Reclaiming motion in the cause Scotland Gas Networks Plc against QBE UK LTD and others

Factual and Procedural Background

The Plaintiff is the statutory successor of a former gas board and operates an extensive gas pipeline network in Scotland. One pipeline runs adjacent to a quarry near a town. Between October 1999 and November 2011, the quarry was leased and operated by a company ("Company A") under various names until its dissolution in January 2020.

In June 2011, an aerial inspection revealed a landslip at the quarry, and it was discovered that Company A had conducted quarrying operations beyond the permitted area, including blasting that fractured rock supporting the pipeline. This compromised the pipeline's integrity and safety.

In 2015, the Plaintiff initiated legal proceedings against Company A seeking £3,000,000 in damages for loss caused by Company A's negligence and nuisance that resulted in the pipeline losing support. The Plaintiff averred that the pipeline could no longer be safely operated or maintained at its location and had been diverted to mitigate risks. Company A’s blasting subcontractor was later joined as a second defender. Company A went into liquidation in June 2017.

In November 2017, Company A and its liquidators failed to appear at a hearing, and a default decree was granted ordering Company A to pay £3,000,000 to the Plaintiff. No attempt was made to challenge this decree.

The Defendants in the present action are the public liability insurers of Company A for the policy years 2009-10, 2010-11, and 2011-12. The Plaintiff contends that Company A’s liability arose during one of these policy years and seeks payment from the Defendants under the Third Parties (Rights against Insurers) Act 2010. The Defendants argue that the default decree does not establish liability for the purposes of the Act and seek dismissal of the action. The commercial judge refused dismissal, and the Defendants appealed.

Legal Issues Presented

1. Whether a default decree granted against an insolvent policyholder establishes liability for the purposes of section 1(4) of the Third Parties (Rights against Insurers) Act 2010.
2. Whether the Defendants (insurers) are entitled to dispute the policyholder’s liability despite the existence of the default decree.
3. Whether the claim against the Defendants is excluded by the terms of the relevant insurance policies.

Arguments of the Parties

Defenders and Reclaimers' Arguments

• A default decree is granted due to procedural non-compliance and does not establish liability arising from an insured peril under the insurance policies.
• Section 1(1) of the 2010 Act requires that the policyholder incur a liability against which they are insured; if this is not established, the action against insurers is irrelevant.
• The commercial judge erred in treating the decree as establishing liability without consideration of the merits of the claim.
• Decree by default is a penalty for procedural failure rather than a determination of liability on the merits; liability for such a penalty is not an insured risk.
• The 2010 Act’s purpose was to remove the requirement to establish liability before suing insurers, not to allow insurers to be bound by liability established without merit-based consideration.
• Insurers retain the right to dispute liability on grounds including contributory negligence, even if a decree exists against the policyholder.
• The commercial judge’s allowance for alternative pleadings regarding the timing of damage is inconsistent with his finding that liability was established by the decree.

Pursuer and Respondent's Arguments

• To succeed under the 2010 Act, the Plaintiff must prove (i) that the policyholder was liable to it, and (ii) that the liability was insured under the relevant contracts.
• Section 1(4) of the Act includes "a judgment or decree" as a route to establish liability; the default decree against Company A satisfies this requirement.
• The ordinary meaning of "establish" is to settle or fix liability beyond dispute; there is no statutory basis to restrict this to merits-based decrees.
• The decree, although granted by default, was pronounced in court and conclusively establishes Company A’s liability to the Plaintiff.
• The Defendants’ interpretation would introduce uncertainty as to what degree of merits consideration is required for various types of decrees or agreements.
• The 2010 Act differs from the 1930 Act by removing the insurer’s ability to dispute liability once established by the means set out in section 1(4), including default decrees.
• The Defendants remain entitled to contest whether the loss is an insured risk under the policy terms, including exclusions for pure financial loss.
• The commercial judge correctly rejected the argument that the decree was unrelated to an insured peril and that the right of indemnity depended solely on the decree’s existence.
• The Defendants’ withdrawal from defending Company A’s case was a commercial decision and does not affect the establishment of liability for the Plaintiff’s claim against insurers.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
AstraZeneca Insurance Co Ltd v XL Insurance (Bermuda) Ltd & Anor [2013] 2 CLC 1029	English law principle that insured must show actual liability to recover from insurer; liability cannot be determined in a legal vacuum.	The court distinguished this case as it concerned reinsurer indemnity and pre-2010 Act principles; confirmed that the 2010 Act removes the insurer’s ability to dispute established liability.
Forrest v Dunlop (1875) 3R 15	Decree by default is a decree in court (in foro) arising out of the cause of action, not merely a penalty for procedural failure.	Used to reject the argument that default decree does not establish liability; supports that decree arises from the underlying cause and can found res judicata.
McCluskey v Scott Wilson Scotland Ltd [2024] CSIH 26	Procedural principle that exclusion of averments from probation should be addressed at debate, not by subsequent by order hearing.	Referenced regarding procedural irregularities in interlocutor excluding averments without allowing proof before answer.

Court's Reasoning and Analysis

The court analysed the meaning of "establish" in section 1(4) of the 2010 Act, concluding that it means to settle or fix liability so as to place it beyond dispute. The court held that a decree by default granted in court, even without consideration of the merits, satisfies this definition because it conclusively sets both the existence and amount of liability.

The court rejected the Defendants' argument that liability must be established only after merits-based consideration, finding that such a restriction is unsupported by statutory language and would create uncertainty in various procedural contexts (e.g., summary decree, decree in absence).

The court distinguished pre-2010 Act case law as not determinative, given the legislative reform intended to simplify third parties' access to insurers by removing the need to re-establish liability.

It was held that once liability is established by one of the statutory means, including default decree, the insurer cannot dispute that liability in proceedings brought by the third party. However, insurers retain the right to contest whether the liability arises from an insured risk under the policy terms.

The court also rejected the proposition that a default decree is merely a penalty unrelated to the cause of action, citing authority that such decrees arise from the cause and can found res judicata.

The court noted procedural irregularities in the interlocutor excluding certain averments without allowing proof before answer and highlighted the need for proper procedural order in future hearings.

Holding and Implications

The court REFUSED the Defendants' reclaiming motions (appeal) and upheld the commercial judge’s interlocutor, allowing the case to proceed to proof before answer.

The direct effect is that the default decree against the insolvent policyholder is sufficient to establish liability for the purposes of the Third Parties (Rights against Insurers) Act 2010, and insurers cannot dispute that liability in subsequent proceedings brought by the third party. However, insurers may still contest whether the loss is an insured risk under the policy.

No new precedent beyond the interpretation of the 2010 Act was set, but the decision clarifies the treatment of default decrees in establishing liability under the Act and confirms procedural expectations for further proof and determination of policy coverage issues.