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Cite as: [2001] IEHC 144

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Kerry Tree (Technology) Ltd. v. Sun Alliance and London Insurance plc [2001] IEHC 144 (3rd October, 2001)

THE HIGH COURT
1996 No. 10602P
BETWEEN
KERRY TREE (TECHNOLOGY) LIMITED J BARRON AND SONS LIMITED AND MELB INDUSTRIES
PLAINTIFFS
AND
SUN ALLIANCE AND LONDON INSURANCE plc
DEFENDANT
JUDGMENT of Ms. Justice Carroll delivered the 3rd day of October 2001.

1. This is an application by the Defendant for an Order for security for costs pursuant to Section 390 of the Companies Act 1963. Section 390 provides:-

“Where a limited company is Plaintiff in any action or other legal proceeding any Judge having jurisdiction in the matter may if it appears by credible testimony that there is a reason to believe that the company will be unable to pay the costs of the Defendant if successful in his defence, require sufficient security to be given for those costs and may stay all proceedings until the security is given.”

2. The original notice of Motion was directed to all three Plaintiffs but was pursued only against the first two Plaintiffs as the third Plaintiff is an unlimited company and so outside the ambit of the Section.

3. It is acknowledged on behalf of the first two Plaintiffs that they are insolvent. However the power to require security for costs to be given is discretionary to be exercised having regard to all the relevant circumstances of the case ( Peppard & Co -v- Bogoff [1962] IR 180). The manner in which the discretion is to be exercised and how the burden of proof is to be distributed has been laid down and discussed in a number of cases among which are Jack O’Toole Limited -v- McKeon Kelly Association [1986] IR 287, Bula Limited (in receivership ) -v- Tara Mines Limited (No. 3) [1987] IR 494, Comhlucht Paipear Riomhaireachta Teo. -v- Udaras na Gaeltachta [1991] IR 320, and Lismore Homes Limited (in receivership) -v- Bank of Ireland Finance Limited [1999] 1 IR 501.

4. In the circumstances of this case as argued the following principles appear to be relevant

  1. There is no presumption either in favour of making or against making an Order for security of costs but where it is established or conceded that a Plaintiff company would be unable to meet the costs of a successful Defendant, the onus of proof to establish special circumstances to justify a refusal of an Order lies on the Plaintiff company. ( Jack O’Toole Limited at p. 283).
  2. If the Plaintiff company relies on a contention that its financial problems were brought about by the conduct of the Defendant which is a subject matter of the claim, it is not enough to make a mere bald statement to that effect. The Plaintiff has the onus of establishing at least a prima facie case of the existence of this special circumstance. ( Jack O’Toole Limited at p. 284).
  3. An examination of the strength of the case for the Plaintiff company is not an appropriate consideration in an application for costs ( Bula at p. 501 and Comhlucht Paipear at p. 331). Whilst it must be established that the Plaintiff does have an arguable case, it is neither necessary nor proper to evaluate the prospects of success ( Comhlucht Paipear at p. 331).

5. The background facts of the case are as follows:-

6. The first Plaintiff was formerly in the business of growing christmas trees. The second and third Plaintiffs are shareholders and guarantors of the first Plaintiff.

7. The first Plaintiff had a policy of insurance with the Defendant (policy 990F642207) dated the 15th of December, 1989, extended and renewed on the 25th of February, 1991 for one year from the 28th of February, 1991, to indemnify against loss or damage occurring to the first Plaintiff in growing noble fir seedlings on certain sites. Under the contract, property damage insurance is limited to the value of the property in the schedule. The value of the trees in the schedule to the original policy is shown as

£256,885.00 (30 acres)
£290,000.00 (96.35 acres)
£100,000.00 (32.6 acres)
Total £646,885.00

8. There is also a Section which provides for an ongoing basis of valuation. There was a further agreement under the policy to indemnify the first Plaintiff for additional expenditure necessarily or reasonably incurred following such loss or damage limited to £25,000. Both the Plaintiffs and the Defendant exhibited incomplete copies of the policy in the grounding Affidavit and replying Affidavit. In the course of the hearing the original policy taken from the files of the Defendant was exhibited.

9. In March 1991 the first seedlings at three sites, Pilgrim Hill, Loughill and Knocknadiha suffered damage by windburn which was one of the risks covered under the policy. It was not discovered until the end of May. The first Plaintiff made a claim and the insurance investigation commenced. The Defendants did not pay out on the policy at that time. Mr. Patrick F. Roche was appointed receiver and manager of the first Plaintiff by deed of appointment dated 16th of November, 1992 under debenture dated 12th October, 1989 made between the first Plaintiff and the Bank of Ireland. He was also appointed receiver of the second Plaintiff.

10. The provisions of the policy required the first Plaintiff and the Defendant to submit to arbitration any difference between them. Clause six of the claims conditions provides:-

“Any difference under this policy shall be referred to arbitration with the statutory provisions currently in force and the making of an award shall be a condition precedent to any right of action against the company. Any claim for which the company has disclaimed liability shall for all purposes be deemed to have been abandoned and not recoverable thereafter unless referred to arbitration under these provisions within one year from the date of such disclaimer.”

11. By instrument in writing (date unknown) the receiver as agent for the first Plaintiff and the Defendant agreed to submit the first Plaintiff’s claim under the policy to arbitration with Mr. Peter Maguire SC as arbitrator . The referral provided:-

“That all matters and differences between the claimant touching and/or concerning the Respondent's liability to indemnify the claimant on foot of the said policy shall be and are hereby referred to the award and final determination of the arbitrator whose award in the matter shall be binding and conclusive on all the parties hereto.”

12. It was also provided under clause (h) that the Defendant was not estopped in law from raising fraud in the points of defence.

13. Points of claim were delivered on 12th of July, 1993. The first Plaintiff claimed damages for breach of contract.

14. Points of defence were delivered on 24th of August, 1993. The Defendant admitted the contract for insurance. It did not allege fraud.

15. There was a hearing lasting 14 days between the 18th of September, 1993 and the 22nd of November, 1993.

16. In the arbitration the first Plaintiff claimed for damage to the trees and also for consequential loss under the policy including an additional claim for damages for an extra years loss on the basis of alleged delay on the part of the Defendant to grant the first Plaintiff permission to replant at two sites, Pilgrim Hill and Knocknadiha. The amounts claimed in the points of claim were for damage to trees £494,971.62 and consequential loss of £25,000. The additional expenditure claim amounted to £90,210.20 but the limit of the indemnity was £25,000. At the arbitration the amount of the claim for damage to trees was increased to £553,565.18.

17. In his award dated 6th December, 1993 the arbitrator held that the policy of insurance was never repudiated by the Defendant. The claim for an extra years loss on the basis of alleged delay was rejected by the arbitrator. The amount of the award was £352,746.64 for damage to trees and the increased costs of working (maximum recovery) £25,000. Total £377,746.68.

18. In his award the arbitrator stated that it was expressly agreed by Counsel on behalf of both parties that the Respondent never at any time rejected the claim.

19. In relation to fraud he said the only use of the word fraud in the documentation was at paragraph (h) in the submission. He then went on to determine that the Respondent wholly failed to establish any fraud or fraudulent behaviour on the part of the claimant or any of its personnel and rejected the entire case as made on behalf of the Respondents of fraud on behalf of the claimants.

20. It is recited in the award that it was accepted and agreed by Counsel on behalf of the first Defendant that no question of the payment of interest on the amount of the award therein provided for prior to the date of the award arose or was recoverable. The arbitrator awarded costs to the first Plaintiff and also interest in accordance with Section 34 of the Arbitration Act 1954 on the sums found payable to the first Plaintiff as from the date of the award (the 6th of December, 1993).

21. The award was duly paid.

22. On the 2nd of December, 1996 the three Plaintiffs initiated an action against the Defendant (Record No. 1996/10602P) claiming damages for breach of contract, negligence and breach of duty of the Defendant. It is in respect of this action that this application is made.

23. On the 30th of May, 1997 the receiver brought separate proceedings (Record No. 1997/6416P) in the name of the first Plaintiff against the Defendant claiming damages for breach of contract, negligence, breach of duty, interference with economic interest and for the tort of bad faith. The particulars of loss and damage in the receivers case as of the 31st of March, 1999 amount to £2,010,300. A statement of claim was delivered on the 21st of January, 1999 and a defence was delivered on the 12th of November, 1999. The claim is basically the claim made on behalf of the first Plaintiff in this action.

24. An order for security for costs was made on the 10th of April, 2000 against the first Plaintiff in the receiver’s action. (No 1997/16416P)

25. In the present action (1996/10602P) three statements of claim were delivered dated 30th of June 1998, 8th of July 1998 and 20th of October 1998. Neither of the latter two are expressed to be an amendment of a previous statement of claim. Following various requests for particulars, the defence was delivered on the 12th of November, 1999.

26. The particulars of loss claimed are as follows:-

27. Total loss for first Plaintiff £3,320,538.00

28. Plus interest from 1992 (and continuing) £ 265,643.00

Total £3,586,181.00

29. Total loss for second Plaintiff £1,328,810.00

30. Plus interest from 1992 (and continuing) £ 106,300.00

Total £1,435,110.00

31. Total loss for third Plaintiff £3,420,100.00

32. Plus interest from 1992 (and continuing) £ 273,000.00

Total £3,693,800.00

33. The basis of the action against the Defendant is summarised in paragraph 17 of the replying Affidavit of Mr. Eamon Barron who is a director of the Plaintiff companies. In it he says:-

“Whereas the arbitration dealt with the issue of actual damage sustained and covered by the policy it did not compensate nor purport to compensate for the consequential losses arising out of the failure of the Defendant to indemnify, following which the shareholders lost their entire interest in the companies and the companies went into receivership. The failure of the Defendant to indemnify the first named Plaintiff in time or in reasonable time on foot of the policy and/or to reasonably work the policy dated the 28th of February, 1991 was the principle reason for the failure and collapse of the first and second named Plaintiffs. If the first named Plaintiff had not invested its money in the replanting of trees it would have been able to meet its obligations to the bank where upon the company would then have survived.”

34. In the third statement of claim dated the 20th of October, 1998 the three Plaintiffs claim that at the time of making the contract of insurance and implementing and working the policy the Defendant owed a duty of care to the three Plaintiffs.

35. The particulars of negligence and breach of contract are as follows:-

  1. Failing to co-operate with the first named Plaintiff to process the claim under the policy.
  2. Effectively requiring the Plaintiffs to mitigate their loss by directing cash flow into the restocking of the first named Plaintiff’s tree stocks at a time when the Defendant knew or ought to have know it would damage the Plaintiffs’ financial well being by so doing.
  3. Failing to pay monies due under the policy promptly and pleading fraud as against the first named Plaintiff.
  4. Failing to comply with the terms of the policy and to deal with the claim of the first named Plaintiff in a fair, prompt and reasonable manner.
  5. Failing to pay sums as they fell due and within a reasonable period of time of notification and presentation of the claim when it knew or ought to have known that failing to do so would cause loss and injury to each of the Plaintiffs.
  6. Failing to take any or any reasonable steps to deal with or resolve differences which had arisen between the parties by referring such differences or disputes to arbitration in a prompt and reasonable manner.
  7. Causing loss damage and expenses to each of the Plaintiffs which was reasonably foreseeable and which with reasonable care by the Defendant could have been avoided.
  8. Wrongfully repudiating the said policy and wrongfully accusing the first named Plaintiff of presenting a fraudulent claim.
  9. Failing to exercise reasonable care in the circumstances of the case.

36. The onus is on the first two Plaintiffs to establish that there are reasonable circumstances which would require the Court to exercise its discretion not to order security for costs under Section 390 of the Companies Act 1963.

37. The Defendant as moving party claimed there are no special circumstances entitling the Plaintiff to a refusal to make an Order under Section 390 for the following reasons:-

  1. The matter is res judicata . The question of the Defendant’s liability under the contract of insurance was dealt with in arbitration. The matter cannot be re-litigated.
  2. The Plaintiffs’ claim is for damages for late payment of damages. This is not a claim known to the law - so held in Sprung -v- Royal Insurance UK Limited 1999 Lloyds Report 11.
  3. The Defendant has no contractual nexus with the second Plaintiff. It is not entitled to sue as a shareholder of the first Plaintiff (see Flanagan -v- Kelly unreported O’Sullivan J., 26th of February, 1999). It has no locus standi .
  4. The first two Plaintiffs are in receivership. The director’s powers are suspended and they do not have power to act. There is no evidence the directors are acting with the consent of the receiver.
  5. The Plaintiffs allege negligent repudiation of contract but the arbitrator records that both parties expressly agreed that the Defendant never at any time rejected the claim.
  6. The Plaintiffs alleged the Defendant pleaded fraud in the arbitration. There was no plea of fraud in the points of defence. Fraud must always be specifically pleaded.
  7. In cases of breaches of contract, damages are confined to what was at the time of the contract reasonably foreseeable as liable to result from the breach ( Hickey -v- Roches Stores [1980] ILRM at 119). The liability of the Defendant under the insurance contract was limited to the value of the trees (subject to the average clause) and £25,000 for additional expense. The amount of the damage to the trees was determined in the arbitration.
  8. When parties are in a contractual relationship then mutual obligations arise from their contract and are found expressly or by necessary implication in the terms thereof. Obligations in tort which may arise from such contractual relationships cannot be greater than those found expressly or by necessary implication in their contract ( Kennedy -v- AIB plc [1998] 2 IR 48 per Hamilton C.J., at 56).
  9. Where a duty of care exists, whether such duty is tortious or created by contract, a claimant is entitled to take advantage of the remedy which is most advantageous to him subject only to ascertaining whether the tortious duty is so inconsistent with the applicable contract that in accordance with ordinary principles the parties must be taken to have agreed that the tortious remedy is to be limited or excluded. ( Kennedy -v- AIB plc [1998] 2 IR 48 per Hamilton C.J., at 56). In this case being a contract of insurance a tortious remedy must be excluded.

38. In claiming that special circumstances did exist entitling them to a refusal of an Order for security of costs it was submitted on behalf of the first two Plaintiffs:-

  1. The Defendant could have applied under Order 19 Rule 28 to have the case struck out on the grounds that there is no reasonable cause of action. Unless such an application will succeed, it can be taken the Plaintiffs have a stateable case.
  2. It is conceded the Defendant has a prima facie defence but if the Plaintiffs have a stateable arguable case it is immaterial whether it is weak or strong. The threshold is very low.
  3. The first two Plaintiffs would not have become insolvent if the Defendant had paid within a reasonable time. The first Plaintiff could have survived if paid by June 1992.
  4. The matter is not res judicata . There are allegations in the statement of claim that the Defendant owed a duty of care to all the Plaintiffs and that it knew the likely effect of its conduct on the Plaintiffs. This was not dealt with it in the arbitration.
  5. While fraud is not mentioned in the points of defence, an allegation in the points of defence that the claim is totally unfounded is equivalent to fraud.
  6. Directors can sue in an appropriate case where there is a receiver (see Wymes -v- Crowley 24th of February, 1987 Murphy J).
  7. It was accepted that a claim for diminution in the value of shareholding in the first Plaintiff cannot be recovered by the second Plaintiff but it can claim for loss of, rather than diminution in, the value of shareholding.
  8. There was delay in seeking an Order for security of costs.

39. In reply the Defendant said there was no delay and gave the following dates (which were not contested) of the course of events after delivery of the third statement of claim on the 20th of October, 1998.

40. Notice for particulars 2nd of November, 1998.

Reply 12th of May, 1999.

41. Further request for particulars 3rd of June, 1999.

42. Request for security for costs 25th of June, 1999.

43. Reply to request for particulars 3rd of September, 1999.

44. Further request for particulars 28th of October, 1999.

45. Motion for security for costs 18th of November, 1999.

46. Reply to request for particulars 7th of January, 2000.

47. The Defendant submitted that an allegation of an unfounded or over stated claim is not the equivalent of fraud.

48. The first thing I have to decide is whether the first and second Plaintiffs have a stateable case. I cannot ignore that all matters touching or concerning the Defendant’s liability to indemnify the first Plaintiff on foot of the policy of insurance were referred to arbitration for final determination to be binding on the parties. The Plaintiffs say they are claiming for consequential losses not the actual losses covered by the policy and seek to do this by way of a claim for damages for breach of contract and breach of duty of care. This amounts to a claim for damages for delay in paying damages which is not a claim known to the law.

49. Damages arising from breach of contract are limited to what was reasonably foreseeable at the time for making the contract and the liability of the Defendant under the contract was limited to the value of the trees damaged plus £25,000 maximum for additional expense. In a contract of insurance (which is not a contract for service) it seems to me that tortious duty is so inconsistent with such a contract as to be excluded.

50. While I accept that it is neither necessary or proper to evaluate the prospect of success of a Plaintiffs case, it is necessary that the Plaintiffs must establish that they do have a stateable/arguable/ prima facie case. In order to evaluate this it is necessary that I should form a view on questions of law involved. I do so not to evaluate the weakness of the Plaintiff’s case but to see if they have a stateable case at all.

51. For the reasons stated above I am of opinion that the first Plaintiff does not have a stateable case in either contract or tort. The second Plaintiff had no contractual relationship with the Defendant. And if the first Plaintiff has no stateable case in tort than neither has the second Plaintiff.

52. The Plaintiffs therefore have not discharged the onus of proving that they have a stateable case.

53. In case I am wrong in holding that there is no stateable case however weak against the Defendant, then I consider that the claim that the first two Plaintiffs would not have become insolvent if the Defendant had paid monies under the policy before June 1992 does not outweigh the special circumstances favouring the Defendant. The allegation of a non-existent plea of fraud and the allegation of repudiation which never happened, do not count for anything.

54. The special circumstances favouring the Defendant are that they have already gone through arbitration on the contract and paid damages and costs; that the Plaintiffs are alleging a claim unknown to law; that these are proceedings brought by two companies in receivership with no indication whether the receiver consents or not. The case of Wymes -v- Crowley does not apply as that was a case where the directors of the company in receivership were making a claim against the receiver. Also the claim by the first Plaintiff is essentially a duplication of a claim made by the receiver on behalf of the first Plaintiff. The delay alleged by the Plaintiffs is not such as would disentitle the Defendant to the order sought. The Plaintiffs were the ones who delayed in delivering three statements of claim and delayed in replying to notices for particulars.

55. The Plaintiffs therefore have not discharged the onus of proving special circumstances which would entitle them to an Order refusing the Order for security for costs. In the exercise of my discretion I order security for costs by the first and second Plaintiffs under Section 390 of the Companies Act 1963 and stay all proceedings until such security is given.

© 2001 Irish High Court

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