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8 September 2016

Cross-undertakings in Damages Insurance - a practical example

Cross-undertakings in Damages Insurance - a practical example
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New ground was broken recently in the matter of Holyoake v Candy when Lord Justice Etherton, the Chancellor of the High Court and soon to be Master of the Rolls, accepted an insurance policy as valid fortification of a cross-undertaking given by the Claimants pursuant to their successful injunction application.

The case had already attracted the interest of practitioners due to the Applicants novel application for a “notification injunction” requiring the Respondents to give written notice before disposing or dealing with their assets, as an alternative to a freezing injunction.

The issues considered by the Court in relation to the notification injunction were:

  • whether there was jurisdiction under the Senior Courts Act 1981 s.37 to grant a notification injunction;
  • whether it was enough for the Applicants to show that there was a serious issue to be tried or whether they had to show a good arguable case;
  • if the test was a good arguable case, and what that meant;
  • whether the Applicants had shown a good arguable case on the merits, and; whether the Applicants had demonstrated a risk of dissipation.

At the initial injunction application Mr Justice Nugee made findings in regards to the above points and granted the application (subsequently upheld on appeal) the Court’s attention then turned to the issue of fortifying the cross-undertaking.

During his tenure as Master of the Rolls during the 1980’s Lord Justice Donaldson described freezing injunctions as one of the laws “nuclear weapons” and access to such cataclysmic tools isn’t granted without appropriate checks and measures. Mr Holyoake’s case was no different and, as with any successful applicant, Mr Holyoake is bound by a number of duties to the court. The most significant is the requirement to fortify the cross-undertaking, which was Ordered in the sum of £5,000,000 “in a form reasonably satisfactory to the Respondents”.

Mr Holyoake already had the benefit of after-the-event legal expenses insurance and re-approached Arthur J. Gallagher, as the brokers who had placed the ATE, to see whether an insurance product could be developed to provide comfort to the Respondents, and by extension the Court, as an alternative to fortifying the cross-undertaking in cash.

Gallagher were able to develop a solution, underwritten by Lloyd’s of London, designed to indemnify the Applicant for liability to pay damages and costs pursuant to an Order made against the cross-undertaking.

Initially the Respondents refused to accept the policy as fortification and centred their objections on the insurers potential to avoid the policy in circumstances where the terms and conditions were not adhered to, a position that attracted some sympathy from the Court. The argument was amplified by the obvious juxtaposition that the policy contained an exclusion for fraud in a case where the underlying litigation contained allegations of dishonesty, which lead Etherton LJ to say:

"the wording of the policy does open a real possibility that the insurer could properly argue that in the circumstances where there is success on the part of the Defendants at trial that there is no liability due to the dishonesty leading to the success of the Defendants, leading to there being no liability to pay under the policy insuring the fortification of the cross undertaking of damages."

With the Court’s comments in mind, Gallagher revisited the policy wording and persuaded the insurer to include a clause making the policy ‘non-cancellable’ meaning that the Insurer waives the right to deny its liability to pay out even in circumstances where dishonesty is proven. Etherton LJ dismissed the Respondent’s remaining objections accepting the amended policy as fortification and upholding the injunction stating as follows: 

"I am satisfied, in view of the revised terms of the policy, that there are no reasonable grounds, objectively considered, for a reasonable apprehension that the insurer will be able to avoid the policy in the event of a successful defence by the relevant defendants."

This highlighted the importance of why insurance policy wordings need to be truly bespoke to each piece of litigation and designed specifically with the nuances of each case in mind to ensure it is fit-for-purpose. To the best of our knowledge (certainly no precedent case law could be found) this is the first time a policy has been tested by the Court in respect of a cross-undertaking, however inevitable this was given the increase used of external capital now supporting Claimant litigation.

It is beyond doubt that the sentiment of Donaldson LJ was quite correct, Freezing Orders when properly obtained are a crucial tool in an applicants armoury and as such they are granted only in the most meritorious circumstances and a high bar is set to procure, fortify and maintain them. It is a sad reality that some applicants have meritorious cases but not the means to meet the fortification requirement and as such access to justice can be prejudiced.

Insurance solutions are a welcome development as they enable an applicant to more readily meet their obligations without compromising the level of protection afforded to the respondents.

Whilst it would not necessarily have been the case for Mr Holyoake, an applicant’s inability to fortify a cross-undertaking would generally cause the injunction to fall away. In circumstances where a real risk of dissipation has been found it is difficult to see how this can be a fair or just outcome and that the increased use of insurance capital can help redress this inequality for other applicants in the future.

Download the Cross-undertakings in Damages Insurance.pdf

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