[1995] 4 All ER 289

INSURANCE: ADMINISTRATION OF JUSTICE; Courts

The plaintiff names, who were members of Lloyd's syndicates, brought proceedings against their managing agents and underwriting agents, claiming damages for negligence and breach of duty in respect of their management of the underwriting of the syndicates and for breach of underwriting agency agreements, which had resulted in the plaintiffs being subjected to excessive risk of liability to third party assureds. The damages claimed by the plaintiffs included those relating to liabilities which Lloyd's had itself discharged out of its central fund on behalf of the plaintiffs. The plaintiffs obtained judgment in their favour and were awarded damages to be assessed for losses representing existing and future claims. The defendants applied under RSC Ord 33, rr 3^a and 4^b for postponement of the assessment of that proportion of the damages which represented losses from future claims. They contended, in particular, that any assessment should wait until judgment had been given in other pending proceedings brought by Lloyd's against one of the plaintiffs, C, in which it sought reimbursement of the moneys paid on his behalf out of the central fund.

Held - (1) The ruling in C's case that he had an arguable defence to the Lloyd's claim for reimbursement based on illegality was no bar to the plaintiffs establishing in the instant case (where that defence was not asserted) that there was a liability to reimburse the payments made from the central fund and therefore the payments made out of that fund did not reduce the losses in respect of which the plaintiffs were entitled to claim damages (see p 294 h j, post).
   (2) The court had jurisdiction pursuant to RSC Ord 33, rr 3 and 4(2) to make an award of damages in relation to part of a claim while deferring for adjudication another part and, accordingly, it was entitled to make an award in respect of claims that had been paid while reserving for future determination that part of the claim relating to anticipated claims. In the interests of bringing litigation to an end it would usually be appropriate to make a single award of damages which included the best assessment possible of future loss, but in exceptional cases that assessment could be deferred. In the circumstances, the special features of the Lloyd's litigation (ie the nature of the loss, the difficulties of assessment and the consequence for related proceedings of a once and for all assessment of damages) weighed strongly in favour of awarding damages in respect of underwriting losses at the point when those losses were sustained and not in anticipation of289 them, particularly in view of the uncertain character of potential third party liability, the burden that would be imposed on the defendants if they were obliged to pay capital sums to cover future losses and the risk that in some cases the damages would be dissipated before the claims were made. The defendants' application would accordingly be granted (see p 297 a to d g to j and p 299 a to c, post); Trans Trust SPRL v Danubian Trading Co Ltd [1952] 1 All ER 970 applied; Parry v Cleaver [1969] 1 All ER 555, Murphy v Stone Wallwork (Charlton) Ltd [1969] 2 All ER 949 and Mulholland v Mitchell [1971] 1 All ER 307 distinguished.

Notes
For general principles of assessment of damages, see 12 Halsbury's Laws (4th edn) paras 1134, 1200, and for reduction of damages by reason of gain to plaintiff, see ibid para 1196.
   For insurance at Lloyd's, see 25 Halsbury's Laws (4th edn reissue) para 21.

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Application
By writ dated 2 March 1993 the plaintiffs, Micheal Eunon McLarnon Deeny and 3,062 other Lloyd's names (the names), brought proceedings against their managing agents, Gooda Walker Ltd and Gooda & Partners Ltd (the first and second defendant), for negligence and breach of duty in respect of their managing of the underwriting of Lloyd's Syndicates 290 (during underwriting years 1989 and 1990), 164 (during underwriting year 1989), 298 (during underwriting years 1988 and 1989) and 299 (during underwriting year 1988) respectively, and against the first defendant for breach of standard agency agreements for its management of Syndicate 290 (during 1990). The names also brought proceedings against another 68 defendants for breach of underwriting agency agreements for the above syndicates. The names further applied for a declaration that they were entitled to be indemnified in respect of both subsisting losses for the syndicates in the relevant years and for any future deterioration in the results for the syndicates in those years. On 4 October 1994 judgment was given in favour of the names for damages to be assessed and thereafter the defendants applied for the postponement under RSC Ord 33, rr 3 and 4 of so much of the damages as represented losses from future claims. The facts are set out in the judgment.

6 April 1995. The following judgment was delivered.

PHILLIPS J. This judgment deals with a number of issues of principle that fall to be resolved in relation to the assessment of damages.

Is it appropriate to assess damages at this stage?
   Mr Eder QC submitted that, having particular regard to comments recently made by Saville LJ when this and other Lloyd's proceedings came before the Court of Appeal, it is not appropriate to embark on the assessment of damages at this stage. Saville LJ said (3 March 1995, unreported):

   These comments do not give, and clearly were not intended to give, any guidance as to what course should be followed by judges who are now faced with the implications of competing claims to limited errors and omissions (E & O) recoveries. When dealing with an application for interim payment in this action on 14 February 1995 and faced with a similar argument advanced by Mr Eder, I291 ruled that it was not appropriate to be influenced by the effect that making or refusing the order sought would have on claims to E & O funds. I remain of that view and accordingly, subject to the next point raised by Mr Eder, I propose to proceed with the assessment of damages in this action.

The effect of Society of Lloyd's v Clementson: the broad point
   Mr Eder submits that I should not proceed to assess damages in this case until judgment has been given in Society of Lloyd's v Clementson. In that action Lloyd's seek to recover from Mr Clementson moneys paid out of the central fund pursuant to para 7(a) of the Central Fund Byelaw (No 4 of 1986) in order to make good defaults by Mr Clementson in meeting his obligations to policyholders under contracts of insurance written on his behalf. Mr Clementson is a plaintiff in this action. The damages he claims in this action include liabilities to policyholders which have been discharged by part of the payments from the central fund which Lloyd's are seeking to recover from Mr Clementson. In this action it is asserted by Mr Clementson, and other names who have had liabilities discharged by payments out of the central fund, that they are liable to reimburse the central fund in respect of such payments. That is not the stance taken by Mr Clementson in the action brought against him by Lloyd's. By his amended points of defence and counterclaim Mr Clementson pleaded that the following contravened art 85 of the EEC Treaty and were void: the decision of the Society of Lloyd's to adopt the Central Fund Byelaw; the decision to make payments out of the central fund in respect of alleged debts of the names under para 7 of the byelaw; the decision to sue the names for reimbursement under para 10 of the byelaw; and the underwriting agency agreements in the standard form required by Lloyd's Agency Agreement Byelaw (No 1 of 1985); and that in consequence the payments out of the central fund are not recoverable.
   The Court of Appeal in Society of Lloyd's v Clementson [1995] CLC 117 has held that the defence based by Mr Clementson on the EEC Treaty is not unarguable.
   In Clementson Mr Clementson has now substituted a more detailed points of defence and counterclaim running to some 50 pages. This alleges that the Lloyd's arrangements, as therein defined, violate art 85 of the EEC Treaty. The Lloyd's arrangements include: (i) the byelaws promulgated by the Council and Committee of Lloyd's pursuant to the Lloyd's Act 1982 and Lloyd's Act 1911; and (ii) the undertakings given by the members of Lloyd's to Lloyd's upon their election to Lloyd's pursuant to which the members agreed to comply with the provisions of the Lloyd's Acts 1871 to 1982 (inclusive) and subordinate legislation made or to be made thereunder.
   The object of Mr Clementson's pleading is to demonstrate that he is under no liability to reimburse Lloyd's for payments made out of the central fund. In order to achieve this end he appears to be attacking the very foundations of Lloyd's. I am told that Mr Clementson has the support of other members of Lloyd's who have joined together to form what is commonly known as the 'Writs Response Group'. They almost certainly include other plaintiffs in this action.
   No issue arises in this action as to the legality of the Lloyd's arrangements. The plaintiffs (the names) contend that those names whose liabilities have been discharged out of the central fund are legally bound to reimburse Lloyd's in respect of such payments. The defendants do not challenge this contention. If the transactions with which this action is concerned were, on their face, manifestly illegal, I should be bound to take account of that of my own motion. Mr Eder does not suggest that this could be the case here. He submits, however, 292that were 'persuasive and comprehensive' evidence of illegality to emerge, I should have to take notice of it. He suggests that, in circumstances where Mr Clementson, supported by other names, is challenging the legality of the Lloyd's arrangements in other proceedings I should consider whether the correct course is not, of my own motion, to stay this action until the result of those proceedings is known.
   Whether Mr Clementson has a good defence to Lloyd's' claim, as presently constituted in Clementson, on the basis of his plea of illegality will not be known until, at earliest, October. An appeal to the Court of Appeal and a reference to Europe are plainly possible. Even if his defence were to succeed it seems to me unlikely that it would do so on a basis that would require this court to refuse to grant the plaintiffs any further relief. Having considered Mr Eder's invitation to stay these proceedings of my own motion pending the result in Clementson I have no hesitation in declining to do so.

The narrow point
   The Lloyd's central fund has paid some £102m in order to discharge obligations of the names in this action in respect of the syndicate years other than 290/1990. A substantial, though unidentified and perhaps unidentifiable, part of this total will have been paid to the managing agents in order to discharge the liabilities to policyholders which form the subject matter of the relief sought in this action. Mr Eder makes the following submissions: (1) names can make no recovery of liabilities discharged by Lloyd's from the central fund unless they can demonstrate, on the balance of probabilities, that they are obliged to reimburse the central fund; (2) because of the plea raised in Clementson, names cannot at present establish that they are liable to repay Lloyd's. In consequence, the damages they recover must be reduced to take account of the liabilities discharged by payments out of the central fund.
   Mr Smith QC joins issue with both these contentions.

Is liability to Lloyd's a precondition of recovery?
   The central fund, save in so far as it may include moneys borrowed by Lloyd's, consists of contributions levied from members of Lloyd's and investments and income derived from such contributions. Mr Smith submits that, in these circumstances, the defendants cannot claim credit in diminution of damages for any liabilities of the names discharged out of the central fund. The fact that the names may prove to be under no duty to reimburse Lloyd's for such payments is irrelevant. The payments are collateral under the doctrine in Parry v Cleaver [1969] 1 All ER 555, [1970] AC 1.
   In Parry v Cleaver Lord Reid considered two situations in which a plaintiff does not have to give credit in favour of the wrongdoer for collateral benefits received from third parties-the proceeds of insurance and sums coming to him by reason of benevolence. He said ([1969] 1 All ER 555 at 558, [1970] AC 1 at 14):

   Both of these situations are a long way away from the position where the third party, Lloyd's, makes payments for the benefit of names on the false premise that the names will be bound to reimburse Lloyd's. I do not find my sense of justice outraged at the possibility that the defendants might benefit from such payments. None the less, on balance, I consider that Mr Smith is correct to contend that such payments would not relieve the defendants of their liability in damages. I have dealt with this difficult point in a cursory manner because I do not consider that it is the primary answer to Mr Eder's contention.

Are Lloyd's entitled to reimbursement?
   On the premise that the payments from the central fund have indeed discharged liabilities of the names to policyholders, Mr Smith has submitted that Lloyd's have a basis for claiming reimbursement which is an alternative to their pleaded reliance upon the Lloyd's arrangements. I can do no better than to quote from his skeleton argument:

I do not find that the facts of this case lie comfortably within the principle upon which Mr Smith relies. None the less I consider that if the names recover damages in respect of liabilities discharged by Lloyd's in an action where they assert that they are liable to indemnify Lloyd's, it is unlikely that the principles of agency and of restitution will not provide Lloyd's with a route to recovery that dispenses with the need to rely upon the Lloyd's arrangements.
   Once again I have dealt with a difficult point in a cursory fashion, for I now come to what seems to me to be the most simple and compelling answer to Mr Eder's submission. In this action no issue of illegality is raised. The defendants have no answer to the names' contention that they are under an obligation to reimburse the central fund pursuant to para 10 of the central fund byelaw. The fact that the Court of Appeal has ruled that there is an arguable defence in Clementson is no bar to the names' establishing in this action, where that defence is not asserted, that there is a liability to reimburse the payments made from the central fund. It follows that the payments made out of the central fund do not reduce the losses in respect of which the names are entitled to claim damages.

The approach to damages
   The point to which I now turn has been raised in respect of the primary losses claimed by the names, that is, liability to policyholders. This head of damage falls294 into two parts; claims that have been paid and claims that the names anticipate that they will have to pay in the future.
   The names contend that they are entitled at this stage to a final award of damages, covering both the paid claims and the anticipated claims. The defendants contend that the appropriate course is that my award should be restricted to the paid claims and that the assessment of damages in relation to anticipated claims should be deferred, subject possibly to a declaration that the names are entitled to an appropriate indemnity in respect of such claims. In support of their proposed approach the defendants have referred me to two precedents.
   In Brown v KMR Services Ltd, Sword-Daniels v Pitel [1994] 4 All ER 385 Gatehouse J gave judgment in respect of what he described as the 'present liabilities' of the plaintiffs and an indemnity against future losses. The nature of that indemnity is not clear from the report of the judgment.
   Trans Trust SPRL v Danubian Trading Co Ltd [1952] 1 All ER 970, [1952] 2 QB 297 was a case where buyers had wrongfully repudiated a contract for the purchase of steel. The sellers claimed that the buyers' breach of contract had rendered them subject to the risk of a claim for damages from their own suppliers. At first instance McNair J ([1952] 1 All ER 89, [1952] 2 QB 297) granted a declaration that the sellers were entitled to be indemnified in respect of any damages that they might have to pay to their suppliers. On appeal this head of claim was held to be too remote, but the court expressed opinions as to the appropriate procedure had this not been the case. Somervell LJ said ([1952] 1 All ER 970 at 975-976, [1952] 2 QB 297 at 303):

Denning LJ added ([1952] 1 All ER 970 at 978, [1952] 2 QB 297 at 307):

295

   Mr Smith submitted that the course proposed by Denning LJ was one which the court has no jurisdiction to follow and I must first deal with this point.

Jurisdiction
   Mr Smith referred me to relevant statements in two cases in the House of Lords. In Murphy v Stone Wallwork (Charlton) Ltd [1969] 2 All ER 949 at 952, [1969] 1 WLR 1023 at 1027 Lord Pearce said:

   In Mulholland v Mitchell [1971] 1 All ER 307 at 308, [1971] AC 666 at 674 Lord Hodson made a similar observation:

   Both of these cases were dealing with the question of whether, upon a change of circumstances, fresh evidence should be admitted on appeal in support of an application to vary the measure of damage awarded. The cases were not dealing with the question of whether the court could, in appropriate circumstances, make an award in relation to one part of the claim while deferring adjudication on another. Mr Eder submitted that the power to do this is conferred by the following provisions of RSC Ord 33:

296

In my judgment these provisions enable the court to make an award of damages in relation to part of a claim while deferring for adjudication another part. In reaching this conclusion I have been influenced by the following consideration. Order 14, r 3 empowers the court to give summary judgment in respect of part of a claim, leaving the balance of the claim to go for trial. It would be illogical if the court were not able, after determining liability in a split trial, to give immediate judgment for heads of damage no longer in dispute while reserving for assessment heads of damage in respect of which an inquiry was necessary. For these reasons I have concluded that I have jurisdiction to make an award in respect of claims that have been paid while reserving for future determination that part of the names' claim that relates to anticipated claims. A similar, although not identical, effect could be achieved by ordering an interim payment to reflect the paid claims.
   The more difficult question is whether it is appropriate to defer the assessment of that part of the names' claim that relates to anticipated claims. In this context the authorities relied upon by Mr Smith, to which I referred earlier, are germane. The desirability of bringing an end to litigation will normally make it appropriate for the court to make a single award of damages which includes the best assessment possible of future loss. This will not always be the case, however. In a personal injury case it may well be in the interests of justice that a final award of damages should not be made until sufficient time has elapsed for a reliable prognosis of the plaintiff's medical condition. Thus in Hawkins v New Mendip Engineering Ltd [1966] 3 All ER 228 at 232-233, [1966] 1 WLR 1341 at 1347 Winn LJ suggested that the defendants should have-

   Since that decision the rules have been amended to permit the court to make a provisional award of damages for personal injuries, thus recognising in that context a situation where the interests of justice can call for the litigation to be kept alive rather than to be brought to an end.
   Personal injury actions have special features which can justify the deferral of the assessment of damages. I have concluded that the current Lloyd's litigation also has special features which can justify this exceptional course. Those features are: (1) the nature of the loss, (2) the difficulties of assessing the loss and (3) the consequences of once and for all assessment of damages.

The nature of the loss
   In this action, as in most of the other Lloyd's actions, the principal complaint made by the names is that their agents subjected them to excessive risk of liability to third party assureds. Damage is suffered as and when third party claims are made. Whether a particular risk written will result in a claim cannot be predicted with certainty, having regard to the capricious way in which the spiral operates. Where a plaintiff seeks relief in respect of potential third party liability which is uncertain, it seem to me, as it seemed to the Court of Appeal in Trans Trust v Danubian Trading [1952] 1 All ER 970, [1952] 2 QB 297, that the appropriate course will usually be to defer dealing with that head of damage until the extent of the plaintiff's liability, if any, has been determined.

297

The difficulties of assessing the loss
   If the future claims pattern could be predicted with reasonable confidence, uncertainty would not constitute a valid objection to making an overall assessment of damages at this stage. I do not, however, consider that the future loss position is clear.
   The approach adopted by the names' experts to the assessment of future losses involves the application of graphical techniques to past claim experience. Mr Jewell's explanation includes the following passage:

   The defendants' experts have applied two main methods to estimate future loss development. They are both based on fitting mathematical models to past development and using past and current trends to estimate the future. A brief description of their methods is given in their report:

   The names' estimates of ultimate losses are substantially higher than the defendants'. It would, of course, be possible for the court to attempt to resolve the differences between them, but having regard to the nature of the methodology that each side has adopted, I do not believe that the court would be able to make confident findings as to future loss development.

The consequence of once and for all assessment of damages
   The uncertainty of future losses is not the most compelling consideration that has led me to defer the assessment of this part of the names' claim. I think it desirable that a uniform approach should be adopted in the Lloyd's cases and this gives merit to adopting a similar approach to that of Gatehouse J. More importantly, the unprecedented circumstances of the Lloyd's litigation make it desirable to consider the overall implications of awarding lump sum damages in respect of future underwriting liabilities before deciding whether this course is appropriate.
   The following questions arise: (1) is it just that agents or their E & O underwriters should be obliged to pay at this stage capital sums to cover losses that the names have not yet suffered? and (2) is it just or desirable that the names should receive at this stage capital sums by way of damages to cover losses that they have not yet suffered?

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   The burden on defendants or their E & O underwriters of having to pay at this stage damages in respect of future losses will be substantial, but as nothing compared to the position of defendants in the 'long tail' cases, should they be held liable.
   If names receive substantial sums in anticipation of losses that they have not yet sustained, there must exist the risk that in some cases the damages will be dissipated before the claims are made. I am told that Lloyd's have just introduced a byelaw designed to prevent this-although I have not been referred to it-but I am also told that the validity of this byelaw is to be challenged.
   Mr Eder touched on these considerations in his submissions, but they have not been fully explored. My overall conclusion is that the special features of the Lloyd's litigation weigh strongly in favour of awarding damages in respect of underwriting losses when those losses are sustained and not in anticipation of them.
   Mr Smith has made the point that names are required to meet cash calls that reflect to a degree estimates of future claims. This might justify an application for an interim payment-I do not prejudge that question-but it does not persuade me that it is appropriate to make at this stage a once and for all assessment of damages.
   In reaching my decision I have not had regard to a factor which Mr Smith did not mention, but must have had in mind, namely the fact that E & O funds are limited. This cuts both ways. Names in syndicates whose actions have not yet come to trial might not unreasonably think it particularly harsh if E & O funds were exhausted in meeting claims for future, and less certain, liabilities, leaving them to bear the burden of the losses that they have already suffered.

Declared losses
   Mr Smith has defined as declared losses the losses that the managing agents have shown for each syndicate year in the annual syndicate returns. Under Lloyd's Solvency and Reporting Byelaw (No 13 of 1990) names have to provide 'eligible assets' sufficient to meet their 'relevant liabilities'. Declared losses form part of the relevant liabilities. Mr Smith submitted that because the declared losses have this direct impact upon the amount of the eligible assets that a name must provide in order to demonstrate solvency, the declared losses resulting from the five central catastrophes constitute damages recoverable by the names. Mr Eder submitted that this was a 'non sequitur'. I agree. Declared losses fluctuate from one year's return to the next. They represent the managing agents' contemporary estimate of the losses that the syndicates are likely to suffer. They are not of themselves conclusive of the amount of the names' losses and such impact as they have on the names' solvency position does not have the effect in law of making them recoverable losses.