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Insurance & Reinsurance Law - A Question of substitution

By : David Pliener

Why the Sardinia Sulcis is unlikely to surface.

THERE has been rather a surprising spate of recent Court of Appeal decisions grappling with the substitution of a new party outside the limitation period, where one of the original parties had been included by mistake.

This is clearly an important area, touching as it does not only upon the circumstances in which a potential Limitation Act defence could be out-manoeuvred but also conversely, upon the professional indemnity insurers for whoever made the mistake in the first place.

One thing which is agreed is that the rules which need to be considered are CPR 17.4 and 19.5, as well as section 35 of the Limitation Ac 1980. However, the source of the current confusion resides not in the CPR but in the 1960s, when civil procedure was governed by the Rules of the Supreme Court (RSC).

Until then the Limitation Act 1939 had set out the stark rule that actions founded on simple contract or tort “shal not be brought after the expiration of six years from the date on which the cause of action accrued” (section 2.1))

If a party was wrongly named, even if the mistake was obvious to all, there was nothing to do but call in the insurers. However, all this changed in 1965 when the Rules Committee introduced Order 20 rule 5 which provided a potential if limited, solution:

“An amendment to correct the name of a party may be allowed under paragraph (2) notwithstanding that it is alleged that the effect of the amendment will be to substitute a new party if the court is satisfied that the mistake sought to be corrected was a genuine mistake and was not misleading or such as to cause any reasonable doubt as to the identity of the person intending to sue or, as the case may be, intended to be sued.”

The courts, anxious to alleviate potential injustice in the 1939 act, defended the vires of this rule on the basis that the correction of a defective pleading by way of amendment was a matter of practice and procedure and hence regulated by section 99 of the Supreme Judicature Act 1925 and part of the Rules Committee’s remit. From then until the introduction of the CPR in 1999 the courts sought to apply Order 20 rule 5, the effective culmination of which was the case of The Sardinia Sulcis [1991], in which Lloyd LJ distinguished between cases where the party named had the correct description, say, “my landlord” but the wrong identity, say “X” whereas in fact the landlord was “Y”, from cases where both the description and name were wrong.

This made good sense as an application of Order 20 rule 5, which had at its heart what we would now recognise as the Mannai Investments principle [1997] of whether a reasonable recipient would be in any doubt as to what was intended.

Of course, in the interim, the 1939 act had been replaced by the Limitation Act 1980. Section 35(6)(a) of that act permitted the addition or substitution of a new party where the original party was named by mistake. It is important to note that the section itself makes no mention of any additional requirement that the mistake should not have been misleading.

The confusion appears to have arisen because subsequent cases have proceeded on the understanding that Order 20 rule 5 was intended to implement section 35 of the 1980 act. As can be seen from the brief history above, it was not; it predated the 1980 act and was created to respond to the injustices flowing from the 1939 act. Consequently, Sardinia Sulcis was at best authority on how Order 20 rule 5 implemented the 1939 act. It could not possibly be authority for how to apply section 35 of the 1980 act.

Still, Order 20 rule 5 and Sardinia Sulcis continued to be used as the test applied for applications to substitute a party named by mistake post-limitation period. The question then arose as to what the courts would do post April 1999 when the CPR replaced the RSC.

Post-CPR

The CPR deals with the matter by way of 2 separate rules. Rule 17.4(3) permits the court to “allow an amendment to correct a mistake as to the name of a party, but only where the mistake was genuine and not one which would cause reasonable doubt as to the identity of the party in question”. However rule 19.5 in effect adopts precisely the wording of section 35 of the 1980 act. These two rules work in tandem.

Rule 17.4(3) applies where the correct and intended party has been named in the claim form, but there has been genuine non-misleading mistake as to the name.

Or, as David Foskett QC put it, sitting as a deputy High Court judge in International Distillers and Vintners Ltd v Hillebrand et al: “Part [19.5] deals with cases where the claimant mistakenly names the wrong party as defendant. Part 17.4 deals with cases where the claimant misnames the defendant.”

This was the approach adopted in the first post CPR case of Gregson v Channel Four Television , which emphasised that the old rules and the old cases were of little assistance. The decision should be made under the new rules, applying the overriding objective.

In other words, in so far as the approach of Sardinia Sulcis might have survived the implementation of the CPR, it did so in the form of rule 17.4 and the new rule not the old case should decide future decisions.

Rule 19.5, on the other hand, is a self-standing and distinct rule which adopts the wording of section 35 of the 1980 act and has no direct relationship to right description/wrong name test, nor is it necessarily limited to circumstances where nobody has been misled. It is not confined by the approach set out in Sardinia Sulcis.

However, notwithstanding the approach in Gregson, the Court of Appeal continued to apply the Sardinia Sulcis test to applications under rule 19.5. The error first seems to have arisen in the case of Horne-Roberts v SmithKline Beecham [2002], where Keene LJ found that Order 20 rule 5 was intended to reflect the provisions of section 35(6)(a) of the 1980 act and that Sardinia Sulcis was authority for the application of that section. As we have seen, both of those findings must be wrong.

The subsequent cases of Parsons v George [2004]and Kesslar v Moore & Tibbits [2004] both held that the law was as set out in Horne-Roberts and thus, in effect, as in Sardinia Sulcis.

The editors of the Civil Procedure News apparently felt sufficiently confident of this to devote an article in the January 2005 edition, which cited Horne-Roberts as setting out the appropriate test and, in fairly mocking tones, pointed out that “the problem cannot be approached on the basis that it is just a matter of interpreting r19.5(3)(a) in the light of the overriding objective and dredging around in r.1.1 for some elements that supports the desired result (and studiously ignoring others)”.

In fact, as Gregson had set out, applying rule 19.5 with regard to the overriding objective was precisely what was required by the rules. This was the essence of the decision of the Court of Appeal in Morgan Est (Scotland) v Hanson Concrete Products.

In that case Jacob LJ, with whom Hooper LJ agreed held that he was not bound by the Horne-Roberts line of cases because, amongst other reasons, they were based upon the fundamentally wrong assumption that Sardinia Sulcis applied section 35. He set out the his history of the rules, outlined above, and suggested that “The Sardinia Sulcis should be allowed to sink back to the ocean bottom. It muddies the water.” There was, he found, no reason to construe “mistake” in rule 19.5 restrictively, as long as one bore in mind that the limit was set by section 35 of the 1980 act.

Clarity restored?

Sardinia Sulcis may have been presumed sunk after Gregson, but it resurfaced in Horne-Roberts. It is unlikely to make such a return again. So, the proper test to apply is now clear; the wording of rule 19.5 and the over-riding objective. Whether that actually assists the court is another matter.

While the Morgan Est approach can be welcomed as avoiding the straight jacket of the Sardinia Sulcis test, it does not provide very much assistance to courts, lawyers or clients as to how such a wide discretion will be exercised in the future, should it be shown that a party was named in the claim form by mistake. The rule permits a party to avoid an otherwise watertight limitation obstacle and should not be invoked lightly.

In Morgan Est, Jacob LJ simply found that there was no prejudice in the substitution, save for that the defendants would be deprived of an “unmeritorious defence arising solely from a blunder by the other side – this does not count as prejudice”. This proved enough to dismiss the appeal.

He went on to say that if the Sardinia Sulcis had been the correct test, he would still have allowed the substitution.

Indeed, there is not a reported case under the CPR where an application under 19.5(3)(a) has been refused on the ground that the Sardinia Sulcis test was not satisfied. No doubt, very often if an application will succeed under the Morgan Est approach it would have also succeeded under the Sardinia Sulcis test.

But it must be the case that the scope for outflanking the 1980 act is now much wider than previously thought.

This article was originally published in Insurance Day on the 15th April 2005.