Legal experts from leading law firm, Gateley cover a range of topical issues relating to international trade and insuring your goods in case of accident
MARINE AND NON-MARINE INSURANCE CLAIMS – AVOIDING THE PITFALLS – By Jane Hobbs
In the last issue, we began our review of how insured parties can maximise their prospects of getting an insurance claim paid.
We now continue that theme by highlighting the pitfalls of non-disclosure, conditions precedent and breach of warranty.
The dangers of non-disclosure
Buyers of insurance, especially in large companies with several branches, often worry about non-disclosure. This is because even an innocent or negligent non-disclosure can have devastating effects, which lie dormant until the company needs to make a claim on its insurance policy.
So what is non-disclosure? An insurance contract is a contract of ‘utmost good faith’. An insured must disclose to the insurer, before the contract is concluded, ‘every material circumstance which is known to’ the insured. This includes deemed knowledge – that is, what the insured ought to know in the ordinary course of business. This is a duty that arises at the time insurance is placed and again at every renewal of a policy.
The consequence of non-disclosure, whether it be fraudulent, negligent or innocent, is that the insurer can elect to ‘avoid’ the policy if the non-disclosure induced the insurer to enter into the insurance contract. Avoidance of a policy means treating the policy as if it never existed, so the particular claim is not paid, the insured must repay earlier paid losses and the insurers must repay premium (unless there has been fraud). The insurer can avoid the policy, even if the non-disclosure was completely unrelated to the loss for which the policy claim is being made. Policies often contain special terms altering this draconian legal position.
Buyers of insurance have to work out for themselves (usually with guidance from their insurance broker) what information counts as a ‘material circumstance’. They also have the practical difficulty of gathering the information from those in the business whose knowledge is relevant. Those with relevant knowledge are the people who are the ‘directing will and mind’ of the company and also the person placing the insurances. It is a heavy burden of responsibility on that person.
You can help to protect your company against the dangers of non-disclosure by taking the following steps:
• Be aware of what non-disclosure is and the serious impact it can have. Ensure that senior people in the company know about it too.
• Keep good records and share information with the person within the company who is responsible for arranging insurances.
• Ensure that there is a ‘fair presentation of the risk’ to your insurers. Allow plenty of time before placing or renewing insurance to collect the relevant information. If you are in doubt about whether something should be disclosed to the insurers, get guidance from your broker.
The dangers of conditions precedent and breach of warranty
1. Do you know what conditions precedent and warranties are contained in your insurance policies?
2. Does your Operations team know about them too?
3. Did you try to negotiate the wording of them or try to get them removed from the policy?
4. Would you have any idea whether you have complied with the precedent and warranties clauses?
5. Where would you find the documents to prove to your insurers that you have complied with conditions precedent and warranties?
If you cannot answer ‘yes’ to each of these questions, your company could be at risk and you may not find out until it is too late to put right.
Perhaps you are wondering exactly what conditions precedent and warranties are and what effect a breach of them has, in the context of business insurances.
A condition precedent is a requirement that must be satisfied before a claim under a policy becomes payable, even if the subject of it has nothing to do with the loss to which the claim relates. It is common to find that such clauses begin with words such as: ‘It is a condition precedent to Underwriters’ liability that…’. A range of matters may be the subject of conditions precedent – for example, in relation to premises, clauses dealing with fire alarm and sprinkler protection and fire extinguishing appliances, maintenance of electrical circuits, intruder alarm protection and other protections against theft. Claims notification clauses are sometimes phrased as a condition precedent to liability. These are the clauses requiring claims or happenings that might give rise to claims to be notified to insurers within certain timeframes.
A warranty is a clause by which an insured party ‘undertakes that some particular thing shall or shall not be done, or that some condition shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts.’ Matters which might be phrased as conditions precedent in one policy might be phrased as warranties in another policy. For example, a policy might include a warranty that an intruder alarm complying with certain requirements is operational at all times when the premises are closed for business.
A warranty must be exactly complied with. If it is not exactly complied with, the consequences for the insured are very harsh; from the moment of breach, the insurer is discharged from liability under the policy. This is so, even if the warranty that has been breached is not material to the risk. The discharge is automatic and requires no election by the insurers. The policy remains intact after the breach but the insurers have no prospective liability under it. These consequences flow even if the breach of warranty is remedied at a later date.
By dealing with each of the questions listed above, you can avoid the difficulties that can be caused by conditions precedent and warranties.
Jane Hobbs is a partner in Gateley’s Shipping & Transport team. Contact Jhobbs@gateleyuk.com
CORPORATE MANSLAUGHTER – IS IT GATHERING PACE?
By Ruth Armstrong
Four years on from the enactment of the Corporate Manslaughter and Homicide Act 2007, three companies have been charged, convicted and sentenced for corporate manslaughter, with a further three companies charged and currently going through the Court process.
Corporate manslaughter is committed when senior management of an organisation organise or manage their activities in such a way that substantially causes a persons death or amounts to a gross breach of a duty of care owed to the deceased. Any significant flaws in health and safety policies, risk assessments, method statements, working methods, equipment and maintenance procedures could open the door to a corporate manslaughter prosecution in the event of a workplace fatality.
Despite the relatively small number of prosecutions in the initial four year period, businesses should not be lured into a false sense of security. Recent figures suggest that 63 investigations into corporate manslaughter were launched in 2012, a rise from the 45 investigations in 2011. This is perhaps unsurprising following criticism of the CPS for failing to make best use of the legislation.
Gateley has seen a change in attitude from the Police who now appear more comfortable investigating organisations for corporate manslaughter. We are currently representing several clients in corporate manslaughter investigations in the type of cases where we would have previously expected the Police to hand over the reins to the Health and Safety Executive under the Health and Safety at Work Act 1974 rather than corporate manslaughter.
Perhaps more worryingly for directors and employees, in five recent cases where corporate manslaughter was not pursued by the CPS, four resulted in alternative charges of gross negligence manslaughter for individuals – an offence that carries imprisonment as a potential outcome.
Of further concern is the current conviction rate of 100 percent following a corporate manslaughter charge. Prosecutions are not taken lightly by the CPS and it is difficult to say that three wins in four years is an upward trend but it certainly feels like corporate manslaughter cases are on the rise.
The suggested starting point for a fine following a corporate manslaughter conviction is £500,000. The companies so far convicted have seen fines of £185,000, £385,000 and £480,000. Again, businesses could be lured into a false sense of security that judges aren’t handing down the severe fines originally anticipated. However, the fine for Lion Steel Limited of £480,000 came after a guilty plea which attracted a twenty percent sentencing discount. It is a sobering thought that the fine far exceeded the pre-tax profits of the offending company and would have been at least £600,000 following conviction after trial. The reality of the sentencing regime is that a fatality leading to a corporate manslaughter conviction can put a business at huge financial risk. Make no mistake, this is an act with teeth and we are just beginning to see the CPS starting to bite.
Partner, Ruth Armstrong heads up the firm’s Regulatory department. Contact RArmstrong@gateleyuk.com
DRIVE YOUR BUSINESS – INVEST IN EXPORT SKILLS
By Philip Alton
They say that every cloud has a silver lining. Given the depth of the recession, silver linings seem to have been in short supply lately. However, there are a number of indicators which suggest that UK companies will emerge stronger from the tough environment in which they currently find themselves.
During the last recession the finance director of a large manufacturing company surprised me when he indicated that the recession was in fact good for the exporting side of his business. He explained this by saying that, in ‘normal’ times, many countries tend to follow nationalistic tendencies in their purchasing habits and buy from producers in their own countries, even where the home-grown products are of inferior quality and higher cost. In recession this favouritism for local suppliers has to be replaced by cold, hard commercial reality – buyers are more driven by simple issues of price, service and quality. This potential levelling of the playing field can mean that markets which are normally difficult to break into can suddenly open up, particularly for the right products supplied in the right way and at the right price. The point we have reached in the cycle suggests that now is the time for exporters to exploit these opportunities where they can find them.
The report of the Select Committee of the House of Lords ‘Roads to Success: SME Exports’ was published at the end of February. The report makes 23 recommendations, all of which provide interesting insights into the challenges still facing SMEs in driving through greater volumes of exports.
The recommendations that are of particular note are those that relate to improving information available to companies that wish to export, simplifying the sources of assistance to SMEs and helping improve skill levels within sales functions. The report observes that, “once a company is in a position to export, they then need to develop practical skills for exporting, including for example, understanding financial requirements, how to bid for finance and how to complete an export certification application.” The committee noted, rather worryingly, that SMEs rarely had access to experts who understood the mechanics and funding of exporting. It also quoted from the International Trade Survey that, “few companies undertake adequate training on export matters.” Even fewer have staff holding recognised qualifications relevant to international trade.
Trained staff are typically found only in larger companies, while smaller businesses rely on experienced staff who approach exporting in the way they have done for many years. For the export potential of these companies to be realised fully requires a change of approach which is brought about with professional training and access to high quality advice.’
The committee recommends that Local Enterprise Partnerships and UK Trade and Investment should be required to work more closely together to identify challenges to exporting and to raise awareness of UKTI’s products and services. Whilst this is something of an admission that there has been poor co-ordination in the past, and it is likely to take some time to implement, some initiatives are already work in progress which should hopefully gather pace in the forthcoming months.
The committee also recommended that organisations that have close links with SMEs, such as Chambers of Commerce, should consider as a priority attracting more SMEs into their organisations so that increased help could be given to exporters. Chambers of Commerce has a potentially important role to play here. Of particular interest is the new service, which is being piloted by the West Midlands Chamber. In a highly proactive initiative, the service can produce all documentation needed for any international shipment and provide specialist expertise to handle such diverse matters as letters of credit, translation services, online credit checks and cargo insurance. The scheme has the potential to not only explain the issues involved but to produce the necessary documentation by entering the data just once. When entered on the system the documents can be shared with, and collected by, the overseas customer or printed and sent to the bank or other third parties as necessary.
This is exactly the sort of help that prospective exporters need and which the select committee would approve of. Hopefully the pilot scheme will be a success – it certainly deserves to be – which can then be rolled out by Chambers across the country. The scheme shows that high-level policy is now beginning to filter down into positive action. It may well prove to be another silver lining.
Philip Alton is a partner in Gateley’s Banking and Finance team. Contact PAlton@gateleyuk.com
ENSURING YOUR CONTRACTS ARE WATERTIGHT
By James Cradick
It is being reported that overall confidence levels in the shipping industry recovered to their highest level for two years in the three months ending February 2013, while UK based manufacturers expect output to accelerate sharply in the next few months. Those seeking to take advantage of moving markets will be reviewing their contracts keenly for any ambiguity which might provide grounds to exit the agreement to seek more profitable business.
The Courts have been called upon to intervene in a number of such cases in the past few years and have recently reviewed the relevant principles that are applied. For a binding contract to exist, and to be enforced, the terms must be certain. Parties must ensure that their agreement is complete so that it does not lack some essential term and the agreement is otherwise not uncertain, vague or ambiguous. Great caution should be applied particularly in circumstances where the parties intend to contract but wish to leave one or two details over for agreement at a future date. It is well established that agreements that lack important or fundamental components will generally be considered incomplete and will only amount to so-called ‘agreements to agree’. These agreements are usually held to be unenforceable.
The latest in this line of cases is MRI Trading AG -v- Erdenet Mining Corporation LLC, in which the Court of Appeal held that the terms of a metal supply contract were sufficiently certain to create an enforceable contract, despite a lack of agreement on the shipping schedule and certain key charges.
This arose from a dispute under a sale contract for copper concentrates which went to arbitration in 2008. This was then settled on terms in 2009 including an agreement to enter new contracts for delivery of similar product in 2009 and 2010. Deliveries were made in 2009, but not 2010. LME arbitrators rejected Buyers’ claim for damages holding that Sellers had no enforceable delivery obligation. The arbitrators held that the January 2009 contract provided that the shipping schedule and other charges ‘shall be agreed during the negotiation of terms for 2010’ and no agreement in the event was reached. The Tribunal held these to be important terms, not mere details, so this was an ‘agreement to agree’ and accordingly not legally enforceable.
The Court of Appeal disagreed. They considered that the tribunal had not properly taken into account that the contract had been made as part of an overall deal for settlement of the earlier dispute. The Sellers had obtained the benefit of that settlement and the parties must have intended the delivery obligation undertaken by Sellers to be legally enforceable. The Tribunal should have approached the matter with a view to preserving and not destroying the parties bargain. It could not be said that the contract was unworkable, or that it was impossible to identify reasonable terms on the points that had not been agreed.
Despite this common sense decision it is still of the utmost importance to ensure that contracts are drafted in terms which are clear and with certainty firmly in mind to avoid costly legal battles.
James Cradick is an associate in Gateley’s Shipping & Transport team. Contact JCradick@gateleyuk.com