Out-Law Guide 3 min. read
04 Nov 2010, 2:50 pm
Travelers Insurance Company Limited v Countrywide Surveyors Limited
The insured was facing claims arising out of residential surveys carried out by one of its former surveyors. It appeared that hundreds of potentially fraudulent valuations may have been carried out by this surveyor and two others, many for the same commercial client.
The insured’s professional indemnity insurance included a Special Institution Condition which provided that the insurer would not exercise any right to avoid the policy for alleged non‑disclosure or misrepresentation, provided the insured could satisfy the insurer that it was free of any fraudulent intent. If there was any dispute about the application of this condition, the matter was to be referred to arbitration.
In order to decide whether there was fraudulent intent, the insurer wanted to investigate whether the insured was aware of the surveyor’s fraud (as opposed to his incompetence) by 25th May 2008 when the policy was agreed, as well as the circumstances surrounding the surveyor’s dismissal.
The insured had provided a large number of documents but the insurer maintained there were others relevant to the issues. It issued an application for pre-action disclosure under the Civil Procedure Rules.
Section 33(2) of the Senior Courts Act 1981 provides that the High Court has power to order a person "who appears to the High Court to be likely to be a party to subsequent proceedings in that court" and who is likely to have relevant documents to disclose and produce those documents. Detailed rules for pre-action disclosure are set out in CPR 31.16.
The insured argued the court did not have jurisdiction to make the order because under the Special Institution Condition the dispute would be determined by arbitration rather that by the court. In any event, the conditions for pre-action disclosure had not been met.
The insurer said there was no argument that the condition applied so there was no dispute to be referred to arbitration. There was, however, a dispute about its effect, which was not caught by the arbitration clause and would have to be dealt with in court.
Alternatively, it argued that the question fell outside the arbitration clause. The arbitrator's jurisdiction was limited to whether or not any misrepresentation or non‑disclosure was fraudulent, not whether there had been a misrepresentation or non‑disclosure in the first place.
The judge agreed with the insured that he had no power to make an order for pre-action disclosure.
The documents already disclosed suggested there might be a legitimate issue as to fraudulent intent. Had he the power to do so, the judge said he probably would have made the order. But on a proper construction of the Special Institution Condition, this was precisely the sort of dispute which the parties had agreed would be referred to arbitration.
The insurer’s argument that the arbitrator would only deal with the question of fraudulent intent would have resulted in two rounds of proceedings. It would need very clear wording to convince the judge that such a cumbersome two-stage process was intended.
Because of the arbitration agreement, the court rules on pre-action disclosure had no application. Section 33(2) of the Senior Courts Act specifically refers to subsequent proceedings in the High Court. It could not apply if the underlying dispute was to be referred to arbitration.
Although the court has power under the Act to make orders for the preservation of evidence or assets in exceptional circumstances, this was not such a case. There was no particular urgency or risk that documents would be lost. It was no different to a run-of-the mill application for early disclosure which could be dealt with by the arbitrator.
Where parties to a contract have agreed to go to arbitration, the court will always be very reluctant to intervene and its powers to do so are extremely limited.
This policy only invoked arbitration in relation to misrepresentation and non-disclosure. By upholding the parties’ agreement to arbitrate, the judge was confident that he was giving effect to the commercial purpose behind the condition - that all allegations involving misrepresentation, non‑disclosure and possible fraud would be dealt with in a confidential forum.
Once those arbitration proceedings had begun, the arbitrator would be able to make an order for disclosure under the Arbitration Act.