Jones v Environcom Ltd and Another

JurisdictionEngland & Wales
JudgeMrs Justice Gloster, DBE,MR. JUSTICE DAVID STEEL
Judgment Date15 April 2010
Neutral Citation[2009] EWHC 16 (Comm),[2010] EWHC 759 (Comm)
Docket NumberCase No: 2008 Folio 177,Claim No: 2008 FOLIO 177
CourtQueen's Bench Division (Commercial Court)
Date15 April 2010
Nicholas G Jones (suing On His Own Behalf And On Behalf Of All Underwriting Members Of The Lloyd's Syndicates Referred To In Schedule 1 Hereto Subscribing To Policy No. Wbcul/07 70695 And On Behalf Of All Underwriting Members Of The Lloyd's Syndicate 1200 Subscribing To Policy No. Wbcul/07 70695 And Policy No. Wbher/05 70108)
(1) Environcom Limited
(2) Environcom England Limited

[2009] EWHC 16 (Comm)


Mrs Justice Gloster, Dbe

Case No: 2008 Folio 177




Royal Courts of Justice

Strand, London, WC2A 2LL

Richard Waller Esq (instructed by Messrs Reynolds Porter Chamberlain) for the Claimant

Neil Hext Esq (instructed by Messrs Edwin Coe) for the Defendants

Hearing dates: 3 rd October 2008

(additional written submissions 6 th October 2008)

Mrs Justice Gloster, DBE



I am asked to determine preliminary issues arising in respect of the claimant insurers' (“Insurers”) application for security for the costs of the counterclaim brought by the defendants, Environcom Limited (“Environcom Scotland”) and its subsidiary, Environcom England Limited (“Environcom England”), (collectively, “the Defendants”). Environcom England is a trading company which at all material times operated an electrical goods and waste recycling plant in Grantham, Lincolnshire. At all material times the principal activity of Environcom Scotland, a company incorporated in Scotland, was to act as a holding company for its subsidiary.


The background to the claim is as follows. Insurers provided cover for Environcom England's recycling facility, pursuant to two policies covering the period 25 May 2007 to 24 May 2008 (“the Policies”). Insurers sue the Defendants for a declaration that Insurers were entitled to avoid those Policies as a result of the Defendants' alleged failure to disclose the use of plasma guns on their refrigerator disassembly line. It is alleged that the reasons that such use ought to have been disclosed is that the use of these tools involved a risk of fire, and that, indeed “small fires” had occurred on the line. It is also alleged that there were other undisclosed fires which occurred at the facility, both before and after the inception of the policies.


The Defendants' position is that Insurers knew of the use of plasma guns at the facility; that Insurers had obtained a survey of the premises in June 2006; that they obtained a further survey in July 2007, after inception of the policy, but took no exception to the use of the plasma guns. There had previously been two significant fires at the facility, in October 2005 and December 2006. As a result of this claims records, Insurers imposed onerous conditions on the policy, including a co-insurance provision for 20% of the risk. The Defendants contend that other ignitions that had occurred were not significant; that they were part and parcel of the recycling business and would not materially have added to Insurers' assessment of the risk (particularly given that the policy was subject to survey). As to fires that had occurred after conclusion of the insurance contract, the Defendants contend that these are irrelevant.


On 16 September 2007, a major fire occurred, destroying the whole of the plant and machinery, and giving rise to the need to demolish the facility. By 10 October 2007, Insurers had already decided that they had a right to avoid. On 30 November 2007, they sent a letter purporting to avoid the Policies. There was then correspondence between the parties' respective solicitors, culminating in a letter dated 8 February 2008 from the Defendants' solicitors asking for an unequivocal assurance that Insurers' accepted liability for the claim, and stating that, in the absence of such an assurance, their instructions were to issue proceedings against Insurers without further notice. It was suggested by Mr Waller, during the course of the hearing, that, because of a concern that the Defendants might issue proceedings in Scotland, rather than in England, Insurers issued the present claim on 22 February 2008, without waiting for the Defendants to issue their own proceedings. I was not shown the terms of the Policies and I accordingly I have no knowledge as to whether they contained an exclusive, or non-exclusive jurisdiction, clause, or as to whether Insurers obtained any tactical advantage in this respect.


Accordingly, Insurers, by their Particulars of Claim, seek a declaration that they have validly avoided the policies of insurance on the grounds of the Defendants' failure to disclose. Alternatively, Insurers claim a declaration that they are entitled to claim damages in the amount of any sum which they might otherwise have become liable to pay to the Defendants under the Policies, by reason of any claims which arose on or after the date when the Policies would, but for the Defendants' alleged breach, have been cancelled, namely on or shortly after 24 July 2007.


The Defendants, in their Defence, set out their case as described above as to why they contend that there had been no non-disclosure on their part. In their Counterclaim, they go on to set out the circumstances of the fire, the losses which they have suffered as a result of the failure of Insurers to indemnify them in respect of such losses, and to claim a declaration that they are entitled to be indemnified in respect of such losses, or, in the alternative, to be paid damages. The damages claimed in relation to property damage and estimated third party claims amount to some £2.9 million; business interruption losses have not yet been quantified, but I was informed that this claim is also likely to be substantial. The Defendants have also issued a third party claim against their brokers for negligence.

Insurers' application for security for costs of the counterclaim


By their application dated 12 September 2008, Insurers sought security in the sum of £147,001.46, which comprised £114,640.21 in respect of costs already incurred and £32,371.25 in respect of costs to be incurred up to the date of exchange of witness statements, although Insurers anticipated that the last figure was in fact an underestimate of the costs that they would incur to that stage. That sum basically reflected Insurers' incurred and anticipated costs of the entire action and not merely the costs of the issues exclusively referable to the counterclaim.


The basis of the application was Insurers' concern, on the basis of the financial information available, about the Defendants' ability to meet an adverse costs order in the event that the counterclaim failed and Insurers were held to have validly avoided the Policies. Accordingly, Insurers contended that they had satisfied the condition set out in CPR Rule 25.13(2)(c), namely that there was reason to believe that the Defendants would be unable to pay Insurers' costs if ordered to do so.


Very shortly before the hearing, the Defendants served their evidence in answer to Insurers' application, with the result that Insurers had only one working day with which to consider such evidence and serve evidence in reply. However, the thrust of the Defendants' late evidence was that they were on the brink of concluding a major new contract which they were confident would transform their fortunes, and that, accordingly, amongst other arguments, the condition set out in CPR Rule 25.13(2)(c) was not satisfied.


In the circumstances, counsel for Insurers, Mr Richard Waller, sensibly suggested that, as there was no urgency for there to be any resolution of Insurers' application (since they were, in the short term, at least in part protected by their retention of the premium in the sum of £109,650, which would in all probability have to be returned to the Defendants, in the event that the counterclaim were dismissed), the court should decide certain preliminary issues raised on the application. If such issues were resolved against Insurers, then no further application for security would be likely to be made; if resolved in Insurers' favour, then the application could be finally determined as to liability and quantum at an adjourned hearing, when the position about the proposed contract and its effect on the Defendants' financial position would be clearer. Counsel for the Defendants, Mr Neil Hext, agreed to this suggestion. The court also acceded to the proposal, as it appeared to be a sensible way of ensuring that the work that the parties had put in to the preparation for the hearing would not be wasted.

Preliminary Issues


The preliminary issues which, at the court's direction, the parties formulated in writing after the conclusion of oral argument, are as follows:

i) Whether the Defendants' counterclaim is to be regarded as having an “independent vitality of its own”, within the meaning of the concept as used in Hutchinson Telephone (UK) Limited v Ultimate Response Limited1;

ii) whether the costs of the counterclaim for the purpose of an application for security for the costs of the counterclaim are, as a matter of law, confined to those costs that are exclusively referable to the counterclaim (as contended by the Defendants); or whether such costs can include, as a matter of law, costs relating to issues which are common to both the claim and the counterclaim (as contended by Insurers)?


Although the formulation in the above terms might suggest that the issues are ones of law, their determination is, in reality, heavily dependent upon the facts and circumstances of this particular case, and the nature of the claim and the counterclaim made in these proceedings. Moreover, as all the authorities emphasize, even once the condition set out in CPR Rule 25.13(2)(c) is held to have been satisfied, the decision whether “it is just” 2 to make an order for security is “largely discretionary”...

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