England and Wales High Court (Technology and Construction Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT

		St. Dunstan's House
		6th September 2010

 


MR. JUSTICE COULSON:

A INTRODUCTION

1. The Defendant ("Countrywide") provides residential surveying services. On 25^th May 2008 Countrywide took out a professional indemnity policy of insurance ("the Policy") in respect of which the Claimant ("Travelers") was the lead underwriter. Issues have arisen in connection with claims made against Countrywide arising out of surveys carried out by one of the former surveyors, a Mr. Morley. It now appears that hundreds of potentially fraudulent valuations may have been carried out both by Mr. Morley and two of his colleagues. Many of these were for the same commercial client. As a result, there is now a possibility that Travelers will seek to avoid the policy for misrepresentation and/or non-disclosure.
2. In order to reach a concluded view on that important question, Travelers have been seeking documentation from Countrywide. These documents concern the extent to which the possibility of fraud on the part of Mr Morley, as opposed to allegations of incompetence, was known to Countrywide at the time that the policy was agreed on 25^th May 2008. They also relate to the circumstances surrounding Mr. Morley's dismissal. The documents would allow Travellers to reach a view as to whether or not there had been fraudulent intent which, as we shall see in a moment, formed the critical part of the relevant exclusion clause in the policy. Travellers threatened to make an application for pre-action disclosure pursuant to CPR 31.16 in relation to this material and it appears that, as a result of the threatened application and other letters written by Travelers' solicitors, Countrywide have provided a large number of documents relating to this topic. However, Travelers maintain that there are still numerous documents relevant to this issues with which they have yet to be provided.
3. Accordingly, on 5^th August 2010 Travelers issued an application pursuant to CPR 31.16 for pre-action disclosure. This application was made after receipt and study of the documents sent by Countrywide's solicitors on 29^th July 2010. In response to the application Countrywide submit that the court does not have the necessary jurisdiction to make the order sought, because the court's power to order pre-action disclosure does not extend to the situation where the dispute between the parties will be determined in arbitration rather than in court. They also submit that, even if the court had the appropriate jurisdiction, the necessary test under CPR 31.16 has not been made out in any event.
4. I propose to deal with the issues as follows. I identify the relevant terms of the policy in section B below; thereafter at section C, I deal with Travellers' threshold response on this issue which is that, as a matter of construction of the policy, the dispute between the parties will inevitably be litigated rather than arbitrated. Then, at sections D and E, I address Travelers' submissions to the effect that, even if they were wrong on that threshold point, the court does have the necessary jurisdiction to make the order sought. There is a short summary of my conclusions at section F below. I am very grateful to both leading counsel for the typical economy and skill with which their submissions have been advanced.

B THE RELEVANT TERMS OF THE POLICY

5. What was called the Special Institution Condition within the Policy provided as follows:

"Underwriters will not exercise any right to avoid this insurance where it is alleged that there has been non-disclosure or misrepresentation of facts or untrue statements in the proposal forms, provided always that the assured shall establish to Underwriters' satisfaction that such alleged non-disclosure, misrepresentation or untrue statement was free of any fraudulent intent …

In the event of any dispute or disagreement between the Assured and Underwriters regarding the application of the Special Institution Conditions, such dispute or disagreement shall be referred by either party for arbitration to any person nominated by the President for the time being of the Royal Institution of Chartered Surveyors or the Financial Ombudsman Service as appropriate."

6. I accept the submission that the overall purpose of the Condition was to ensure that the policy was not avoided because of an inadvertent misrepresentation or non-disclosure. As to the arbitration agreement within the Condition, it is to be contrasted with the general provisions in the policy which make plain, in two separate places, that all other disputes under the policy will be dealt with in the English courts.
7. For the purposes of this application, I accept that there may well be a legitimate issue between the parties as to whether or not there was a fraudulent intent on the part of Countrywide at the time of the inception of the policy. I have been shown documents which indicate that, prior to 25^th May 2008, various individuals at Countrywide were aware that the scope of Mr. Morley's default went beyond the two particular valuations which formed the basis of his dismissal, and which were the only two potential claims notified to Travelers at the time of the inception of the policy. Of course, whether or not that demonstrates a fraudulent intent for the purposes of the Special Institution Condition is an entirely separate question, and not one that I can begin to answer on this application. On the basis of the material, all I can say is that, if fraud was asserted, such an assertion could not be regarded as fanciful.

C THE CONSTRUCTION OF THE SPECIAL INSTITUTION CONDITION

8. The first question for me is, if Travelers seek to avoid the policy on the ground of fraudulent intent, and that course was challenged by Countrywide, in what forum would such a dispute be determined? Mr. Soole maintains that, in accordance with the Special Institution Condition, such a dispute would centre on whether the Condition applied on the particular facts or not, and would therefore have to be referred to arbitration in accordance with its express provisions. Mr. Brannigan, on behalf of Countrywide, argues that this confuses the application of the Condition with its effect. He says that, whilst there is no dispute here that the Condition applied, and therefore nothing to be referred to arbitration, there is a dispute about the effect of the Condition which is not caught by the arbitration clause and would therefore have to be dealt with in court. In those circumstances he says that the court's power to order pre-action disclosure would be clear.
9. Mr. Brannigan also has an alternative submission on this aspect of the case, which is that, on a proper construction of the Special Institution Condition, the arbitrator would have jurisdiction, but it would be limited to the second issue, namely whether or not any misrepresentation or non-disclosure was fraudulent or not. He maintains that the first issue, namely whether or not there was misrepresentation or non-disclosure in the first place, fell outside the arbitration clause and would have to be determined in court in any event.
10. Although Mr. Brannigan's submissions on the construction of the Condition were put forward with his customary skill, I do not accept that either element of it is correct. The issue between the parties will be whether or not the Condition bites in all the circumstances of this case; whether or not the Condition, and in particular the condition precedent of fraudulent intent, applies on the facts which are found. That, so it seems to me on a proper construction of the Condition itself, was precisely the sort of dispute which the parties agreed would be referred to arbitration.
11. It seems to me that it would be in very rare circumstances that there could ever be a dispute about the simple application of the Condition, as opposed to a dispute about its effect. Mr. Brannigan maintained that there might be a dispute as to whether this particular Condition met the RICS minimum term in relation to non-disclosure and misrepresentation, but it seems to me that such a dispute is manifestly unlikely. I accept Mr. Soole's submission that, in this case, the Condition plainly 'applied' because it was in the agreed written contract of insurance, so that the only likely dispute to arise out of the Condition was whether or not, on the facts, Travelers were entitled to avoid the policy because of the express provisions of this Condition. Any distinction, so it seems to me, between application and effect in such circumstances would be artificial and, so it seems to me, impossible to police sensibly.
12. Further, the agreement to arbitrate any disputes about the application of the Condition must be construed in a sensible way so as to give effect to the commercial purpose of the clause (see paragraphs 6 and 8 of the judgment of Lord Hoffmann in Fiona Trust Cor v. Yuri Privalov [2007] UKHL 40). In this case, I have no doubt that the commercial purpose of the arbitration agreement within the Special Institution Condition was to ensure that all allegations involving misrepresentation, non-disclosure and possible fraud were dealt with in a confidential forum. That was why it was only disputes under this Condition which were to be referred to arbitration and not other disputes as to the operation of the policy generally.
13. Mr. Brannigan's alternative submission on the construction of the Condition was that, whilst an arbitrator might be necessary for stage two, the issue of fraud, he would not have jurisdiction to deal with stage one, namely whether or not there was a misrepresentation or non-disclosure in the first place. Again, that seems to me to be a strained construction of this Condition which would not honour the commercial agreement between the parties. In truth, it would lead to a very unsatisfactory result in which two rounds of proceedings would be inevitable. The court would deal first with whether or not there had been a misrepresentation or non-disclosure, but scrupulously avoid questions of fraud or inadvertence. The arbitrator would then come in for round two and, despite the considerable overlap between the areas of fact under consideration, would be obliged to address all questions of fraud. The potential for confusion and conflict would be very great. Moreover, the purpose of confidentiality would, so it seems to me, be largely lost because the court would have already dealt openly with all issues of misrepresentation and non-disclosure.
14. In my judgment, it would need very clear wording for me to conclude that the parties had agreed to such a cumbersome two stage process. In my view, there is nothing in the Condition which could lead to the conclusion that such a process was, in fact, what the parties had intended or agreed.
15. For those reasons, therefore, I reject Travelers' submissions that the underlying dispute between the parties falls outside the arbitration agreement. On the contrary, it seems to me that the application or otherwise of the Condition, in particular the existence or otherwise of fraudulent intent which lies at the heart of the dispute between the parties, is a dispute which they have agreed to arbitrate. The court must therefore enforce that agreement. The next question is whether, in such circumstances, the court's powers under CPR 31.16 are available.

D CAN PRE-ACTION DISCLOSURE BE ORDERED CPR 31.16 IN A SITUATION WHETHER THE UNDERLYING DISPUTE WILL BE DECIDED IN ARBITRATION NOT IN THE HIGH COURT?

16. In its amended form, Section 33(2) of the Senior Courts Act 1981 (as we must now call it) provides as follows:

"On the application in accordance with rules of court of a person who appears to the High Court to be likely to be a party to subsequent proceedings in that court the High Court shall, in such circumstances as may be specified in the rules, have power to order a person who appears to the court to be likely to be a party to the proceedings and to be likely to have, or to have had, in his possession, custody or power any documents which are relevant to an issue arising, or likely to arise, out of that claim:

(a) to disclose whether those documents are in his possession, custody or power; and

(b) to produce such of those documents as are in his possession, custody or power to the applicant, or on such conditions as may be specified in the order …"

17. CPR 31.16 provides a detailed set of rules relating to applications for pre-action disclosure. The operation of those rules has been explained in detail by Rix LJ in Black and Others v. Sumitomo Corporation [2002] 1 WLR 1562. The power to order pre-action disclosure is now wide-ranging and applies to all civil litigation, and is not limited (as once it was) to those claims relating to personal injury or death.
18. As a matter of statutory construction, it is plain that the power to order pre-action disclosure in accordance with s.33(2) can only be invoked by an applicant who "appears to the High Court [to be] likely to be a party to subsequent proceedings in that court". That must mean litigation in the High Court. If the subsequent proceedings between the parties are to be referred to arbitration, the applicant would not be a party to subsequent proceedings in the High Court. As a matter of construction, therefore, it seems to me that s.33(2), and thus CPR 31.16, does not apply if the underlying dispute is to be referred to arbitration.
19. There are a number of subsidiary matters which, in my judgment, support that construction. First, the courts have repeatedly said that arbitration pursuant to the 1996 Arbitration Act is an entirely separate dispute resolution process in respect of which the courts have extremely limited powers of intervention and control. For example, in Cetelem SA v. Roust Holdings Ltd [2005] 1 WLR 3555, Clarke LJ (as he then was) said at para.61:

"I entirely accept the submission that a central and important purpose of the 1996 Act was to emphasise the importance of party autonomy and to restrict the role of the courts in the arbitral process. In particular, the Act was intended to ensure that the powers of the court should be limited to assisting the arbitral process and should not usurp or interfere with it."

In my judgment, it would be contrary to that policy to find that, in the absence of clear words, the court had the jurisdiction to make an order for potentially wide-ranging pre-action disclosure in an arbitration case.

20. Secondly, the policy behind the Arbitration Act 1996 provides an answer to the argument that, because technically the dispute could be dealt with in the High Court (because, for example, both sides subsequently waived their right to rely on the arbitration agreement), the court has the jurisdiction to make the order sought. On the basis of the papers it is plain that, if Travelers avoided the policy, Countrywide would make their claim in arbitration, and Mr. Soole has confirmed that if Travellers sought a declaration in court that their avoidance was valid, Countrywide would seek a stay of that claim for arbitration. It would, I think, be contrary to the policy of the Act to allow Travelers to invoke CPR 31.16 simply for a purpose which was ancillary to the arbitration.
21. Thirdly, although there is no authority on this issue which is binding on me, I note that in EDO Corporation v. Ultra Electronics Limited [2009] EWHC 682 (Ch) Bernard Livesey QC (sitting as a Deputy Judge of the High Court) reached precisely the same conclusion, to the effect that a claim for pre-action disclosure could not be entertained where the underlying dispute was going to be referred to arbitration.
22. It was also submitted by Mr. Brannigan that s.37(1) of the Senior Courts Act gave the court the necessary jurisdiction because that provision operated as a kind of sweep-up arrangement. The section provides that:

"The High Court may by order, whether interlocutory or final, grant an injunction or appoint a receiver in all cases in which it appears to the court to be just and convenient to do so."

23. I do not consider that s.37 can be invoked in circumstances where there is otherwise no express jurisdiction. In Elektrim SA v. Vivendi Universal SA and Others [2007] EWHC 571 (Comm), Aikens J (as he then was) was considering the operation of the section in respect of a claim for an injunction. He said:

"67 Arbitrations that fall within the 1996 Act are the result of agreements between two (or possibly more) parties to resolve legal disputes through a private impartial tribunal. Such arbitrations are, by definition, consensual. As s.1(b) of the 1996 Act states, 'the parties should be free to agree how their disputes are resolved, subject only to such safeguards as are necessary in the public interest'. I have already noted that under the pre – 1996 Act regime, it was well established that the courts did not have a general supervisory power to intervene in arbitrations before an award was made, either by injunction or some other method. That remains the position. Section 1(c) of the Act is an express statutory warning to the courts not to intervene except as provided in Part 1 of the 1996 Act. That reflects the underlying principles of the 1996 Act of party autonomy and the minimum of interference in the arbitral process by the courts, at least before an award is made.

68 In my view the whole structure of Part 1 also suggests that the scope for the court to intervene by injunction before an award is made by arbitrators is very limited."

24. In my judgment, the same approach is applicable to an application for pre-action disclosure in an arbitration case. There is no difference in principle between the two. For the same reasons as Aikens J refused to apply s.37 in Elektrim, I would refuse to apply it here.
25. For all those reasons, I conclude that the existence of the arbitration agreement would, as a matter of construction of s.33 of the Senior Courts Act 1981, deprive the court of the power to make under CPR 31.16. But that is not an end of the matter, because Travelers say that the court has the appropriate power as a result of section 44(3) of the Arbitration Act 1996. I therefore turn to deal with that final issue on jurisdiction.

E SECTION 44(3) OF THE 1996 ACT

26. Section 44 of the 1996 Act is in the following terms:

"(1) Unless otherwise agreed by the parties the court has, for the purposes of and in relation to arbitral proceedings, the same power of making orders about the matters listed below as it has for the purposes of and in relation to legal proceedings.

(2) Those matters are:

(a) the taking of the evidence of witnesses;

(b) the preservation of evidence;

(c) making orders relating to property which is the subject of the proceedings or as to which any question arises in the proceedings:

(i) for the inspection, photographing, preservation, custody or detention of the property; or

(ii) ordering that samples be taken from or any observation be made or experiment conducted upon the property and for that purpose authorising any person to enter any premises in the possession or control of a party to the arbitration;

(d) the sale of any goods the subject of the proceedings;

(e) the granting of an interim injunction or the appointment of a receiver.

(3) If the case is one of urgency the court may, on the application of a party or proposed party to the arbitral proceedings, make such orders as it thinks necessary for the purpose of preserving evidence or assets."

27. In my judgment, s.44(3) is intended to be invoked in exceptional circumstances where, for example, the critical evidence is about to be lost forever or there is a risk that it will be destroyed or otherwise tampered with, such as to make it of no probative value. On the face of it, it should not be used in the standard case where, once arbitration proceedings start, the arbitrator can make precisely the same order for disclosure as the court could, in accordance with his express powers under s.44(2).
28. Mr. Brannigan suggested that there was urgency here because of the need to process the underlying claims being made against Countrywide and which were being passed on to Travelers. In addition, he said that there was a risk that documents would be lost, in particular because the papers show that the hard drive of one of Countrywide's employees has apparently crashed, with the result that some documents had already been lost. In reality, it seems to me that this application for pre-action disclosure is no different to the run-of-the-mill application for early disclosure which arbitrators are well-versed in addressing. There is the usual need for the matter to be progressed with reasonable speed, and of course, as time goes on, there is always a risk that documents may be mislaid or their electronic storage may be adversely affected and documents may be lost. But in the present case, in the absence of any express evidence as to a particular risk of lost documents, or an imminent threat to the preservation of the evidence or the assets (and I accept that the claim is an asset for this purpose), there is no urgency, and therefore the court has no power to make an order under s.44(3). In the absence of real urgency, the provision is not engaged.
29. I note for completeness that, in the case of EDO, to which I have already made reference, Bernard Livesey QC came to the same conclusion on the non-application of s.44(2) in such circumstances. He said this:

"18. I also take the view that, had it been the intention of the legislature to grant to those who are likely to be parties to arbitral proceedings similar ancillary assistance to that provided by s.33(2), it would have made express provision to that effect either within the Supreme Court Act or more probably within s.44(2) of the Arbitration Act 1996 …

20. … the powers with which the High Court has been endowed for the purpose of providing ancillary assistance in support of arbitral proceedings are, for present purposes, listed in s.44(2) of the Arbitration Act 1996, and I note, where the case is one of urgency, include a power 'for the purpose of preserving evidence or assets' pursuant to s.44(3). An application for pre-action disclosure does not come within the powers given to the court by ss.44(2) and (3), and, as The Tasman Spirit [2005] 1 Lloyd's Rep 525 also shows, where the power is not expressly given by the section, the court does not have a residual power to grant the relief sought."

F CONCLUSIONS

30. For the reasons set out above, I conclude that:

(a) The underlying dispute as to the possible misrepresentation and/or fraudulent intent as at May 2008 is the subject of a binding arbitration agreement;

(b) In those circumstances the court's powers to order pre-action disclosure are not exercisable. There is no jurisdiction.

31. Although, in the light of those conclusions, it is unnecessary for me to deal with the merits of the underlying application under CPR 31.16, I should say that, had I had the power to order pre-action disclosure in this case under that part of the rules, I probably would have done so. It seems to me that this is a case where, in accordance with the principles noted by Rix LJ in Black, an order pursuant to CPR 31.16 would have been appropriate.
32. In particular, it seems to me that the documents now sought, particularly those relating to the decision as to what information to provide to Travelers in May 2008 and what information not to provide, would be disclosable on standard disclosure if and when this dispute comes to be determined in arbitration. The early provision of that documentation would plainly narrow the issues and reduce costs. Indeed, there must be a real chance that, if all the information sought was provided, Travelers would take the view that there had not been fraudulent intent, so that the issue would never even arise. In any event, the early production of information would allow Travelers to make an informed decision as soon as possible, on the basis of the fullest available information. I would have thought that such a result was in everybody's interests. In the exercise of my discretion I would have made the order for those reasons, and because my instinct is, on the basis of the papers that I have seen, that such an order would have been beneficial. I would have made the order notwithstanding the warning given by Rix LJ at para.54 and following of Black about fraud cases.
33. None of that should be taken as a particular criticism of Countrywide's solicitors, who I acknowledge have endeavoured to provide a good deal of the documents sought by Travellers on a voluntary basis. I also accept that the focus of Travelers' inquiries has shifted slightly and that, notwithstanding that, Countrywide's solicitors have promised to carry out further searches for this documentation. I trust that, despite my views as to jurisdiction, the voluntary disclosure of those documents will continue for the reasons that I have given. I accept, therefore, the general submission made by Travelers that there are likely to be other documents which exist and which should be provided sooner rather than later. I would be very hopeful that those documents are provided well in advance of the proposed mediation in November 2010.
34. For those reasons, therefore, I refuse the application with a certain amount of regret. However, the court's want of jurisdiction is the direct effect of the parties' original agreement to arbitrate this dispute. It is that agreement which the court must now enforce. On the basis of the authorities which I have set out above, that inevitably means that this application for pre-action disclosure must be dismissed.