Sugar Hut Group Ltd & Ors v A J Insurance Service (a partnership)  EWCA 461
In the main proceedings in this case2 the claimant, Sugar Hut, claimed damages against its insurance broker, A J Insurance. Sugar Hut had suffered losses as the result of fire at its nightclub premises - “a beautiful place teeming with beautiful people” according to the evidence of the owner. Sugar Hut had been unable to claim under its insurance policy because that policy had been avoided due in part to the negligence of A J Insurance in placing it.
Sugar Hut claimed damages from A J Insurance representing the sums that it said it would have recovered in respect of property damage, business interruption and other associated losses under its insurance, but for the avoidance.
Questions of liability having been agreed prior to the trial, the court had to decide, amongst other things, the appropriate method for calculating the loss of turnover during the period of closure, so as to be able to quantify the business interruption portion of Sugar Hut’s loss. A lack of available evidence meant that various alternative methods for carrying out this exercise were considered.
The court held that, on the facts, no assistance could be gained from analysing the turnover actually achieved after the club reopened. This was due in part to the “TOWIE effect”, which was the effect upon the turnover of the club of its use in a popular television programme “The Only Way Is Essex” (“I have not had the benefit of seeing this TV show”, Mr Justice Eder admitted). The loss in turnover was accordingly instead assessed solely by reference to a “necessarily crude and somewhat inexact” analysis based upon a comparison of turnover during certain periods prior to the fire. On this basis, the court assessed Sugar Hut’s business interruption loss at £568,670, against Sugar Hut’s claim of £862,024.
Following the judgment in the main proceedings, a separate dispute arose over costs. In our 30 January 2015 bulletin3 we reported that, when called upon to adjudicate this dispute, the court had ordered Sugar Hut to pay A J Insurance’s costs relating to the assessment of damages from 21 days after the date on which A J Insurance had made a Part 36 offer.
This was on the basis that although Sugar Hut had (by a small margin) beaten A J Insurance’s overall Part 36 offer (to settle the entire claim), the figure for business interruption upon which A J Insurance’s offer had been based (£600,000) was in fact higher than the assessment of the business interruption loss arrived at by the court (£568,670, as above). In the court’s view it was unreasonable for Sugar Hut to have continued to pursue a claim for business interruption losses which was larger than the figure that AJ insurance had offered.
Appeal of costs decision
In this latest decision, however, the Court of Appeal has overturned the decision on costs. The Court of Appeal held that Sugar Hut’s conduct in pursuing a higher figure for business interruption had not been unreasonable. A J Insurance had made no standalone offer capable of acceptance to compromise the business interruption losses for £600,000. The offer was part of a wider offer which Sugar Hut had ultimately beaten. It could not be unreasonable conduct simply to pursue one head of loss in an amount greater than that at which it was valued by the other party.
The Court of Appeal also disagreed that certain other factors relied upon at first instance in categorising Sugar Hut’s conduct as unreasonable (supposed exaggeration of the claim and an unreasonable approach to disclosure) were made out.
In addition, the first instance court had already penalised Sugar Hut for failing to make out a large portion of its business interruption claim by reducing the amount of costs recoverable by Sugar Hut relating to the period prior to the Part 36 offer. The lower court’s order in respect of the period following the offer therefore meant that Sugar Hut was being “twice penalised” for the same shortcoming.
The main proceedings in this case are:
- An important reminder of the large liabilities that can be incurred by brokers in failing properly to discharge their obligations upon the placement of a policy. In this case, the broker was effectively required to stand in the shoes of the insurers and to pay damages equivalent to an indemnity under the avoided policy, albeit adjusted to reflect the agreed apportionment of liability.
- An interesting illustration of a court attempting to reach a sensible means of assessing a business interruption loss in circumstances in which the crucial evidence was lacking in some respects.
The costs proceedings provide a useful reminder of the operation of Part 36 principles, in particular as to the other factors which may in certain circumstances displace the usual Part 36 consequences.