Court of Appeal rules on service out of the jurisdiction in support of negative declaratory proceedings

The Court of Appeal has upheld a Commercial Court decision which declined to set aside an order for service out of the jurisdiction granted on a claim by insurers against their insured seeking, in effect, a declaration of non-liability: Faraday Reinsurance Co Limited v Howden North America Inc & anor [2012] EWCA Civ 980.

In light of this decision, parties to disputes in relation to the construction of insurance policies written in the London market and governed by English law may wish to consider the early issue of declaratory proceedings in the English courts, particularly where issues of law and jurisdiction may have a significant impact on the outcome of the case. The decision also highlights the Court of Appeal's reluctance to interfere with first instance decisions on matters of jurisdiction; parties seeking permission to appeal on a jurisdictional point, particularly in an insurance context, need to proceed with caution. Tony Dempster and Christopher Charlton comment further on the case below.

	Tony Dempster Partner +44 20 7466 2340
	Christopher Charlton Associate +44 20 7466 2972

The underlying dispute

The substantive issue between the parties arose out of asbestos liability claims brought against Howden, arising out of its historic business activities.  Mass tort proceedings have been on foot since 1999, and coverage litigation with Howden's insurers commenced in Pennsylvania in 2003.

Faraday, as successor to General Star International Indemnity Ltd, insured Howden under three excess layer general liability policies (although prior to the hearing before Beatson J, Howden conceded that it sought cover under only one such policy, for the 1998/1999 policy year (the "Policy")). Faraday was not involved in or aware of the underlying proceedings until a notice of circumstances was made to it on behalf of Howden in August 2010.

Following receipt of the notification, Faraday pre-emptively issued proceedings in the Commercial Court seeking a declaration as to the construction of the policy which would, in effect, have amounted to a declaration that Faraday was not liable for the claim. Faraday obtained permission and served proceedings on Howden out of the jurisdiction. Howden challenged the grant of permission to serve out.

The question of jurisdiction was of particular importance as a result of two key differences of approach between English law and the laws of certain US states (including Pennsylvania). Firstly, under English law, exposure to a hazardous condition does not in itself constitute an injury; by contrast, Pennsylvania law recognises multiple triggers of periods of insurance from such exposure. Secondly, under English law, the period clause is a fundamental term of an insurance policy to which effect must be given, whereas under Pennsylvania law it is not. These differences of approach of course translate into substantial differences in insurers' potential liability.

The first instance decision

Beatson J at first instance applied the recognised test for permission to serve out of the jurisdiction, holding that Faraday was required to establish a jurisdictional gateway, satisfy a formal merits requirement and establish that England was the forum conveniens for the dispute to be heard. He also accepted that because the application was made in respect of a claim for negative declaratory relief, Faraday was required to demonstrate that the proceedings served a useful purpose.

Beatson J held that the Policy was governed by English law and, having so determined, held that England was the proper place to bring proceedings. Despite the wide-ranging litigation in Pennsylvania, which had been on foot for a number of years, he did not consider that Howden had made out its claim that Pennsylvania was a more suitable forum for the dispute to be heard.

Finally, Beatson J held that the proceedings were useful, in that Faraday had a legitimate interest in obtaining an early commercial determination of its liability where it had been notified of circumstances which might give rise to a claim. The lack of a formal claim did not render the proceedings merely hypothetical.

Conflicting evidence was presented to the Court on whether an English judgment would establish "issue preclusion" on Faraday's liability in the Pennsylvania courts which, it was alleged, was Faraday's purpose in seeking the declaration. Beatson J took the view that it was not appropriate to resolve the conflicting evidence as to the effect of the English judgment at this interim stage, and was not persuaded that the proceedings were without utility.

The appeal

Howden appealed the decision on the ground that the utility of the proceedings had not been established. Howden submitted that the only useful purpose relied on by Faraday was the establishment of issue preclusion, and that the evidence showed that an English decision would not preclude the Pennsylvania courts from coming to their own conclusions on the law governing the Policy and Faraday's liability under it. Further, Howden submitted that the judge had erred in holding that it was not appropriate to resolve the conflicting evidence before him on the point, but rather should have evaluated the evidence and reached a conclusion. If he had done so, he would have concluded that the proceedings would not achieve issue preclusion.

Longmore LJ (giving the leading judgment in the Court of Appeal) held that given Beatson J was plainly aware of the need for utility to be shown in relation to the proceedings and directed himself accordingly, the Court of Appeal should be slow to interfere with the exercise of his judgement on the issue.

Howden’s submission that the judge should have resolved the conflicting evidence on issue preclusion was held to be misplaced. Rather, Longmore LJ held that it is inappropriate for a set battle as to issues of foreign law to be fought at an interim stage, causing unnecessary expense and delay. The Court is entitled to take a broad view on the suitability of the proceedings for determination by the English court, as Beatson J had done in this case.

In the circumstances, therefore, Longmore LJ found no grounds to interfere with the judgment of Beatson J, and the Court dismissed the appeal.

Longmore LJ also referred with approval to a dictum of Phillips LJ (as he then was) in New Hampshire Insurance Company v Philips Electronic North America Corp’n ([1998] CLC 1062), to the effect that jurisdictional challenges absorb significant resources and are often brought not to secure a trial which satisfies the interests of justice, but rather to obtain some perceived advantage by delaying resolutions of the substantive issues in the case. Philips LJ commented:

“I do not believe that an appeal in relation to the exercise of discretion on a question of jurisdiction is justified or should be allowed unless the judge has made an error which risks having adverse consequences on the trial of the action which significantly outweigh the prejudice that will inevitably be caused to the proceedings by the appeal process.”

Longmore LJ suggested that where permission to appeal is sought on a jurisdictional issue: “any applicant for permission to appeal should, as part of the duty to make proper disclosure on what is an ex parte application, draw [Phillips LJ’s comments] to the specific attention of the court and say why in the particular circumstances of the case, they do not furnish good reason for refusing permission to appeal.”

Comment

Given the apparent willingness of the English courts to retain jurisdiction over disputes in relation to the construction of policies written in the London market and governed by English law, consideration should be given to the early issue of declaratory proceedings in any case where issues of law and jurisdiction may have a significant impact on the shape of the case and the liability at issue.

Longmore LJ's comments in relation to future appeals, whilst strictly obiter, highlight the high standard likely to be imposed by the court when considering whether to grant permission to appeal on an issue of jurisdiction. Further, the Court of Appeal's firm rejection of Howden's arguments in this case demonstrates the restrictive attitude of the courts to interfering with first instance decisions on matters of jurisdiction.