McIlroy (Swindon) Ltd & Ors v Rannoch Investments Led & Anor

On 5^th September 2006 a fire broke out in shop premises in the High Street in Lewes. In due course it spread to neighbouring premises as well. The premises where the fire broke out were owned by Rannoch Investments Ltd (“Rannoch”) and consisted of a ground floor shop with two residential flats above, all of which were leased to William McIlroy (Swindon) Ltd (“McIlroy”). At all material times the shop premises were occupied by an associate company Mackays Stores Ltd (“Mackay”).

At the time of the fire refurbishment works were being carried out in the shop pursuant to a contract between Mackay and Cathedral Works Organisation (Chichester) Ltd (“CWO”). CWO sub-contracted the roof work and the work involved in the removal of paint from the front of the building to A Lenihan Ltd (“Lenihan”), who carried on business in a small way as a roofing and building contractor. It was alleged that the fire had been caused by one of Lenihan’s employees using a blowtorch in a negligent way while he was engaged in paint removal.

At all material times Lenihan were insured under a policy of public liability insurance issued by Quinn Insurance Ltd (“Quinn”). Although Lenihan contended that the outbreak of fire was not their fault, their brokers duly notified Quinn when the fire took place, and on being told that Lenihan were denying that their workmen were using hot works on the day of the fire, Quinn closed their file. They later reopened the file after Rannoch had written a letter of claim to Lenihan, and after a considerable delay they refused to provide an indemnity to Lenihan for two reasons. The first related to the way in which the blow torch had been used. It was said that this contravened General Condition 6 of the Policy, which required the Insured to take all reasonable precautions to prevent accidents. The second, which was later abandoned, relied on alleged material non-disclosure arising out of untrue statements which Lenihan’s employees were said to have made to loss adjusters following the fire.

In due course Rannoch and neighbouring occupiers brought an action against McIlroy, Mackay, CWO and Lenihan. The first three defendants defended the action and brought CPR Part 20 proceedings against Lenihan. Lenihan and Quinn were kept informed of the progress of the litigation, but took no part in it. Default judgments were entered against Lenihan by Rannoch on 21^st April 2009 and by the first three defendants in the Part 20 proceedings on 12^th August 2009.

On 19^th November 2009 all the claims in the main action (other than the claim against Lenihan) were settled at a mediation. On 11^th December 2009 Ramsey J held that the settlements were reasonable. He went on to assess CWO’s damages against Lenihan in the sum of £600,000 and costs, and the claim by McIlroy and Mackay in the sum of £150,000 and costs. On 13^th January 2010 the same judge assessed the value of Rannoch’s claim against Lenihan in a total sum of £792,542 inclusive of interest and costs.

Lenihan did not satisfy any of these judgments. On 17^th February 2010 a voluntary winding up resolution was passed, and Lenihan’s rights against Quinn were then vested in the various claimants pursuant to section 1 of the Third Party (Rights against Insurers) Act 1930.

This led to two actions being brought promptly against Quinn to recover the damages assessed against Lenihan by Ramsey J. McIlroy, Mackay and CWO were now jointly represented in the first action, and Rannoch were the claimants in the second. These two actions have been managed and heard together as have the appeals. In their defence Quinn raised an entirely new ground for non-payment, namely that Lenihan should have instituted arbitration proceedings within nine months of February 2009, when Quinn’s refusal of an indemnity was first communicated to Lenihan, and the actions were now time-barred. In this context Quinn relied on General Condition 16 of the policy which provided that:

Ramsey J directed that Quinn’s entitlement to rely on General Condition 16 should be tried as a preliminary issue, and this preliminary issue came on for trial before Edwards-Stuart J on 28^th July 2010. A number of witness statements were filed with the court. Their contents were taken to be true, and the judge heard no oral evidence. So far as is relevant to the present appeals, the judge rejected the claimants’ contention that the time bar in General Condition 16 was an onerous and unusual clause which had not properly been brought to Lenihan’s attention, and held that their claims were time-barred by the operation of General Condition 16.

The claimants now appeal to this court. The trial judge gave them permission to appeal on the time-bar point, and Richards LJ granted the McIlroy claimants permission to appeal on the “unusual and onerous condition” point. Quinn were content that Rannoch should be entitled to rely on this point, too, but it was common ground on the hearing of the appeals that if the appellants were successful on the time-bar point there would be no need for this court to go on to consider whether or not sufficient steps had been taken to draw Lenihan’s attention to this provision of their policy.

The central issues to be determined on the appeals on the time-bar point were said to be whether Quinn’s refusal of indemnity in February 2009 amounted to a dispute which triggered the time-bar clause, and/or whether their refusal in December 2009 to provide an indemnity to Lenihan in relation to the judgments awarded against them amounted to a further dispute which also triggered a right to arbitrate. If it did, Quinn accept that the claims were brought in time and are content to submit to the jurisdiction of the High Court to resolve the matter. I should say at once that the alternative argument has no merit at all, since if time did run against Lenihan from February 2009 onwards, then “the claim shall be deemed to have been abandoned” in November 2009 and no further dispute could possibly arise under the indemnity cover aspects of the policy the following month.

The argument on the appeal followed a different course from that apparently pursued before the judge. On the face of it, the judge’s conclusion seemed remarkably unfair, since his construction of the clause would require Lenihan to have initiated proceedings within nine months of Quinn purporting to repudiate liability under the policy, even though Lenihan were contending that the fire was not their fault, and even though, if they were indeed responsible, their liability to the present claimants might not have been established at any point during the nine-month period. It was therefore necessary for us to consider the wording of General Condition 16 with care to see if it required us to uphold the judge’s interpretation.

It is trite law that liability under an indemnity policy does not accrue unless and until the existence and amount of the liability to relevant third parties has first been established, whether by a judgment or by an arbitration award or by agreement. See Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363 per Lord Denning MR at pp 373-4; Bradley v Eagle Star Insurance Co Ltd[1989] 1 AC 957 per Lord Brandon at p 966 A-B.

It follows that no dispute could have arisen between Lenihan and Quinn on Quinn’s liability under the public liability section of the policy, whether in respect of a claim or the amount to be paid, unless and until Lenihan’s liability to the present claimants had been established by the judgments on the assessment of damages which Ramsey J directed to be entered in December 2009 and January 2010 respectively. It follows that the judge was wrong to hold that Lenihan’s rights under the policy had been extinguished by that time by the operation of General Condition 16. The present actions were commenced well within the nine-month period after December 2009 or January 2010 which is stipulated by General Condition 16, and Quinn takes no point on the fact that court proceedings, as opposed to arbitration proceedings, were initiated in order to enforce these claims.

The only argument which provided any cause for pausing before reaching this obviously fair conclusion was founded on a decision of this court in Walker v Pennine Insurance Co Ltd [1980] 2 Lloyd’s Rep 156 which came to light for the first time very shortly before the appeals were heard. In that case the relevant provisions of the defendant’s motor insurance policy read:

The relevant accident took place in August 1970. The insurers received notice of a claim by the injured party’s solicitors in December 1970, and in February 1971 their agents notified the insured that because the car was overcrowded and therefore unroadworthy his insurers had decided not to meet the claim. In March 1973 the injured party’s solicitors obtained a default judgment against the insured, which prompted his solicitors to reopen correspondence with the insurers in 1975. The insured’s action against the insurers was initiated before the injured party’s damages were assessed in November 1976.

Sheen J held that on the proper interpretation of that policy the insurers had disclaimed liability for the insured’s claim in March 1971, and that his present action was therefore time-barred, and this conclusion was upheld by this court. All these cases turn on the wording of the particular policy, but during the course of his leading judgment Roskill LJ said at p 159:

This appears to have been an ex tempore judgment during the course of which Roskill LJ made no reference to the decision of this court in the Post Office case. It is of course possible that if he had done so, he would have explained why in his opinion it did not affect his interpretation of the policy he was engaged in construing. However, if and in so far as the Walker decision might be taken to impugn the authority of the Post Office decision (later upheld as it was in 1989 by the House of Lords in the Bradley case), it should not be followed. In my judgment, in the present case Quinn’s “liability in respect of a claim or the amount to be paid” cannot possibly have accrued until the assessments of the present claimants’ damages against Lenihan had taken place.

For the sake of completeness I would add that this judgment is concerned only with Quinn’s liability under the public liability provisions of the policy. The policy also provided other cover that might possibly have been relevant in the events that took place (for example, for costs and expenses incurred with Quinn’s consent or for the reasonable solicitor’s fee for representation at any Coroner’s inquest), and in any such events a dispute between Lenihan and Quinn “in respect of a claim or the amount to be paid” might have arisen at an earlier date. These appeals, however, are not concerned with any cover under the policy other than the public liability cover.

I would add that if for any reason Lenihan had wanted to challenge Quinn’s purported repudiation of the policy in February 2009, they could have issued court proceedings at any time prior to February 2015, because such a dispute would not have triggered the provisions of General Condition 16. In the event they did nothing to accept the repudiation, which as Asquith LJ memorably said in Howard v Pickford Tool Co Ltd [1951] 1 KB 47 at p 421, remained “a thing writ in water”. See also Lefevre v White [1989] 1 Lloyd’s Rep 569 per Popplewell J at p 574. Different considerations would of course have arisen if liability was later established against Lenihan and a quantified claim had then been presented to and rejected by Quinn.

For these reasons I would allow these appeals, set aside the judgment of Edwards-Stuart J, and invite Counsel to draw up minutes of order accordingly.

I agree.

I am grateful to Sir Henry Brooke for setting out the material in this appeal. I agree with his judgment, and add a judgment of my own, as we are differing from the judge and distinguishing Walker v. Pennine Insurance Co Ltd [1980] 2 Lloyd’s Rep 156 (CA).

The critical wording in the policy in this case (General Condition 16) provides:

Quinn’s argument, accepted by the judge, is that a dispute within the clause had arisen as soon as Quinn had declined cover (albeit on erroneous grounds, asserting breaches of condition and non-disclosure) and that Lenihan (and therefore the claimants who now stand in its shoes under the 1930 Act) were therefore time barred nine months later.

There was at one time controversy as to exactly when Quinn had managed to transmit to Lenihan its letter declining cover, but by the time of trial it became common ground that that had occurred on 18 February 2009, with the result that the nine months had been spent by 19 November 2009. Proceedings were not commenced until 23 April 2010 (in the case of the claimants other than Rannoch) or 14 June 2010 (in the case of Rannoch). The two actions were consolidated. Quinn takes no point that proceedings were begun by action rather than in arbitration, but submits that both actions were out of time.

The claimants, however, submit that time did not begin to run until Lenihan’s liability had been established and quantified: Post Office v. Norwich Union [1967] 2 QB 363 at 373-5, 377E, Bradley v. Eagle Star [1989] 1 AC 957 at 965-6. That was not until 11 December 2009 and 13^th January 2010. Thus it is said both actions were within nine months of those dates.

The judge, Edwards-Stuart J, agreed with Quinn. It is helpful to set out the judge’s reasoning, for it reflects the argument which has been addressed to this court by Mr Nicholas Davidson QC on behalf of Quinn. The judge first appears to have distinguished Post Office v. Norwich Union on the ground that it was only concerned with a “money claim” (see at paras 65 and 67), and then continued:

Now, the distinction drawn there between suing for an indemnity and suing for a declaration in advance of being in a position to claim for an indemnity is recognised in Post Office v. Norwich Union itself. Thus Lord Denning there said at 374:

But the question remains: have the parties agreed for a 9 month time bar even in a situation where the only dispute which has arisen between insurer and insured is the wider dispute about cover under the policy, but where the insured does not as yet have a claim under the policy?

The judge considered that the arbitration clause, and therefore its time bar, must apply to the situation of a repudiation of liability by the insurer in advance of the insured’s having a claim for an indemnity, because otherwise the insured would have no remedy against the insurer in the case of the latter’s repudiation and so would be unable to establish his rights, so as to protect for instance his right to call upon the insurer to assist him in his defence of the third party’s claim. However, with respect that is a non sequitur. If there is a dispute about cover, or the continued existence of the policy which perhaps the insurer has purported to avoid, but if such a dispute were not within the arbitration clause, the only consequence of that would be that such a dispute did not have to be arbitrated. But the insured would always be entitled to go to court for a declaration, and so would the insurer.

If on the other hand, an insured was obliged by general condition 16 to arbitrate, at pain of losing all remedy after 9 months of such a dispute arising, then an insured would be forced to arbitrate even at a time when there might be no third party claim in the offing at all, indeed not even an incident which might in due course give rise to a third party claim. This might all be years before any third party claim might be intimated, let alone brought to court, let alone adjudicated and quantified. Although an arbitration brought in such circumstances might I suppose be stayed by agreement, this is a highly inefficient dispute resolution mechanism. It would also be an unfortunately one-sided clause, for there is no provision to time bar the insurer’s assertion of its right to repudiate his policy.

Is this therefore what the clause was nevertheless intended to achieve?

In my judgment it would be strange if it was. It is necessary to consider the wording of the arbitration agreement more carefully.

The first and most important matter to observe is that it only operates in respect of a “dispute…on our liability in respect of a claim or the amount to be paid” (emphasis added). What is that claim? Is it the third party’s claim, or is it the insured’s claim under the policy? Plainly, it is the latter. For the condition goes on to refer to such a claim being “deemed to have been abandoned and not recoverable thereafter”, and the insured could not refer a third party claim against the insured to arbitration under the policy. Thus the arbitration clause can only be referring to a claim under the policy. Indeed, that was common ground before the judge, as he remarked at para 60 of his judgment, and as was common ground before us.

It therefore follows that if a dispute under the clause could arise before the Post Office v. Norwich Union time for a claim for an indemnity under the policy, the word “claim” would have to embrace “potential claim”. But that is not what the clause says: and its talk of “the claim shall have been deemed to have been abandoned and not recoverable thereafter” emphasises to my mind that what the clause is talking about is a claim for an indemnity which an insured is entitled to make against his insurer. It is only such a claim which can properly be said to have been abandoned and to become “not recoverable”. A merely potential claim is in any event irrecoverable, as Post Office v. Norwich Union teaches. In other words, I would regard “claim” in this context as being synonymous with the assertion of a purported cause of action. That, after all, is the usual context of a time bar provision, and it might be said a fortiori of a time bar provision which not only bars the remedy but also bars the claim itself.

Therefore, to my mind both the logic of the situations discussed by the judge and the wording of the arbitration clause itself combine to suggest that the clause simply does not have in mind a dispute as to liability under the policy divorced from a particular claim or cause of action for an indemnity which has, as the insured may assert but the insurer may deny, matured into a liability under the policy. Similarly, the quantification of the insured’s liability may be in dispute in respect of such a claim (“or the amount to be paid”). That alternative is suggestive of a situation where liability is acknowledged by the insurer, but he disputes the amount in which liability has been assessed or agreed as between third party and insured.

It seems to me that the judge was therefore wrong to say that the repudiation by Quinn of all liability under the policy was therefore a “dispute in respect of Quinn’s liability in respect of the claim by Lenihan under the policy” (at his para 75). Lenihan could have made no claim under the policy at that time. It could only have notified an incident which might give rise to a third party claim, or notified such a third party claim itself. This is reflected in other language of the policy. Thus under the policy’s “Introduction”, the first of several “Important Points To Note” provides:

Is there any reason why what I consider to be the natural and business-like meaning of General Condition 16 should not be given appropriate effect?

Mr Davidson relied in this connection on Walker v. Pennine Insurance Co Ltd [1980] 2 Lloyd’s Rep 156 (CA) (an authority not put before the judge). That concerned a motor policy which included cover for the insured’s liability for personal injury to a third party. The policy included the following clause 6:

On 5 August 1970 the insured injured a third party in a road traffic accident. In November 1970 the insured was notified that a claim would be made by the injured party. When that came to the attention of the insurer, it repudiated liability by a letter dated 3 February 1971 on the ground that the insured’s car had been in an unroadworthy condition: “They have therefore decided not to proceed to meet the claim”. On 25 October 1972 the injured party started proceedings against the insured. It was not until 25 November 1976 that judgment for £6065.22 was entered against the insured in favour of the third party claimant. The insured sued his insurers for a declaration that he was entitled to be indemnified in respect of his liability, at a time before that judgment was entered, but outside one year from the insurer’s repudiation of liability. The insurers relied on the one year time bar contained in clause 6.

Lord Justice Roskill referred to letters passing between the parties in 1971 and stated (at 159 lhc) –

The matter was therefore dealt with somewhat peremptorily. It is true that there was little in West Wake Price to support the proposition put to the court in Walker, and that Devlin J was there considering a totally different clause (a QC clause) in a totally different type of policy (an accountants’ liability policy). It remains the case, however, that Roskill LJ seems to have rejected the proposition which a citation of Post Office v. Norwich Union would have vindicated. In such circumstances, he seems to have regarded notification of a third party claim or of a merely potential claim to be identified as constituting a “claim” for the purposes of clause 6.

As it is, Devlin J in West Wake Price [1956] 1 WLR 45 considered the possible meanings of “claim” in different settings. Thus in the context of an indemnity clause, he said this (at 49):

I can find remarkably little assistance in the text-books on this question of construction. Chitty on Contracts, 30^th ed, 2008, cites Walker (at Vol II, paras 41-025 and 41-071) but not for the precise point involved. MacGillivray on Insurance Law, 11^th ed, 2008 at para 28-64 refers to Walker in unenthusiastic terms, describing it as a “hard decision” and the clause as a “trap for the unwary”. Jackson & Powell on Professional Negligence, 6^th ed, 2007, does not cite it at all. Colinvaux’s Law of Insurance, 9^th ed, 2010, at para 9-040, cites Walker under the heading “Variation of the limitation period” without recognising that its effect is not to shorten the period, but to abrogate the concept of limitation altogether. Mustill & Boyd, The Law and Practice of Commercial Arbitration, refers not to Walker and the insurance context but to the well-known Centrocon arbitration clause (“Any claim must be made in writing and claimants’ arbitrator appointed within three [usually amended to nine] months of final discharge…”), but the context there is shipping and the “claim” there referred to is typically a completed cause of action for cargo damage. Even so its learned editors observe that “clauses of this type must be strictly construed, and a claim will not be barred by lapse of time unless the provision clearly applies to the claim in question” (at 201/2).

It is possible that in a motor policy (Walker) the word “claim” is to be regarded in a hybrid way. If an insured’s car is damaged in a collision, the insured is commonly spoken of as making a “claim” on his policy, assuming it to be comprehensive. If in the collision a third party’s car is also damaged, usually in circumstances where fault is disputed, the insured’s “claim” may possibly be regarded as encompassing a request for cover for any third party claim that may be made. It may be that in such circumstances the word “claim” may be given a wide meaning as encompassing any assertion of a potential future liability on the part of the insurer.

Whatever may be the meaning given to “claim” in such different circumstances, however, I am satisfied that in the context of a public liability policy such as is found in the present case, the essence of a claim under the policy is a request for an indemnity on the basis of an established cause of action in respect of a third party claim where liability and quantum have been ascertained, where the insured’s “liability in respect of a claim” can properly be so regarded, and where such a claim can sensibly be spoken of as abandoned. In any event, a decision which does not take into account the doctrine of Post Office v. Norwich Union cannot in my opinion bind us in this case. In my judgment it makes no sense to think that an insured may have become time barred in a claim under such a policy before, possibly years before, he has any cause of action to bring it. Normally a time bar operates in respect of a cause of action and not before a cause of action has even matured. I would agree with MacGillivray in regarding an arbitration clause such as the judge construed it, in such a policy with standard wording put forward by an insurer, as amounting to a trap for the unwary, ie the typical, insured. In such circumstances, if “claim” can be given a different meaning which would avoid such consequences, it should be. As it is, the observations of Devlin J suggest that the primary meaning of “claim” in liability insurance would support the appeal. In sum, I would be reluctant to uphold the judge’s construction of such a clause unless it was plainly necessary. Not only is it not necessary, but it is not the natural construction.

I would hold that Quinn’s liability in respect of the claims put forward in the claimants’ consolidated actions had not been disputed more than nine months before those actions were commenced, for they had not then existed. Those claims are not time barred and are not to be regarded as abandoned or irrecoverable. That is not to say that Lenihan could not have sought a declaration as to the ongoing validity of the policy in the courts at any time after receiving Quinn’s letter disputing liability. I would therefore allow the claimants’ appeal.