Court of Session considers whether settlement between insurer and insured in English proceedings binding on Scottish claimants

United Kingdom

In October 2019 the Supreme Court considered the issue of an insurer’s liability for non-party costs orders in Travelers Insurance Company Ltd v XYZ. To read more on the judgment see our Law Now. The matter has once again been before the Courts, this time in Scotland, to ascertain whether a Settlement Agreement, primarily drawn up to deal with the English proceedings would be binding on Scottish claimants.

Background

Travelers (Insurers) provided product liability insurance to Transform (the Insured), a cosmetic business undertaking breast augmentation surgery. Several claims were raised against Transform in relation to the supply of defective breast implants. Most of these claims were raised in the High Court in London and were managed under a Group Litigation Order (the GLO). There were also a few Scottish cases outside the GLO.

Alongside the claims relating to the defective implants, Travelers and Transform found themselves embroiled in a dispute regarding the extent to which claims by breast implant patients were covered by Travelers’ policies (the “coverage dispute”). A date had been set for trial of the coverage dispute, however the parties reached an agreement and a Settlement Agreement was drawn up (the “SA”). Shortly thereafter, Transform went into administration. In terms of the Third Parties (Rights against Insurers) Act 1930, Transform’s rights against Travelers under its contract of insurance were transferred to the Scottish claimants. Relying on the 1930 Act, the claimants sought payment of damages from Travelers.

The matter came before Lord Tyre in the Court of Session on the question of whether the SA, agreed in the context of the GLO, should be binding on the Scottish claimants. As Transform were in administration they did not participate.

The Settlement Agreement

The SA sought to resolve the coverage dispute not only in relation to the GLO claimants but also in relation to the Scottish claimants.

The SA narrated:

Recital 3

Various claims are also made against Transform by Claimants in Scotland, who are not part of the GLO, and possibly by further claimants…. The settlement between Transform and Travelers is intended to and does (to the extent set out below) address all claims against Transform made by all claimants in relation to PIP breast implants

Recital 4

The settlement reached between Transform and Travelers has been reached after lengthy and detailed negotiations. It is a settlement reached in good faith and is a commercial settlement that takes into account the various risks…inherent in the Transform Claim."

Specifically of note was the fact that the SA divided the Claimants into three categories:

  1. Claimants who appeared arguably to have suffered injury within the policy period. These were subdivided into three further categories reflecting the perceived strength of their claim:
  2. Category 1(a) – probably covered

    Category 1(b) – possibly covered

    Category 1(c) - unlikely to be covered.

  3. Claimants who appeared not to have suffered injury (not covered); and
  4. Claimants who suffered any injury outside the policy period (not covered).

The claimants’ position

The claimants in the Scottish action argued that the SA was not applicable to them because it had not been entered into in good faith. Particularly, it had been finalised at a time when it was likely that Transform would enter administration and as such, there was no benefit to be gained from proceeding with the SA. In short, the Court was invited to infer collusion between Transform and Travelers with the purpose of prejudicing claims by the claimants.

The defender’s position

Travelers submitted that it was not the case that Transform had obtained no benefit from the SA. The agreement had been negotiated by parties at arm’s length, separately represented by independent advisors and Transform was relieved of the need to go to trial in hundreds of cases on the coverage issue. The fact that Transform had entered administration shortly after the SA was concluded did not mean the parties were colluding or acting in bad faith.

Decision

The Court noted that the legal basis upon which the claimants asserted that the SA should not be binding on them was not entirely clear. It seemed that the claimants relied on a general principle that the Court should not lend itself to the enforcement of fraudulent transactions. That was not the case here. Lord Tyre was persuaded that the agreement reached was between two commercial parties each dealing with one another at arm’s length and after detailed, lengthy negotiations. The fact that Transform went into administration shortly after the SA was concluded did not demonstrate bad faith, let alone fraudulent conduct on the part of either party. Rather, it was entirely understandable that parties wished to use the vehicle of the SA to resolve the coverage dispute in relation to all extant and unknown claims.

Comment

Insurers can take some comfort that the Courts will seek to operate consistently across the border when faced with interpreting rulings from other jurisdictions. Here, the Scottish Court assessed that parties had acted commercially, at arm’s length, each with independent advisors and following detailed negotiations. Steps had been taken to resolve the dispute with certainty (rather than engaging in lengthy litigation with unpredictable outcomes). Considering all of that, the Scottish Court was comfortable to uphold the SA agreed in the context of the English proceedings.