The claimant provided claims handling services to the defendant insurer pursuant to a Claims Management Delegated Authority Agreement ("the Agreement"). The Agreement provided that the insurer could carry out audits from time to time. After a series of satisfactory audits, the insurer requested an urgent review of every open file being handled by the claimant (of which there were a very large number). Batches of files were sent to the insurer's lawyers but eventually the claimant refused to provide a further 1,500 files without a further meeting with the insurer. The insurer alleged that that refusal, together with alleged defects in the way the claims were being handled, amounted to a repudiatory breach of the Agreement. Various issues fell to be decided by the judge (although at this stage he was not required to decide whether the claims had in fact been handled negligently). Males J held as follows:
- The claimant had been under no obligation to send files off-site to the insurer's lawyers. All the claimant's files were paper files (there were no electronic files) and hence the requirement to send these off-site was significantly disruptive to the claimant's business. The judge said that this was a "legitimate consideration" when construing the terms of the Agreement.
Clause 13 of the Agreement provided that the insurer had the right to examine the claimant's "books and records" at the claimant's premises during business hours. The judge held that this meant the paper claims files and not just (as the insurer claimed) the claimant's own records. Clause 12 of the Agreement provided that "all data" held by the claimant was the property of the insurer and that the insurer had "unrestricted access" to that data. The judge held that that even if that meant ownership of the files themselves (which he did not think was the case), that did not entitle the insurer to insist that the files be sent away from the claimant's premises. Instead, the insurer would have unrestricted access at the claimant's premises.
- Even if the claimant had been obliged to send the files off-site, a refusal to do so would not have been repudiatory. Although a refusal to permit any audits at all would be a serious matter, there had been no outright refusal here and the claimant had offered unrestricted access to the files at its premises. The insurer argued that the cumulative effect of the refusal and the alleged defective performance of the claimant's duties amounted to a repudiation. The judge held that although it is in theory possible that the cumulative effect of breaches which individually are not repudiatory may satisfy the test for repudiation, that argument did not arise here as the refusal to send files off-site was not a breach at all.
- The judge held that the allegations against the claimant, if true, would be capable of amounting to a repudiatory breach of the Agreement. These allegations related to various issues which are of key importance to insurers eg the need to reserve accurately (without creating an unduly adverse view of the insurer's solvency), the need to close dormant files appropriately, the need to avoid overspending on claims, as well as the desirability of an early settlement (because of FCA requirements and to avoid incurring greater costs). However, the claimant sought to raise the following arguments:
- It referred to the fact that the insurer did not originally rely on an allegation of defective performance as a ground for termination. Although parties can subsequently raise arguments justifying a refusal to perform a contract (provided that that justification existed at the time of the refusal), that general rule will not apply "if the point taken is one which if taken could have been put right" (see Heisler v Anglo-Dal ). Males J held that the Heisler qualification applies only to anticipatory breaches, though, and not to breaches which (as, allegedly, was the case here) have already occurred. In any event, the claimant had been vague as to how the breaches could have been remedied going forward: "in my judgment, there must be at least a real prospect, as distinct from a merely theoretical or fanciful possibility, of the necessary correction being made".
- Reference was also made to terms in the Agreement providing for termination in the event of a "material breach", which the claimant argued applied here. That argument was also rejected by the judge: "Termination for material breach and for repudiation are separate matters even if there is some overlap between them. The criteria for repudiation are demanding but, if they are satisfied so that the effect of a breach is to deprive [the insurer] of substantially the whole benefit of the contract, there is no reason why it should not treat the contract as discharged". Accordingly, an agreement that the Agreement could only be terminated following a material breach if sufficient notice was given did not impact on the insurer's right terminate for repudiatory breach of the contract.
Accordingly, the claimant's arguments on this point failed.
- A further issue in the case was whether the Agreement had been varied by an exchange of emails between the parties. The judge held that, on the facts, and viewed objectively, they had agreed to be bound by the exchange, even though they also contemplated that the agreement would be recorded later on in a formal contract. However, applying the recent Supreme Court decision of Marks & Spencer v BNP Paribas (see Weekly Update 45/15) on implied terms, he rejected an argument that the parties had varied the Agreement to include an implied term that the insurer would continue to pass claims to the claimant. Such a term was neither necessary nor obvious and the amended contract worked perfectly well without it.