Laker Vent Engineering Ltd v Templeton Insurance Ltd

This is an appeal from the decision and order of HHJ Hegarty QC made on 30 May 2008, when sitting in the Mercantile Court at Liverpool. The case arises out of an insurance policy for legal expenses between Laker Vent Engineering Limited (“LVE”) and Templeton Insurance Limited (“Templeton”). The judge declared that Templeton was bound, pursuant to the policy, to indemnify the claimant in respect of the claimant’s legal costs and expenses arising out of an arbitration between the claimant and a third party that began in 2005. The judge also declared that Templeton was obliged to indemnify LVE in respect of any liability on it to pay the legal costs and expenses of others, all up to a total of £245,000. The judge refused permission to appeal, but permission was granted by Stanley Burnton LJ on 8 August 2008 on a paper application.

LVE, the assured, is an engineering contractor. LVE specialised in the fabrication and installation of pipework and pumps for the petrochemical, pharmaceutical, aviation and power industries. At the relevant times LVE had an insurance broker called Lymm Insurance Brokers (“Lymm”). Templeton, the insurer, is an insurance company incorporated and operating in the Isle of Man. Templeton operated through underwriting agents called Legal Risk Management (“LRM”).

LVE was first insured by Templeton for legal expenses risks under a Constructors Protection Policy which had effect for one year from 19 December 2002. The initial period of cover therefore expired on 18 December 2003. It was renewed for a further year which expired on 18 December 2004. The present dispute concerns the renewal of the policy for the following year, ie. 2004/2005. It is agreed between the parties that (subject to the arguments that arise in this case), the renewal for the 2005 policy year took place on 17 January 2005, but was back – dated so that it took effect as from 19 December 2004.

On 20 January 2005 Lymm wrote to LRM, asking it to send a new claim form through to LVE “for a potential new claim”. The letter explained the circumstances briefly. The potential claim arose out of a construction contract (“the contract”) that had been concluded on 15 June 2004 between LVE and Gas Wasser Umwelt Gommern GmbH, (“GWUG”). Under the contract LVE agreed to carry out certain specialist sub – contract work involving the manufacture, supply and installation of piping at a major engineering project at Cottam Power Station, near Retford, Nottinghamshire (“the contract works”). Later in this judgment I will have to set out the relevant chronology of the discussions and the eventual dispute that arose between LVE and GWUG.

On 17 February 2005, LVE, through Lymm, submitted a claim form to Templeton, through LRM. In the claim form LVE sought from Templeton an indemnity in respect of legal expenses in connection with a dispute with GWUG, which LVE said had arisen from the contract. LVE stated that it intended to pursue this dispute in an arbitration against GWUG. Templeton declined the claim. Ultimately it relied on two grounds for doing so.

First, Templeton alleged that, prior to the policy renewal for the 2004/2005 policy year, LVE had failed in its duty of utmost good faith to the insurers, because it had not disclosed a “material fact” or a “material circumstance” (in the sense understood in insurance law) (Footnote: ¹) to Templeton. In paragraph 8 of its amended defence, Templeton had identified five particulars of material facts which were said to be known (or ought to have been known) to LVE before or at the time of renewal on 17 January 2005. Effectively they amount to an allegation that between October 2004 and early January 2005 there was an escalating dispute between LVE and GWUG in relation to the progress of the contract works and payment for them. Templeton alleged that the pleaded facts were “material” to a “prudent underwriter” and that Templeton was induced by their non – disclosure to enter into the policy renewal. It was pleaded that this failure of duty by LVE entitled Templeton to avoid the Policy. Templeton gave a notice of avoidance to LVE on 31 May 2006.

Secondly, Templeton alleged that LVE had failed to comply with a claims notification provision in clause 6.1 of the policy terms. Clause 6.1 stipulates that the assured must give notice in writing “…immediately the insured is aware of any cause, event or circumstance which has given or is likely to give rise to a Construction Claim”. Compliance with this provision is stated to be a condition precedent to the liability of the insurer under the Policy. Templeton asserted that LVE had failed to comply with this term. Templeton said that it was, therefore, under no liability to LVE in respect of the legal expenses claims arising out of the dispute concerning the contract.

Those defences, which I will call respectively the “non – disclosure” defence and the “notification of claim” defence, were maintained at the trial before the judge. He rejected them both, having heard evidence from witnesses of fact and experts. Templeton submits on appeal that the judge was wrong to reject both defences and argues that it was entitled to avoid the policy; alternatively, that it is not liable to pay under it.

I have set out the relevant policy terms in an Annex to this judgment. It is enough to note here that the key clauses are: (i) the statement at the head of the policy terms that the policy is a “claims made policy”; (ii) the “definition” of “Construction Claim” at clause 1.5, and (iii) clauses 6.1 and 6.2.

LVE started proceedings on 20 June 2006. The trial before HHJ Hegarty QC took place over three days in February 2008. LVE called Mr Richard Ventre, a director and the chief executive of LVE, as a witness of fact. He was cross – examined on the relevant contemporary correspondence between LVE and GWUG during the period from June 2004 to January 2005. LVE also put in evidence witness statements from Mr John Ashe, the Finance Director of LVE, and Mr Glen Slaymaker, manager of the contract. Neither was required for cross examination.

The underwriter of the policy, Mr Antony Corlett, had ceased to work for Templeton by the time of the trial. Mr Corlett said that he would not come to give evidence for the insurer. So neither he nor any other witness from amongst its underwriting staff was called by Templeton. Nor did it call any witness from LRM. Instead Templeton called as a witness Mr Antony Murphy, who was Templeton’s general legal counsel. He explained that Mr Corlett had refused to give evidence on behalf of Templeton at the trial because of an employment dispute between them. I shall have to return to this matter later in this judgment.

Both sides served expert’s reports on the issue of the “materiality” of the alleged escalating dispute between LVE and GWUG. Both experts were cross – examined on their reports. LVE called Mr Nicholas Stanbury, an insurance consultant with specialist knowledge of legal expenses insurance. Templeton called Mr Grahame Pipe, a former underwriter who had become an insurance and reinsurance consultant.

The judgment, which runs to 162 paragraphs, is very careful and detailed. After setting out his findings of primary fact and reaching some conclusions on construction issues, the judge deals with the issue of whether Templeton was entitled to avoid the Policy for non – disclosure of a material circumstance. (Footnote: ²) Mr Mark Smith, who appears on the appeal for Templeton, accepts that the judge set out the correct principles of law on the assured’s duty of disclosure and the circumstances in which an insurer can avoid a policy for non – disclosure of a material circumstance. The judge referred to section 18 of the Marine Insurance Act 1906 and the leading case on the law concerning non – disclosure of a material fact to an insurer, the House of Lords’ decision in Pan Atlantic Insurance Co Limited v Pine Top Insurance Co Limited. (Footnote: ³) That case, like the present one, was a non – marine insurance case. But, in giving the leading speech in Pan Atlantic, Lord Mustill stated that the law relating to the duty of disclosure of material circumstances and the consequences of non – disclosure were the same in both marine and non – marine insurance. The law is based on the language of section 18 of the Marine Insurance Act 1906, which, as Lord Mustill reminded us, embodies a partial codification of the relevant common law. (Footnote: ⁴)

Section 18 of the Marine Insurance Act 1906 provides as follows:

“(1)

Subject to the provisions of this section, the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured…

(2)

Every circumstance is material which would influence the judgment of a prudent underwriter in fixing the premium or determining whether he will take the risk”.

(3)

In the absence of inquiry the following circumstances need not be disclosed, namely: -

…..

(b)

Any circumstance which is known or presumed to be known to the insurer. The insurer is presumed to know matters of common notoriety or knowledge, and matters which an insurer in the ordinary course of his business, as such, ought to know;

……

(4)

Whether any particular circumstance, which is not disclosed, be material or not is, in each case, a question of fact.

(5)

The term “circumstance” includes any communication made to, or information received by, the assured.”

Mr Smith therefore accepts before us that the judge correctly set out the law on this topic at paragraph 96 of the judgment. The judge stated:

“So, in order to make good its contention that it was entitled to avoid the Policy [for non – disclosure of a material circumstance], Templeton must show that the state of the relationship between LVE and GWUG was such as would have had an effect on the mind of the prudent insurer in deciding whether to accept the risk or as to the terms on which he should do so and that, as a matter of fact, it was actually induced by the non – disclosure to renew the Policy on the terms which it did”.

Mr Smith’s criticism of the judge is that he failed properly to apply these tests to the facts of the case. He submits that the judge should have concluded that it was obvious that the fact of the disputes between LVE and GWUG would have had an effect on the mind of the “prudent underwriter” in deciding on whether to accept the risk upon renewal or as to the terms on which to do so. He also submits that, on the facts found, the judge should have held that it was clearly to be inferred that Templeton’s underwriter had been “induced” to enter into the Policy by virtue of the non – disclosure of the fact of the dispute prior to the policy renewal on 17 January 2005.

The judge dealt with the claims notification issue, arising out of clause 6.1 of the Policy terms, at paragraphs 68 to 88 and 147 to 159 of the judgment. It is common ground that this Policy is a “claims made” policy, as it so states at the outset of the policy terms. In other words, the Policy will indemnify an assured for risks covered by the Policy in respect of claims made during the policy period. (Footnote: ⁵) Mr Smith accepts that the judge was correct to analyse the first sentence of clause 6.1 as giving rise to two issues. The first is: was LVE aware of any “cause, event or circumstance”? The judge held that this depends on what LVE was actually aware of at the time and that is a question of fact. (Footnote: ⁶) Mr Smith does not quarrel with that construction.

The second issue is whether any “cause, event or circumstance” of which LVE has actually become aware “[has] given or is likely to give rise to a Construction Claim”. The judge held that this question had to be answered objectively by the court, on the facts as found by it. (Footnote: ⁷) This second issue also raises two further points of construction. First, what is meant by the words “likely to give rise to”. It was common ground below and in this court that these words mean that the advent of a Construction Claim is “more probable than not”. (Footnote: ⁸) The second point is whether the judge was correct to conclude that it is an objective test whether the “cause, event or circumstance” of which the assured is aware has, at any particular time, “…given or is likely to give rise to a Construction Claim”? I note here that it appeared to be common ground before us that a “Construction Claim” cannot have arisen, for the purposes of clause 6.1 of the Policy, unless LVE had made an application for payment under the contract and that had been rejected in writing on at least two occasions, either in whole or in part, by the other party, GWUG, or its agent.

Mr Smith makes two criticisms of the judge on the claims notification issue. The first is the judge’s conclusion, on the construction of clause 6.1, (Footnote: ⁹) that notification only has to be given by the assured when a dispute has reached the stage where adjudication, arbitration or litigation is likely to be required in order to resolve the differences between the parties. He submits that, on the true construction of clause 6.1, there must be notification at an earlier stage of a dispute. Secondly, Mr Smith submits that, on the facts, the judge should have held that, before 17 January 2005, LVE was aware of events or circumstances which, objectively or on a reasonable view, (Footnote: ¹⁰) either had given rise to, or were likely to give rise to, a “Construction Claim”. Therefore, Mr Smith submits, LVE came under a duty, under clause 6.1 of the Policy, to give immediate notice in writing of those events or circumstances on or before 17 January 2005. It failed to do so, he submits, with the result that Templeton had no liability to indemnify under the Policy.

Other issues arose before the judge concerning the second and third sentences of clause 6.1 of the policy. In particular, Mr Smith had argued that they extended the duty of disclosure. Before us he accepted that the effect of the second and third sentences was to impose on the assured a duty of disclosure at renewal which was equivalent to that imposed by section 18 of the Marine Insurance Act. Therefore no further issue on clause 6.1 arises on this appeal.

It is clear from this summary that no general principle of law arises on this appeal. Nor does Mr Smith for Templeton challenge the primary findings of fact of the judge. Rather, Mr Smith’s principal challenge is to the judge’s interpretation of the facts and the application of the law to the facts relating to the two defences raised by Templeton.

There are three issues that arise on the appeal in relation to the “non – disclosure” defence. They are:

On the “notification of claim” defence two issues arise. These are:

It is necessary, first, to consider the judge’s findings of facts and his assessment of the evidence of the factual and the expert witnesses. It will then be necessary to examine the judge’s analysis and conclusions on (a) “material circumstance” and (b) inducement.

In paragraphs 20 to 67 the judge sets out his findings of fact concerning LVE’s dealings with GWUG, from the time of the conclusion of the contract on 15 June 2004 until the notification of the claim by LVE to Templeton on 19 January 2005. I will attempt to summarise the judge’s findings, which were based on the documents and the evidence of Mr Ventre.

The contract between LVE and GWUG was contained in a Purchase Order from GWUG dated 15 June 2004. The contract was subject to German law. (Footnote: ¹²) It provided that LVE would manufacture, supply and install piping as part of the flue gas desulphurisation systems of the power plant at Cottam. The piping was to be installed in Units 2 and 3 of the power station. The purchase order stipulated that the work on Unit 2 would start on 1 July 2004 and finish on 8 October 2004; that on Unit 3 was to start on 15 August 2004 and to finish on 15 February 2005.

The total contract price was stated as £740,973.90, plus VAT. There was to be a down - payment of 10% and the next 80% would be paid “depending on monthly progress of deliveries and installation work confirmed by GWUG”. There were to be two final payments of 5% each. Payments were to be subject to retentions amounting to 15%. Subject to retention, payments were to be made 30 days after the receipt of an invoice.

The contract incorporated conditions laid down by the head contractor for the construction of the power station. That was a German company called RWE Industrie – Loesungen GmbH (“RWE”). Those conditions provided that RWE could suspend progress of the works (clause 5); they also obliged LVE (as supplier) to carry out the work diligently and in a timely manner (clause 7). The contract provided for liquidated damages (clause 8). It also permitted RWE, as the purchaser of the work, to terminate the contract in the event of prolonged delay which would have resulted in RWE being entitled to claim the maximum liquidated damages allowed under the contract. Clause 10 permitted RWE to alter, amend, omit, add or otherwise vary any part of the works, by way of a Variation Order.

Clause 18 dealt with defaults by LVE, as supplier. If the supplier did not execute the works in accordance with the contract, RWE (as purchaser) could give a notice requiring the proper work to be done within a certain time. If the supplier did not do so, RWE (as purchaser) could terminate the contract after a further period of notice. By clause 22, RWE (as purchaser) could terminate the contract by giving two weeks notice in writing to LVE as supplier. (Footnote: ¹³)

The judge found that the principal links between LVE and GWUG were between Mr Slaymaker, LVE’s project manager, and Dr Bernd Kulbe of GWUG. However, Mr Ventre of LVE was also much involved.

LVE submitted its first invoice to GWUG, for 10% of the contract price, (£74,097.39 plus VAT of £12,967.04). on 26 July 2004. On 2 September 2004, Dr Kulbe faxed LVE, contending it was only entitled to payment for the materials delivered to the site. A little later, GWUG paid about £44,000 of this invoice.

In August 2004, LVE submitted its first application for payment for work done. This was queried by GWUG and led to a meeting between Mr Ventre and Dr Kulbe on 16 September 2004. It was agreed that there should be a monthly billing system. It was also agreed that the balance of the 10% of the contract price should be paid by 10 October 2004. This was confirmed in a fax from Mr Asperger of GWUG.

However, issues about the progress of the works and payment of LVE remained. Mr Ventre raised some of them in an email to Dr Kulbe on 4 October 2004. He asked for a detailed response and expected a satisfactory resolution in a week. Mr Ventre’s evidence was that GWUG did not appear to grasp the way that the certification procedure worked in engineering contracts in the UK and that problems were exacerbated by language difficulties. However, the judge found that Mr Ventre had “no concerns about non-payment or short payment since such problems occurred frequently within the industry”. He also found that by December 2004 GWUG had caught up with its payments. In cross –examination Mr Ventre “rejected any suggestion that these matters could not or would not be resolved by agreement”. The judge accepted this. (Footnote: ¹⁴)

Further email exchanges between Dr Kulbe and Mr Ventre took place in late October and early November. Then on 15 November 2004, Dr Kulbe proposed a meeting, which he thought was urgently needed to deal with “still outstanding discrepancies”. He identified six areas. Mr Ventre agreed a meeting was needed.

The meeting took place on 26 November 2004. The judge characterised it as “both amicable and constructive,” in which a substantial measure of agreement was reached between the parties. (Footnote: ¹⁵) The meeting resulted in a memorandum of agreement dated 30 November 2004. The memorandum became an Addendum to the contract. It was signed by Mr Ventre on 6 December 2004, although subject to matters set out in two attached appendices. The Addendum dealt with a revised timetable for the works, payments to LVE and the mechanism for dealing with variations in the future.

Despite this new agreement, there was continued correspondence between Mr Ventre, Mr Slaymaker and Dr Kulbe and Mr Asperger. On 7 December, Mr Asperger sent an email to Mr Ventre complaining about slow progress, inadequate manpower and lack of an authorised representative for quality control purposes. He sought a “significant acceleration” in LVE’s work. Dr Kulbe also sent an email to Mr Ventre on 8 December commenting on some outstanding issues and urged Mr Ventre to sign the proposed original addendum, rather than any variation of it; otherwise it might jeopardise the advanced payment regulation with RWE.

The correspondence continued with a fax from LVE to GWUG on 10 December 2004 and a response email from Dr Kulbe on 13 December 2004. The judge summarised the debate thus far (at paragraph 44 of his judgment) as “fairly amicable and constructive”. There was a further meeting between Mr Ventre, Mr Slaymaker, Dr Kulbe and Mr Asperger on 15 December 2004. Mr Ventre emailed Mr Asperger on 16 December 2004 in which he referred to those discussions. The judge records that this email refers to what Mr Ventre called “an instruction from RWE for the parties to agree a commercial settlement”. (Footnote: ¹⁶) It also gave details of the extra costs that would be incurred by LVE because of the extension of time that would be needed to complete the works that LVE was undertaking. The email said that “on account” payments were unacceptable and unworkable and it urged GWUG to pay for work done using “a simple method of certification” that LVE had explained.

Mr Asperger did not respond directly to this until an email of 7 January 2005. In an email on 4 January 2005, Mr Asperger said that LVE “had to improve significantly its performance till 9 January 2005, otherwise RWE’s site management is threatening to substitute [LVE]….I ask you to initiate measures immediately”. Mr Ventre’s evidence was that it would have been almost impossible for RWE to substitute another supplier in place of LVE. The judge accepted that, although he commented that the email did “seem to reflect an increasing level of dissatisfaction on the part of RWE”. (Footnote: ¹⁷)

In the email of 7 January 2005 to Mr Ventre, Mr Asperger says that GWUG had passed on “unchanged” the email of 16 December 2004 to RWE and that GWUG “are making all efforts to convince RWE to accept the LVE claims”. After commenting on the 16 December email, Mr Asperger urges Mr Ventre to “make sure that the work will have been completed by January 28, 2005”. There were further exchanges between Dr Kulbe and Mr Ventre about payment. There were difficulties in ensuring that amounts payable by GWUG were successfully transferred to LVE’s bank account. (Footnote: ¹⁸)

On 14 January 2005, Mr Slaymaker sent an email to Mr Asperger, complaining that the approved valuation of the work carried out to date was much less than the amount requested by LVE. He said that the email of 16 December 2004 had requested additional costs for acceleration of the contract extension, but a month had passed without a formal response. The email continued:

“We respectfully request that until commercial negotiations reach their conclusion our latest application for payment (No 5) is approved in full and payment is processed by the end of the month”.

There was no response from GWUG. On 18 January 2005, Mr Ventre wrote to Dr Kulbe, stating that he required an answer to the email of 16 December 2004 and that it was unacceptable not to have received a response so far. This spurred GWUG into action. It sent a letter dated 19 January 2005, which was signed by both Dr Kulbe and Mr Vonend. The letter stated that GWUG had wanted to await the official response of RWE before it replied to LVE’s emails of 10 and 16 December 2004, but it would respond now as LVE had requested GWUG to do so.

The letter rejected what it described as LVE’s demands. It denied that:

“….[LVE] are entitled to any additional reimbursement regarding acceleration, site establishment, time extension cost and additional supervision. We do not see the reasons you cite as purported justification for your asserted claims. We have a completely different view on this issue. Therefore, we have to reject them once more, on the contrary, we have to point out that you are in delay with the performance of the work.”

Further on, the letter continued:

“Unless we are unable to find a mutual agreement in this matter until the finalization of the project, this issue should be brought to the arbitration as foreseen in the Purchase Order dated 15 June 2004 with the integrated Purchasing Conditions FGC Project LPC Cottam (“Purchasing Conditions”) Article 21. Such arbitration tribunal should make the final decision. It is our opinion that this is a reasonable solution for both parties….”.

Between paragraphs 57 and 67 of his judgment, the judge made his findings on the question of whether there was a serious subsisting dispute between LVE and GWUG in December 2004 and prior to 19 January 2005. His conclusions can be summarised as follows: (1) There were some problems about interim valuations and payments during this period, but they were largely procedural in nature, because of the lack of a proper certification mechanism being in place. (2) Although Mr Ventre thought there were underpayments on LVE’s monthly applications, that was common in this business and he had no concerns about non – payment at that stage. (3) By the end of December 2004, there was only a 10% shortfall in payments, but that was not out of the ordinary in the context of this type of engineering contract. (4) Although there were delays in completing work by LVE, this was caused by matters outside its control. (5) RWE and GWUG accepted the need to accelerate the works by LVE. LVE quantified the additional cost involved in the email of 16 December 2004, but that did not elicit a response until the letter from GWUG of 19 January 2005. (6) Until that letter, Mr Ventre did not consider that there was anything out of the ordinary in relation to the contract or that LVE was “in any sense in dispute with GWUG”. (7) During this period, the parties were in “fairly amicable discussions” on the points in issue. (8) The agreement reached on 26 November 2004 had not “fallen apart” as had been asserted by Mr Smith, counsel for Templeton, in the course of argument.

The judge summarised the position thus:

“In my judgment, despite the delays to the works and the differences of opinions between the parties, the relationship between LVE and GWUG remained fairly amicable at least up until 19 January 2005; and there was no obvious indication, prior to that date, that the differences between them would or might lead to any form of process of adjudication, arbitration or litigation”. (Footnote: ¹⁹)

As I have already mentioned, the parties each submitted expert reports on the question of whether the relationship between LVE and GWUG in the period from October 2004 to 17 January 2005 was a “material fact” that LVE should have disclosed to Templeton. Templeton’s expert, Mr Grahame Pipe, had extensive underwriting experience at Lloyd’s but no experience of legal expenses insurance and had only limited knowledge of construction disputes. (Footnote: ²⁰) LVE’s expert, Mr Nicholas Stanbury had particular specialist knowledge of legal expenses insurance as well as experience of placing risks in the London market between 1989 and 1998. (Footnote: ²¹)

Having heard the two witnesses, the judge found Mr Stanbury to be the “clearer and more confident of the two experts” with more relevant experience in the field of legal expenses insurance. (Footnote: ²²) He found difficulty in extracting from the written and oral evidence of Mr Pipe “the precise nature of the circumstance which he considered to be material or the exact stage in the relationship at which the risk of a claim under the Policy after renewal had increased to such an extent as to require disclosure”. (Footnote: ²³)

The judge noted (Footnote: ²⁴) that section 18(4) of the Marine Insurance Act 1906 provides that the question of whether a particular circumstance, which is not disclosed, be “material” or not is a question of fact. It is for the court to decide, although the court may be assisted by expert evidence on the issue. He accepted, at least implicitly, the principle that the existence of disputes between a contractor and an employer in a complex building contract could be a “material fact” which had to be disclosed to an insurer before the inception of a policy of legal expenses insurance or at the time of its renewal. (Footnote: ²⁵) He found, (agreeing with Mr Stanbury, although the latter had no particular experience of the construction trade), that complex construction contracts “almost invariably give rise to disputes and differences of various kinds as to the progress of the works, the sums due to the contractor, the quality of the work and so forth”. (Footnote: ²⁶)

The judge rejected the notion that any difference or dispute between contractor and employer in a building contract that might possibly give rise to a formal process of dispute resolution must be disclosed as a “material fact”. (Footnote: ²⁷) Instead, he held that the fact of disputes between contractor and employer would only be material to be disclosed if there were “features of the relationship which, viewed objectively, show a real risk of escalation to the point of formal dispute resolution procedures beyond the risk ordinarily inherent in any complex construction contract”. (Footnote: ²⁸) But the judge concluded, on the evidence, that the state of the relationship between LVE and GWUG “had not reached the stage where it was properly to be regarded as a material circumstance which required to be disclosed to Templeton”. (Footnote: ²⁹)

The judge found (Footnote: ³⁰) that Templeton, as an insurer of legal expenses risks, would be presumed to know that disputes about the timing and quality of work and payment for it were endemic between contractor and employer in the construction industry. He referred to section 18(3)(b) of the Marine Insurance Act 1906, (Footnote: ³¹) but did not draw the conclusion that because of this presumed knowledge, LVE was not therefore under a duty to declare the fact of disputes between LVE and GWUG to Templeton. Mr Bellamy informed us that no argument based on section 18(3)(b) was made to the judge. He said that he did not rely on any argument based on that sub – section in this court. He was right to eschew it. I need only add that even if it were correct that Templeton should be presumed to have known of the possibility of such disputes arising, that could not relieve LVE of disclosing them if, in the circumstances, it constituted a “material fact”.

As I have already noted, the judge had no evidence from the underwriter at Templeton, Mr Antony Corlett, who was employed by Templeton from September 2000 to July 2006. Nor was there any evidence from Mr Greig Hills, who was described by Templeton’s General Legal Counsel (who gave evidence on why Mr Corlett was not being called as a witness), as an “underwriting clerk”. (Footnote: ³²) Mr Hills was one of Mr Corlett’s subordinates and he was still employed by Templeton at the time of the trial.

Mr Murphy’s evidence (in re-examination) was that he did not think that Mr Hills was involved in the underwriting decisions of the renewal. However, the judge noted that the renewal terms offered by Templeton were set out in manuscript by Mr Hills. (Footnote: ³³) Further, the renewal form that had been completed by LVE was forwarded (via Lymm and LRM) to both Mr Corlett and Mr Hills on 8 November 2004. With it was a letter from Ms Amy Vickers of LRM, suggesting a reduction in the premium payable by LVE because of its reduced turnover. Mr Hills himself wrote a response to Mr Vickers on the issue of premium. (Footnote: ³⁴)

The judge concluded that the exchange between Mr Hills and Ms Vickers gave the impression that “Mr Hills played a somewhat more important role in relation to the renewal terms than simply acting as Mr Corlett’s amanuensis”. (Footnote: ³⁵) Mr Smith drew our attention to the fact, noted by the judge, that Ms Vickers had suggested adding a 15% claims loading to the renewal premiums because of past claims and that Mr Hills had written, in response, that there should be a 20% claims loading for past claims. (Footnote: ³⁶)

The judge reminded himself that if an insurer wishes to prove that it was entitled to avoid a policy for non – disclosure of a material fact, the insurer must prove that the actual underwriter concerned was, in fact, induced to conclude the contract or to offer the terms made, because of the non – disclosure concerned. He said that he neither had evidence from Mr Corlett or Mr Hills, nor any other factual evidence to indicate that they would have given evidence that were induced by the non – disclosure of the “disputes” between LVE and GWUG to conclude the renewal on the terms offered. The only evidence to suggest that they were was “the somewhat half-hearted evidence of Mr Pipe and any inference which it might be possible to draw from Mr Hills endorsement on [Ms Vickers’] letter of 8 November 2004”. (Footnote: ³⁷)

The judge concluded, on the assumption (contrary to his earlier conclusion) that the disputes between LVE and GWUG constituted a material fact to be disclosed, that he was “not prepared to speculate how Templeton’s underwriters would have responded in the absence of any direct evidence from the underwriters concerned or even any evidence of Templeton’s general practice”. He was not prepared to hold that it was “obvious” that Templeton would either have loaded the premium or imposed other terms if the fact of the disputes had been disclosed to it. Therefore, Templeton had failed to establish “inducement”. (Footnote: ³⁸)

The judge’s conclusion that LVE was not under a duty to disclose to Templeton the facts of the discussions and arguments between LVE and GWUG because it was not a “material circumstance” must itself be a finding of fact: see section 18(4) of the Marine Insurance Act 1906. That finding of fact is based on the judge’s assessment of the tenor of what actually occurred between LVE, GWUG and RWE during the period from the start of the contract in June 2004 until 17 January 2005, assisted, to some extent, by the expert evidence of Mr Stanbury. The judge had to place his assessment of the facts against the legal test of what constitutes a “material circumstance” for the purposes of an assured’s duty of disclosure before an insurance contract is concluded or renewed. Ultimately, the judge’s conclusion that there was no material circumstance to be disclosed is an exercise of judgment or evaluation, weighing all relevant facts and factors.

The Court of Appeal has the power to draw any inference of fact which it considers justified on the evidence: CPR Pt 52.11 (4). It is very well – established that this Court will not interfere with a judge’s findings of primary fact based on the oral evidence of witnesses, unless the appellant establishes that the trial judge was plainly wrong in his assessment and finding. Where there is no challenge to the primary fact findings of the judge, but the challenge is to his overall assessment of the effect of those findings, the Court of Appeal has a greater latitude to reconsider the judge’s evaluation.

In Assicurazioni Generali SpA v Arab Insurance Group (BSC) (Footnote: ³⁹) the Court of Appeal had to consider the extent to which it was entitled to re-assess the trial judge’s findings of fact in relation to defences of non – disclosure and misrepresentation. These defences had been raised by quota share retrocessionaires in answer to a claim for damages by retrocedents on a quota share retrocession contract. In the course of his judgment, Clarke LJ considered a large number of cases on the question of when an appellate court is entitled to interfere with the conclusion a judge has made after an assessment of primary facts, other facts, expert evidence and his overall assessment by reference to a legal test such as negligence or (as in that case) non – disclosure or misrepresentation of a material circumstance. I think I can summarise his conclusion thus: where a court of first instance has to make an assessment, by reference to a legal concept such as negligence or “material fact”, and this assessment involves the application of both findings of primary fact, the evaluation of other facts, opinions (particularly of experts) impressions and nuance (Footnote: ⁴⁰) and the judge has to weigh them all, then an appellate court has to take particular care before deciding it can safely interfere with the judge’s assessment. (Footnote: ⁴¹) There is no single test for when an appellate court can interfere. But, generally speaking, the more the first instance judge’s assessment is dependent on oral evidence, or the overall assessment of a number of factors, the less willing an appellate court is likely to be to interfere with the judge’s conclusion.

Clarke LJ’s statements on the correct approach of an appellate court to findings and inferences of fact made by a judge at first instance after hearing evidence were approved by Lord Mance by the House of Lords in Datec Electronic Holdings Limited and others v United Parcels Service Limited. (Footnote: ⁴²) I must therefore adopt that approach on this appeal.

Mr Smith, for Templeton, did not point to any error in the judge’s findings concerning the principal events that occurred between LVE and GWUG. He could not do so, because the events were recorded in the emails, faxes and letters between them. The judge’s characterisation of the nature and the extent of the dispute between LVE and GWUG during the period October 2004 and 17 January 2005 was dependent upon his evaluation of the written and oral evidence of Mr Ventre and the written evidence of Mr Ash and Mr Slaymaker against the background of those events. Mr Smith did not, indeed could not, attack the evidence of Mr Ventre or the judge’s assessment of him as a witness.

Instead, Mr Smith relies on the following facts to show that there was an advanced dispute between LVE and GWUG by January 2005. First, LVE’s “demand” on 3 December 2004, for compensation for the additional time taken and supervision of the contract, which was rejected by GWUG on 8 December 2004. Secondly, LVE’s further request for compensation for the extension of time and additional supervision made on 10 December, which was rejected by GWUG on 13 December 2004. Thirdly, the fact that LVE’s claim for compensation for delays in the project that it made in the meeting of 15 December 2004 was not accepted by GWUG. Lastly, the fact that LVE’s written request, in its letter of 16 December 2004, for compensation for extension of time and extra supervision was not answered until Mr Asperger’s email of 7 January 2005. Mr Smith relies on the judge’s finding that, thereafter, the tone of statements from GWUG hardened.

Mr Smith’s argument is that GWUG was, effectively, rejecting all LVE’s claims and that the events of December and early January led directly to the arbitration between LVE and GWUG and the claim under the policy. How could they not have influenced a “prudent underwriter” in deciding on whether to make the renewal or on what terms?

Despite the attractive way Mr Smith put his arguments, (both written and oral), he has been unable to point to any failing by the judge in his overall characterisation of the relationship between LVE and GWUG during this period. The key conclusions at paragraphs 64 and 65 of the judgment are based on his assessment of the documentary evidence as explained by the evidence of Mr Ventre, Mr Ash and Mr Slaymaker. In my view the overall conclusion of the judge (Footnote: ⁴³) that “despite the delays to the works and the differences of opinions between the parties, the relationship between LVE and GWUG remained fairly amicable at least up until 19 January 2005” cannot be successfully challenged.

In my view, it cannot. It was common ground that the “dispute” between LVE and GWUG was not disclosed by LVE to Templeton. So the judge had to decide, as a question of fact, whether that particular circumstance was material and ought to have been disclosed. (Footnote: ⁴⁴) In the Pan Atlantic case the majority of the House of Lords held that, for a circumstance to be material, it does not have to have a decisive influence on the mind of the anthropomorphism “the prudent underwriter”. The judge was aware of this test of a material circumstance and stated it accurately at paragraph 96 of his judgment.

To answer the question: was the circumstance of the “dispute” material, because it would have influenced the judgment of a “prudent underwriter”, the judge had to do three things. First, evaluate the primary facts; secondly, assess Mr Ventre’s evidence, particularly as to the nature of the discussions and arrangements between LVE and GWUG in the relevant period and, thirdly, he had to assess the expert evidence of Mr Pipe and Mr Stanbury.

Mr Smith’s principal submission was that the nature and extent of the dispute was so obviously something that might affect the mind of the “prudent underwriter” in deciding whether to renew or on what terms that the judge’s conclusion was plainly wrong. Yet Mr Smith could not attack any particular aspect of the judge’s assessments.

The judge held that, in the sphere of legal expenses insurance, the prudent underwriter would regard as material “features of a relationship which, viewed objectively, show a real risk of escalation to the point of formal dispute resolution procedures beyond the risk ordinarily inherent in any complex construction contract”. (Footnote: ⁴⁵) I regard that statement of when the circumstances of a relationship would become a “material circumstance” to a prudent insurer of legal expenses insurance as both rational and sound. Ultimately, all Mr Smith could submit was that the judge’s conclusion on how far the dispute had progressed was obviously wrong and he ought to have concluded that it had got further and become a “material fact”. I accept that another judge may have evaluated the facts differently. But Judge Hegarty had to make a value judgment on whether such a circumstance would have influenced the prudent underwriter in deciding whether to renew or on what terms. In my judgment, the judge’s overall evaluation of the relevant facts and factors that “the differences of opinion between the parties were being addressed in a reasonably amicable and constructive manner, despite the arguments about the precise cause of the delays which had clearly affected the project” (Footnote: ⁴⁶) cannot be impugned as being obviously wrong. There is no basis to do so.

That is enough to dispose of this part of the appeal. However, as there was argument on the issue of “inducement” I will express my conclusions on it.

In the Assicurazioni Generali case, Clarke LJ referred to the cases that establish that a material non – disclosure (or misrepresentation) will not entitle an underwriter to avoid a policy of insurance unless the non – disclosure or misrepresentation concerned had “induced” the underwriter to make the contract he did on the terms he did. Clarke LJ summarised the relevant principles at paragraph 62 of his judgment (Footnote: ⁴⁷) as follows:

“(i)

In order to be entitled to avoid a contract of insurance or reinsurance, an insurer or reinsurer must prove on the balance of probabilities that he was induced to enter into the contract by a material non – disclosure or by a material misrepresentation.

(ii)

There is no presumption of law that an insurer or reinsurer is induced to enter in the contract by a material non – disclosure or misrepresentation.

(iii)

The facts may, however, be such that it is to be inferred that the particular insurer or reinsurer was so induced even in the absence of evidence from him.

(iv)

In order to prove inducement the insurer or reinsurer must show that the non – disclosure or misrepresentation was an effective cause of his entering into the contract on the terms on which he did. He must therefore show at least that, but for the relevant non disclosure or misrepresentation, he would not have entered into the contract on those terms. On the other hand, he does not have to show that it was the sole effective cause of his doing so”.

Mr Smith’s difficulty is that there was no evidence before the judge to prove that Mr Corlett was “induced” to agree to the renewal by virtue of the fact that he was not told the facts of the relationship between LVE and GWUG. I will assume that Mr Corlett could not have been called to give evidence for good reason. But there was no reason why Mr Hills could not have given evidence. He could have explained the principles on which he and Mr Corlett worked and told the court what information Mr Corlett (and he) regarded as material at the time of renewal of a policy such as this one. Ms Amy Vickers of LRM was not called either; she could have been. She was clearly involved in the process of renewing and settling policy terms, particularly the premium.

In the circumstances where no evidence was called, the judge’s conclusion that Templeton had failed to prove inducement on the balance of probabilities cannot be faulted. There was no basis on which he could have reached any other view.

Therefore the appeal on non – disclosure issue must fail.

A notification in accordance with clause 6.1 of the Policy has to be given by the assured “immediately the insured is aware of any cause, event or circumstance which has given or is likely to give rise to a Construction Claim”. As already noted, the parties agreed that “likely” in this clause means “probable” or “more likely than not”. The judge points out (at paragraph 71 of the judgment) that the partial definition of a “Construction Claim” in clause 1.5 of the Policy terms means that a “bona fide construction claim” cannot arise until the “Insured” has first made an application for payment or asserted a defence under the relevant contract and the application or assertion “shall have been rejected in writing on at least two occasions either in whole or in part by the Other Party or its agent”.

Given this partial definition of “Construction Claim” it seems to me that the judge must be correct in concluding (Footnote: ⁴⁸) that under clause 6.1, a “Construction Claim” will only be “likely” if it has reached the stage where adjudication, arbitration or litigation is likely to be required to resolve the differences between the parties. Any other construction which placed the obligation to notify at an earlier stage in the evolution of disputes would fail to give effect to the partial definition of “Construction Claim”.

Therefore I reject Mr Smith’s argument that, on the correct construction of the first sentence of clause 6.1, notification of a cause, event or circumstance of which the assured is aware has to be given at an earlier stage of a “dispute”.

As already noted, the judge concluded, at paragraph 76 of the judgment, that the phrase “which has given or is likely to give rise to a Construction Claim” in clause 6.1 qualifies “cause, event or circumstance” and does so in objective terms. Therefore, he held, the question of whether a Construction Claim was likely was to be determined objectively. In short, he held that it was a question of fact for the court to determine.

Since the judge handed down his judgment, the Court of Appeal has delivered its judgment in HLB Kidsons & Ors v Lloyd’s Underwriters subscribing to Policy 621/PKD00101 and others. (Footnote: ⁴⁹) In that case the court had to consider whether HLB Kidsons had given a valid notice under a claims notification clause in professional indemnity policies. Kidsons said that they had done so, with the consequence that they became entitled to be indemnified under the policies in respect of claims that were actually made against Kidsons after the expiry of the policy period. The relevant wording of the notification clause in that case was:

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

An issue on the correct construction of the first sentence of that clause was raised both before Gloster J and in the Court of Appeal. The particular question that concerns this case was: whose view of whether a particular circumstance “may give rise to a loss or claim” against the assured was relevant? Was it the subjective view of the assured; or was it to be judged objectively, if necessary, by a court? Toulson LJ expressed his views on the construction of the first sentence of that clause in somewhat different terms from those used by Rix LJ, with whom Sir Richard Buxton agreed.

Rix LJ stated (Footnote: ⁵⁰) that, generally, two issues will arise if there is a question of whether the assured has complied with the obligation, under such a clause, to give notice “as soon as practicable of any circumstances of which they shall become aware during the period specified in the Schedule which may give rise to a loss or claim against them”. The first issue is: have such circumstances come to the attention of the assured (during the policy period), so that he is aware of them? The second is: are those circumstances such that they “may give rise to a loss or claim” against the assured? Rix LJ said that the second question is an objective one, whatever the views of the assured. He went on to say, at paragraph 76 of the judgment, that even if the circumstances concerned arose within the organisation of the assured itself, the question of whether the circumstances might give rise to claims against the assured had to be answered objectively.

Toulson LJ stated that he did not believe the test was either simply objective or subjective. (Footnote: ⁵¹) Instead he considered (Footnote: ⁵²) that:

“the question whether a circumstance may give rise to a claim is not a matter of simple knowledge, a question of fact of which a person may or may not be “aware”; rather, it involves a degree of crystal – ball gazing, an estimation of the likelihood of a claim”.

Having considered three possible examples of “circumstances”, Toulson LJ concluded that when a clause imposed a duty on an assured to give notification of circumstances, then “the right general approach” was to treat the clause:

“…as implicitly limited, not only by the requirement that the circumstance may reasonably be regarded as a matter which may give rise to a claim, but to a circumstance which either the insured notifies or which any reasonable person in his position would recognise as a matter which may give rise to a claim and therefore requiring notification to the insurer”. (Footnote: ⁵³)

Although Toulson LJ expressed his view on this issue of construction more expansively than did Rix LJ and in different language, I think that the result is the same. When Toulson LJ says that the issue is whether the circumstance in issue “may reasonably be regarded as a matter which may give rise to a claim”, it imports an objective test to answer the question: is this circumstance a matter which may give rise to a claim? The objective nature of the inquiry is reinforced by the way Toulson LJ expresses himself in the second part of the quotation set out above, ie. by asking whether a “reasonable person” would recognise a matter as giving rise to a claim.

The wording of the clause in the present policy is slightly different to that in the Kidson case. However, in my view the approach to the construction of the wording “has given or is likely to give rise to a Construction Claim”, must be the same; ie. it is an objective test. The words “…any cause, event or circumstance which has given or is likely to give rise to…”, therefore refer to a state of affairs which can be objectively ascertained. Moreover, such a construction avoids the difficulties which would be bound to arise if it were left to either the assured or the insurer to decide, on subjective grounds, what it thought about the likelihood of a circumstance giving rise to a claim.

Therefore the judge was correct to hold that he had to ask whether, objectively speaking, the circumstances of the relationship between LVE and GWUG had given or was likely to give rise to a Construction Claim before LVE actually gave notice on 20 January 2005.

Given the judge’s construction of the words “…is likely to give rise to a Construction Claim” in clause 6.1, which I have held was correct, the judge was bound to ask whether, objectively speaking the “dispute” had reached the stage where adjudication, arbitration or litigation was likely to be required to solve the differences between the parties. On his evaluation of the evidence, it was not. That evaluation was based on the primary facts, the oral evidence of Mr Ventre and his overall assessment of the position. Mr Smith is unable to point to any fact or factor that led the judge to err in his conclusion. It is clear, in my view, that the judge’s conclusion cannot be characterised as “obviously wrong”.

Therefore the appeal on the notification issue must also fail.

For the reasons set out above, this appeal must be dismissed.

I agree.

I also agree

DEFINITIONS

Construction Claim

Own Costs

Any word or phrase used in the Policy or the Schedule, which is defined in the Civil Procedure Rules 1998, shall have that same meaning in the Policy and/or the Schedule.

The due observance of and compliance with the terms, provisions and conditions of this Policy insofar as they relate to anything to be done or complied with by the Insured or his Appointed Representative, shall be conditions precedent to any liability of the Insurers to make or continue to make any payment hereunder.

INSURANCE

Subject to the terms and conditions of this Policy, the Insurers shall indemnify the Insured in respect of Policy Claims.

NOTIFICATION OF POLICY CLAIMS

It is a condition precedent to the Insurers’ liability hereunder that We are notified in writing, immediately the Insured is aware of any cause, event or circumstance which has given or is likely to give rise to a Construction Claim. It is important to note that on any renewal declaration to the insurers, the insured must advise the Insurers of any potential claims, not already advised by the Insured and received by the insurers. If the Insured fails to notify Us of such cause, event or circumstance during the Period of Insurance, any claim arising from that cause, event or circumstance shall not be admitted unless the Insurers in their sole discretion decide otherwise.

Where such notification has been given, the Insurers agree to treat any subsequent Construction Claim in respect of the cause, event or circumstance notified as though the Construction Claim had been made, brought or commenced during the Period of Insurance. Upon receipt of a notification by the Insured under Clause 6.1, We will forward to the Insured a claim form which must be completed and returned if the Insured wishes to proceed with a Policy Claim.

NON-DISCLOSURE

The Insurers shall be entitled to avoid the Policy where there has been non-disclosure or misrepresentation of facts or untrue statements made buy the Insured at the inception of this Policy including without limitation, as a result of the contents of the Proposal Form.

GOVERNING LAW

The Policy shall be governed by and construed in accordance with English law.