Taking some of the shine off commercial product liability?

When a ship, a rig, a factory or an office-block is damaged owing to some malfunctioning device or other, a claim in tort against the manufacturer of the device has distinct attractions for the owner and/or its subrogated insurer. Contractual restrictions on liability can be bypassed. So (in the case of ships) can limitation of liability, since component or machinery makers are outside the charmed circle of those who can limit under the 1976 Convention.

A case today in the English Court of Appeal may, however, cause some such claimants to have second thoughts. In Howmet Ltd v Economy Devices Ltd & Ors [2016] EWCA Civ 847 an English factory owned by Howmet, an ALCOA subsidiary and manufacturer of turbine blades, burnt down after a badly-designed thermosensor on sensitive equipment failed. The factory owner (H) sued the manufacturer (EDL). The awkwardness was that there had been problems with the thermosensor before, as H’s employees well knew, but H had continued to use the device. Did this matter? Most lawyers until today would have said that for an owner suing in tort, the worst that could happen was that he might have damages docked for contributory negligence. But a majority in the Court of Appeal (Jackson LJ and Sir Richard Akenhead) held that in a case such as this the claimant failed entirely on causation grounds, as he would in contract under Lexmead v Lewis [1982] AC 225. Arden LJ dissented, essentially arguing that if this was right, it deprived the Law Reform (Contributory Negligence) Act 1945 of a great deal of its point.

This is highly significant in practice. It’s very often possible for a well-advised defendant to a commercial product liability  suit to provide evidence that someone knew of problems earlier: in so far as this is now capable of leading to a dismissal of the whole action rather than a docking of damages, the effect of this on settlement prospects will be clear.

What can claimants do? Grin and bear it, perhaps. Or possibly, look for somewhere else to sue. Most European jurisdictions, one imagine, would not only welcome the legal business but say that this was a simple case of apportionment for faute de la victime, Mitschulden, or whatever. Time will tell.

The freezing order — a useful weapon, but there is a price tag attached

The ability to get a worldwide freezing order with comparative ease is one of the reasons why claimants like to bring their heavy international litigation to England. Quite right too: but there is a price attached, which can be high. It is known as the undertaking in damages. Today Fiona Trust found this out to their cost in the latest episode of the Privalov saga, Fiona Trust v Privalov [2016] EWHC 2163 (Comm). Essentially Fiona, a Russian state-owned shipping conglomerate, alleged that another Russian shipping magnate, Yuri Nikitin (whom Russia had previously tried without success to extradite from the UK and has it seems recently taken steps to prosecute in his absence), had suborned an officer of theirs to enter into charters that were disadvantageous to them and hugely profitable to him, in exchange for a cut of the profits. They claimed a cool half-billion dollars or rather more in damages, and in 2005 and 2007 got orders freezing assets of Nikitin worth, in round figures, $600 million. After bitter litigation (see  Fiona Trust v Skarga & Nikitin [2013] EWCA Civ 275, and also Novoship (UK) Ltd v Mikhaylyuk & Ors [2014] EWCA Civ 908;[2015] Q.B. 499, the latter of which is now a leading case on account of profits), Fiona recovered about $16 million.

The day of reckoning then arrived for the undertaking in damages. Andrew Smith J had earlier decided, rightly, that findings of dishonesty on Nikitin’s part did not bar such claims, on the basis that even crooks had rights not to have their financial lives upended without recourse (see Fiona Trust v Privalov [2014] EWHC 3102 (Comm)). Males J in the present follow-on case decided that Nikitin was entitled to damages in a sum which remained to be calculated, but cannot have been too far from $50 million. Most of this arose from the loss of the opportunity to make profits in the volatile shipping market. In particular Males J made some points that could usefully be borne in mind:

(1) A ‘liberal approach’ was appropriate, in that the court should not be over eager in its scrutiny of the evidence or too ready to subject its methodology to minute criticism, in part because the very nature of the exercise rendered precision impossible;

(2) The fact that all claims to would-be profits were speculative and that it was always possible that the person seeking recompense would in fact have made a loss was no bar;

(3) Although loss of profits had to be proved and a “loss of chance” award was not appropriate, there was no need for rigorous proof and the court could look at the figure in the round with reference to the vagaries of business;

(4) Males J was unimpressed with an argument that Nikita had failed to mitigate his loss by failing to apply for permission to use the blocked funds for business activities. Not only was there no such exception in the terms of the freezing orders; in any case to demand that a defendant to litigation indulge in further satellite litigation in such a situation was hardly reasonable;

(5) He was also unconvinced by an argument that in a volatile shipping market it should be possible for the person seeking compensation to rely on the rate at which he could have borrowed money (LIBOR + 2.5), either as surrogate proof for the profits he would have made, or as a ‘conventional’ measure.

All in all, one suspects, a chain of litigation that seems a fairly Pyrrhic victory for Russian state shipping. $16 million against an incidental ‘undertaking in damages’ bill of three times that amount is not that pretty a balance sheet, and might well serve as a warning.

Andrew Tettenborn

Settlement of fraudulent insurance claims – Insurers 1, Fraudsters 0.

Among a slew of important commercial cases this week is the Supreme Court’s decision in Hayward v Zurich Insurance plc [2016] UKSC 48, which will we suspect gladden the hearts of underwriters everywhere.

A work accident victim, CH, took the opportunity grossly to overstate his disability and claimed some £400,000 from Zurich, the employer’s insurers. Zurich thought the claim might well be a wrong ‘un, and indeed pleaded that it was. But they settled it for about £135,000. Tipped off later that CH had indeed been lying all along, they sued to undo the settlement for fraud. The judge obliged, substituted an award of about £15,000 and ordered CH to repay the rest. The Court of Appeal reversed. Having themselves had suspicions about the claim, the insurers (it was held) couldn’t put their hand on their heart and say that they thought CH had been telling the truth: it followed that they couldn’t show the necessary reliance for the purpose of invoking CH’s fraud.

This holding was, to say the least, worrying for underwriters, and not only in injury cases brought against liability insurers. Theoretically, it seemed to mean that if any insurer thought a claim by a commercial policyholder was fraudulent and said so in the course of negotiation or litigation, the claimant was nevertheless safe in possession of his loot once he had extracted an agreement to settle.

The Supreme Court were understandably unhappy with this prospect. It accordingly restored the first instance judgment. To succeed in a claim of fraud, a person did not have to show that he had believed in the truth of what the defendant had said; he merely had to show that the untruths he had been told had acted as an influence on him. Since Zurich had clearly been influenced into settling by what CH had said, the necessary reliance was present; CH retained only the damages he was actually entitled to and had to return the rest.

This result is, it is suggested, welcome. It will add to the armoury available to insurers against fraud (already augmented, in the case of fraudulently exaggerated personal injury claims, by s.57 of the Criminal Justice and Courts Act 2015 allowing their dismissal in toto), and do something to make up for their loss last week in Versloot Dredging BV & Anor v HDI Gerling Industrie Versicherung AG & Ors [2016] UKSC 45 of the ability to decline payment on the basis of collateral lies told by the assured.

Note: the Supreme Court left open the question whether a court settlement could only be reopened for fraud on the basis of evidence not reasonably detectable at the time. It is to be hoped that the answer to this is No, as already suggested in Australia. Why, one might ask, should a settling underwriter owe any duty whatever to a fraudster to check for possible evidence of the latter’s dishonesty at the time of settlement?

Liars’ poker and the oil trade

“O what a tangled web we weave When first we practise to deceive”

Sir Walter Scott, Marmion, vi.17.


We don’t often run commodity trade cases in the blog, but OMV SA v Glencore AG [2016] EWCA Civ 778 is worth a look.  The facts, once the irrelevancies are removed, were simple. Glencore (staid corporate successor to the colourful Marc Rich AG) agreed repeatedly to ship particular grades of Iranian Heavy and GOSM crude oil to the Romanian government for refining. In fact they deliberately shipped an assortment of blends of other oils obtained in Israel which had much the same characteristics as what had been ordered, and seemed to perform about as well when refined, but were worth a good deal less on the open market. They arranged for the forgery of shipping documents referring to Iranian Heavy or GOSM, as the case might be, presented them to the buyer’s bank, and used them to obtain payment under the corresponding letters of credit.

Following a tip-off, the buyers sued Glencore for deceit, claiming some $40 million, being the difference between what they had paid and the market value of what was provided, plus a further discount they said they would have been able to insist on had they realised the truth at the moment of acceptance. With an amusing degree of chutzpah, Glencore argued that the buyers had suffered little or no loss and therefore had little to complain about. The oil had been bought for sale to refiners and sold to them; it behaved in much the same way as what they had promised to supply; in these circumstances it should be up to the buyers to prove loss of refined yield if they could.

Flaux J, deciding in favour of the buyers, was having none of it. Even if it might be open to the victim of deceit to increase his recovery by taking account of events subsequent to reliance, this choice was not available to the deceiver to reduce it. Furthermore, even if in breach of contract cases like Bence v Fasson [1998] QB 87 a seller might be allowed to say that the unsatisfactory article he had supplied had actually worked just as well, this once again could not be prayed in aid  by a liar. The Court of Appeal yesterday briefly dismissed the appeal.

Two morals to this tale. First, as we know, the tort of deceit has its own rules of damages and what counts as loss, and they are not indulgent to the defendant. Second, it is surprisingly easy to transform what looks like a simple breach of contract – albeit a deliberate one – into a deceit case, with all that involves as regards the measure of damages, the unavailability of a plea of remoteness, and so on. We are getting close to a situation where, if the price of goods sold is payable on right delivery, any knowing delivery of non-conforming or defective goods now amounts potentially to the tort of deceit. Sellers, watch out!


Groundless commercial litigation – advantage defendants?

Discreetly slipped out at the same time as the more high-profile Versloot decision comes another Supreme Court case, of more subtle significance for commercial lawyers. In Willers v Joyce [2016] UKSC 43 a businessman caused his company to sue his erstwhile sidekick for breach of contract and fiduciary duty, well knowing that there was no plausible claim against the latter. The action duly failed, whereupon the erstwhile defendant sued the businessman in tort, seeking to recover the losses that had not been made good by the award of costs in his favour. His claim was dismissed at first instance, and an appeal followed.

By a 5-4 majority the Supreme Court followed the lead of the Privy Council in Crawford Adjusters (Cayman) Ltd v Sagicor General Insurance (Cayman) Ltd [2014] AC 366 and decided that there was a cause of action available for maliciously bringing civil proceedings without reasonable and probable cause and for purposes other than the bona fide enforcement of legal rights. The claim was therefore allowed to proceed.

Defendants and P&I interests might care to take note, since what was said in Willers is highly apposite to commercial litigation generally. Imagine, for example, a cargo claim brought by a claimant whose CEO or controlling mind was fairly sure that the loss was actually due to inherent vice; or a charter claim brought with a view to extracting something by way of settlement despite advice to the claimant that it was almost certainly statute-barred. In both cases it would seem that the person sued now has a plausible claim to recover damages at large, including investigation expenses and where appropriate unrecoverable costs.

Two caveats.

(1) It is not clear what degree of knowledge must be shown by the (now) claimant. Lord Toulson (with whom Lady Hale and Lords Kerr and Wilson agreed) seems to suggest actual knowledge or recklessness: Lord Clarke, who drew an analogy with liability for wrongful arrest of ships, might be taken as suggesting that extreme negligence would do. One hopes that the former criterion will be applied.

(2) If the claim is defended by, and at the expense of, insurers or P&I interests, there is a possible technical argument that it is not they, but their assureds, who are being sued, and therefore that they have no claim. Whether this will be accepted, at least where the Third Parties (Rights against Insurers) Act 1930 (or 2010) is in play, will have to be seen. A possible workaround, though one that will have to be closely looked at, might be an arrangement under which underwriters or P&I clubs take an assignment from their insureds of any rights to sue the undeserving claimant.

New Book on Air Cargo Insurance published by Professor M Clarke and Dr G Leloudas

The most recent addition in the list of publications of IISTL members is the book entitled “Air Cargo Insurance” by Associate Professor George Leloudas and Professor Malcolm Clarke.

This exciting new book is the only one on the market that deals exclusively with air cargo insurance, and will therefore, be a vital addition to the collection of any practitioner, professional or academic working in the field. The book analyses the model policies and standard terms and conditions of air cargo insurance used in the London markets. The authors also provide readers with an invaluable perspective on cases in other jurisdictions, and the book discusses freight forwarders’ relations with airlines and addresses the possibility of recovery from third parties.

Clarke & Leloudas - Air Cargo Insurance

Commercial firms possibly to breathe easier — courtesy of the ECJ

A City firm advises a commercial client from elsewhere in the EU on a big deal. Months or years later the client alleges the advice was bad and that it has suffered loss. If it comes to a claim in tort, can the firm insist on being sued in London, or must it (and its PI insurers) gear up to fight the proceedings in Tallinn, Trieste, or wherever the client is located? This depends on what is now Art.7(2) of Brussels I Recast, allowing suit in tort “in the courts for the place where the harmful event occurred or may occur”, and whether an Italian or Estonian trader is deemed to suffer loss in Italy or Estonia because — well — it is based there.

The ECJ today, sensibly, said No: see Universal Music International Holding (Judgment) [2016] EUECJ C-12/15. So a multinational that got its fingers burnt in a Czech acquisition couldn’t sue in Holland merely because its profits there were diminished. As we said, a matter for relief in EC3 and EC4.


“Deepwater Horizon”. Economic loss claims from US offshore moratorium dismissed.

On March 10, 2016, Judge Carl Barbier ruled that economic loss claims resulting from the moratorium on offshore drilling imposed by the US government after the ‘Deepwater Horizon’ blowout in 2010 cannot be brought against BP , as the responsible party under the Oil Pollution Act of 1990 (“OPA”), 33 U.S.C. § 2702(a). The losses resulted from the perceived threat of discharge from other wells, rather than from discharge or the substantial threat of discharge from the Macondo well.

Click to access Deepwater-March2-.pdf

Remoteness restated

In an otherwise rather boring solicitors’ negligence case, the CA have included a useful nugget. All three of their Lordships accepted that where a person such as a professional can be liable either in contract or in tort — in other words, where there is concurrent liability — the relevant test for remoteness of damage is that in contract, namely the rule in Hadley v Baxendale. And quite right too.

See Wellesley Partners LLP v Withers LLP [2015] EWCA Civ 1146, November 11, 2015.



Good news for judgment creditors (at least in part)

Getting judgment in a commercial case is one thing. Extracting hard cash from a seriously bloody-minded defendant is another. But for judgment creditors there was at least some good news today from Teare J in the Commercial Court.

Mukhtar Ablyazov, the defendant in JSC BTA Bank v Ablyazov & Anor [2016] EWHC 230 (Comm), is a colourful Kazakh politician, dissident and businessman who used to run the biggest bank in Kazakhstan. A little time ago the bank got judgment against him in the English courts in the modest sum of US$4.6 billion, together with the usual paraphernalia of worldwide freezing orders. But for some little time Mr Ablyazov, like Macavity, hasn’t been there. In 2012 he fled England (where he had been granted asylum) with the prospect of imprisonment for contempt hanging over him. Since then he has been elusive, save for a brief time last year being entertained for free courtesy of the French police, and allegedly busy moving assets around where they can’t be found.

Not having extracted much worthwhile from Mr Ablyazov, the bank then turned to a pal of his, Ilyas Khrapunov, who had allegedly helped him hide, move and spirit away assets subject to the worldwide freezing order. They sued him in tort, alleging that the above acts amounted to unlawful means and could thus engender civil liability for the economic tort of causing loss by unlawful means. Mr Khrapunov applied to strike, arguing that if (as is clear) contempt of court cannot give rise to damages, the bank shouldn’t be allowed to get a similar remedy by the back door.

Teare J held that the bank had at least an arguable cause of action. This is significant. Big-time debtors need people to help them evade judgment creditors: this salutary judgment not only gives creditors someone else to sue, but more importantly will give anyone contemplating helping a fugitive tycoons something to worry about.

Why only partly good news? The answer is Euro-law on jurisdiction. The assets were abroad, and neither Mr Ablyazov nor Mr Khrapunov was resident here (Mr Ablyazov seemed to be in Switzerland). Moreover, the damage alleged was held to have occurred abroad, even though it related to the frustration of an English judgment. It followed that the only head of jurisdiction under the Lugano Convention was such loss as might be proved to have been caused by acts, if any, committed by Mr Khrapunov in England before Mr Ablyazov left in haste.

Oh well, you can’t have it all. After all, what’s a billion or so between friends? In any case one suspects we haven’t heard the last of this.