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Aiken and Others v
Stewart Wrightson Members Agency Ltd and Others Court of Appeal
(Civil Division) HEARING-DATES: 11, 16
July 1996 16 July 1996 CATCHWORDS: Practice — Lloyd's litigation — Interim
payment — Reinsurance — Dispute between plaintiff Names and defendant members'
agents and managing agents — Interim payments ordered to be paid to plaintiffs
— Whether interim payments should be made on basis of calls which had been
made on Names. HEADNOTE: The plaintiffs were a number of Lloyd's Names
who were members of Lloyd's Syndicates 334 for the 1985 underwriting year of
account (the syndicate). The defendants were the first defendant member's
agents and the 10th defendants, Pulbrook Underwriting Management Ltd, the managing
agents (PUM). By the beginning of 1981 there was substantial
concern in the insurance market about the number and financial effect of claims
in the United States relating to asbestosis and other industrial diseases. It
was therefore decided to take steps to protect the syndicate in respect of
liability which might be incurred in its 1975 and earlier years of account and
in 1981 PUM entered into a contract for the provision of aggregate excess loss
reinsurance without limit in excess of an aggregate net loss of US$12 m with
effect from Jan 1, 1981. The insurance was effected between the syndicate and
Syndicate 418. By letter of May 4, 1989 Syndicate 418 gave
notice of avoidance of the insurance on the ground that PUM as the managing
agents had failed to disclose to Syndicate 418 various matters material to the
assessment of the risk underwritten. By an arbitration award made on Feb 2, 1990 it
was held that Syndicate 418 had lawfully avoided the contract of reinsurance
and was discharged from all liability. The syndicate claimed against the defendant
members' agents and managing agents. Certain preliminary issues were ordered to be
tried. — Held, by POTTER, J, that (1) the members'
agents owed a duty in contract (but not in tort) to all the plaintiffs to act
with reasonable skill and care in relation to the placing of the run-off
reinsurance in September, 1981; (2) PUM owed a duty in tort to all the
plaintiffs to act with reasonable skill and care in relation to the placing of
the reinsurance; (3) the members' agents and PUM were in breach
oftheir respective duties by reason of PUM's non- disclosures; (4) if the three matters which should have been
disclosed had been disclosed run-off reinsurance would have been placed on the
same terms as it was in fact placed save that the premium would have been
considerably greater; (5) save for 11 plaintiffs all the claims in
contract against the members' agents in relation to the run-off reinsurance
were statute barred. On Feb 13, 1995 the syndicate issued a summons
seeking interim payment pursuant to O 29, r 11, which provided inter alia: (1) If on the hearing of an application under
Rule 10 in an action for damages, the Court is satisfied . . . (b) that the
plaintiff has obtained judgment against the respondent for damages to be
assessed . . . the court may, if it thinks fit, . . . order the respondent to
make an interim payment of such amount as it thinks just, not exceeding a
reasonable proportion of the damages which in the opinion of the Court is likely
to be recovered by the plaintiff. The syndicate argued that the interim payment
should be based either on the estimated eventual loss as set out in the
syndicate's annual report to Dec 31, 1993 or alternatively on the basis of the
declared loss as shown in the underwriting account for the year ended Dec 31,
1993. PUM and the members' agents argued that any interim payment should be
based not on the estimate of the eventual loss or on the declared loss but on
the amount of 115 claims which had already been paid. — Held, by POTTER, J, that it was right in
principle that the interim award should be limited to compensation in respect
of paid claims. The syndicate appealed contending that the
interim payment should be made on the basis of the calls which had been made on
the Names. — Held, by CA (NEILL, OTTON and WARD, LJJ),
that (1) on the present state of the evidence it would be wrong to make any
finding of fact that the calls that had been made would have been made in any
event; it seemed quite likely that the calls would have been made if only to
comply with the Solvency and Reporting Byelaw of 1990 but this had not been
established (see p 582, col 2; p 584, col 2); (2) an interim payment in a case such as the
present was in respect of damages which the plaintiff was thought likely to
recover; the damages which the syndicate would receive in this case were the
proved losses; and the fact that the Names had had to pay money over in
response to calls did not automatically mean that the sums paid represented
damages; the money paid remained the property of the Names; it was quite wrong
to treat sums paid in response to calls as losses by the individual Names and
the suggestion that the interim payment should be based on calls would be
rejected (see p 583, col 1; p 584, col 2); (3) the constituent elements of the calls and
declared loss consisted of the notified claims and of the IBNRs (incurred but
not reported claims); there was no satisfactory basis for making an interim
payment in respect of the IBNRs which were speculative and at this stage were
incapable of precise assessment; no award of an interim payment would be made
in respect of notified claims since it was important that a uniform approach
should be adopted in all the Lloyd's cases; these were "long-tail"
cases and it was not just or desirable that the Names should receive at this
stage capital sums by way of damages to cover losses which they had not
actually suffered; the appeal would be dismissed (see p 583, cols 1 and 2; p
584, col 2); — Deeny v Gooda Walker Ltd (No 3), [1996] LRLR
168 applied. CASES-REF-TO: Arbuthnott and Others v Feltrim Underwriting
Agencies Ltd, [1996] CLC 714; Brown v KMR Services Ltd, [1995] 2 Lloyd's Rep
513; [1994] 4 All ER 485; Deeny v Gooda Walker Ltd (No 2), [1996] LRLR
176; Deeny v Gooda Walker Ltd (No 3), [1996] LRLR
168; Hadmor Productions Ltd v Hamilton, (HL) [1983]
AC 191. Moore v Assignment Courier Ltd, [1977] 1 WLR
638. INTRODUCTION: This was an appeal by the plaintiff Names,
members of Syndicate 334 and represented by Mr PJ Aiken from the decision of Mr
Justice Potter ordering that interim payments should be made to the Names in
their action against the defendant members' agents Stewart Wrightson Members
Agency Ltd and others but on the basis that such payments should be limited to
compensation in respect of paid claims. The further facts are stated in the judgment of
LordJustice Neill. COUNSEL: Mr N Strauss, QC for the Names; Mr Julian Flaux,
QC for Stewart Wrightson; Mr Jeremy Cooke, QC and Mr Rory Phillips for the 10th
respondent PUM. JUDGMENT-READ: Judgment was reserved. Tuesday July 16, 1996 PANEL: Neill, Otton, Ward LJJ JUDGMENTBY-1: NEILL LJ JUDGMENT-1: NEILL LJ: Introduction The plaintiffs in these proceedings are a number
of Lloyd's Names who are or were members of Lloyd's Syndicate 334 for the 1985
underwriting year of account. This account has not yet been closed. I can refer
to them collectively as the syndicate. The only defendants who are parties to
this appeal are the first defendants (to whom I can refer as the members'
agents) and the 10th defendants, Pulbrook Underwriting Management Ltd, the
managing agents (to whom I can refer as PUM). I can state quite shortly the circumstances in
which the matter comes before the Court. By the beginning of 1981 there was
substantial concern in the insurance market about the number and financial
effect of claims in the United States relating to asbestosis and other
industrial diseases. It was decided that steps should be taken to protect the
syndicate in respect of liability which the syndicate might incur on its 1975
and earlier years of account. It was in these circumstances that in September,
1981 PUM entered into a contract for the provision of aggregate excess loss
reinsurance without limit in excess of an aggregate net loss of US$12 m with
effect from Jan 1, 1981. The insurance was effected by a contract of
reinsurance between the syndicate and the underwriter of Syndicate 418. This
type of reinsurance contract in respect of old years is referred to as
"run-off" reinsurance. By letter dated May 4, 1989, however Syndicate
418 gave to the syndicate notice of avoidance of the contract on the ground
that PUM as the managing agents had failed to disclose to Syndicate 418 various
matters material to the assessment of the risk underwritten. By an arbitration
award made on Feb 2, 1990 it was held by arbitrators that Syndicate 418 had
lawfully avoided the contract of reinsurance and was discharged from all
liability. The syndicate then brought the present
proceedings. On Nov 1, 1993 Mr Justice Cresswell ordered
certain preliminary issues to be tried: (1) Whether the defendants or any of them, and
if so which, owed a duty in contract or in tort or in both to the plaintiffs or
any, and if so which of them, to act with reasonable skill and care in relation
to the placing of the run-off reinsurance in September, 1981. (2) If so, whether any such defendant was in
breach of any such duty by reason of the failure to disclose the three matters
which it was held in the interim award should have been disclosed or any of
them. (3) If so, whether. if the matters which ought
to have been disclosed had been disclosed, run-off reinsurance would have been
placed, and if so, on what terms and what premium. (4) Whether any of the plaintiffs' claims in
relation to the run-off reinsurance are statute barred. The preliminary issues were tried by Mr Justice
Potter in 1994 (see [1995] 2 Lloyd's Rep 618). In his reserved judgment dated
Feb 10, 1995 he held: (1) That the members' agents owed a duty in contract (but
not in tort) to all the plaintiffs to act with reasonable skill and care in
relation to the placing of the run-off reinsurance in Sept 1 1981. (2) That PUM owed a duty in tort to all of the
plaintiffs to act with reasonable skill and care in relation to the placing of
this reinsurance. (3) That the members' agents and PUM were in
breach of their respective duties by reason of PUM's non-disclosure. (4) That if the three matters which should have
been disclosed had been disclosed, run-off reinsurance would have been placed
on the same terms as it was in fact placed, save that the premium would have
been considerably greater. (5) That save for 11 plaintiffs all the claims
in contract against the members' agents in relation to run-off reinsurance were
statute barred. Mr Justice Potter's decision is subject to
appeals. It is now reported: [1995] 2 Lloyd's Rep 618. On Feb 13, 1995 the syndicate issued a summons
seeking interim payment. The application was made pursuant to O 29, r 11. I
shall refer to the wording of this rule later. The application against PUM was
by all the plaintiffs. The application against the members' agents are by 11 of
the plaintiffs. By order dated July 31, 1995 Mr Justice Potter
ordered that interim payments should be paid to the plaintiffs as set out in
the order. He gave leave to the syndicate to appeal against the order. At the hearing relating to the interim payment
before the Judge the syndicate contended that the interim payment should be
based either on the estimated eventual loss as set out in the syndicate's
annual report to Dec 31, 1993 or alternatively on the basis of the declared
loss as shown in the underwriting account for the year ended Dec 31, 1993. It is not necessary to refer in detail to the
contentions raised before the Judge on behalf of PUM and the members' agents,
though it is to be observed that PUM raised a point on causation which if
established would substantially reduce the amount which the syndicate is likely
to recover. For the purpose of this appeal, however, it is sufficient to record
that PUM and the members' agents submitted that in any event any interim
payments should be based not on the estimate of the eventual loss or on the
declared loss but on the amount of the claims which had already been paid. The Judge accepted that it was reasonable to
proceed upon the assumption that the eventual loss of the syndicate would be at
least in the region of the figures provided in the accounts, that is, £64m. He
came to the conclusion, however, that it was right in principle to adopt the
same approach as had been established in other Lloyd's cases and that prima
facie the interim award should be limited to compensation in respect of paid
claims. At p 16 of his judgment the Judge set out what seemed to him the
principal reasons for this approach: (1) The practical difficulty of assessing
ultimate future losses. (2) The potential unjustness within the Lloyds'
context of awarding sums which have not yet fallen due in order to compensate a
Name in respect of an aspect of potential loss to which the sum awarded may
never be applied. (3) The potential injustice to the defendants or
their E & O insurers of being obligated to pay damages in respect of future
losses before such losses would have been due for payment. Having set out these reasons, however Mr Justice
Potter continued: Having said that, in any individual case it may
he right to temper that approach where it appears that in addition to the
necessity to reimburse the plaintiff for claims already paid, substantial calls
have been made and complied with by Names against declared losses which the
court is satisfied will indeed occur. In such cases, although the moneys stand
to the account of Names and yield investment income to them until paid out, if
there are calls to which the Name would never have been submitted but for the
negligence of the defendant, it would appear equally unjust that the plaintiff
should be denied an interim award in respect of them, given there is no danger
of dissipation before application in payment of claims. No doubt, that is an
argument which Phillips J had in mind when he expressly reserved the question
as to whether such a situation might justify an application for an interim
payment. In this last sentence Mr Justice Potter was
referred to a passage in the judgment of Mr Justice Phillips in Deeny v Gooda
Walker Ltd (No 2), [1996] LRLR 176 at p 182, col 2; [1995] 1 WLR 1206, at p
1216A where he expressed the conclusion that the special features of the
Lloyd's litigation weighed strongly in favour of awarding damages in respect of
underwriting losses when those losses were sustained and not in anticipation of
them. But Mr Justice Phillips continued: [Counsel for the Names] 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 pre-judge 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. I can return to the judgment of Mr Justice
Potter. However, that is not this case. The respect in
which I have found PUM negligent has been limited to their effecting run-off
reinsurance. There is no finding of negligence on the part of PUM in
underwriting or advising the Names so as to expose them to claims which would
not otherwise have been made. If I were to make an order which put the
plaintiffs into a position where they recovered the whole or a substantial
proportion of their sums paid under calls but not yet applied in payment of
claims, they would indeed be recovering a windfall, or at least a substantial
advantage, to the extent that such claims exceeded the claims paid from time to
time. On that basis I see no reason in this case to
depart from the prima facie rule . . . The appeal It was submitted on behalf of the syndicate that
the Judge had correctly recognized that there was an exception to the prima
facie rule in cases where it could be established that calls had been made on
Names which would never have been made but for the negligence of the relevant
defendant. Mr Justice Potter however, had fallen into error in failing to treat
the present case as one which fell within this exception. His failure to do so
was based on a misunderstanding of the evidence. Accordingly the Court of
Appeal was entitled to interfere with the exercise by the Judge of his
discretion: see Hadmor Productions Ltd v Hamilton, [1983] AC 191 at 220C per
Lord Diplock. The Judge's order should be set aside and an interim award should
be made on the basis of the calls which had been made on the Names. These calls
corresponded with the declared loss of £39,455,000 shown in the under-writing
account for the year ended Dec 31, 1993. The precise amount of the award, which
depended upon certain agreed percentages, had already been calculated. Counsel for the syndicate developed his argument
on the following lines: (1) The Judge correctly held that an interim
payment should be based upon calls where three conditions were satisfied: (a)
That substantial calls had been made and complied with against declared losses.
(b) That the Court was satisfied that those losses would indeed occur. (c) That
the Names would not have submitted to the calls but for the negligence of the
defendants. (2) In the present case calls had been made and
complied with by the Names by the payment of sums equivalent to the declared
loss of £39,455,000. (3) In his judgment Mr Justice Potter had stated
that he proposed to proceed on the assumption that the eventual loss of the
Names would be at least in the region of £64 m. (4) It was established by the uncontradicted
evidence of Mr Mark Everiss, the syndicate's solicitor, that the syndicate
would not have submitted to the calls but for the negligence of PUM and the
members' agents. Counsel referred us to the following passage in the affidavit
sworn by Mr Everiss on June 8, 1995: 16. Had the run-off reinsurance been valid,
because it is 100% and unlimited in excess of US$ 12 m there would have been no
need to require cash calls from Names in the amount of the declared losses,
because the reinsurance would simply respond as and when necessary. This is
witnessed by the fact that significant cash calls were only made after the
result of the arbitration was known (2 February 1990). 17. It is therefore clear that in addition to
the paid claims, the negligence of PUM has unarguably cost the Names the need
to pay very large cash calls in the amount of the declared losses. 18. It is said by Mr Merrett [the chairman of
PUM] that in reality the cash calls, save in so far as they are in respect of
paid claims, do not represent losses to the Names as the reserves are held for
the benefit of the Names. 19. Again, with respect, this is not a fair
view. 20. Money paid by way of cash calls will only be
returned to Names (i) when the 1985 year is eventually closed; (ii) if, when it
is closed the eventual size of the actual loss is less than the amount of the
cash calls. Unless and until both those events occur there
will be no money at all returned. In the next two paragraphs of this affidavit Mr
Everiss stated that there was no prospect of the 1985 year being closed and
that it was unlikely that the eventual losses would be less than the present
declared losses or that there would be any return of moneys on closure of the
1985 year. "The reality is . . . that the declared losses are effectively
losses to the Names." (5) The size of the calls in the years between
1990 and 1994 demonstrated that the calls were made necessary by the absence of
any reinsurance. The arbitration award was made on Feb 2, 1990. As a result in
the course of 1990 calls were made totalling £28,863,000. In the following four
years, apart from 1992 when the calls amounted to £6,245,000, the calls
amounted to £2,000,000 per year or less. (6) Under the terms of the reinsurance policy
which was effected in 1981 paid claims would have been reimbursed by the
reinsurers on a regular annual basis. Furthermore, under art 8 of the policy it
was provided that where losses exceeded US$100,000 they could be recovered on
30 days' notice. But even if this acceleration provision was ignored the cash
calls which would have been needed would have amounted to no more than a sum
sufficient to fund the paid claims for a period of about nine months until the
payment from the reinsurers had been received. At most the calls would not have
exceeded £4,000,000. In all probability the cash calls would have been much
less. (7) If the reinsurance policy had been in place
the anticipated recoveries under the policy would have been shown in the
accounts and would have reduced the declared loss accordingly. This could be
demonstrated by the notes to the 1993 accounts which showed a figure of
£14,595,000 as the reinsurance recoveries anticipated under specific excess of
loss policies (vol II: 366). These arguments on behalf of the syndicate were
challenged by Counsel for the members' agents and PUM on two principal grounds:
(a) It was not accepted that Mr Justice Potter had misunderstood or misapplied
the evidence. (b) In any event, the conclusion reached by the Judge was plainly
right both as a matter of principle and on the facts. It was recognized by both Mr Cooke, QC and Mr
Flaux, QC that there was no direct evidence available to challenge the
assertion by Mr Everiss that had the run-off reinsurance been valid there would
have been no need to require cash calls from the Names. It was submitted,
however, that it was the recognized practice for calls to be made to meet the
declared losses. Our attention was drawn to the reference in the judgment of Mr
Justice Phillips in Deeny v Gooda Walker Ltd (sup) at p 182, col 2; p 1216D to
the Lloyd's Solvency and Reporting Byelaw which required Names to provide
eligible assets sufficient to meet their relevant liabilities. For this
purpose, it was said, declared losses formed part of the relevant liabilities
of Names. Furthermore, no reliance could be placed on the fact that a figure of
£14,595,000 was shown in the 1993 accounts as a deduction for anticipated
reinsurance recoveries from the provision for net claims. This figure related
to recoveries under a form of policy known as a "time and distance"
policy which was concerned with recoveries between specific dates and which did
not provide an accurate guide to the treatment of recoveries under a
reinsurance policy of the kind arranged in 1981. The principal argument on behalf of the members'
agents and PUM, however, was directed to showing that the prima facie rule,
which had in fact been adopted by Mr Justice Potter was correct. Counsel
underlined the fact that the money which was paid under calls remained the
property of the Names. The Names did not suffer any out of pocket loss until
the claims were paid. If the syndicate received damages or an interim payment
in respect of anything more than the paid claims it would be in a better
position than had the reinsurance been in force. As is apparent from the
reinsurance policy the reinsurers made payments only in respect of paid claims.
If the syndicate received an interim payment on the basis of the calls there
would be double recovery in respect of any interest earned on that sum. The
Names were already entitled to any interest paid on the sums provided by way of
calls. The Judge was correct in taking the view that if the syndicate recovered
on any basis other than a paid claims basis it would receive a
"windfall's". We were referred to substantial passages in the
judgment of Mr Justice Phillips in Deeny v Gooda Walker Ltd (sup). In that case
the claim for damages fell into two parts, claims that had been paid by the
Names and claims that the Names anticipated that they would have to pay in the
future. The Judge held that he had jurisdiction to make an award in respect of
the claims that had been paid and to reserve for future determination that part
of the case which related to anticipated claims. In reaching the conclusion
that the damages at that stage should be limited to the paid claims Mr Justice
Phillips took account of the difficulty of assessing future losses and of the
desirability of adopting a uniform approach which would be in line with the
previous decision of Mr Justice Gatehouse in Brown v KMR Services Ltd, [1995] 2
Lloyd's Rep 513; [1994] 4 All ER 485. He also took account of the burden on the
defendants or their E & O underwriters if damages had to be paid in respect
of future losses. The law The interim award made by Mr Justice Potter was
made by him in the exercise of his discretion. Mr Strauss, QC for the syndicate
submitted that this Court was entitled to interfere with the Judge's award, not
on the more usual ground that the Judge had erred in principle, but on the
basis that the Judge had misunderstood the evidence and had failed to apply the
formula which he had enunciated to the facts. In Hadmor Productions Ltd v Hamilton, (sup) Lord
Diplock at p 220C set out the circumstances in which an appellate Court can
interfere with the exercise by a Judge of his discretion. He said: The function of the appellate court is initially
one of review only. It may set aside the judge's exercise of his discretion on
the ground that it was based upon a misunderstanding of the law or of the
evidence before him or upon an inference that particular facts existed or did
not exist, which, although it was one that might legitimately have been drawn
upon the evidence before the judge, can be demonstrated to be wrong by further
evidence that had become available by the time of the appeal; or upon the ground
that there has been a change of circumstances after the judge made his order
that would have justified his acceding to an application to vary it. It follows therefore that if the Court is to
accede to Mr Strauss' argument that we should interfere it must be on the basis
that the Judge's exercise of his discretion was flawed. In that event the
appellate Court can look at the matter afresh. I should next refer briefly to the law relating
to interim payments. The power to make rules to enable a Court in
which any proceedings are pending to make an order for an interim payment was
first conferred by s 20 of the Administration of Justice Act, 1969. The Court
has no inherent power to order an interim payment: Moore v Assignment Courier
Ltd, [1977] 1 WLR 638. The statutory basis for the jurisdiction is now
contained in s 32 of the Supreme Court Act, 1981. By s 32(5) an interim payment
is defined as meaning . . . a payment on account of any damages, debt
or other sum (excluding any costs) which that party may be held liable to pay
to or for the benefit of another party to the proceedings if a final judgment
or order of the court in the proceedings is given or made in favour of that
other party. The order which was made in the present case was
made under RSC, O 29. r 11. So far as is material that rule provides: (1) If, on the hearing of an application under
Rule 10 in an action for damages, the court is satisfied . . . (b) that the
plaintiff has obtained judgment against the respondent for damages to be assessed
. . . the court may, if it thinks fit . . .,order the respondent to make an
interim payment of such amount as it thinks just, not exceeding a reasonable
proportion of the damages which in the opinion of the court is likely to be
recovered by the plaintiff. Conclusions It was faintly argued on behalf of the members'
agents that there was no evidence that the calls had been made or complied
with. I proposed to proceed, however, on the basis that calls equivalent to the
amount of the declared losses shown in the accounts to Dec 31, 1993 have been
paid. It is quite plain that the importance of the
calls has assumed a greater significance in this Court than before Mr Justice
Potter. The absence of any further evidence as to what calls would have been
made had the run-off reinsurance policy been in force is therefore less
surprising. I have come to the conclusion, however, on the present state of the
evidence that it would be wrong to make any finding of fact that the calls that
have been made would have been made in any event. Having been referred to the
reports of some of the other litigation, including the report of the decision
of Mr Justice Phillips in Deeny v Gooda Walker Ltd (sup), it seems to me quite
likely that the calls would have been made, if only to comply with the Solvency
and Reporting Byelaw of 1990. But this has not been established. I shall
therefore assume, without deciding, that, because the matter was not fully
explored before him, Mr Justice Potter may have been mistaken in thinking that
the case did not fall, in whole or in part, within his stated exception. If the
point had been developed before him he might have had to consider in detail
whether the same calls would have been made in any event or whether some lesser
sum would have been required by the managing agents. I am, however, quite satisfied that this Court
cannot accept Mr Strauss' suggestion that we should substitute an interim award
on the basis of the exception which Mr Justice Potter contemplated. I say this
for three reasons: (a) Despite the evidence of Mr Everiss I am not satisfied
that no calls would have been made, even on the syndicate's own case. (b) The
Judge himself did not state unequivocally that he would have applied the
exception had the facts shown that the calls would not have been made but for
the negligence of the defendants. He began this part of his judgment with the
phrase "It may be right to temper [the prima facie approach . . . ]".
(c) An interim payment based on calls would in my view be wrong in principle. I should expand this third reason. It is important to recognize, as Mr Everiss
explained in par 12 of his affidavit, that declared losses are divisible into
three categories: (1) Claims paid out by the syndicate. (2) Reserves held by
the syndicate in respect of outstanding claims — that is to say notified
claims. (3) Reserves held by the syndicate in respect of claims which have been
incurred but not reported (IBNR). It is also important to emphasize that an
interim payment in a case such as the present is in respect of the damages
which the plaintiff is thought likely to recover. The damages which the
syndicate will receive in this case are the proved losses. The fact that the
Names have had to pay money over in response to calls does not automatically
mean that the sums paid represent damages. The moneys paid remain the property
of the Names. I can imagine that in certain circumstances it
might be possible to prove with appropriate evidence that a particular Name had
suffered some recoverable loss by being obliged to pay money in response to a
call into the Premium Trust Fund. Thus, for example the loss of the use of the
money might be recoverable from a third party if it were shown that he knew of
the precise financial difficulties which such a transfer of funds might make.
But in my judgment it is quite wrong to treat sums paid in response to calls as
losses by the individual Names. I would therefore reject the suggestion that the
interim payment should be based on the calls. I can therefore turn to examine the constituent
elements of the calls and the declared loss. Apart from the paid claims they
consist of the notified claims and of the IBNRs. But I can see no satisfactory
basis whatever for making any interim payment in respect of the IBNRs, which
are speculative and at this stage are incapable of precise assessment. That
leaves the notified claims. I would, however, decline to make any award of
an interim payment in respect of the notified claims. It seems to me most
important that a uniform approach should be adopted in all these Lloyd's cases.
It is to be remembered, as Mr Justice Phillips pointed out in Deeny v Gooda
Walker Ltd (sup) at p 182, col 2; p 1216C that E & O funds are limited.
These are "long tail" cases and I do not consider it would be just or
desirable that the Names should receive at this stage capital sums by way of
damages to cover losses which they have not yet actually suffered. I would
respectfully agree with the conclusion of Mr Justice Phillips in Deeny v Gooda
Walker (No 3), [1996] LRLR 168 when he said: The Names sustain losses as and when the funds
of their syndicates are used by their managing agents to discharge their
liabilities. Accordingly, for the reasons which I have
endeavoured shortly to outline, I would dismiss this appeal. Lord Justice OTTON: I agree. Lord Justice WARD: I agree that this appeal
should be dismissed and state my reasons very shortly. 1. I am not persuaded that Mr Justice Potter
made the error of finding that this case was not within the exception he had
created in respect of calls. The learned Judge had stated his conclusion to be
that: . . . considered broadly, it is in principle
desirable that there should be a similar approach adopted in all those Lloyd's
cases . . . That approach is that prima facie it is appropriate to limit such
awards (of damages) to compensation of paid claims. He then identified a possible exception in
saying that — . . . in any individual case it may be right to
temper that approach. Next he stated the elements of the category,
including that the calls to those: . . . to which the Name would never have been
submitted but for the negligence of the defendant. Finally he stated his conclusion — "That
is not this cases" — and he explained why. Assuming, and I am prepared to
make the assumption, that the evidence was that calls would not have been made
if the reinsurance was in place, then it follows that the Judge made an error.
The logic of the submissions would compel us to accept that the error lay in the
conclusion. But, if the conclusion is emphatically stated, and in my judgment
it is, for I am in no doubt that the Judge was clear in his own mind that the
case did not fall within a category he was creating — not a category he was
applying, then I have to ask myself whether the apparent error is not more
likely to be found in the formulation of the conditions for the existence of
the exception rather than in their application and in the conclusion. In my
judgment this is where the error lay, if error it really was. The Judge explained his conclusion in these
terms: The respect in which I have found PUM negligent
has been limited to their effecting of run-off reinsurance. There is no finding
of negligence on the part of PUM in underwriting or in advising the Names so as
to expose them to claims which would not otherwise have been made. It is quite apparent to me that the feature
which the Judge found to have taken this case out of his exception is the
identification of the duty and the nature of the negligence. That suggests to
me that it is his definition of the exception which needs further
consideration. What the Judge was intending to say was that he could
contemplate an extension to the general rule where the Names satisfied calls
for declared losses on claims that would never have been made but for the
negligent underwriting or advice. I can see the argument for then saying that
they should get their money back because, but for the negligence, they would
never have had to pay it over anyway. As the Judge clearly said, that was not
the case he was dealing with. He went on to hold: If I were to make an order which put the
plaintiffs into a position whereby they recovered the whole or a substantial
proportion of their sums paid under calls but not yet applied in payment of
claims, they would indeed be recovering a windfall, or at least a substantial
advantage, to the extent that such sums exceed the claims paid from time to
time. This sentence makes it plain to me that he
accepted that calls were made to cover claims paid as well as outstanding
claims and IBNRs. Paid claims are recoverable but the others are not. That was
the established position then and it is even more firmly established now. The reasons given by Phillips J for coming to
his conclusion (in Deeny) are, in any event, equally applicable to outstanding
notified claims as to IBNRs and . . . are not only persuasive in themselves but
also dictate that I should not now award damages in respect of outstanding but
unpaid claims .. . [per Mr Justice Longmore in Arbuthnott & others v
Feltrim Underwriting Agencies Ltd, [1996] CLC 714.] If Mr Justice Potter had allowed the recovery of
that future element within the money called he would have been giving a
"windfall" in the sense that that money could not have been reclaimed
from the syndicate and could not be recovered from the defendants if the
general rule was followed. The advantage they would gain is getting their money
back before it was set aside to pay claims, that payment being the event which
was the trigger to recovery under the reinsurance scheme. That is why the Judge
came to his final decision: On that basis I see no reason in this case to
depart from the prima facie rule. Reading the judgment as a whole, it seems to me
that he was following the Deeny lead and was not prepared to make an exception
in respect of calls because called money related, at least in part, to unpaid
claims. To the extent that it did not, he allowed £3 m to cover the amount by
which paid claims would have increased to the end of 1995. If my view of the
judgment is correct, Mr Justice Potter made no error in the actual exercise of
his discretion. 2. Even if Mr Strauss had persuaded me that the
Judge had made an error entitling us to interfere, then I do not regard myself
bound to do what Mr Strauss says the Judge would have done if he had followed
his own approach. If he erred in a way which amounts to an error of principle,
then this Court is free to exercise its discretion de novo. The need for
consistency of approach would drive me to apply the prima facie rule Mr Justice
Potter correctly found. To the extent that calls include future losses, the
moneys are not recoverable. I would, therefore, uphold the result. 3. I am, in any event, very doubtful whether the
plaintiffs can establish any loss — or any sufficient loss for interim award
purposes — even if all the evidential assumptions are made in their favour. I
accept, for the sake of the argument, the evidence of Mr Everiss that: The negligence of PUM has unarguably cost the
Names the need to pay very large cash calls in the amount of the declared
losses. [My emphasis.] They have not lost that money. It remains
theirs. They have only lost the use of it. But it is invested for their benefit
and I doubt whether they have established or could establish any greater
monetary loss had they retained personal control of that investment. I
appreciate there is a period between allocation of the funds and reimbursement
under the reinsurance policy when the Names do not enjoy its income but if this
loss is calculable (or recoverable otherwise than as interest on damages), the
calculation has not been made. The reality of the complaint is that the Names
have been put to very real hardship in having to put up more money than they
would have had to have done but even if a claim for such general damages for
distress and inconvenience lies, it has not been made. For all these reasons, as well as the reasons
given by Lord Justice Neill I too would dismiss the appeal. DISPOSITION: Appeal dismissed with costs SOLICITORS: DJ Freeman & Co; Reynolds Porter Chamberlain |