Nesbit Law Group LLP v Acasta European Insurance Company Ltd

There are essentially two issues in this appeal, each of which could be determinative as to the outcome. The first issue relates to the proper construction of an exception or exclusion clause contained in a series of Financial Guarantee Indemnity (“FGI”) policies underwritten by the Part 20 defendant and appellant, Acasta European Insurance Company Limited (“Acasta”). The second issue, which arises only if Acasta’s construction of the exclusion clause is correct, is whether Acasta should be granted permission to amend its Part 20 defence (the “Defence”) to plead that the defendant, Part 20 claimant and respondent, Nesbit Law Group LLP (“Nesbit”), had acted in breach of the terms of what has been confusingly referred to as a “Term Loan” agreement concluded on 28^th June 2010 between Nesbit and its lender, Clydesdale Financial Services Limited (“Clydesdale”). I shall call that agreement the “Refinancing Agreement”, since it operated to refinance the numerous loans made by Clydesdale to Nesbit under the litigation funding scheme that underlies this case.

On 15^th September 2016, Mr Stuart Brown QC, sitting as a Deputy High Court Judge, decided that the proper construction of the exclusion clause did not include a reference to the Refinancing Agreement. As a result, he made an order on 19^th September 2016 giving Nesbit judgment for £1,195,600.04 against Acasta in respect of insured irrecoverable costs.

The exclusion clause in question provided as follows:-

In summary, the question of construction is whether the words “including but not limited to any agreement entered into by [Nesbit] and [Clydesdale] to repay a Loan” either (i) are able to be taken to be referring to what became the Refinancing Agreement which refinanced the earlier series of loans made by Clydesdale to Nesbit (as Acasta contends), or (ii) refer either only to the original Irrecoverable Costs Loan Agreement (“ICLA”) made between Clydesdale and Nesbit, or to any loan agreement specifically replacing the ICLA in question entered into whilst the litigation funding scheme was in full operation (as Nesbit contends).

Also in summary, the amendment issue turns on whether it is now too late for Acasta to amend its Defence, bearing in mind the guidance on this issue given in Swain-Mason v. Mills & Reeve [2011] 1 WLR 2735 (at paragraphs 69 to 72, 85 and 106) (“Swain-Mason”) and other cases. Acasta acknowledged the need for finality in litigation, and was unable to offer any excuse for making its application only four weeks before the hearing of this appeal, but argued that the case might anyway have had to go back for a further trial, even had the application been made much earlier. Acasta submitted that significant injustice would be caused to it if permission were refused, but there would be little prejudice to Nesbit if it were allowed.

Before dealing in detail with the arguments of the parties, I should set out a little of the factual background.

In about 2007, Clydesdale and Acasta (registered in Gibraltar, and previously known as Focus Insurance Company Limited) set up a funding scheme for personal injury solicitors. Its key features included the following:-

Clydesdale would provide loans to the solicitors to fund their recoverable and irrecoverable costs.

Acasta would provide two types of insurance: Legal Expenses Insurance for clients who entered into conditional fee agreements with the solicitors, and FGI insurance for the solicitors themselves in respect of irrecoverable costs such as referral fees incurred in respect of unsuccessful claims (those fees being paid out of the solicitors’ profits in the case of successful claims).

In April 2007, Nesbit, a solicitors’ firm in Bury specialising in personal injury litigation, began its participation in the litigation funding scheme, which involved entering into the following agreements:-

A framework agreement with Clydesdale (the “Umbrella Agreement”), which set out the general terms on which monies were to be advanced by Clydesdale to Nesbit.

The ICLAs between Nesbit and Clydesdale for each individual loan made as the scheme progressed (averaging about £1,000 per case).

FGI policies underwritten by Acasta in respect of each funded case (the “FGI Policies”). It was a condition precedent of funding that Nesbit took out an FGI Policy for each case.

After joining the Scheme, Nesbit was introduced to several thousand clients, and its loan facility reached a peak of £6 million. Nesbit encountered financial difficulties, and, as a result, Clydesdale terminated the Umbrella Agreement on 31^st July 2009, leaving large sums due from Nesbit to Clydesdale.

Under the Refinancing Agreement of June 2010, Clydesdale advanced the lesser of £3,165,000 or the amount equal to Nesbit’s liabilities to Clydesdale under the “existing litigation funding loans” made between Clydesdale and Nesbit. Those loans were said to be scheduled to the Refinancing Agreement, but the schedule was in fact left blank. The funds were used to repay loans made by Clydesdale in respect of both irrecoverable and recoverable costs, and were repayable by 53 monthly instalments of £65,959.34.

On 22^nd February 2012, Nesbit’s solicitors wrote to Acasta, seeking payment under the FGI and Legal Expenses Insurance policies in the sum of £1,257,861.53. Nesbit contended, however, that it had informed Acasta prior to that date of which specific clients’ claims had been unsuccessful.

On 29^th January 2013, Clydesdale issued proceedings against Nesbit claiming instalments allegedly unpaid under the Refinancing Agreement. Nesbit then filed a defence and counterclaim, including a Part 20 claim against Acasta for £1,257,861.53.

On 13^th December 2013, Clydesdale’s claim against Nesbit was settled by a Tomlin Order, under which Nesbit was to pay Clydesdale a sum by way of settlement by monthly instalments.

On 14^th January 2016, HH Judge Behrens stayed those elements of Nesbit’s Part 20 Claim against Acasta relating to the Legal Expenses Insurance policies, in respect of which separate litigation was being brought against Acasta by Nesbit’s clients. Nesbit’s claim relating to the FGI Policies in the sum of £991,908.86 continued.

On 15^th July 2016, Mr Colin Graham Sayer made a statement on behalf of Acasta in which his summary conclusion was that any right to claim under the FGI Policies was extinguished under the Refinancing Agreement “from the very moment [Nesbit] effected the draw down”, all monies were repaid to Clydesdale on 16^th July 2010 using the draw down, and the alleged irrecoverable costs incurred by Nesbit were paid and settled by the Refinancing Agreement.

On 9^th September 2016, Ms Karen Troy, then counsel for Acasta, filed her skeleton argument for the trial due to commence on 12^th September 2016. She described the full range of issues for trial as being (i) whether on a true construction of the FGI Policies, Nesbit was prima facie entitled to recover; (ii) whether Acasta had any remaining liability after the Refinancing Agreement was entered into, (iii) quantum, and further issues concerning commissions paid to Clydesdale and interest. A joint note from counsel for both sides dated 12^th September 2016 agreed that the court could have regard to certain materials as commercial context in construing the FGI Policies including documents evidencing Nesbit’s default under the Refinancing Agreement.

On 19^th September 2016, Mr Brown gave judgment in favour of Nesbit for £991,908.86 plus interest of £203,691.18 and costs. The judgment sum was ordered to be paid into court, and Mr Brown refused permission to appeal.

On 6^th October 2016, Acasta filed an Appellant’s Notice. On 11^th October 2016, Moore-Bick LJ refused permission to appeal the judge’s order for payment into court. He adjourned the substantive application for permission to appeal, requiring Acasta to file succinct amended grounds of appeal, which were duly filed on 2^nd November 2016. David Richards LJ granted permission to appeal on 11^th April 2017.

On 5^th July 2017, Nesbit filed a Respondent’s Notice seeking to uphold the judge’s decision on the grounds that no breach of the Refinancing Agreement had been pleaded, and, had Acasta applied for permission to amend, it ought to have been refused. On 22^nd December 2017, Acasta issued an application for permission to amend its Defence to plead for the first time the exclusion clause itself and the construction of it for which Acasta contends, and to plead alleged breaches of the Refinancing Agreement. That application is not opposed insofar as it relates to the construction of the exclusion clause itself, since the judge decided those issues with the consent of both parties, but is opposed insofar as the alleged breaches are concerned.

It will be recalled that the exclusion clause excludes payment for “Irrecoverable Costs … where the terms and conditions of the Loan have not been strictly adhered to, including but not limited to any agreement entered into by [Nesbit] and [Clydesdale] to repay a Loan”.

“Irrecoverable Costs” are defined as meaning “in relation to the Proceedings the capital costs incurred by [Nesbit] (and not the Client) which are funded by way of a Loan provided to [Nesbit] by [Clydesdale] under the Litigation Funding Scheme”.

“Loan” is defined as meaning “the funds advanced to [Nesbit] by [Clydesdale] to finance the Irrecoverable Costs and the interest that accrues upon those advances”.

The parties placed reliance also on the following clauses of the FGI Policies:-

In describing the facts at paragraph 11 of his judgment, the judge said, in a passage relied upon by Acasta, that the proceedings arose because Nesbit was unable to meet its obligations under the Refinancing Agreement. He then said at paragraphs 12-14 that he had agreed with the course proposed by the parties to the effect that the “primary issue (of construction)” did not require oral evidence and should be heard first as if it was determined in Nesbit’s favour, the remaining issues and the oral evidence would not arise.

The judge then formulated the primary issue that had been agreed should be determined as follows:-

The judge then said at paragraph 18 that, although the FGI Policies were central, he could and should have regard to the litigation funding scheme as a whole. The judge took the legal principles he was applying to the construction issue from Rainy Sky SA v. Kookmin Bank [2011] UKSC 50 (“Rainy Sky”) and Re Sigma Finance Corporation [2010] 1 All ER 571, including the principle that where there are two possible constructions the court was entitled to prefer that consistent with business common sense.

The judge considered Acasta’s primary submission to the effect that, if by the time a claim was made by Nesbit under the FGI Policies, the Umbrella Agreement was not subsisting, but had instead been replaced by the Refinancing Agreement, then no claim could be made on the FGI Policies. The judge rejected that argument as contrary to business common sense, and his conclusions on that point have not been appealed.

The judge then dealt with what was then Acasta’s subsidiary (and unpleaded) argument concerning the exclusion clause. He said this at paragraphs 47-58:-

Acasta relies on the following four grounds of appeal:-

The judge ought to have concluded that the exclusion clause covered the Refinancing Agreement.

The judge was wrong to conclude that any lack of strict adherence by Nesbit to the terms and conditions of the Refinancing Agreement was irrelevant to his decision.

The judge was wrong not to have made findings of fact, or to have postponed to a further hearing the issues of fact, about whether there had been a lack of strict adherence by Nesbit to the terms and conditions of the Refinancing Agreement prior to Nesbit’s claim on the FGI Policies.

The judge ought to have found that Nesbit had failed strictly to adhere to the terms and conditions of the Refinancing Agreement prior to its claim on the FGI Policies, and therefore that Nesbit’s claims on the FGI Policies were not covered.

As I have already said, the two main issues that require consideration are (i) the proper construction of the exclusion clause and (ii) Acasta’s application to amend its Defence. Only if Acasta succeeds on both these issues does any question of breach of the Refinancing Agreement arise.

Mr Michael McLaren QC, leading counsel for Acasta, relied heavily on the provisions of the Umbrella Agreement. It is not necessary to set out those terms extensively in this judgment, but it is right to say that they set the backdrop to the operation of the litigation funding scheme. As to construction itself, Mr McLaren argued that the first limb of the exclusion clause (“[t]he terms and conditions of the Loan have not been strictly adhered to”) was referring to the individual ICLAs entered into for each case between Clydesdale and Nesbit. He accepted the possibility that the words “[t]he terms and conditions of the Loan” might apply in addition to the Umbrella Agreement, but said that, even if they did, that did not affect the obvious and unambiguous meaning of the second limb of the exclusion clause namely “including but not limited to any agreement entered into by [Nesbit] and [Clydesdale] to repay a Loan”. Those words were to be taken as meaning what they said, namely to extend the exclusion for breach of the Loan itself to breach of any agreement to repay that Loan. The Refinancing Agreement was just that: an agreement to repay the loans advanced under all the extant ICLAs. That was clear from the terms of the Refinancing Agreement which made it clear in paragraph 4.2 and elsewhere that the refinanced loan had to be immediately applied (as it was) to repay the existing litigation funding loans, which included those made under the ICLAs.

I confess to having found Mr McLaren’s argument beguilingly attractive for its simplicity and the fact that it neatly gives meaning to every aspect of the exclusion clause. Ultimately, however, I am unable to accede to it for reasons that I am able to express briefly.

The words “[t]he terms and conditions of the Loan” need to be read incorporating the definitions used in the FGI Policies. Thus, one can read them as “[t]he terms and conditions of the [funds advanced to [Nesbit] by [Clydesdale] to finance the [capital costs incurred by [Nesbit], in relation to the Proceedings, which are funded by way of a Loan … under the Litigation Funding Scheme]”. The definitions of “Litigation Funding Scheme” and “Proceedings” do not take the matter much further, save that they make clear that the individual loan under an ICLA is part of the greater funding and insurance arrangements I have described. Read in this way, it seems to me clear that the “[t]he terms and conditions” referred to are all the terms and conditions affecting the individual loan covered by the ICLA in question, so that they must include both the ICLA and the Umbrella Agreement. Mr McLaren did not, in fact, much quibble with that approach.

In order properly to understand the second limb of the exclusion clause, in my judgment, one needs to have regard to the context of the litigation funding scheme. One may also have regard to business common sense, because in my judgment, the second limb is not unambiguous as Mr McLaren submits. It could be taken to refer only to an agreement between Nesbit and Clydesdale to repay the specific loan made under the ICLA in question, or it could refer additionally to any agreement to refinance all the loans made under the litigation funding scheme. The distinction between the use of the term “the Loan” in the first limb and “a Loan” in the second limb adds to this ambiguity. I should say in passing that I am not persuaded by the judge’s construction which, as it seems to me, gives no additional meaning to the second limb of the exclusion clause over and above the first. He held at paragraph 51 of his judgment that “the [exclusion] clause is intended to allow Acasta to avoid cover if the loan (and the initial loan only) conditions, including obligations to repay, are breached”.

The context and background that needs to be taken into account is the nature of the litigation funding scheme itself. It was a highly structured arrangement established by the Umbrella Agreement, under which for each ICLA there had to be a FGI Policy (see clause 5.1.7). Moreover, each ICLA and FGI Policy in respect of each particular advance for a particular case incepted together. There were then detailed provisions as to how each individual loan was to be repaid if the personal injury action were successful, and was to be the subject of a claim on the individual FGI Policy if the action were unsuccessful. Clauses 12 and 13 of the Umbrella Agreement made clear what was to happen on its termination, but broadly the litigation funding scheme went into run-off so as to unwind the relationship. The point, however, as it seems to me, is that nothing in any of the litigation funding documentation which was created in 2007 envisaged a global refinancing arrangement replacing the Umbrella Agreement and the other documentation after the termination of the litigation funding arrangements themselves.

What actually happened was that Nesbit overreached itself (as the judge put it), Clydesdale terminated the Umbrella Agreement on 31^st July 2009, and Nesbit was left with a large debt to Clydesdale. The Refinancing Agreement was a completely new arrangement between Clydesdale and Nesbit entered into nearly a year after the litigation funding scheme had ended so as to find some means by which Nesbit could repay its outstanding debt. There were still outstanding loans and personal injury claims, but no new loans or FGI Policies were being entered into.

There is nothing in the FGI Policies that indicates that any future global refinancing was in the contemplation of the parties. It is for that reason that it seems to me that Mr McLaren’s construction of the second limb of the exclusion clause is a construction driven by hindsight in more ways than one. First, Acasta’s primary case right up to the trial was that the litigation funding arrangements had terminated at least when the Refinancing Agreement was concluded and all the outstanding loans from Clydesdale to Nesbit were repaid. Its contention was that the definition of “Irrecoverable Costs” in the FGI Policies made it clear that the policy related only to costs funded by a loan provided by Clydesdale under the “Litigation Funding Scheme”, and, after the Refinancing Agreement, all the individual loans had been repaid and no longer existed. This argument was right up to a point – what it showed was that the FGI Policies were all about cover provided for loans made under the litigation funding scheme in place at the time, and the terms of the FGI Policies did not contemplate future run-offs or refinancings once the scheme came to an end. Secondly, of course, Acasta did not even think of its secondary (and now primary) argument until the eve of trial, which is strange if the underwriter who drafted the exclusion clause had really thought it was meant to cover the present situation. I accept, of course, that this latter point is not an admissible argument on construction.

In these circumstances, I do not think that Mr McLaren’s construction of the second limb of the exclusion clause accords with the context and background of the FGI Policies or with business common sense. The exclusion was looking at breaches of the loan arrangements that were in place at the time or might be in place at a later stage under the litigation funding scheme. The second limb must be taken to refer only to any replacement agreement entered into as part of the same litigation funding scheme to repay the individual loan under the ICLA. I accept that this still does not explain the distinction between “the Loan” in the first limb and “a Loan” in the second limb, but that cannot affect the proper meaning of the exclusion clause which related to the current litigation funding scheme and not to future arrangements that could not have been contemplated by the parties at the time.

I would, therefore dismiss Acasta’s appeal on this point and uphold the judge’s decision that the exclusion clause did not cover any breaches of the Refinancing Agreement.

In the light of my decision on the construction issue, the amendment issue does not in fact arise. Since the application for permission to amend was fully argued, however, I will deal briefly with it.

The principles relating to the grant of permission to amend are set out in Swain-Mason and in a series of recent authorities. The parties referred particularly to Mrs Justice Carr’s summary in Quah Su-Ling v. Goldman Sachs International [2015] EWHC 759 (Comm) at paragraphs 36-38 of her judgment. In essence, the court must, taking account of the overriding objective, balance the injustice to the party seeking to amend if it is refused permission, against the need for finality in litigation and the injustice to the other parties and other litigants, if the amendment is permitted. There is a heavy burden on the party seeking a late amendment to justify the lateness of the application and to show the strength of the new case and why justice requires him to be able to pursue it. These principles apply with even greater rigour to an amendment made after the trial and in the course of an appeal.

Mr McLaren did not seek to justify Acasta’s delay in making the application. He acknowledged that the application could and should have been made before the trial. He argued, however, that the judge treated the breach argument as being “in play” as was evidenced by paragraphs 49 and 58 of his judgment. In any event, the position was no worse for Nesbit than it would have been if the application had been allowed before the trial, because even then the judge would still most likely have decided the construction point first and then, if necessary, adjourned the case for the breach issues to be tried at a later date. There was some argument about whether Nesbit could or should have raised substantive factual arguments in resisting the contention that it had acted in breach of the Refinancing Agreements. It seems to me, however, that we must assume that there would have been arguments available to Nesbit that might have required either or both of new evidence and an adjournment of the trial.

In these circumstances, and striking the relevant balance, in my judgment, the application to amend was far too late. Whilst I accept that, had Acasta been right on construction, it would have had a strong case for establishing breaches of the Refinancing Agreement, we cannot pre-judge the outcome. The point here is that we are dealing with an insurer whose own policy terms were in issue. It should pre-eminently have been expected to plead the exclusion clause on which it wished to rely at an early stage in the proceedings and certainly well before trial. The new argument was an afterthought.

If the amendment were allowed, the litigation would have been thrown open and would have been back almost to square one. Acasta had no justification for its delay, or for asking the Court of Appeal to allow an amendment that would effectively mean (if it had won the construction point) that the courts would be clogged up with a re-run of this litigation so that finality would be much delayed. The new approach to late amendments epitomised in Swain-Mason would be set at nought if an amendment in these circumstances were to be allowed. Effectively, the court would be saying that, because costs might be able to compensate Nesbit, the amendment should be allowed. That is not the correct approach on current authority. For these reasons, I would have refused the amendment to plead breaches of the Refinancing Agreement, even if I had been with Acasta on construction.

Accordingly, the application for an amendment can be allowed only insofar as it is common ground, and must be refused on the crucial breach issue.

For the reasons I have sought briefly to give, I would dismiss Acasta’s appeal. I would allow the amendment to plead the construction point, but refuse it insofar as Acasta seeks to amend to plead breaches of the Refinancing Agreement.

I agree.

I also agree.