Vol 7 (2010) - Issue 6

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Cavell USA Inc. and another v Seaton Insurance Company and another: Interpretation of the Term ‘Fraud’ within an Agreement by the Court of Appeal

1. Introduction

The recent Court of Appeal judgment of Longmore LJ in Cavell USA, Inc and another v Seaton Insurance Co and another considered whether the interpretation of the term 'fraud', within the context of a limitation of liability clause, was confined to claims where deceit could be established, or whether it could be extended to cases of 'dishonest' abuse' of a fiduciary duty. The Court of Appeal found that in the circumstances the intentions of the parties were such that the concept of 'fraud' could have a wider interpretation than merely the tort of deceit.
The case will be of importance to practitioners as the decision may lead to future claims on the basis of this broader interpretation when applied to complex commercial cases. It will be of equal importance to practitioners in drafting future limitation clauses excluding liability except for cases of ‘fraud’ and provides some guidance on the courts’ interpretation of the concept of ‘fraud’ in civil claims.

2. The background
Cavell USA (the 'First Claimant') and Kenneth Edward Randall (the 'Second Claimant') (together the 'Claimants') provided claims-handling and management services to insurance companies in 'run-off' – the period in which an insurance company must provide professional indemnity insurance following the date it ceased trading.
Seaton Insurance Company (the 'First Defendant') and Stonewall Insurance Company Cavell (the 'Second Defendant') (collectively the 'Defendants') were both insurance companies, which in 1999 and 2000 (respectively) ceased accepting new business and entered into run-off.
On 31 March 1999, the First Claimant and the First Defendant entered into an agreement by which the First Claimant agreed to provide claims-handling and management services for the First Defendant in respect of the liability of future claims during the run-off period.
On 26 September 2000, a similar agreement was entered into between the First Claimant and the Second Defendant.
The relationship between the parties broke down and in February 2006, the parties signed an agreement (the 'Term Sheet'), the aim of which was the orderly termination of the contractual and other commercial relationships between the Claimants and Defendants and the handover of the management of the Defendants during run-off to another claims-handling company.
Clause 13 of the Term Sheet ('Clause 13') provided for a release from liability in the Claimants' favour:
'from all actions, causes of action, suits, claims and demands whatsoever, whether at law or equity … save … in the case of fraud'.
Clause 29 of the Term Sheet ('Clause 29') provided that:
'This Term Sheet shall be governed by and construed in accordance with English law and the parties submit to the exclusive jurisdiction of the English Courts.'
On 6 August 2007, the Defendants commenced proceedings against the Claimants in New York alleging that the Claimants had fraudulently sub-contracted the conduct of the run-off to the Defendants' re-insurer, National Indemnity Company ('NICO') by means of a concealed collaboration agreement (the 'Collaboration Agreement').