Many of the facts of this decision on preliminary issues have not been decided, but the principles may be relevant to any company with a Third Party Claims Handler/Administrator (TPA). It considers when a TPA contract may be terminated, by repudiatory breach.

The claimant TPA, C&S, contracted to handle UK motor claims for insurer Enterprise. C&S’ role included reviewing policies, investigating liability and quantum of claims, reserving, defending claims and negotiating settlement, and reporting to Enterprise.

The relationship broke down when Enterprise arranged for a law firm, Ozon, to carry out an impromptu audit of every open file. Each paper file would be sent off-site. A transfer of more than 2,000 files took place. Enterprise had concerns about the rising cost of claims, inefficient claims handling and erroneous reserving by C&S. The audit allegedly identified breaches of duty by C&S.

Enterprise explained that Ozon would handle all the files already transferred. C&S’ request for a meeting to discuss this was deferred by Enterprise, who requested transfer of a further 1,500 files. C&S refused to do this until the meeting took place, but instead offered for the audit to take place at their premises. C&S argued that Ozon’s retention of files caused disruption and loss of revenue, and the transfer of another 1,500 files would exacerbate this. Enterprise then ended the TPA contract on the ground that C&S’ refusal to release the files was a repudiation of the contract.

The judge said of the TPA contract that, although Enterprise retained ownership of information in the files, and had unrestricted access, it was only entitled to examine the files at C&S’ office during business hours. Enterprise gave C&S the right, and the duty, to handle claims on its behalf, so C&S was entitled to possession of the files to fulfil the TPA contract. “Unrestricted access” did not allow Enterprise to insist the files be transferred off-premises; so there was no breach by C&S in “refusing” this.

Although there was no breach, the judge considered whether, if there were such a breach, it would have been repudiatory. The bar for repudiation is high, and the circumstances in question should go to the “root of the contract”. It is also relevant to consider what benefit Enterprise was intending to obtain through the TPA, and the effect of breach on the injured party, for example, whether it caused financial loss.

It was held that refusing to send the files alone could not be repudiatory. The benefit to Enterprise was efficient handling of claims, including being able to audit, so an outright refusal of an audit would be serious. But C&S refused to transfer on the condition the scheduled meeting took place first, and at the same time offered unrestricted access to the files at their premises. The only effect of the breach was a short delay, and personnel could have been sent to C&S’ offices if necessary. The judge had no doubt, if there had been a breach, it was not repudiatory.

Separately, it was also alleged C&S had systems and procedures that were fundamentally flawed and it repeatedly acted incompetently. If that was the case, it would have had the effect of depriving Enterprise of substantially the whole benefit of the TPA contract.

C&S’ responses to this either failed or were not decided.

  • The first response arose from the fact Enterprise did not expressly rely on defective performance of the TPA contract when purporting to terminate it. Although under general principles, Enterprise might later justify the termination if facts in existence at the time supported it, they could not do that if, as C&S argued, the point taken could have been rectified by C&S (Heisler v Anglo-Dal Ltd). However, it was held the Heisler qualification applies only to situations where a future (anticipatory) breach can be avoided, and Enterprise’s case was that breaches had already occurred. Assuming the Heisler qualification could apply when the breach had already occurred, there would have to be a real prospect that C&S could improve its performance and C&S’ case on this was vague. It was not possible to decide this factual matter at this stage, and this would turn on the facts found at trial.
  • Second, C&S argued that the TPA contract provided a period of time to remedy any “material” breach, and therefore, if it was capable of being remedied, a material breach could not amount to a repudiation. The judge did not accept this: notwithstanding that material breaches were capable of being remedied, a “sufficiently serious” breach could still amount to a repudiation.
  • Third, C&S argued the alleged breaches could not amount to a repudiation. Although the judge accepted that whilst each breach alone could not do so, the cumulative effect could, particularly if they revealed systemic failings on the part of C&S. Whether they did would depend on the facts found at trial.

This case reaffirms the principles for establishing a repudiatory breach. It must be “sufficiently serious” in the circumstances. Assessment requires a factual analysis of the benefit of the contract and effect of the breach.

Having a watertight contract with a TPA is important, and it should include a clear process for checking compliance and for termination. This often includes stating specific remedies (including termination) for common breaches, but this case makes it clear that other (unspecified) conduct, if sufficiently serious when viewed in isolation or cumulatively, may also allow termination of the TPA contract. It is sensible for a principal not to enter into a contract with a TPA for a long period without a break clause to allow the option of changing provider.

If the contract with a TPA does not expressly provide a remedy for dissatisfaction which has arisen, then audits continue to provide the most useful tool for assessing whether conduct is systemic and sufficiently serious to be regarded as repudiatory. Whether the conduct can easily be remedied will also be relevant.

The case can be found here: