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The Key
July 2011
Nano to Giga: When small becomes big
Nanotechnological products carry significant insurance risks.
There are currently over 1,000 consumer
nanotechnology products available on the
global market and the number is only
going to increase. The most conservative
forecasts predict that the total global
revenue for nanotechnologies will grow
from around $2bn in 2007 to $81bn in
2015 (see Nanomaterials and Markets
2008-2015, Nanopost, quoted in
Nanoscale Technologies Strategy 2009-12,
Technology Strategy Board, September
2009). The UK is ranked third in the
world (after the USA and Germany) in
terms of the number of operating
nanotechnology companies.
The rapid rise in nanotechnological products
can be seen in many sectors, including food
and beverages, pharmaceuticals and medical
devices, animal health and feed, personal
healthcare products, cosmetics, aerospace,
energy, the automotive industry, construction,
electronic consumer goods, textiles,
chemicals, water and the environment.
This article gives a brief overview of
nanotechnology and nanomaterials; the
recent developments when it comes to risk
assessment of engineered nanomaterials,
specifically in the food and feed industry; and
the implications of nanotechnological
products for the insurance market.
What is nanotechnology?
Nanotechnology is a field of science associated
with the manipulation of matter on a moleculeby-molecule
basis. Its aim is to improve
product performance or to create new
components (for example, computer chips) or
other devices that are thousands of times
smaller than are possible using traditional
technologies.
What is nanomaterial?
In October 2010, the European Commission
proposed an overarching definition of
“nanomaterial” to help the development of
new EU policies and regulatory regimes, as
well as the implementation of existing rules. It
was suggested that “nanomaterial” would be
defined as any material that:
(1) Consists of particles, with one or more
external dimensions in the size range 1
nanometer (nm) to 100nm for more than
1% of their number size distribution; or
Inside this issue:
Page 3
Close encounters of a less regulated kind
Reverse mergers and backdoor registration
Page 6
Reducing the charges
It is worth trying to persuade the prosecution to
amend the counts in an indictment
Page 7
CBI Cover - are you aware of the pitfalls?
Page 9
For a short time only
A recent Court of Appeal case sheds welcome light
on time-limited settlement offers
Page 10
Who’s to say who’s an expert? – Part 6
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(2) Has internal or surface structures in one or
more dimensions in the size range 1nm –
100nm; or
(3) Has a specific surface area by volume
greater than 60 m2/cm3, excluding
materials consisting of particles with a size
lower than 1nm.
However, the definition debate is still continuing.
Inherent risks
Reducing bulk material to the size of
nanoparticles may cause it to behave differently,
and to display completely unexpected
properties. According to some studies, certain
nanoparticles may cause adverse effects
because of their small size and specifically
manufactured properties. There is also concern
about the unknown consequences of exposure
to these minute particles either by ingestion or
absorption. This could happen in any number of
different ways, either directly or via
environmental exposure.
Responsibility and research
In order to evaluate the potential risks and safety
aspects of nanomaterials and nanotechnological
products, developments are being monitored
internationally. For example, the OECD working
party on manufactured nanomaterials (WPN)
was established in March 2007 to advise on
emerging issues in science, technology and
innovation relating to the responsible
development and use of nanotechnology. The
WPN works closely with national and European
scientific advisory bodies, such as the European
Commission’s scientific committee on emerging
and newly identified health risks.
In February this year, the US Environmental
Protection Agency – in conjunction with the
Consumer Product Safety Commission and the
UK's Natural Environmental Research Council –
awarded $12m to three consortia of leading US
and UK universities and research centres. The
grant was to fund research aimed at achieving a
greater understanding of the potential risks
posed by engineered nanomaterials to both the
environment and human health.
The results of this research are eagerly awaited.
The hope, of course, is that it will help the
nanoindustries create safer nanotechnological
products.
Food and feed
The consulting firm Cientifica estimates that the
overall market value of food applications of
nanotechnology will reach $5,800m by 2012.
Nanofood is food that is cultivated, produced,
processed or packaged using nanotechnological
techniques. Nanostructured foodstuffs are
usually used to enhance the taste, texture,
flavour, digestibility and nutritional quality of
food products.
At present, there are only a few items – such as
food supplements – containing nanomaterials in
Europe. Most food sector products are currently
available outside the EU.
On 11 May 2011, the European Food Safety
Authority (EFSA) published a guidance
document for the risk assessment of engineered
nanomaterial applications in food and feed. The
EFSA describes the document as “the first of its
kind to give practical guidance for addressing
potential risks arising from applications of
nanoscience and nanotechnologies in the food
and feed chain”.
The guidance recognises that there are gaps in
scientific knowledge when it comes to the use of
nanotechnology in food and feed. Professor
Vittorio Silano, the chair of EFSA’s scientific
committee commented on the publication of the
EFSA guidance, saying: “We recognise
uncertainties related to the suitability of certain
test methodologies and the availability of data
for engineered nanomaterial applications in food
and feed”.
For example, little is known about the effects of
engineered nanoparticles in the dietary
supplement market. Consumers are potentially
exposed to unknown risks, which need to be
balanced against the possible benefits of taking
such supplements.
The EFSA document provides guidance on
several different fronts. It covers risk
assessments for food and feed applications,
including food additives, flavourings, enzymes,
novel foods, food contact materials, feed
additives and pesticides.
The guidance says that nanomaterials should be
characterised at five stages:
1. When manufactured (pristine state);
2. When delivered for use in food/feed
products;
3. When present in the food/feed matrix;
4. When used in toxicity testing; and
5. When present in biological fluids and tissues.
Different tests for use when examining
parameters are also outlined in the guidance.
These include tests for distribution, absorption,
metabolism, in vitro genotoxicity, excretion and
repeated dosage.
According to the guidance, the testing
approaches should take into account how the
above parameters are influenced by the size,
shape, solubility, surface charge and surface
reactivity of nanomaterials.
The guidance notably states that when there is
“convincing evidence” that a nanomaterial will
not migrate from food-contact materials – or
will completely degrade or dissolve in the
gastrointestinal tract without being absorbed –
there may be no need for additional testing.
However, if such data is not available, then the
tests should follow the EFSA’s guidance.
Risk to manufacturers and insurers
When it comes to developing nanotechnological
products, manufacturers and insurers in all
sectors face risks and challenges. Manufacturing
companies must ensure that nanotechnological
products do not threaten their users directly or
others passively. Further, as the nanotech
market expands – and law and regulation
evolves – manufacturers will have to conduct
the necessary safety trials to show product
safety and quality.
It is also essential for UK manufacturing
companies to keep up to date with legal and
regulatory developments at a UK, EU and
international level. This is necessary in order to
ensure compliance and thereby minimise the risk
of product liability claims arising from exposure
to nanotechnological products either during
their manufacture, or in the consumer market, or
in the environment.
2

Nanotechnology insurance
In response to the increasing possibility of
unanticipated nanotechnological risks, insurance
companies are starting to create products to
guard against such exposure. These include
underwriting nanorisks and developing risk
management tools for nanotechnology.
One insurance company has recently developed
a web-based software product that looks at
nanoparticle characteristics and is designed to
help nanotechnology users determine potential
hazard levels.
Another insurance company has created an
integrated coverage insurance policy specifically
for companies whose principal business is
manufacturing nanoparticles or nanomaterials,
or using them in their processes. The policy
provides protection for general liability, product
liability, product pollution legal liability and
product recall liability. It also deals with first
party product recall, covering expenses incurred
where a product containing nanoparticles or
nanomaterials is recalled from the market for
safety reasons.
However, it is important to remember that while
the materials themselves may be nano, the need
for risk assessment and insurance coverage in
this area may well become giga in the near future.
Karishma Jasani
London
k.jasani@kennedys-law.com
Anne Ware
London
a.ware@kennedys-law.com
www.nanotechproject.org/inventories/consumer
www.nanovip.com
www.nanowiki.no/wiki/Applications_of_nanotechnology_for_the_food_sector
Close encounters of
a less regulated kind
Reverse mergers and backdoor registration.
Introduction
The ‘alien’ is equally adored and vilified in
American pop-culture, whether it be the
moustachioed gun-toting Mexican bandito
hot footing it over the border or the bug
eyed, tentacle waving visitors from outer
space. Corporate America now faces a new
and real invasion by a class of aliens that
are far dryer than either of these
romanticised notions and whose whitecollared
pursuits, whilst presenting a risk
to the American investing public, would
certainly not pique the interests of Messrs
Mulder and Scully.
These ‘aliens’ are foreign companies, mainly
Chinese businesses, that are obtaining a listing
on US stock exchanges – and thereby access
to American investors through “backdoor
registrations”.
What is a backdoor registration?
A backdoor registration takes place when a
privately owned business takes effective control
of a publicly listed US shell company, thereby
automatically gaining the public company’s
listing on an American stock exchange.
The way this is done is that the public shell
company is actually the “acquirer” of the private
operating business, which is treated as the
“acquiree”. However, through a reverse merger,
although the public company is the surviving
entity, the private business’s board moves over
to take control of the public company. The
“acquiree” then becomes the “acquirer” for
accounting purposes.
Right now, there is a rash of reverse mergers
by Chinese owned private businesses on the
lookout for publicly listed US shell companies.
The Chinese buyers are assisted by US based
promoters who identify suitable targets and
arrange for a reverse merger to take place.
Lack of scrutiny
A reverse merger is an entirely legal way for
companies to obtain listing quickly and more
cheaply than the traditional Initial Public Offering
(“IPO”) route. However, the reason they are
cheaper and quicker than IPOs is that they avoid
the scrutiny and rigorous due diligence
associated with an IPO. The company is not even
required to file a Registration Statement under
the Securities Act 1933 or the Exchange
Act 1934.
Are Chinese reverse mergers a
real problem?
The short answer is, yes. In the US, both the
Securities and Exchange Commission (SEC) and
the Public Company Accountant Oversight Board
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(PCAOB) have launched significant
investigations into the subject in the last year.
In a recent research note, the PCAOB found that
between January 2007 and 31 March 2010
there was 603 reverse mergers. Most were
entirely US based. However, of the total 603,
159 were Chinese reverse mergers. Not
surprisingly such figures are stimulating the
current press interest in the trend.
The lack of due diligence at registration does not
necessarily present a problem. The main problem
is that numerous Chinese reverse mergers have
recently either been subject to de-listing or have
seen trading in their securities halted. Primarily
because of deficiencies in the audit procedures
and irregularities in the financial statements of
the Chinese reverse mergers.
For example on 21 March 2011, the SEC
suspended trading in Heli Electronic Corp.
because of concerns about the accuracy and
completeness of the information in the
company’s public filings relating to the
company’s cash balances and accounts
receivable. The company had also failed to
disclose that its independent auditor had
resigned due to accounting irregularities.
Less than a fortnight later, the SEC suspended
trading in RINO International Corporation. The
company had failed to disclose that the external
law firm and forensic accountants hired by the
company’s audit committee to investigate
allegations of financial fraud at the company had
resigned after reporting the results of that
investigation to the board.
These examples reveal some of the investments
dangers involved. For regulators, the key issues
are protecting investors and making sure they
are given material information that might inform
their assessment of the companies. In the name
of investor protection, the SEC recently revoked
the registrations of at least eight Chinese
reverse mergers.
The contagion has now spread. Chinese reverse
mergers and the difficulties they now find
themselves in have started to cause problems
for Chinese companies that have reached the
American market through IPOs. These
companies have in recent months started to
become the subject of speculative
investor actions.
Impact on London underwriters
The listing of Chinese reverse mergers
represents a real D&O risk even where the
company is entirely legitimate. Indeed, there are
claimant law firms in the US whose raison d’être
is purely to commence class actions against
publicly listed companies. Right now, Chinese
reverse mergers are a favoured target and there
are already several class actions in the US that
have impacted on the London market.
Over a quarter of such mergers since March
2007 have involved Chinese companies. So it is,
perhaps, not surprising to discover that, so far
this year, Chinese reverse mergers have
accounted for a significant proportion of the
class actions commenced in America. As at 18
April, 61 securities class actions had been filed in
the US with 14 (or 23%) of those actions
relating to Chinese reverse mergers. Of those 14
actions, 10 were filed in the month of April.
It would be all too easy for underwriters to be
over-cautious and to simply turn their backs on
Chinese companies seeking D&O cover at this
time. However, that is simply not commercially
viable given the obvious significance of that
market and would be grossly unfair to the Chinese
businesses seeking D&O insurance who are
genuine. Underwriters can take steps to minimise
their exposure to the risk that they encounter
one of the few Chinese reverse mergers looking
to take advantage of US investors.
The warning signs
The difficulty underwriters will face is the same
as that the investing public and regulators in
America have already encountered. On the face
of it many Chinese reverse mergers look sound
and present a compelling picture (and some, no
doubt are sound). However, given that these
companies are many thousands of miles away
4

and with the associated language, cultural and
regulatory differences and barriers it simply is
not possible to absolutely verify the picture
presented.
Even the appointment of, and endorsement by,
a large US auditor cannot be seen as conclusive
proof that a Chinese reverse merger is a
genuine concern with correct and true financial
statements. Indeed there are a number of wellknown
and highly regarded audit firms currently
under investigation by the SEC for their part in
failing to spot overstatements of revenue and
other inaccurate financial statements put out by
Chinese reverse mergers.
Not wanting to milk the analogy too much,
Chinese reverse mergers will not turn up
asking to be taken to your leader, instead,
think of it as the ‘Invasion of the Body
Snatchers’. At first glance Chinese reverse
mergers appear to be normal, reputable and
healthy listed companies. But in reality they
have been taken over and are controlled by a
wholly different beast.
From our review of the Chinese reverse mergers
that have turned sour, we think the warning
signs include:
1. A recent listing in the US.
2. Changes in (or resignation(s) of) auditors;
and
3. Incorporation in the British Virgin Islands or
Cayman Islands (or other similar offshore
jurisdiction) but with its main corporate base
in China.
The Proposal Form is your friend
The Proposal Form and placing information
should tackle:
1. The question of listing in the US. Where
listing has occurred, the prospective insured
should be asked when and how it took place.
2. If the prospective insured is a Chinese
reverse merger then it would be prudent to
ask questions about its US filing and
regulatory history. In particular whether it
has ever had to restate its financial
statements, and whether it has ever had to
restate or been the subject of regulatory
investigations relating to the accuracy and
content of its financial statements and filings.
3. It would also be wise to examine closely the
audit history of any Chinese reverse merger.
In particular:
●
●
●
●
Does the prospective insured retain local
Chinese auditors and/or US auditors?
Who presently acts as auditor and how
long have they been in place?
What are the prospective insured’s
procedures for appointment and rotation
of auditors?
Have any auditors resigned or been
replaced during the previous six years? If
so, why did the auditor resign or why was
it replaced?
4. The detail of the prospective insured’s
incorporation. This can be done by way of
questions in the proposal form and requests
for sight of incorporation documents.
Conclusion
Backdoor registrations and Chinese reverse
mergers represent a serious risk both to
investors and the unwary underwriter. While it
is difficult to eliminate the danger entirely,
underwriters can take action to minimise the
risk provided they are alive to it and take steps
to illicit further information from Chinese
companies in respect of their audit history,
incorporation, financial statements and
registration in the US.
This is not simply a hyped up conspiracy theory,
it is a real risk and whilst it might not yet be time
to don your tin foil hat every time a Chinese
company comes looking for D&O cover, it is
certainly time to exercise caution.
Adam Edwards
London
a.edwards@kennedys-law.com
John Bruce
London
j.bruce@kennedys-law.com
5

Reducing the charges
It is worth trying to persuade the prosecution to amend the counts in an indictment.
A new offence of causing death by careless driving was
introduced by the Road Safety Act 2006. It can be tried in
either the Magistrates’ or the Crown Court and carries a
maximum prison sentence of five years, along with
obligatory disqualification.
The new law was introduced because it was felt that the courts
had inadequate sentencing powers in cases where a driver who
caused a death was prosecuted simply with careless driving – a
charge that did not take into account that someone had died and
which carried only a fine and potential disqualification.
The aim of the new offence is to ensure that drivers involved in fatal
accidents received fair and proportionate sentences. However, the
reality has been rather different. There has been little consistency
in the charging decisions made by the Crown Prosecution Service
and the sentences eventually imposed by the courts.
Given the legal distinctions between dangerous and careless
driving, it is well worth challenging any questionable CPS decisions
at each and every stage. Apart from anything else, there may well
be significant costs consequences.
Mr A’s case
A recent case highlights some of the issues faced by lawyers
dealing with road traffic law cases.
Mr A was involved in a fatal accident on the motorway. CCTV and
witness evidence revealed that Mr A – who was travelling in the
inside lane – collided with the rear of a very slow moving vehicle
ahead of him. Although Mr A was unharmed, the driver of the
other vehicle tragically died and his passenger sustained lifechanging
injuries.
6
Subsequent examination of the deceased’s vehicle showed that it
had suffered a mechanical failure. At the time of impact, it was
travelling at just 7mph. For reasons unknown, the deceased failed
to manoeuvre onto the hard shoulder, despite ample opportunity
to do so. There was no evidence that the deceased’s vehicle
displayed hazard warning lights.
Mr A was interviewed and gave a plausible account of the collision.
He accepted that, when he first saw the deceased’s vehicle, he
misjudged its speed. He prepared to overtake it, looked over his
shoulder to check the traffic flow but could not move out because
two vehicles were already occupying the middle lane. When he
looked back ahead, it was too late. CCTV footage demonstrated
that he’d had approximately six seconds in which to see and react
to the deceased’s vehicle immediately ahead of him.
Despite the lack of aggravating features, the CPS then prosecuted
Mr A for causing death by dangerous driving – an offence that
carries a maximum sentence of 14 years’ imprisonment.
At an early stage, representations were made to the Crown that
the circumstances of the offence were more consistent with
carelessness than with dangerousness. These representations
focused on the CPS charging codes and referred to several other
cases – involving similar facts to Mr A’s case – that had been dealt
with by the same CPS office and which had resulted in prosecution
for the lesser offence.
However, the CPS stood by its original decision, despite being
shown expert evidence demonstrating that Mr A may, in fact, have
had as little as two seconds in which to see the deceased’s vehicle.
At every stage, the prosecution was repeatedly invited to review
its position, emphasising that Mr A would plead guilty to the lesser
charge. This was formally noted on the court file.
The trial
On the first day of the trial, the presiding Judge took the
unorthodox decision of inviting the defendant to indicate his plea
to the offence of causing death by careless driving, despite the
fact that his admission of this charge was not acceptable to the
Crown. The jury were therefore directed that Mr A accepted his
driving was careless but not dangerous.
Following a three-day trial, Mr A was acquitted of causing death

y dangerous driving. Turning to his admission of
the lesser charge, the judge gave Mr A full credit
for his guilty plea, recognising the persistent
efforts made by the defence to prompt the
prosecution to reconsider its case. The judge also
referred to the helpful evidence given by
witnesses and the police, which he took into
consideration for sentencing purposes. He then
sentenced Mr A to a community order and
imposed the minimum period of disqualification.
The judge next considered the question of
defence costs, saying that if the prosecution had
accepted Mr A’s plea to the lesser charge,
considerable costs would have been avoided.
Accordingly, he made a defence costs order,
enabling the defence to recoup a proportion of
the costs incurred in defending Mr A.
Costs advantages
This case shows that there can be significant
advantages in trying to persuade the CPS to
change its mind about the offence with which it
charges a defendant – and continuing to do so
right up to the trial itself. With the increasing
pressures on CPS lawyers, it is clear that files are
often being reviewed insufficiently. Defence
lawyers should exploit this weakness to the full
in order to maximise the chances of getting a
good result and recovering defence costs.
Naomi North
London
n.north@kennedys-law.com
Mark Skinner
London
m.skinner@kennedys-law.com
CBI Cover - are you aware of the pitfalls?
The Japanese Quake.
The Tohoku earthquake on 11 March was
a magnitude 9.0 undersea earthquake
that triggered powerful tsunami waves
that travelled in shore, causing extensive
damage. Media coverage was substantial,
reporting the effect of the shutdown of
the nuclear plants but also some
conventional electricity supply plants by
the Tokyo Electric Power Company.
There was also disruption to railways,
with trains being cancelled or run
less frequently.
It appears the full magnitude of that disaster has
not yet reached international shores, with much
of the direct insurance exposure apparently
contained in the Japanese market. However, the
market is conscious of foreign reliance upon
Japanese production, particularly in electronics
and the automotive industry and is fearful of
exposure to Contingent Business Interruption
(CBI) claims.
In March we heard press reports of reductions in
car and steel manufacture.
An article in the Economist online dated 19 May
stated that the quake “ravaged the suppliers of
critical parts and raw materials in north-eastern
Japan”. They commented further that: “it only
takes one missing part to bring an assembly line
stuttering to a halt”.
So, what issues are likely to arise when
considering CBI cover? Some guidance can be
found in a consideration of an incident that
occurred just over three years ago that had wide
spread CBI consequences.
On 3 June 2008, a gas explosion occurred at a
facility on Varanus Island, off the North West
Coast of Western Australia. As a result, Western
Australia’s gas supply was reduced by
approximately one third. Subsequently, a large
number of claims based on contingent business
interruption were notified to the London market.
Significant commercial enterprises were
interrupted or unable to function, because of the
lack of gas coming from the facility. Whilst some
gas was available by August 2008, this was
insufficient to satisfy the requirements of all
those who had contracted with suppliers. The
large number of claims demonstrated that the
accumulation risk to insurers’ in respect of CBI
cover should not be underestimated.
How does the cover appear
in the policy?
In common with other “Anglo centric” CBI
policies, in the standard ISR wording used in the
Australian market place, CBI cover is provided by
“Customer and Suppliers” and “Utilities”
extensions. The terms of the Customers and
Suppliers extension in particular could be wide or
narrow, i.e. providing cover in respect of
property owned, utilised or operated by any
direct or indirect suppliers, customers etc.
Subject to the operation of the other terms and
conditions of the policy, these extensions
provide cover for the insured in respect of their
business interruption losses, resulting from
material damage to the property of third parties.
In order for a CBI claim to be indemnifiable, the
requirement for physical damage to have
occurred still exists. However the damage to the
relevant property must also have resulted in an
interruption to or interference with the business
of the insured. Underwriters may have little or
no knowledge of the third party property and
the risks to it when agreeing to provide CBI
cover, often subject to high sub-limits.
This is an important risk management point. It is
essential for underwriters to consider all of the
potential CBI losses that could affect their
insured’s business, when assessing whether or
not to underwrite a risk and on what terms/at
what rate. For example, does the insured have
alternative sources of supply in the event that a
major supply is interrupted? This situation came
to the fore after the Varanus Island incident,
when it became clear that it was extremely
difficult to maintain supply to a vast and diverse
array of businesses and residential customers.
Named vs Unnamed:
Direct vs Indirect
CBI extensions often contain important terms
which, perhaps because CBI extensions are often
a “bolt on” to property policies, are undefined. It
is important in assessing insurers’ exposure to
7

consider applicable sub-limits e.g. for “Named” or
“Direct” suppliers as opposed to “Unnamed” or
“Indirect” because insureds usually have higher
sub-limits for Named counterparties. Problems
arise when they are not accurately described
(for example referring to a particular company
when it is actually a subsidiary or associated
company which is in contract with an insured).
Problems also arise in defining what proximity of
relationship is required for a “direct” supplier
when that is not defined. Is it a key supplier? One
which is in direct contract with the insured? Or
via a direct chain of contracts albeit via
intervening parties?
Policy terms that do not fit
One of the problems with CBI cover arises from
the fact that the underlying policy terms are
designed to deal with the consequences of
damage to the insured’s property and may not
be as well suited to damage to a third party’s
property. For example, the policy may impose an
obligation on the insured to mitigate its loss.
How can the insured do so when they have no
control over and potentially no knowledge of the
process and timeline of third party repairs?
The policy may also contain a “Precautions to
Prevent Loss” clause, under which the insured
must use reasonable precautions to prevent loss,
destruction or damage to the property insured
by the policy. Arguably this clause is rendered
useless in the context of a CBI loss.
Concerns for the Adjuster
A CBI loss may pose interesting legal questions in
relation to the wording of the policy, but often it
presents a significant challenge to the adjuster
as well. Following the incident on Varanus Island,
those adjusting CBI claims had no access to the
site of the property damage. This made it
8
difficult for them to comment on the time-line of
repair or to assess the appropriateness of
decisions taken by the insured (themselves
ignorant of repair timelines) on additional
expense intended to avert BI losses.
Even if information is available, adjusters may
also find themselves constrained by the fact that
information relevant to the adjustment may be
commercially sensitive (i.e. contract prices) and
the insured may be prevented or limited in what
they can pass on due to confidentiality
obligations.
Contract pricing raises another relevant
consideration in the adjustment of a CBI loss. We
are all aware of the importance of “causation”.
With the potential for commercial disputes over
the price of products supplied to the insured and
actions they may take that could affect and
indeed increase the loss they suffer, adjusters
must consider if the chain of causation has been
broken, so as to minimise the insurable loss
under the policy. We must always return to the
question, was the insured’s loss caused by the
relevant damage, rather than some extraneous
cause such as a contractual dispute between
supplier and insured, or insured and customer.
CBI potential in the wake of Japan
If a CBI loss arising from the incident is reported
to insurers, obviously the potential operation of
exclusions such as those relating to earthquake,
tsunami, or nuclear risks will have to be
considered. However, in addition, the terms of
the relevant extensions and the chain of
causation must also be reviewed. Insurers should
look at what has actually caused the supplier (be
it direct or otherwise) to cease or reduce supply
to the insured.
There is also a serious issue to be considered
(as it must be in any Property/BI loss involving
widespread devastation) regarding the correct
application of the “other circumstances” clause
when looking at adjustments to “Standard
Turnover” while assessing BI losses. What must
be assumed not to have occurred? The peril? Or
the damage to the third party’s property
relevant to the operation of the CBI extension?
The law on that issue is uncertain in many of the
world’s premier “insurance law” jurisdictions.
Matt Andrews
London
m.andrews@kennedys-law.com
Alex Nurse
London
a.nurse@kennedys-law.com

For a short time only
A recent Court of Appeal case sheds welcome light on time-limited settlement offers.
In C v D [2011] EWCA Civ 646, D appealed against a
decision that a time-limited offer to settle did not
constitute a Civil Procedure Rules Part 36 offer. C had put
forward the proposed settlement almost a year before
trial. Described as a Part 36 offer, it was “open for 21
days” from the date of the letter. Nearly a year later, just
weeks before trial, D attempted to accept C’s proposal.
The judge decided that a time-limited offer was not permitted
under Part 36, as a Part 36 settlement proposal could only lapse
upon service of a written notice of withdrawal. He ruled that the
words “open for 21 days” meant that C’s offer lapsed without
express withdrawal and consequently was time-limited. C’s
settlement proposal was therefore not a Part 36 offer and not
open for acceptance when D tried to accept it.
Appeal ruling
D successfully appealed against the decision. It was agreed that a
Part 36 offer could not be time-limited. However, the Court of
Appeal decided that, in the context of Part 36, it was entirely
feasible and reasonable to read the words “open for 21 days” as
meaning that the offer would not be withdrawn within that period
of time, even though (under the CPR) such a withdrawal could in
fact be effected with the court’s permission. “Open for 21 days”
was simply a way of saying that there would be no attempt to
withdraw the settlement proposal within that time.
However, it was also a warning that, once those 21 days had
expired, a withdrawal of the offer was on the cards. This
construction did two things: it allowed the settlement proposal to
count as a Part 36 offer, and it also gave the clarity and certainty
that both Part 36 and the offer letter aimed to achieve. It left the
offeror free to withdraw the offer immediately after the 21 days
had expired, or to leave it open for as long as it wished. At the same
time, it assured the offeree that it had 21 days to consider its
position, while making it clear that the offeree risked the proposed
settlement being withdrawn if was not accepted within that period
of time.
Lessons from the decision
This decision provides some useful lessons for both Part 36
offerors and offerees. In particular, it emphasises the importance
of formally withdrawing a Part 36 offer if the offeror no longer
wants it to be available for acceptance. If it is not withdrawn, an
offer can be accepted at any time, so it may be worth carrying out
a review of cases where Part 36 offers have been made – even if
that was long ago – but have not been formally taken off the table.
It may be, for instance, that new evidence has subsequently come
to light which now makes the original offer less attractive for the
offeror (in which case, it can be withdrawn) or, alternatively, more
attractive to the offeree (in which case, its acceptance can be
reconsidered). A Part 36 offer should therefore never be regarded
as a fire-and-forget weapon.
The lessons learned from Gibbon v Manchester City Council
[2010] EWCA Civ 726 should also be borne in mind – namely,
that a subsequent Part 36 offer does not cause an earlier offer to
lapse. If an offer has not been withdrawn, it is still capable of
acceptance, even if a further offer has been made. It is also wise to
remember that, providing it has not been formally revoked, a Part
36 offer can still be accepted even if it has been rejected
previously. Withdrawal of an offer should be carried out by serving
a written notice in clear, unambiguous terms.
Conclusions from C v D
What conclusions can be drawn from the Court of Appeal’s
decision in C v D? It demonstrates the developing nature of Part
36 offers, as well as the appellate court’s ability to apply common
sense where before there has been confusion. While courts will not
readily interpret a time-limited offer as not obeying Part 36 rules,
the decision also emphasises the need for clarity and the risks of
non-compliance with CPR requirements when making a Part 36
offer. Of course, if an offeror wants to make a time-limited
settlement proposal that simply lapses at the end of the specified
acceptance period rather than being formally withdrawn, it is free
to do so. However, such an offer will not provide it with the
protection of Part 36.
Miranda Cooke
Birmingham
m.cooke@kennedys-law.com
Eamon Mooney
Birmingham
e.mooney@kennedys-law.com
9

Who’s to say who’s an expert? – Part 6
Paul Newman (1925-2008)
In the sixth article in the series, we look at the use of expert evidence in the German courts.
This time we head off to northern Europe, looking at
the expert witness (Sachverständiger) in Germany.
Although the system shares many common factors
with other European jurisdictions, the German
procedure – set out in §402-414 of the
Zivilprozessordnung (Code of Civil Procedure) (ZPO)
– has its own particularities.
When can expert evidence be used?
German courts will admit expert evidence where they
consider the proof of facts or circumstances requires a
special expertise or knowledge: §414 ZPO. Expert
evidence is not limited to that produced for the present
case. The court has a discretion to rely on relevant
expert evidence presented in other cases: §411 ZPO.
The use of expert evidence is generally governed by
the rules on other witness evidence, subject to §403-
414 ZPO: see §402 ZPO. The expert’s report has the
status of formal evidence but does not bind the court.
Its purpose is to assist the court in reaching its decision
and the court retains full discretion as to the weight to
be placed on it.
How is the expert appointed?
§ZPO provides for the appointment and number of experts, the
court retaining discretion to appoint more, as the case demands.
The trial court normally delegates the appointment to the judge
responsible for supervising expert investigations who assumes the
powers and duties of the trial court: §405 ZPO.
Initially, the judge invites the parties to propose the names of
potential experts, but may limit the number of choices. If the
10
parties agree a choice, the court will appoint that expert.
The expert will, if possible, be appointed from publicly-maintained
lists. Such experts are not subjected to the same qualification
rigours as, for example, in France. Others may be appointed if
special circumstances require it. The expert will usually have an
academic degree in the relevant field. In most cases, they will be a
professor at a German university or higher technical college or a
member of a relevant institute or public body.
The appointment of a court expert does not prevent the parties
from presenting their own expert evidence. However, this only has
the status of submissions by the parties.
On appointment, experts must ensure the assignment falls within
their expertise without the involvement of other experts.
Otherwise, they must inform the court immediately: §407a ZPO.
The expert cannot delegate their appointment but may employ
staff to assist them.
How do experts carry out their function?
A court-appointed expert must be independent and impartial.
The evidence is produced in response to issues designated by the
court for assessment: §403 ZPO. Depending on the specifics of
the case, the court may:
●
●
●
Hear the expert evidence before designating the issues to be
addressed §404a(2) ZPO);
If the facts are disputed, state the assumed facts on which the
investigation will be based §404a(3) ZPO);
Instruct the expert to involve the parties and determine the
extent of their participation, including the calling of meetings
with the parties §404a(4),(5) ZPO).
If the expert is unsure about the content and scope of the
appointment – or anticipates that the investigation costs are
disproportionate to the value of the dispute or advance on the
expert’s fees the court’s clarification must be sought immediately:
§407a(3) ZPO.
Although the court directs the expert’s activities, the expert
decides without restriction how these will be carried out. For
example, the expert may:
●
Carry out any inspections of (and tests on) the disputed subject

●
●
matter that are necessary to help form conclusions;
Interrogate witnesses; and
Demand further information and documentation.
If the parties retain their own experts, these effectively
shadow the investigation and can avail themselves of the
same rights as the court expert. Additionally, the parties
(either through their own experts or their lawyers) can make
representations to the court-appointed expert.
The court will stipulate a period within which the expert must
complete their investigation §407 ZPO or – if they submit a
written report (the more common requirement) – when they
must file their signed report (see §411 ZPO). A written
opinion must be in German and state that it is compiled
impartially and to the expert’s best knowledge and belief. The
expert can make this declaration to the court at the outset of
the investigation: §410 ZPO.
On completing the investigation, the expert must return any
documents, records or test results provided to them. Failure
to file a report or return evidence can expose the expert to an
order for costs and a fine: §409 ZPO. This is subject to a right
of appeal.
The court may summon the expert to explain the contents of
their report. The court sends a copy of the report to the parties
and sets a deadline for the parties to file objections – or raise
any supplementary questions – arising from the document. It
will also usually fix a hearing for the expert to attend for crossexamination
by the parties on his or her report.
In practice, the courts will rarely depart from the expert’s
opinion when reaching its decision.
How can the expert be challenged?
An expert can be removed from office on the same grounds
as a judge: §406 ZPO. The application can be made within
two weeks of service of the order for the appointment. A later
application can only be made if the applicant can prove that
they were prevented, for reasons other than their own fault,
from making an earlier application.
The grounds for removal §41 and 42 ZPO are that the expert:
●
●
●
Is (or represents) a party in the proceedings, or their
spouse or life partner (even if the relationship has ended) is
a party in the case, or they are related by blood or marriage
(within certain degrees) to one of the disputants; or
Has participated in a previous action or arbitration
proceedings about the same subject matter, other than as
an expert; or
Is suspected of partiality or bias.
The fact that the expert has been questioned as a witness is
not grounds for removal.
How is the expert remunerated?
Experts are paid on a scale according to the Judicial
Remuneration and Compensation Act. Their fees as treated as
court expenses.
Where a party is completely successful in its claim, the fees
are met by the losing party. If the claim is only partially
successful, the fees will be apportioned by the court between
the parties.
Mike Walker
London
m.walker@kennedys-law.com
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