Implied ‘duty to speak’
TED BAKER v AXA INSURANCE (CA) [2017]
The Court of Appeal (“CA”) found that an insurer had an implied ‘duty to speak’ to tell its customer that certain material it had requested for the purpose of investigating claims from the customer was outstanding. In the circumstances, the customer was entitled to expect that, if the insurer regarded the material as still to be provided, then, acting honestly and responsibly, it should have said so and not to do so was misleading.
Background:
In relation to commercial contracts generally, there is authority supporting an implied ‘duty to speak’ in certain circumstances which, if not complied with, could prevent a party from enforcing a contract (a so-called ‘estoppel’). Importantly, where this duty exists and it is breached, in almost all cases it does not enable the injured party to claim for damages but it may incidentally allow that party to progress a right to sue the defaulting party that would otherwise fail.
Facts:
- Ted Baker, the clothing retailer, (“T”) had claimed against AXA (“A”) for losses said to have arisen in respect of goods that had been stolen. Various documents were requested by A, including profit and loss and management accounts, to enable it to investigate the claim as provided for in its insurance policy.
- T did not provide the requested documents and A eventually rejected T’s claims. T then took A to Court but its claims were rejected because, amongst other things, the Court found T was in breach of the insurance policy condition by not providing the required documentation.
- T appealed arguing that, in all the circumstances, A should have spoken up if it still regarded the accounting material as outstanding.
Decision:
- The CA agreed with T and decided A had a duty to tell T that the material it had originally requested was still awaited. It therefore decided that A could not escape liability for the claims on the ground of T's non-compliance.
- However, it dismissed the appeal because T had failed to establish that it had suffered the losses claimed.
Duty to speak in commercial contracts
- In coming to their decision, the judges reviewed the case law on good faith in insurance contracts after the making of the contract and the duty in speak in other commercial contracts:
- The Lutetian [1982] mentions the proposition that a duty arises where a reasonable man would expect the person in question, acting honestly and responsibly, to bring the true facts to the attention of the other party known to be mistaken about their respective rights and obligations;
- in ING Bank v Ros Roca [2011] the judge observed that a duty to speak might arise pursuant to either contractual obligations involving collaboration and co-ordination with other business advisors or obligations as an honest business partner. In that case the question arose in circumstances where ING Bank failed to disclose what it knew to be a difference between it and Ros Roca on the calculation of its fee;
- in Starbev v Interbrew [2014] it was decided that a duty to speak may arise on the particular facts where one party is proceeding on the assumption that something is agreed, whereas the other party knows that it is in dispute. In this type of situation, there may be a duty to speak because a reasonable man would have the expectation referred to in The Lutetian above.
When does a ‘duty to speak’ arise?
- The judges also looked at the situations in which a ‘duty to speak’ may arise. They commented:
- whether such a duty arises depends on what a reasonable person would expect of a person acting "honestly and responsibly". There may be such a duty if, in the light of the circumstances known to the parties, a reasonable person would expect the other party acting honestly and responsibly to take steps to make his position plain;
- dishonesty or an intention to mislead is not required nor any impropriety beyond what would be obvious in concluding that the contracting party in question should have spoken but did not. Where they do not do so, it would be unjust and unconscionable to allow them to escape liability on the ground of non-compliance with a condition of a policy;
- the duty to speak is not dependent on the contract being, as it was here, one of the ‘utmost good faith’, of which insurance contracts are the classic example. However, it is clear that the fact that the contract is of such a nature will increase the likelihood of a party having a duty to speak.
Points to note:
- It would be wrong to over emphasise the scope of the potential application of this line of cases to IT projects and outsourcing contracts. This decision, like all others, turned on its own facts but it was clear that the application of an implied ‘duty to speak’ is not limited to insurance cases. It is perfectly possible to envisage circumstances where such a duty could be potentially applied to IT projects and outsourcing contracts where the supplier or service provider becomes aware, during the course of the project or the term of the contract, of facts or circumstances which it ought honestly and responsibly to have brought to the attention of the customer but failed to do so.
- Arguments focussed on implied duties of good faith in relation to commercial contracts do not have a good track record in the Courts in recent years. This trail of decisions possibly provides another useful line of reasoning which customers might like to investigate and which might be received more favourably.