Federal Mogul Ltd

Jawdat Khurshid QC

Although Aikens LJ, in Rolls Royce Plc v Unite the Union [2010] 1 WLR 318 at [120], noted that the circumstances in which the court will be prepared to grant declaratory relief are considerably wider than they were once thought to be, and although Mummery LJ, in Milebush Properties Ltd v Tameside Metropolitan Borough Council [2011] EWCA Civ 279 at [88], observed that the jurisprudence has developed to the point at which it is recognised that the court may in an appropriate case grant declaratory relief even though the rights or obligations which are the subject of the declaration are not vested in either party to the proceedings, until now the courts had not been required to exercise their discretion whether or not to grant declaratory relief in an ordinary commercial situation, where a third party to a contract claimed to be entitled to a declaration as to the meaning or performance of the contract.

In The Federal Mogul Asbestos Personal Injury Trust v Federal-Mogul Limited [2014] EWHC 2002 (Comm), Eder J. accepted that a person not a party to a contract generally has no locus, save perhaps in exceptional circumstances, to obtain a declaration in respect of rights of other parties to that particular contract, at least where the contracting parties themselves are not in dispute as to their respective rights and obligations. Whilst the law had moved on since Meadows Indemnity Co Ltd v Insurance Corpn of Ireland Plc [1989] 2 Lloyd’s Rep 298, the ratio of the judgment of May LJ in that case (at 309, with whom Nourse LJ agreed) remains the general position, at least as a matter of the court’s discretion. As there were no exceptional circumstances on the facts of the case before him justifying a departure from the general principle, Eder J. concluded that the Trust had no standing to seek declarations as to the meaning or performance of a contract of insurance between Federal-Mogul and its insurers.

The decision in Federal Mogul also considered the nature of the constraints on a contractual discretion conferred on insurers to handle claims on behalf of the assured by the words “in a businesslike manner in the spirit of good faith and fair dealing having regard to the legitimate interests” of the parties to the contract of insurance and the reinsurers. Eder J. accepted that “businesslike manner” was only a loose constraint, which only excluded courses of conduct which no similarly situated business could take; that the phrase “in the spirit of good faith and fair dealing” required the party on whom the discretion was conferred to act honestly and conscionably vis-à-vis the other parties to the contract (Yam Seng Pte Ltd v International Trade Corp Ltd [2013] 1 Lloyd’s Rep. 526 at [136]-[141]); and that, when a decision maker is to “have regard to” something, he can ascribe to it such weight, including no weight, as he thinks fit, as long as he is not acting irrationally (JML Direct Ltd v Freesat UK Ltd [2010] All ER (D) 21 at [21]-[22], per Moore-Bick LJ).

To view the judgment, please click here.

Date added: June 27th, 2014


Area of Expertise

Insurance & Reinsurance