“Many Thanks Myles, Much Appreciated” – Lessons In Audit Rights, Repudiatory Breach And Informal Variation

In a dispute between an insurer and its claims handler, issues concerning the right to access files and data arose which are common to many outsourcing or data-processing arrangements. It was held that an insurer was not entitled to demand the files, especially as they were being used for the claims handler’s business. In C&S Associates UK Ltd v Enterprise Insurance Co plc [2015] EWHC 3757 (Comm) the court also ruled on termination provisions (the effect of a commonly used “cure” period for breaches on rights to terminate) and whether informal email correspondence could satisfy a contractual requirement that any variation be in writing and signed by or on behalf of the parties (it could).

In July 2012 C&S Associates (C&S), a motor insurance claims handler, began providing claims handling services to Enterprise Insurance, a Gibraltar-registered insurer. Initially, all seemed to go well. By January 2014, however, the relationship between the parties had broken down, and Enterprise purportedly terminated the Claims Management Delegated Authority Agreement (the Agreement) governing the provision of services by C&S. C&S started a breach of contract claim in the High Court.

Mr Justice Males was asked to determine a number of preliminary issues prior to full trial, including the following:

Whether C&S was obliged to deliver case files at Enterprise’s instruction

It was common ground between the parties that in the competitive environment of motor insurance, effective claims handling is important. Claims handlers negotiate insurance claims to obtain the best result possible for an insurer and, crucially, determine, monitor, and adjust if necessary, the reserving of funds required to cover each claim, in line with any bespoke guidelines issued by the insurer.

Unsurprisingly, therefore, Enterprise had the right under the Agreement to audit the claims handling work of C&S. Such audits were undertaken in 2012, and twice in 2013, and were generally satisfactory. In October 2013, however, the CEO and principal shareholder of Enterprise informed C&S that external solicitors instructed by Enterprise would be conducting a full audit of all active case files held by C&S. C&S held a single copy of each Enterprise case file in physical paper form, which was permissible under the Agreement. C&S was requested to send the files in batches to Enterprise’s solicitors, for review and return. C&S was initially compliant, but became concerned as batches of files went unreturned, which caused significant disruption to its processing of claims. At this point, the motive behind Enterprise’s request (apparent dissatisfaction with the C&S’s service levels) was finally made clear. C&S took the view that the premise of Enterprise’s audit was erroneous and, after review of the files that were returned, disagreed with Enterprises’ solicitors’ analysis that generally claims had been over-reserved. C&S stated that it would not provide any more files, pending a relationship discussion with Enterprise.

Enterprise terminated the Agreement via its solicitors a few days later. Enterprise argued that C&S’s refusal to send further files was a repudiatory breach of the Agreement. Males J disagreed. He held that, although the data contained within the files was Enterprise’s, the Agreement could not be construed as giving Enterprise the right to demand delivery up of the files. The right of audit was clearly drafted as a right of access only. Further, once files were passed to C&S, C&S had the right to work those files to earn its fee; Enterprise should not be permitted to demand delivery of files if it interfered with this, as it would be contrary to the commercial reality of the arrangement.

Whether pleaded allegations of negligence by C&S were capable of amounting to a repudiatory breach

Males J did not doubt that a number of less material breaches, taken cumulatively, are in theory capable of being repudiatory. In this case, however, the parties had provided contractually for a right to terminate for material breach, subject to a 30-day cure period following written notice of such breach. Males J noted that this provision would aid the interpretation of the sorts of breaches that might be considered by the parties to be repudiatory (or otherwise). This provision would not, however, exclude either party’s right to terminate for repudiatory breach by the other, provided that such breach was incapable of remedy. As the Court of Appeal made clear in Stocznia Gydnia SA v Gearbulk Holdings Ltd [2009] EWCA Civ 95, only express wording demonstrating the parties’ clear intention will be sufficient to exclude the common law right to terminate for repudiatory breach. As such, C&S’s alleged breaches, if proven at trial, were capable of amounting to repudiatory breach.

Whether the Agreement had been varied by exchange of emails

In September 2013 C&S sought to renegotiate the fees under the Agreement, and to introduce a minimum two-year term to what had previously been a rolling agreement. During September and October 2013, the Finance Director and COO of C&S and the Head of Claims UK of Enterprise exchanged emails negotiating the terms of the proposed new arrangement. This discussion concluded with an email from Enterprise’s Head of Claims UK stating “I am pleased to confirm that…we are happy to agree the fees outlined…with a 2 year agreement to take effect from 1 October 2013… We will in due course submit to a you a revised Claims Administration Service Agreement to include the agreed terms” to which C&S responded “many thanks Myles, much appreciated.”

The Agreement required that any variation to the contract be in writing and signed by or on behalf of each party. Despite the relatively informal language and medium, this exchange was nevertheless a binding variation of the Agreement. Males J noted that: (i) from this point Enterprise paid the increased fees without protest; (ii) an electronic message such as an email is still “in writing”; (iii) the relevant emails were signed on behalf of each party, and there was no reason to assume the relevant individuals did not have authority to do so; (iv) the intention to execute subsequently a formal document to confirm this variation did not prevent these emails from varying the contract, given especially that the parties used the language of contract; offer (“we are pleased to confirm”) and acceptance (“many thanks Myles”); and (v) any uncertainty arising out of the variation (in particular what was meant by a “2 year agreement”) was insufficient to prevent the new agreement from being given effect.

Comment:  This decision is highly relevant to the day-to-day management of commercial contracts.

In relation to outsourcing and data processing contracts, the data owner should not assume that it will have an unfettered right to demand access to its own information and/or data. If a purported right to access data files were to conflict with the commercial practicalities of the contract as drafted, an English court is likely to also consider the impact on the processor’s ability to perform its duties under the contract. Of course, this potential difficulty falls away if the data is in an easily reproducible (eg electronic) form.

Courts will still start from the assumption that neither party intends to abandon any common law remedies for breach. It takes clear wording to exclude any common law remedy and, the more valuable the right in question (eg the right to terminate for a breach that goes to the heart of the contract), the clearer and more express this wording must be. But it appears likely that English courts are likely to closely scrutinise any termination provisions for guidance as to which types of breach the parties considered insufficiently serious to give rise to a right of termination. It is not yet clear whether in some cases this may erode the common law right to terminate.

Finally, parties should be extremely careful in any contractual renegotiation. Informal email correspondence may still be sufficient to vary a contract. Arguing that the informality of the exchange led to too much uncertainty to create a valid contractual state of affairs may fail: provided the purported variation appears objectively to have been intended by the parties and does not lead to a commercially absurd result, it is likely to be held effective by the courts.