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Legge v Sterte [2016] EWCA CIv 97 – another case on non-party costs orders

Last week, the Court of Appeal determined an appeal by an insurer claiming that it should not the subject of  a third party costs order under s51(3) Senior Courts Act 1984Legg & Others v Sterte Garage [2016] EWCA Civ 97.

The Defendant company, insolvent at the time of judgment, conducted a motor vehicle repair business on a residential street. In 2003, residents noticed diesel odours in their garden and asked their local authority to investigate.

The Authority investigated and interviewed company employees who confirmed the spillage of 200 litres of diesel from an above ground tank in around 2001, and notwithstanding a clean up operation at the time, may have been the cause of the on-going problem. The Authority commissioned the report of engineering consultants, who concluded that the tank failed in 1998 and had released 300 litres of fuel, but added that the diesel was still migrating upwards through the soil and into the air outside the Claimants’ homes. Further reports obtained in 2005 and 2006 suggested that the spill had been 700 litres.

Appropriate notices were served by the Authority and the residents were decanted from their properties for 9 weeks whilst attenuation works including the removal of the ground floor of each property were undertaken.

The Defendant’s insurers, Aviva, investigated and concluded that the cause of the loss was not the spillage in 1997/1998, but gradual pollution which was outside of the exception to the exclusion for losses arising by pollution etc. The Insurer appointed solicitors to deal with the claims on behalf of the Defendant.

The first claim (for Mr & Mrs. Legg) was issued arguing that there was a failure of the diesel tank in August 1997 and that the Claimants suffered loss from a major spill, pleaded on the basis of negligence and nuisance invoking Rylands v Fletcher.

The Insurer sought to have the same struck out arguing that any claim stemming from 1997 was time barred. The application was dismissed on the basis that there was nothing to put the Claimant on notice until 2003, but, out of the expert evidence secured for the application, there arose a further possibility: that the contamination was caused by long term leaks from various underground pipework and other larger tanks, and that rising ground water levels in 2002 brought the diesel to the surface –  i.e. gradual pollution consistent with the insurers’ early denial.

The Claimants amended their claim to plead the new cause of loss, but, importantly, did not delete the original assertion that the loss was caused by a spill in 1997. Five other claimants issued claims incorporating the alternative bases of claim, and the Insurer appointed solicitors in respect of these claims also.

By consent, it was ordered that defences be filed, but before the deadline for compliance, the solicitors appointed for the insured asserted that the policy did not cover the claims and that they were no longer instructed. As a consequence, judgment was given in default with damages to be assessed, and these damages and costs were duly assessed against the Defendant.

In the fullness of time the Claimants sought an order against the insurer under s51(3) SCA 1981. The DDJ found that the judgment was on the basis of pleaded claims that included non-gradual pollution (ie. within the Policy), and the insurer engaged with the claim throughout because of this pleading. The DDJ said that Aviva withdrew from the proceedings on the basis of the pleaded claim of gradual pollution (arguably outside of the policy) when the original claim was still extant, but that in respect of the latter there was nothing to justify the change of position.

The Insurer argued that the Claimants had failed to establish non-gradual pollution.

Specifically in relation to s51(3), it was observed by the DDJ that Aviva took over the defence of the action, determined that the claim would be contested, funded the defence, had effective conduct of the defence and did so for its own benefit, and thereby were defending their own interests. The learned DDJ also made the costs order on the alternative basis of the terms of the policy and that the Claimants succeeded to the company’s rights under the Third Party (Rights Against Insurers) Act 1930.

The Insurers appealed asserting that (1) that they had consistently rejected claims save for those based on a single incident (2) that they only participated in the defence on the basis that the same was pleaded, (3) that they were largely successful in the defence of that part of the claim and that the amendment to plead non-gradual pollution effectively abandoned the earlier claim, (4) that the court ought to have determined the cause of loss, (5) that they acted in the interests of the company as well as their own and (6) were compelled to defend the claim as it prima facie fell within the terms of the policy and the company would have legitimate cause for complaint had they not so acted.

The Court of Appeal applied Palmer v Palmer [2008] EWCA Civ 46 to these somewhat unusual facts.

It was noted (para 51) that in Palmer:

“ …a critical issue was whether the insurers were “motivated either exclusively or at least predominantly, by a consideration of its own interest in the manner in which it conducted the defence of the litigation.”

David Richards LJ concluded that on this point, there was ample evidence upon which the DDJ could have based his decision. Of significance was that from the outset, it was apparent that the company would not be able to meet any award of damages if it was not covered by the policy and that the “only reason for the conduct of the defence by the insurers, and their only interest in it, was to avoid a claim falling within the policy”.

He continued that had the claim for the 1997 spill been abandoned, the insurers would have had a good defence to the non-party costs application, but this was not abandoned “neither in form nor in substance….” (para 53). He further concluded that it would have been wholly unrealistic for the DDJ to have made any determination as to the proximate cause of loss – the reports were not consistent upon the cause of loss.

In the light of the above, there was no basis to challenge on appeal the broad discretion of the DDJ in relation to costs.

Whilst strictly unnecessary, the DDJ’s assessment of the subrogated rights under the policy was also correct  on the construction of the policy.

The interest in the decision lies not so much in the difficulty of challenging any costs decision, but the importance of the fact that the garage was either insolvent or would not have been able to meet an award of damages. It raises the interesting question of how, in less obvious cases, the motivation of the insurer under the test in Palmer can be tested: would there be an assessment at the start ? at key points in the litigation or pre-litigation phases ? and how can a potential Claimant maintain an assessment of their own costs risks ?

Jonathan Smith

29th February 2016

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