Constantia Insurance Company LTD v Compusource (Pty) Ltd Case Notes

Post Dispute or Post Litigation Insurance (PDL Insurance)

• Novel in South Africa, originated in England where it's known as 'after the event' insurance (ATE).

• The risk insured: liability for legal expenses in litigation; covers own costs, opponent's costs, or both.

• Traditional insurance against litigation costs is an adjunct to other indemnities (motor vehicle, professional liability, homeowner's).

• PDL insurance provides cover when the dispute or litigation has already begun.

• Advantage: mitigates disastrous financial consequences of litigation.

• Disadvantage: substantially higher premiums because part of the risk has already materialized.

• PDL insurance policies contain terms unlikely to be found in other policies.

Constantia Insurance Company LTD v Compusource (Pty) Ltd

• Constantia (appellant) issued two PDL insurance policies to Compusource (respondent) through Legal Protection Services (LPS).

• Constantia cancelled the policies but claimed premiums totaling R1 364 363.11 based on clause 3.5 read with clause 3.3.2 of the policies.

• Compusource disputed the claim, arguing it was not bound by clause 3.5 because the provisions were unknown to its representative and LPS didn't bring it to his attention.

• The court a quo sided with Compusource, dismissing Constantia's claim with costs.

• The appeal is against that judgment.

Background Facts

• Evidence from Mr. Simon Fegen (LPS representative), Mr. Christopher Binnington (LPS joint managing director), and Mr. Simon Rust (Compusource co-director).

• Rust visited Fegen in Cape Town on June 6 and 7, 2001, regarding litigation against three other companies (referred to as 'CQP') in the Cape High Court.

• The litigation was a damages claim for R590m by Compusource against CQP, based on repudiation of a joint venture agreement.

• The dispute was referred to arbitration; Compusource was ordered to furnish security for CQP's costs in the sum of R800 000 by June 15, 2001.

• Compusource couldn't provide the security and sought assistance from LPS.

• Fegen provided Rust and Viveiros with a 'welcome pack' introducing Constantia's PDL insurance policy and explained how it could be used to furnish security for CQP's costs.

• The welcome pack included a specimen copy of the PDL insurance policy and a 'questions and answers' document.

• Rust noted an answer stating that 'Normally a minimum of 20% of the premium is payable in order to incept the policy. Flexible premium payment terms are, however, available, including fully deferred payments (to date of award or judgment) as well as "no win – no premium".'

• Fegen explained LPS could offer a 'no win – no premium' policy, ideal for Compusource's financial situation.

• Rust completed an application form for PDL insurance securing CQP's costs to a limit of R800 000, including information about Compusource's legal representation.

Quotation and Policy Issuance

• Fegen forwarded the application to Binnington in Johannesburg, along with documents and information regarding the merits of Compusource's claim.

• Binnington assessed the risk and provided Compusource with a quotation on June 12, 2001, stating the insurer's liability would be 'strictly in accordance with the terms of the policy'.

• Two premium options were given:

  • Option 1: Payment of R180 006 (inclusive of VAT) to incept the policy, with a second equal tranche due before trial.

  • Option 2: 'Self-insuring' the premium with a 'no win, no premium' type policy. The full premium of R594 815.37 would become payable upon a successful outcome, provided there is no adverse award of costs contained in the judgment.

    • If there was an adverse award of costs, insurers would be liable up to the limit of indemnity, and no premium would be payable.

• The second option meant Constantia would become liable if Compusource lost the arbitration with a costs order in favor of its opponents, and the premium would be payable only if Compusource won with a costs order.

• Rust accepted the quotation on behalf of Compusource and agreed to pay the premium under the second option in a letter dated June 14, 2001.

• Binnington issued the policy, consisting of a schedule and the standard policy conditions (same as the specimen policy in the welcome pack).

Further Developments

• CQP wouldn't accept the policy as security; a bank guarantee was obtained using the policy as collateral, costing Compusource an additional R125 000.

• Compusource took out a second PDL insurance policy for its own costs in the arbitration.

• Rust signed a proposal form on July 10, 2001, and Binnington provided a quotation on July 30, 2001, which Rust accepted.

• The policy covered Compusource against its own costs to a limit of R1m, with a 'no win – no premium' premium of R769 547.74.

• Constantia required an 'inception fee' of R57 000, which was postponed on the 'no win – no pay' basis in exchange for an additional amount of R25 000 ('facilitation fee').

Deterioration of Prospects and Cancellation

• On January 10, 2002, Binnington received a letter from Compusource's attorney stating that the legal team believed Compusource's case had worsened due to CQP introducing two new defenses.

• Previously, the legal team had expressed confidence in Compusource's prospects, but this was no longer the case.

• Rust disagreed with his legal team's assessment.

• Binnington suggested Rust consult an independent senior counsel.

• When the independent counsel agreed with Compusource's legal team, Binnington invoked Constantia's right of cancellation under clause 3.3.2 on January 29, 2002.

• The cancellation forced Compusource to settle with CQP, which had negative financial implications.

• Constantia then held Compusource liable for the full premium of approximately R1.3m based on clause 3.5 of the policies.

Policy Clauses 3.3 and 3.5

• Clause 3.3: If any fact or evidence is discovered that materially adversely affects the Insured's prospects of success, the Insurers may:

  • 3.3.1: Determine the increase in the Premium that the Insured shall be obliged to pay.

  • 3.3.2: Issue a notice to the Insured cancelling forthwith the Policy.

• Clause 3.5: If the Insurers exercise the option granted by Clause 3.3.2, the Premium as stated in the Schedule shall have been fully earned. Cancellation date is seven days from the Insurer's cancellation notice.

Rust's Awareness and Understanding

• Rust claimed he was unaware of clause 3.5 until shortly before the cancellation and was surprised by Binnington's reliance on it.

• He 'skim read' the questions and answers document and glanced at the specimen policy, assuming it was the same as the questions and answers.

• He didn't study the detailed provisions because he assumed it wouldn't deviate materially from the 'no win no pay' premium explained by Fegen.

• Rust stated he would never have agreed to policies subject to clause 3.5 had he been aware of it.

• Constantia accepted Rust's lack of intent to be bound by clause 3.5 but argued that Compusource was bound since Rust accepted quotations subject to the standard policy, including clause 3.5.

Compusource's Defence

• Compusource didn't dispute Constantia's right to invoke cancellation under clause 3.3.2, nor that Constantia would be entitled to payment of the premiums under clause 3.5 on a prima facie construction.

• Compusource argued it was not bound by clause 3.5 because Rust was unaware of it and Fegen and Binnington failed to alert him to its existence.

• Compusource's defence was framed as misrepresentation by omission (non-disclosure of clause 3.5).

Court's Reasoning: Dissensus

• The court disagreed with the misrepresentation approach, stating that the isse was one of dissensus.

• Constantia's representatives thought Rust had agreed to clause 3.5, but he had not.

• Rust created the impression of agreement by accepting quotations subject to the standard policy.

• The court cited Sonap Petroleum SA (Pty) Ltd v Pappadogianis [1992 (3) SA 234 (A)] and Smith v Hughes [(1871) LR 6 QB 597]:

  • Blackburn J: "If, whatever a man's real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon the belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party's terms."

• The key inquiry: Did the party whose actual intention did not conform to the common intention expressed, lead the other party, as a reasonable man, to believe that his declared intention represented his actual intention?

• A threefold inquiry is necessary:

  • Misrepresentation as to one party's intention.

  • Who made that representation.

  • Was the other party misled thereby?

Application of the Principles

• Constantia's representatives genuinely believed Rust agreed to clause 3.5 due to Rust's conduct.

• The outcome depends on whether a reasonable person in Fegen and Binnington's position would have had the same misapprehension.

Constantia's argument: A reasonable person would have thought Rust agreed to all terms, considering Rust's education, possession of the policy, express reference to the standard policy in the quotation, and lack of indication that Rust hadn't read or understood document.

Counterarguments: PDL insurance was novel; clauses 3.3.2 and 3.5 would be unexpected for the uninitiated. Policies were sold with a "no premium unless successful" basis, creating an expectation that premium payments would come from a capital award. Fegen and Binnington were aware of Compusource's financial limitations. Invoking clauses 3.3.2 and 3.5 would leave Compusource unable to pay premium, continue arbitration or pay CPQ's fees

• The reasonable person would doubt Rust would agree to obligations his principal couldn't meet.

• Clause 3.5 meant Constantia could cancel the policy the day after it was entered into and hold Compusource liable for the full premium.

• The reasonable person would be surprised Rust accepted these obligations without demur.

• The 'questions and answers' document omitted Clause 3.5. This omission is particularly significant, as other clauses are included.

• Clause 3.5 is not worded clearly, using the expression "shall have been fully earned", meaning that a non-peruser may miss its implications.

• The reasonable person would have enquired from Rust to test the understanding of the clause.

Conclusion

• The reasonable person would not have inferred Rust's acceptance of quotations meant he agreed to clause 3.5, necessitating an enquiry.

• Compusource cannot be bound by a clause its representative didn't and couldn't be reasonably thought to agree to.

• The appeal is dismissed with costs of two counsel.