Contracting out of your obligations upon failure isn't easy

A Court of Appeal judgement has demonstrated the ongoing relevance of the anti-deprivation principle – and the profound effects it can have on commercial contracts, writes Paul Cox, an insurance lawyer at Browne Jacobson LLP.

In the case, Folgate London Market v Chaucer Insurance Plc, an assured insurer was told by the CoA that its attempt to contract out of its obligations upon insolvency was contrary to the anti deprivation principle.

This principle seeks to prevent a company from depriving its creditors of assets in the event of insolvency, and the agreement in question, fell foul of the principle and was therefore void.

What happened?

In September 2001, a Mr Justin Mayhew suffered a serious personal injury when a load carried by a lorry belonging to Milbank Trucks Limited slipped and struck his car.

Milbank was insured by Chaucer, but Chaucer declined to indemnify it against Mr Mayhew's claim on the ground that the claim fell within an exception in the policy.

Milbank commenced proceedings against their broker Folgate for negligently selling the insurance policy with Chaucer.

Milbank and Folgate agreed a settlement in which Folgate would indemnify Milbank against the claim; however, the settlement included a clause (clause 11) which meant Milbank’s right to indemnity would cease should it become insolvent.

Milbank subsequently fell into administration and the administrators assigned all of Milbank’s rights under the agreement to Chaucer who sought to enforce the indemnity.

Folgate refused, arguing that the termination clause released it from any liability as it merely served to impose a time limit on the indemnity, albeit the time limit was determined by reference to an event (namely the insolvency).

There was, it was said, no reason to treat such a limit differently from a specific time limit. However, Chaucer maintained that the termination clause was invalid as it was contrary to the anti-deprivation principle. The High Court agreed.

The author acted for Chaucer Insurance Plc before the Judge and on appeal.