s commercial and financial position and chose to make no inquiry, a fact demonstrating that the interests of PZP and defending the Klunk-Klip were not a material consideration in the decision-making process. As for the lawyers’ views that the defence would succeed, that was immaterial because it was a judgment made by RSA as the controller of the litigation and for its benefit. RSA was the true defendant in all but name.

Mr Cory-Wright QC, for RSA, emphasised that the starting point in considering the judge’s order was the product liability policy. RSA’s stance is that all it was doing was that which it was entitled to do under the policy, namely to defend the case on behalf of its insured. Had it refused to do so, the insured would have had justifiable grounds for complaint. He submitted that the defence so advanced was, as with any product liability claim, for the mutual benefit of insurer and insured. As regards the insurer, success would save it from having to pay out any of the £500,000. As regards the insured, success would (i) save it from liability for any excess or for any sum over and above the policy limit, and (ii) protect its commercial reputation and that of its product. He submitted that there was nothing unusual, let alone exceptional, about the circumstances of this case and, in particular, that on the evidence the judge was not entitled to find, as he did, that from August 2003 RSA was defending the proceedings solely by reason of the protection of its own interest. I will come to how Mr Cory-Wright challenges the basis of the judge’s decision but will first consider the correct approach to the question before the judge by reference to authority.

The jurisdiction under section 51 is by now a familiar one. Issues similar to that in the present case arose for consideration in two decisions of this court. They had contrasting outcomes. The first is T.G.A. Chapman Ltd and Another v. Christopher and Another [1998] 1 WLR 12 (“Chapman”) The second is Alan Cormack and Another v. The Excess Insurance Company Limited, 16 March 2000 (“Cormack”). The judge regarded the position in the present case as much more akin to Chapman than to Cormack.

In Chapman the plaintiffs were the owner and lessee of a warehouse which the first defendant (Mr Christopher) negligently set alight, causing loss to the plaintiffs of some £1.13m. Mr Christopher had no assets but was covered by an insurance policy under which the limit of liability for damages and recoverable costs was £1m. His defence was funded by the insurers but he was found liable for some £1.13m, plus interest and costs. The plaintiffs settled for £1m and sought an order for the costs of the claim against the insurers personally. The application succeeded and was upheld on appeal. Phillips LJ delivered the leading judgment, with which Waller and Mummery L.JJ agreed. Phillips LJ concluded that the insurers were the defendants in all but name. He acknowledged the principle that the jurisdiction to make a costs order under section 51 is an exceptional one, and identified the five features on which the plaintiffs relied in order to justify the order sought ([1998] 1 WLR 12, at 20). They were “(1) the insurers determined that the claim would be fought; (2) the insurers funded the defence of the claim; (3) the insurers had the conduct of the litigation; (4) the insurers fought the claim exclusively to defend their own interests; (5) the defence failed in its entirety.” Phillips LJ regarded all five features as established and said that only point (4) was the subject of challenge. He said of that:

The later case of Cormack also concerned a bid by the claimants to recover costs from an insurer in circumstances in which there was a limit to the policy cover. The case, like this one, was one in which the insurers had defended the claim unsuccessfully and, after paying damages and costs to the claimant up to the policy limit, left the claimant with a costs shortfall of over £100,000 which the defendant had no means to satisfy. Hence the claim against the insurers, the case being that they had preferred their interest to that of the defendants. The response was that the interests of the insurers and the insured had coincided and that the conduct of the proceedings on behalf of the insured had been reasonable.

The judge refused the order sought, holding that whilst the circumstances for the making of such an order might be sufficiently exceptional if there was proof that the insurer’s conduct of the defence was “sufficiently self-motivated to the exclusion of the defendant’s interest”, the evidence did not prove any sufficient such self-motivation. This court upheld his decision. Auld LJ delivered the leading judgment, with which Nourse and Tuckey L.JJ agreed. Auld LJ described the judge as having held that:

Auld LJ re-affirmed that the discretion to make a costs order against a non-party should only be exercised where, in the view of the judge, the circumstances of the case are sufficiently exceptional to warrant it; and that it was a jurisdiction to be exercised with caution. This was demonstrated by Lord Goff of Chievely in Aiden Shipping Co, Ltd. v. Interbulk Ltd. [1986] AC 965; by Balcombe LJ in Symphony Group PLC v. Hodgson [1994] QB 179; and by Phillips LJ in Murphy and Another v. Young & Co’s Brewery and Another [1997] 1 WLR 1591 and in Chapman. Auld LJ disagreed with the submission that, in Globe Equities Limited v. Globe Services Limited and Others (1999) The Times Law Reports 34, Morritt LJ had denied the test of exceptionality as a normal basis for the exercise of the relevant discretion.

Auld LJ turned to what makes a case exceptional in a context such as the present. He referred to Phillips LJ’s judgment in Chapman and to the five features of that case to which I have referred. He said that the distinguishing circumstance of Chapman, which with all its other features made it exceptional, was the insurer’s overriding self-interest in the conduct of the proceedings, converting it for practical purposes into the defendant. In the case under appeal, Auld LJ said that the judge had adopted the same approach, by considering whether, having regard to the contractual limit of the indemnity, the insurer’s conduct was “sufficiently self-motivated” to the exclusion of the defendant’s interest to subject it, as a non-party, to an order for costs. The judge had found that the insurer had not failed to have adequate regard to the defendant’s interest and that “an acceptable balanced way was followed, which was safely within the bounds of normality, and lacked the stamp of exceptional or extraordinary conduct …”. Auld LJ held that the judge had applied the correct test and was entitled to exercise his discretion the way he did. He continued as follows:

That authority shows, in my judgment, that in the present case Judge McKenna approached the task before him by asking himself the question most relevant to the exercise of his discretion, namely whether RSA was motivated either exclusively, or at least predominantly, by a consideration of its own interest in the manner in which it conducted the defence of the litigation. The judge found on the facts that that self-interest was the material governing consideration, being a circumstance that pushed the case into the exceptional type of case in which it was appropriate to make the order sought. He regarded the facts of the case as much closer to those of Chapman than of Cormack.

The thrust of Mr Cory-Wright’s submissions in support of the appeal was that such a finding was not open to the judge on the evidence. He said it showed that the action was fought both by PZP and RSA on the basis of advice from their lawyers as to the merits of the defence and in the clear expectation that it would succeed. Mr Oxley’s evidence (all unchallenged) was that in August 2005 he wanted advice on the merits so as to know whether to invest money in PZP in ordering parts from Taiwan. If the advice was positive, he would do so. At that stage, whilst BLM were fairly confident, they had not yet obtained counsel’s advice and so Mr Oxley “decided to place only a small order for the parts that would keep us going until the trial.” Counsel’s advice was later given in conference in November 2005, at which Mr Oxley participated. His views were sought and he was asked whether he was happy with the conduct of the defence. He was and he felt encouraged by the advice. Both he and RSA therefore regarded his views as relevant to the conduct of the defence. Following the conference, and in the lead up to the trial, he had continuing contact with BLM, providing his own engineering expertise in relation to various reports with which he was provided. He was told on 13 January 2006 of the rejection of the Part 36 offer because it was not thought that it put PZP at considerable risk and it was still hoped to defeat the claim. He agreed with the decision. Why, it is asked, was he told of the decision if it was not regarded as something in which he had an interest? He was copied in on communications between BLM, counsel and the experts and described himself as having been “very much included in the final stages of preparing for trial”. He attended each day of the trial and discussed with counsel any issue that arose. At the end of the trial, BLM and counsel were confident of success and Mr Oxley also hoped PZP would win. Following the giving of the judgment adverse to PZP, he wrote a letter to BLM on 15 May 2006 reflecting his disappointment, but also expressing thanks for the teamwork involved in the defence. His letter plainly reflected that the efforts had been on behalf of PZP.

As for Mr Spence, his evidence in his witness statement was that at every stage in the litigation BLM’s advice to him on liability was that PZP had a good case and RSA continued to be confident about that. That was the primary reason why the case was defended. He acknowledged that there would be a financial benefit to RSA if the case was won, but asserted that it was fought just as much for PZP’s benefit; and PZP was, he said, involved at every stage. Mr Spence referred to the conference with counsel in the lead up to the trial, attended by Mr Oxley (presumably the November 2005 one). The risks inherent in running the case to trial were discussed, including with Mr Oxley, who felt strongly that the defence of the claim should be continued. That decision was at no time based on RSA’s limited exposure under the policy. He asserted that the case was defended not purely for RSA’s benefit but, just as importantly, in the interests of defending the Klunk-Klip as a product and PZP as a company. He stressed that circumstances would have to be extreme before RSA would settle a case that the insured wished to continue to fight. His evidence was that RSA would only contemplate that when there was clear legal advice that the case should not be fought. That was not this case. He explained in his oral evidence in chief that the reason the £300,000 offer was rejected was because, in the light of advice given and the discussion at the previous conference, it was thought that £300,000 did not represent the risk. The evidence pointed away from any conclusion that RSA had defended the claim solely in its own interests.

The crucial issue is, therefore, whether the judge was entitled to find, as he did, that from the outset the interests of PZP were an immaterial consideration in RSA’s decision making, and that the only real interest that RSA was defending was its own. At least on the face of it, I regard Mr Cory-Wright’s submissions as having force. There is no doubt that RSA wanted to defend the claim, but there is equally no doubt that PZP wanted to do so as well. Each was obviously encouraged by the positive advice as to the likely success of the defence, although Mr Cory-Wright acknowledged that there was no question of that advice being that success was certain. It can, therefore, be said, as Mr Cory-Wright did say, that the claim was defended in the mutual interests of both PZP and its insurer.

If that is the correct analysis, it would point against this being regarded as a case in which RSA could fairly be regarded as the true defendant in all but name. The judge did not, however, assess the case like that. He looked into the reality of what was going on and came to the conclusion that “to all intents and purposes RSA were the relevant defendant in all but name.” Mr Norman submitted that he was right to do so; and I have come to the conclusion that the judge was fully entitled so to assess the case. Whilst the evidence before him solidly supported the view that Mr Oxley wanted to defend the claim at trial rather than settle it, the reality was that he – and, more importantly, PZP - had no commercial interest in pursuing its defence to that extent; and Mr Oxley’s apparent wish so to defend it was, so it seems to me, and with respect to him, commercially irresponsible. As for RSA, if it had addressed any consideration to the commercial interests that PZP had in defending the claim, it would also have recognised that.

By the time of the litigation, Mr Oxley knew PZP was close to insolvent. The Klunk-Klip business had virtually dried up, and PZP had no continuing commercial interest in defending the reputation of the Klunk-Klip product. If PZP had any future at all, it was only in the unrelated igniter business. Failure in the litigation would result in a judgment against PZP that would spell its certain end, as it did. Given that (as Mr Cory-Wright acknowledged) the advice, although positive, was not that success in the litigation was certain, it is obvious that PZP’s interests were best served by settling the litigation, not by fighting the claim. If PZP could settle it for damages and costs of less than £500,000, it could emerge from it financially unimpaired and with perhaps still some prospect of a future. Yet when there was a prospect of a settlement in January 2006 at £300,000, RSA rejected the offer without even a reference to PZP. PZP was admittedly consulted after the event, when it agreed with the rejection of the offer. But its agreement makes no commercial sense. Given its extreme financial circumstances, and the fatal effect upon it that failure in the litigation would achieve, Mr Oxley’s duty at that stage was towards PZP’s employees and creditors; and if he had properly considered their interests he would have jumped at the offer and made complaint that he had not been consulted about it before it was rejected. He would, and should, have sought to re-open the possibility of a settlement on offered terms. Instead, he appears simply to have welcomed the prospect of a trial at which success could be of no more value to the objective interests of PZP than would a settlement; but at which failure would be terminal.

As for Mr Spence, he acknowledged in cross-examination that he was aware during the litigation that PZP’s Klunk-Klip business was struggling financially and that it might be closed down; that he knew that PZP was a small company; and that he was aware of what the consequences to PZP would be if a £2m judgment were given against it. He said he was worried about what would happen, but each time they looked at it the advice was that PZP would win. He said that at no stage before trial was he told that PZP was nearly insolvent, and that there was no discussion about insolvency or otherwise in Mr Oxley’s company. He also said he never made any inquiry about PZP’s finances.

Mr Spence’s evidence was, so it seems to me, the key to the conclusion to which the judge came. Given his admissions as to what he knew about PZP and its Klunk-Klip business, including his recognition that a judgment of £2m would spell the end for PZP, it is impossible to reconcile the assertion that the defence was being conducted in the mutual interests of PZP and RSA with the admission by Mr Spence that he did not even make an inquiry about PZP’s financial position. Had he focused at any stage on PZP’s commercial interest in the litigation, he could only have concluded that its interests would best be served by a settlement of it. Yet when the opportunity arose in January 2006 to settle for £300,000, it was turned down without even a reference to Mr Oxley. The inference is that RSA was not interested in a consideration of how the defence of the litigation might be conducted so as to achieve the best commercial outcome for PZP. It is fair to recognise that, in the light of Mr Oxley’s own uncommercial approach to the litigation, any implied criticism of RSA on this ground would be unfair, and I do not intend any. No doubt, from the perspective of the insurance industry, RSA’s conduct of the litigation was no more extraordinary than that of the insurers in Chapman. But the evidence before the judge was, in my view, amply sufficient for him to find, as he did, that the defence of the claim was throughout conducted on the basis that the only real interest being protected was RSA’s; that is, that RSA was funding, controlling and directing the defence of the litigation in its own interests. That was a basis on which the judge could properly make the costs order against RSA that he did.

I would dismiss the appeal.

I agree.

I also agree.