2002 WL 1654876
Court of Appeal (Civil Division)
A3/2000/3863A; A3/2000/3863B; A3/2001/2013/A; A3/2002/0069; A3/2002/0069B; A3/2002/0069C; A3/2000/3863; A3/2001/0162; A3/2001/0957; A3/2001/1913; A3/2001/2013; A3/2001/0163
Before: Lord Justice Waller, Lord Justice Robert Walker and Lord Justice Clarke
On Appeal from the High Court of Justice Queens Bench Division Commercial
Court (Cresswell J)
Mr Simon Goldblatt QC and Mr Vincent Nelson QC (instructed by More Fisher Brown) for certain of the appellants.
Mr Gordon Nardell and Mr Giles Richardson (instructed by Grower Freeman) for others of the appellants.
Sir William Jaffray Baronet, Mrs Heather Adams, Mr Sydney Butler, Mr Richard Carter, Mr Cary Harrison and Mrs Ann Strong appeared in person.
Mr Charles Aldous QC, Mr Richard Jacobs QC and Mr David Foxton (instructed by Freshfields) for the respondent.
Mr Colin Edelman QC (instructed by Barlow, Lyde & Gilbert) appeared on behalf of Equitas (intervening).
Lord Justice Waller:
1. This is the judgment of the court (to which we have all made a substantial contribution) on an appeal from an order of Cresswell J made in the commercial court on 3 November 2000. The judge decided what has become known as the threshold fraud issue (described below) adversely to the claimant names. He refused permission to appeal but permission on limited grounds was granted by this court on 8 October 2001, with the rest of the application for permission to appeal being adjourned to the appeal hearing.
2. It is easy to understand the depth of feeling of those names who became members of Lloyds between 1977 and 1987. They joined Lloyds at a time when there were many syndicates infected with asbestos-related risks which were persistently underestimated. The procedure at Lloyds was that each years accounts were, at the end of a three-year period, closed into the next years accounts. The effect was that the new names inherited losses of massive proportions.
3. Policies written in the fifties and sixties were coming alive again. Claims were being made in the 1970s and for many years thereafter by persons who suffered from cancer and other diseases caused by inhalation of asbestos during the 1940s and 1950s. Those claims were succeeding against producers and producers were claiming on policies written long before the names ever became members of Lloyds. Lloyds syndicates were claiming on reinsurances taken out with other Lloyds syndicates long before the names became members. Courts in the United States were apparently holding producers liable on any basis that gave the claimant the best prospect of succeeding in his or her claim, and were allowing producers to succeed on claims under their policies on any basis that would lead to insurers or reinsurers having to pay.
4. The names say that by the time they joined Lloyds it was known by those in the market and at the centre of Lloyds that there were unquantifiable but potentially massive losses in the pipeline for which proper reserves had never been made, and about which the names were not warned. Indeed they say they were given the impression that all was under control and properly reserved for.
5. Many actions have been brought against members agents and managing agents, and indeed against auditors. Some have succeeded by compromise or at trial, although not always with full recovery. The thrust of the actions has been to allege that the names were exposed to these losses only because of bad underwriting or poor advice and (so far as both the underwriters and the auditors are concerned) through failures relating to the RITC (reinsurance to close). It is said either that the premiums paid on reinsurances to close were totally inadequate in various years or that the reality was that certain years should never have been closed, leaving the names on those years to suffer the losses but not new names.
6. Attempts have also been made to render the Corporation of Lloyds itself liable. Previous decisions have established first that there is no room for the imposition on Lloyds of a duty of care by statute or common law, and second that there is no room for the implication of terms in the contract between Lloyds and names who became external members of Lloyds. See Ashmore v Corporation of Lloyds  2 Lloyds Rep. 620; Ashmore v Corporation of Lloyds (No 2)  1 WLR 446; and Society of Lloyds v Clementson and v Mason  CLC 71;  CLC 117[; Times L. Rep. 11 Jan. 1994].
7. In this action what is in issue is whether Lloyds are liable for making fraudulent misrepresentations. It is a fact to which the judge referred that the major part of the Lloyds litigation has been settled by the R&R Settlement (see paragraphs 280ff below), and this action is brought by a limited number of names that have refused to accept that offer. We stress that no inference should be drawn against the names who have chosen to continue with this action from any refusal to accept that offer, and indeed we do not understand Lloyds (through Mr Charles Aldous QC) to be suggesting that it should.
8. What is alleged (putting it shortly) is that in brochures issued by Lloyds and in global accounts (globals) issued by Lloyds certain representations were made as to the quality of the Lloyds regulatory procedures and in particular the audit procedures described in the brochures as rigorous. It is alleged that the names relied on those representations in making their decisions to join Lloyds, and in their decisions to remain members and/or increase their underwriting capacity. It is alleged that those representations were untrue. Lloyds (it is said) did not have the quality of regulatory procedures, and in particular auditing procedures, which it was asserting it had. Furthermore it is said that those making the representations appreciated that fact.
9. The key to the names case is a letter, the Neville Russell letter, written on behalf of a number of panel auditors on 24 February 1982. It will be necessary to look at that letter in detail, but for the present it is enough to set out the penultimate paragraph which said:--
We consider that the impossibility of determining the liability in respect of asbestosis falls into this category [ie requires to be reported to the Committee] and we accordingly ask for your instructions in this respect.
10. The names say that that letter establishes that it was in 1982 impossible to close accounts fairly because of the totally unquantifiable impact of asbestosis. The names say that Lloyds instead of facing up to that fact (a) sent out to underwriting agents (and then it is asserted only to managing agents) another key document (the Murray Lawrence letter) together with a letter to auditors signed by Mr Randall (then a senior employee of Lloyds), which in effect encouraged syndicates and auditors to continue to close their accounts although, as they all knew, no RITC could be fairly estimated; and (b) continued with the representations that the audit procedures were rigorous, thus allowing names to remain in ignorance of the fact that (as the names would allege) the audit procedures were not such as to enable any proper check on the assessment of the RITC.
11. The names case has some potency when put as starkly as we have so far put it. But many names have gone further, and indeed in this case some names go further. They have suggested a dishonest conspiracy amongst those running Lloyds to keep quiet about the impact of asbestosis so as to enable the numbers at Lloyds to be increased so as to bring in more names to share the burden recruit to dilute. As part of that dishonest conspiracy it has been suggested first that the cynical response to the Neville Russell letter was to produce the Murray Lawrence letter either as a letter for the file or at least as a letter with limited circulation so that the problem remained as far as possible undiscovered. It was said that members of the Committee of Lloyds looked after their own interests by reinsuring the liabilities of their own syndicates but left others to suffer. It has been alleged that Lloyds dishonestly fixed the minimum percentages for reserves so as to enable the syndicates to continue to close their accounts, and continue to declare profits. It has been alleged through Mr Bradley that as early as 1974 individuals at the centre of Lloyds knew the extent to which the asbestosis losses would rise and set about protecting their own syndicates and deliberately inflicted the losses on new names. This dishonest conspiracy was said to have continued over eleven years, each group of committee men and members of Council in succession carrying on a scheme designed to keep Lloyds afloat by disguising the extent of the problem from the individual names. The depth of feeling of the names has been such that almost any conduct of those at the centre has been interpreted by them as having an improper motive. Many of the allegations which were chased down at the trial took time and energy, although none succeeded and many have been abandoned on this appeal.
12. On this appeal the grand conspiracy theory is not alleged. Furthermore although Sir William Jaffray in his submissions clung faintly to the point, it cannot be plausibly asserted that Lloyds dishonestly recommended low minimum percentages as reserves. The allegation of a limited circulation of the Murray Lawrence letter is persisted in, but in reality it is not a key point in the essential case which the names make.
13. We believe that the other points have detracted and do detract from what is essentially a straightforward case, which (as we should say at the outset) cannot be dismissed lightly. There is no question but that by brochures, and to a lesser extent globals issued by Lloyds throughout the relevant period, the impression was being given to any reader that Lloyds was an institution that could be relied on with controls and in particular auditing controls which were of a high order. There is furthermore no question but that history demonstrated that many syndicates were throughout the period under-reserved. The syndicates were in fact under-reserved in the 1950s and 60s when workmen were breathing in the asbestos dust. They were also under-reserved through the 1970s and 1980s, as the building up of claims was to demonstrate. Thus it was that new names were on any view taking on claims for which inadequate premiums had been paid to them by their predecessors on the RITCs. Issues arise as to whether the impressions given by the brochures amount to representations, and as to whether those representations were relied on by the names, but the central question seem to us in reality to be was it at any time appreciated by those at the centre of Lloyds that syndicates accounts were being closed when in fact no fair assessment of the RITC premium could be made? If that was appreciated, and yet a false impression was being created so far as names were concerned, it would be the basis for a strong claim of deceit.
14. To understand the names case and the Lloyds answer it is necessary now to go into much more detail. The history needs to be spelt out, and the important characters identified. It is also necessary to address in some detail certain factual issues which underlie consideration of the case that representations were made, that they were relied on, that they were untrue, and that they were known to be untrue.
The threshold fraud issue
15. The trial before the judge was limited to a single issue which was defined in an order made by Colman J on 30 June 1998 as follows:
The Threshold Fraud Point refers to the issue whether Lloyds made representations which it knew to be untrue and/or as to which it was reckless whether they were true or false and whether such representations were communicated to the Names and if so, when.
The order of 30 June 1998 further contained directions as to which names should be bound by a determination of the threshold fraud point. Thereafter all concerned proceeded on the basis that the trial would be limited to the threshold fraud point as defined, subject only to some refinement as follows.
16. Paragraph 4 of a further order made by Colman J on 16 March 1999 provided that the trial be limited to three selected individual claimants, namely Sir William Jaffray, who joined Lloyds in 1982, Mrs Dona Evans, who joined in 1988 and an individual claimant who joined Lloyds in 1979 to be nominated by Sir William, or perhaps by the names. Captain Hindle was subsequently chosen. There were thus three sample names. By paragraph 4 of a further order made by Cresswell J, on 1 July 1999, it was directed that the issues to be determined would include, in addition to those ordered by Colman J on 30 June 1998, the question whether each of the sample names relied upon any of the pleaded misrepresentations during the relevant period.
17. The relevant period was defined by paragraph 1 of that order as 1978 to 1988. The order also identified those individuals against whom allegations of fraud were made. As set out in chapter 7(1) of the judgment under the heading the Names Pleaded Case, they were the following:
(i) Certain members of the Council and/or Committee of Lloyds: Sir Peter Green, F Barber, Richard Ballantyne, D J Barham, J R K Beckett, I R Binney, P G Bird, B J Brennan, A H Chester, M H Cockell, D E Coleridge, P T Daniels, R D Hazell, C O Gibb, C D D Gilmour, A W Higgins, V V Hudson, R J Kiln, W N M Lawrence, S R Merrett, Sir Peter Miller, C K Murray, E E Nelson, A Parry, I R Posgate, Sir David Rowland, C H A Skey (including, where relevant, their membership of Audit and Membership Committees and their statements in the Global Reports and Accounts as LUNMA Chairmen respectively during the Relevant Period). The Names say that where any one or more of these persons acted during any year between 1978 and 1988 as Chairman or a Deputy Chairman of the Committee/Council of Lloyds they carried special responsibilities in the oversight and administration of the Lloyds market and had particular influence which was likely to be decisive in matters relevant to the problem of asbestos-related claims.
(ii) K E Randall.
(iii) H R Rokeby-Johnson, Robin Jackson, Bryan Kellett and Michael Williams (the other LUNMA Chairmen who contributed to the Global Reports and Accounts in the Relevant Period).
(iv) Certain members of the Asbestos Working Party during the Relevant Period (E E Nelson, H R Rokeby-Johnson, R A G Jackson, D Tayler, C H A Skey).
18. In these circumstances it was, as we understand it, common ground at the trial that the only cause of action being considered by the judge was the tort of deceit based upon various alleged fraudulent misrepresentations which we identify further below. Both Lloyds and all relevant names were to be bound by the decision made on the issues determined, which included whether the names had established the ingredients of the tort of deceit on the facts, subject to questions of reliance and loss. Issues of reliance were to be determined only in the case of each of the three sample names. Issues of loss were to be postponed for later decision if necessary.
19. No other issues fell for determination at the trial. It follows that, in the absence of permission being obtained from this court to raise new issues, no other issues fall for decision in this appeal. On 8 October 2001 this court, then consisting of Lord Phillips MR, Waller LJ and Clarke LJ, granted permission to appeal against the decision of the judge on the threshold fraud point, and stood over to the hearing of the full appeal the question whether permission to appeal should be granted on the ground of unfair trial. That is a distinct point which we deal with in Part VII below.
20. The names subsequently sought to include in the appeal for which they had permission a number of points which were not advanced before the judge. However, on 21 January 2002, having heard and read detailed submissions on all sides, we directed that the appeal be limited to an appeal on the threshold fraud point. The reasons for that decision are set out in the judgment of Waller LJ given on that day. As explained in that judgment, it will ultimately be a matter for the judge to decide the extent to which (if at all) further points can be raised by the names in the light of this judgment.
21. It is of great importance to have in mind throughout that we are concerned in this appeal only with the names case in deceit. It follows that in order to succeed the names must establish the ingredients of the tort of deceit. We are not considering other possible causes of action, including allegations of negligent misrepresentation. That is not only because of the way the threshold fraud issue was formulated as a preliminary issue in these proceedings but also because of the way in which the courts have decided other actions against Lloyds.
22. For example, the question whether Lloyds owed names a duty of care was raised in Ashmore v Corporation of Lloyds  1 WLR 446. In the course of his consideration whether Gatehouse J should have ordered a preliminary issue which included the question whether Lloyds owed names a duty of care, Lord Templeman said at pp 451H-452A:
If Lloyds owe a duty by statute or contract, then the preliminary issue will be decided in favour of the plaintiffs. But if no duty was imposed by statute or contract it does not appear to me that a duty could have arisen in tort. If statute or contract between Lloyds and a name do not impose an obligation on Lloyds to convey information to a name concerning his managing agent, an obligation to convey information could not arise just because and whenever information was obtained by Lloyds.
At the trial of the preliminary issues before Gatehouse J,  2 Lloyds Rep 620, the question whether Lloyds owed a duty of care in tort was not pursued: see p 623.
23. Gatehouse J also considered the question whether certain terms should be implied into the contract or whether duties in similar terms were imposed by statute. The specific duties contended for by the plaintiffs were
(a) a duty to take reasonable steps to alert the plaintiff names about matters which might seriously affect their underwriting interests and (b) a duty to impose a premium income monitoring system even if it was only an ad hoc system of monthly monitoring of the syndicates managed by an agent in trouble.
24. He concluded against the plaintiffs, and made this observation in relation to good faith at p 631:
This led to the limited proposition that it is the duty of a regulator to exercise its powers and discretions in good faith and that where the regulator secures for itself contractual powers and discretions it is a necessary legal incident of such contract that (unless expressly excluded) the regulator will exercise its powers and discretions in good faith. A well-known example is Weinberger v Inglis ,  AC 606, in which this proposition was assumed by the House of Lords. The duty extends no wider, said Mr Simon. Whether an attempt expressly to exclude any duty of good faith could survive the Unfair Contract Terms Act 1977 was not canvassed and, in any case, does not arise; Lloyds accepted (obviously correctly) an unqualified duty to act in good faith. But I know very little about the self-regulating bodies which, it is claimed, constituted a type or category of contractual relationship and I do not feel able to say that there is such a type, of which Lloyds contract with a Name is an example. I remain of opinion that the Lister v Romford principle has no application.
25. In Society of Lloyds v Clementson and v Mason  CLC 71 ;  CLC 117 the terms contended for by Mr Clementson and Mr Mason respectively were in the following form:
1. that Lloyds would regulate and direct the business of insurance at Lloyds with care and diligence and/or lawfully;
2. that Lloyds would manage and superintend the affairs of the Society with care and diligence;
3. that Lloyds would advance and protect the interests of members of Lloyds in connection with the business carried on by them with care and diligence and/or lawfully; and
4. that Lloyds would collect, publish and diffuse intelligence and information to members of Lloyds including the defendant in connection with the business carried on by them, with care and diligence and/or lawfully.
1. that Lloyds would comply with the provisions of the Lloyds Acts 1871-1982, any subordinate legislation made thereunder and any direction given or provision or requirements made or imposed by the Council or any person(s) or body acting on its behalf pursuant to such legislative authority;
2. that Lloyds would regulate the business of insurance at Lloyds lawfully and/or in good faith and/or with reasonable care and diligence; and
3. that Lloyds would advance and protect the interests of members of Lloyds in connection with the business carried on by them as members of Lloyds lawfully and/or in good faith; and with reasonable care and diligence.
26. The decision of Saville J that no such terms fell to be implied was upheld by the Court of Appeal. Observations in relation to the obligation of Lloyds to act in good faith were made by Saville J, Steyn LJ and Hoffmann LJ. We do not understand there to be a difference between them, but Hoffmann LJ spelled out the position in this regard at pp 133-134:
1. Implied terms
Mr Beveridge said that agreements by which members of an organisation agreed to be bound by its rules and regulated by a committee or similar body were a type of contract into which certain obligations on the part of the organisation (if corporate) or its committee were customarily implied. He said that the powers of regulation were regarded as fiduciary and had to be exercised in good faith and for the purpose intended by the rules. From this he said it was a short step to the implication of a duty to members to exercise regulatory powers with reasonable care.
In my view the fallacy of this argument is to confuse the extent of the powers conferred on the organisation or committee with its contractual obligations to its members. The fiduciary nature of the powers means that a purported exercise of those powers in bad faith or for an improper purpose will be invalid. It does not follow that the mere invalid exercise of the power will be a breach of contract for which the organisation is liable in damages, although it may mean that the organisation will be unable to justify an act (such as depriving an expelled member of the benefits of membership) which would be wrongful in the absence of a valid exercise of the power. Once it is appreciated that an improper exercise of the power is not in itself a breach of contract but simply a nullity, the basis for implying a contractual obligation not to act otherwise than in good faith and for a proper purpose disappears. A fortiori, there can be no foundation on which to build an implied term to exercise the power with reasonable care.
27. We shall return below (paragraphs 303ff) to the reasons given by Saville J and this court for rejecting the implied terms proposed in Clementson because in chapter 22, where the judge gave his reasons for rejecting the names case that Lloyds made a series of fraudulent representations to names and prospective names, he relied upon some of the reasoning in Clementson.
28. It is no doubt because of the decisions and reasoning in some of these cases that we are not concerned with a case which alleges that Lloyds are liable to the names because of a breach of contract. Nor are we concerned with the breach of an alleged duty of care, whether committed in bad faith or otherwise. In particular, we are not concerned with a case based upon the allegation that Lloyds fraudulently failed to disclose material facts to prospective names. Any such case is not within the threshold fraud issue.
29. This is important because a significant amount of the argument of the litigants in person, and particularly Sir William Jaffray, sought to advance just such a case. For example it was said that Lloyds motto is Fidentia, that Lloyds owed the names a duty of the utmost good faith and that Lloyds was in breach of that duty in that it fraudulently failed to give information to prospective names as to the risks associated with asbestos related claims because it knew that, if it did, prospective names would be put off. Submissions along these lines were advanced with great vigour and conviction, but they cannot assist the names in this appeal because in order to establish the tort of deceit the names must establish relevant fraudulent misrepresentations. Mere omissions are not sufficient.
30. It follows that, in so far as it is said that the appeal should be allowed on the ground that the judge reached the wrong decision, we focus in this judgment solely upon the threshold fraud point and thus on the tort of deceit.
The judgment below
31. The trial occupied 64 days between 6 March and 14 July 2000, after the judge (who was already very familiar with the case through his case-management responsibilities) had spent some considerable time pre-reading. There were ten days of oral opening submissions and over 40 days of oral evidence. There was a huge volume of documentary evidence. The parties put in lengthy written closing submissions and produced numerous agreed (or partly agreed) statements of fact on particular topics. In opening this appeal Mr Simon Goldblatt QC referred to the judge having had to assess about two million spoken words, and about twenty million written words.
32. The conduct of a trial of such length, with so great a volume of written material, would in any circumstances have been a heavy burden for any judge. Cresswell Js burden was increased by the number of litigants in person who were appearing before him (in addition to the three teams of counsel) and by the strength of the names feelings which pressed on the crowded court-room throughout the trial. The judge had to deal with frequent interruptions for ' housekeeping' points and peripheral issues of every sort. Often he had to begin the day by complaining of letters which had been sent to him either by litigants in person or by non-litigating names, and directing (unfortunately to little effect) that names should not attempt to communicate with him otherwise than in open court. On occasions (especially during the oral evidence of Sir Peter Miller) the judge had to give a stern warning that any attempt to intimidate or insult a witness amounted to a serious contempt of court.
33. It will be necessary to return to the course of the trial in more detail in connection with the application for permission to appeal on the ground that the names have not received a fair trial. For the present it is sufficient to say that the complete transcript of the trial conveys a strong first impression that Cresswell J performed a very difficult task with enormous patience and good humour, and sensibly gave the litigants in person a great deal of latitude (while showing firmness on those occasions when it was called for).
34. When he reserved judgment on 14 July 2000 the judge said that he hoped to deliver judgment in the last week of October or the first week of November. He achieved that aim. On 3 November 2000 he handed down a judgment divided into 25 chapters and four appendices, extending to 635 pages in all.
35. In preparing his judgment the judge had the benefit of five lengthy statements of facts which had been wholly or largely agreed between the parties. These dealt with (i) the administrative structure and governance of Lloyds and its insurance market; (ii) the regulatory background as regards accounts and auditing; (iii) the rules and procedures governing admission to underwriting membership; (iv) the chronology of information relevant to asbestos-related claims between 1978-88 (the relevant period); and (v) cases in the United States concerned with asbestos-related claims during the relevant period. There was also prepared a chronology of matters relevant to Lloyds treatment of asbestos-related liability during the relevant period (this was not agreed). The first three of these statements were supplemented by numerous appendices and supporting documents.
36. The judge drew on this material in the narrative parts of his judgment, the scheme of which is summarised in chapter 4. The chapters most directly derived from the statements of facts are chapters 10 (administrative structure and governance), 11 (regulatory background for the auditing and accounting regime), 12 (rules and procedures governing membership), 13 (RITC general principles and the role of the managing agents/underwriter), 14 (RITC the role of the auditors) and 16 (overview of the nature and development of asbestos-related claims). There is a useful glossary and list of abbreviations and acronyms in chapter 3.
37. This background material is likely to be familiar to most of those who will read this judgment, and so it is unnecessary to reproduce it here at length. As factual material it is largely uncontroversial (although part of the appellants case is that the judge erred, in deciding that there had been no representations made by Lloyds, by placing too much weight on the constitutional and regulatory framework and too little on what was actually said in the brochures and global reports on which the appellants relied).
38. For the purposes of this appeal the most important chapters of the judgment are chapter 15 (the witnesses) and chapter 22 (analysis and conclusions on the issue of threshold fraud). It is in those chapters that the reader looks to find the reasons for the judges conclusions, and it is mainly on what is said (or omitted) in those chapters that the grounds of appeal have focused.
39. In chapter 15 the judge identified all the witnesses who had given evidence orally or by witness statement, and gave an indication (sometimes quite detailed, but in most cases brief) of the topics covered in their evidence. The judge was to some degree critical of several of the witnesses for the names (including Mr Stockwell, Mrs Mackenzie-Smith, Mr Steel and Mr Bradley, of whom the judge was most critical). The judge commented favourably on the evidence of Mr Fredjohn, Sir Eddie Kulukundis and Mr Sturge. In relation to each of the three sample names the judge said that he was not persuaded that he or she relied on any of the alleged fraudulent misrepresentations. He did not enlarge on his reasons beyond saying that Sir William Jaffray probably relied on conversations with his two successive members agents (and possibly also on conversations with his cousin) and that Mrs Evans probably relied on conversations with her members agent.
40. The judge did not make any adverse comments on any of the witnesses for Lloyds, beyond using the word surprisingly to describe Sir Peter Millers evidence that he was not aware that twenty years or more may elapse between exposure to asbestos and the manifestation of serious asbestos-related illness. The judge made favourable comments about the evidence of a number of the Lloyds witnesses, including Sir Peter (articulate), Sir David Rowland (highly articulate), Mr Lord (impressive), Mr Murray (a highly professional and skilful underwriter), Mr Keeling (a particularly astute underwriter) and Mr Rayment (a highly conscientious claims man I was greatly assisted by his evidence). In relation to Mr Lawrence the judge made a clear finding that he accepted as accurate his evidence about the distribution of the Murray Lawrence letter.
41. At the end of chapter 15 the judge added this observation:
Lloyds did not call a number of witnesses whose witness statements were exchanged. In reaching the conclusions set out in this judgment I have had regard to the fact that Lloyds did not call these witnesses and I have considered whether any adverse inferences should be drawn.
The most important uncalled witness in this category was probably Mr Randall. It appears that the judge must have decided not to draw any adverse inference from the failure to call the witnesses, since the judge did not again refer to this point in his judgment.
42. In chapter 22 the judge began by referring to his summaries of the competing cases and the relevant legal principles (chapters 7, 8 and 9). He reminded himself of the names pleaded case as to the alleged misrepresentations. It was pleaded that the brochures represented that a name joining Lloyds:
(i) Could have confidence in Lloyds as an institution to safeguard his/her interests;
(ii) Could trust those who were chosen by Lloyds to regulate the Lloyds market and manage its affairs;
(iii) Because of the way in which Lloyds regulated and monitored underwriting accounts year by year:
(a) could rely on syndicate accounts;
(b) could in underwriting and/or deciding whether to remain a member of Lloyds have confidence in the audited syndicate results, for results of past years;
a. could be sure that Lloyds as part of its regulatory duties would ensure that when prospective liabilities were reinsured by one syndicate year into another, such liabilities were being fairly assessed and quantified as between the two syndicate years.
43. It was also pleaded that the globals represented to a name who read them:
(a) that the Lloyds market was in a sound financial condition;
(b) that Names could safely join Lloyds and/or continue their membership of Lloyds and/or increase their Premium Income Limit with confidence that known and projected claims had been prudently and adequately reserved to ultimate.
44. The judge then stated his conclusion that neither the brochures nor the globals made the alleged representations. In relation to the brochures the first five of his stated reasons (elaborated in three further subparagraphs) were as follows:
(i) The whole of each Brochure must be considered.
(ii) The starting point is the actual words used in the Brochures.
(iii) A useful question is as follows: What would a reasonable applicant for membership of Lloyds/Name understand when reading the Brochure as a whole? (iv) The alleged representations are not contained in any of the express words used in the Brochures.
(v) The alleged representations (a) are not necessary to give business efficacy; (b) do not represent the obvious, but unexpressed, intention of the parties; and (c) are inconsistent with the express words used in the Brochures.
In relation to the globals his stated reasons were very similar. In relation to both he summarised his reasoning by observing that the alleged representations were unclear in their terminology, did not accord with the administrative structure and governance of the Lloyds market and the regulatory background, and were inconsistent with what the documents in question had actually said.
45. The judge then went on, in case he was wrong about the absence of any representations, to find that the other ingredients of the tort of deceit had not been made out: in particular, that fraud (in the relevant sense) had not been made out. He observed that the names case was limited to the alleged known impossibility of proper reserving for asbestos-related claims, as part of a wider picture which included pollution and other long-tail claims, several catastrophic losses between 1987 and 1990, and the LMX spiral. He also observed (and this is, we think, a dominant and recurring theme of the judgment) that the names case must be judged against the way the Lloyds market and the Lloyds regulatory system operated.
46. He developed this theme by reference to a number of topics as follows: (a) market associations; (b) the role of the DTI; (c) minimum percentage reserves; (d) developments in the Lloyds regulatory environment for auditing and accounting; (e) managing agents; (f) panel or registered auditors; (g) meetings of panel auditors; (h) members agents; and (i) the Rota committee. In this and the following sections of the chapter the judge made four important findings of fact (or conclusions representing his assessment of the facts):
(i) The Committee/Council of Lloyds was generally entitled to assume that auditors were performing their duties competently.
(ii) At the annual meetings when Mr Lawrence, Mr Nelson, Mr Rokeby- Johnson and Mr Jackson addressed the panel auditors about asbestos- related claims, they did so (in the case of Mr Nelson probably did so) honestly and responsibly.
(iii) the Murray Lawrence letter and the Randall letter were an honest response to the issues raised by the Neville Russell letter.
(iv) The view that RITC should be left to managing agents and auditors, and should not be second-guessed by the Council, was representative of the then current thinking of the Committee/Council, and in my judgment reflected the distinction between the role of the Committee/Council and the duties and responsibilities of managing agents/underwriters and auditors of individual syndicates.
47. The judge then considered three particular contentions which had been relied on by the names as part of their case: the allegation that Lloyds deliberately chose not to make an independent investigation and assessment of the overall exposure of the Lloyds market to asbestos-related claims (the so- called 'back of an envelope' issue); the allegation that Lloyds deliberately followed a policy of expanding its membership in order to place part of the burden of under-reserving on new names who were not told of the risks (the so- called 'recruit to dilute' policy); and the allegation that the 1979 year of account should have been left open by syndicates affected by asbestos-related claims. The judge rejected all of these contentions. On the 'back of an envelope' point he relied on the evidence of Mr Rayment and Mr Lord as to the task being both enormously complicated (as was shown by the Equitas reserving project) and inappropriate to the Lloyds system. On the 'recruit to dilute' policy he said that it was a matter for agents, not for Lloyds. On the closure of the 1979 year of account he referred to his own judgment in the Merrett case and also to the Kerr report on syndicate 418/417s closed year.
48. The judge concluded that if he were wrong in his view that no representation had been made, the claim would still fail, especially on the issue of fraud. The judge did not in that part of his judgment add to his brief findings (in chapter 15) as to the failure to prove reliance on the part of the three sample names. Nor did he add to what he had said in chapter 9 (relevant legal principles) as to the representors intention to convey a false meaning, or as to the issue of attribution of intention to a corporation (he cited, without comment, a passage from Meridian Global Funds Management Asia Ltd v Securities Commission  2 AC 500, 506). He did not in terms deal with the reference in the early brochures to a 'rigorous audit', a fact which no doubt reflects the way in which the names case has developed in this court.
II Legal Issues
The tort of deceit
49. The names rely upon a number of representations which they say are contained in various Lloyds brochures and in annual statements known as globals. In the case of each alleged representation, in order to recover damages for deceit a name must establish the following:
i. that Lloyds made the representation;
ii. that the representation was material;
iii. that the representation was untrue;
iv. that when it made the representation, Lloyds knew or believed that it was untrue or made it recklessly, careless whether it be true or false;
v. that when it made the representation, Lloyds intended that the representation should be relied upon by the name;
vi. that the name in fact relied upon the representation; and
vii. that the name has suffered loss as a result.
It is convenient to consider each of those ingredients in turn in the context of a case of this kind.
i) The Representation
50. The names must establish that Lloyds made the representation alleged, which involves two questions, namely whether a relevant representation was made and, if so, whether Lloyds made it. As to the second question, since the alleged representations are all contained either in the brochures or in the globals, and since both the brochures and the globals were prepared and published by Lloyds, we do not think that there can be any doubt that a representation contained in either publication was made by Lloyds.
51. As to the first question, namely whether a relevant representation was made, the representation must be a representation as to a past or existing fact and not as to the future: see eg Yorkshire Insurance Co v Craine  2 AC 542 per Lord Atkinson, giving the judgment of the Judicial Committee of the Privy Council, at p 553.
52. Whether any of the alleged representations was made involves a consideration of each brochure or set of globals relied upon in order to see what the words used in the relevant document mean. The particular words used must of course be read in their context, which involves considering them in the context of the particular brochure or set of globals as a whole. Further, just as the words used must not be read in isolation, so the document must itself be considered against the relevant surrounding circumstances. In particular, it is necessary to have regard to the purpose for which the document came into existence, why the statements contained in it were made and by whom they were intended to be read.
53. It follows that the words used may have a meaning other than their literal meaning. They may also have a meaning which is not expressly stated, but which is implicit. However, as we see it, their meaning, whether explicit or implicit, should be arrived at by a process of construction and, subject to one point, not by a process of implication. In particular, whether the relevant document contains a particular representation does not depend upon a process of implication of the kind which is appropriate in answering the question whether a particular term is to be implied into a contract.
54. Mr Goldblatt submitted that the test is simply whether an ordinary person in the position of a prospective or existing name would have understood the document in question, read as a whole, to carry or contain the representation contended for. We agree. There has been some debate as to what attributes should be given to the person reading the brochure as a prospective name. In this regard Mr Goldblatt submitted that the ordinary person of reasonable intelligence in the position of a prospective (or indeed existing) name should not be treated as someone with previous knowledge of the insurance market generally or Lloyds in particular. Again we agree.
55. The point seems to us to be well demonstrated by the following statement made by Langley J in Sumitomo Bank Ltd v Banque Bruxelles Lambert SA  1 Lloyds Rep 487 at 515:
It is well established in law that the question whether any kind and if so what particular representation was made depends upon an objective assessment of what was said or done and its likely effect on the alleged representee in the context in which the particular parties were concerned. In other words, what would the documents and exchanges relied upon have conveyed to a prudent banker in the position of the plaintiff banks?
In the instant case we are not concerned with the prudent banker, who is already versed in the world of banking, but with prospective names who may have no previous knowledge of the world of insurance.
56. There is one respect in which the courts have sometimes spoken of implied representations. This can be seen, for example, in the judgment of Bowen LJ in Smith v Land and House Property Corporation (1884) 28 Ch D 7, where he said at p 15:
if the facts are not equally known to both sides, then a statement of opinion by one who knows the facts best involves very often a statement of a material fact, for he impliedly states that he knows facts which justifies his opinion.
That principle has recently been considered by Evans-Lombe J in Barings Plc v Coopers & Lybrand  EWHC 461 (Ch) at paragraphs 46 to 50.
57. As Evans-Lombe J observed at paragraph 49, in Brown v Raphael  Ch 636 Lord Evershed MR said at p 642:
it suffices for the application of the principle if it appears that, between the two parties, one is better equipped with information or the means of information than the other.
In that case it was held that the test was met where the vendors solicitors expressed an opinion in sale particulars as to an important aspect of the property about which the purchaser could know nothing. Lord Evershed continued at p 643:
What would be the effect of this language upon the mind of a possible purchaser? Clearly, I should have thought, it would flow from the language used and would be intended to be understood by a reader of the particulars that persons who knew the significance of this matter and who were experienced and competent to look into it were expressing a belief founded upon substantial and reasonable grounds.
58. Those cases were considered by this court in the context of section 20 of the Marine Insurance Act 1906 (applied in a non-marine context) in Economides v Commercial Assurance Co Plc  QB 587, where (at p 599B) Simon Brown LJ stressed that in the passage from the judgment of Bowen LJ in the Smith case quoted above Bowen LJ had said that in circumstances in which the representor knows the facts a statement of opinion will very often amount to a statement of fact for he impliedly states that he knows facts which justify his opinion. As to Brown v Raphael, Simon Brown LJ said (at p 598H to 599A) that the representation there, purporting as it did to come from the vendors solicitors, would inevitably carry with it the implication that there were reasonable grounds to support the belief.
59. These cases seem to us to show that all depends upon the circumstances. In each case it is necessary to ask the question identified above, namely what would the reasonable person in the position of the representee understand by the words used in the document. In our opinion there is no rule of law that any particular statement carries with it any particular implication. All depends upon the particular statement in its particular context. So, here, as already stated, the question is whether the particular brochure or set of globals relied upon would be reasonably understood by the ordinary applicant for membership of Lloyds to have the meaning alleged. That meaning might either be explicit in the words used or implicit (and in that sense implied) from the words used. We shall return in Part IV below to the distinction between a representation and an implied term in a contract.
ii) The materiality of the representation
60. Although it is doubted (with some force) in paragraph 6-040 of volume 1 of the 28th edition of Chitty on Contract and in paragraph 15-36 of the 18th edition of Clerk & Lindsell on Torts, the traditional view is that in order to succeed in the tort of deceit the claimant must prove that the representation was material. Thus, in Downs v Chappell  1 WLR 426 Hobhouse LJ, with whom Roch and Butler Sloss LJJ agreed, said at p.433:
For a plaintiff to succeed in the tort of deceit it is necessary to prove that (1) the representation was fraudulent, (2) it was material and (3) it induced the plaintiff to act (to his detriment). A representation is material when its tendency, or its natural and probable result, is to induce the representee to act on the faith of it in the kind of way in which he is proved to have in fact acted.
iii) The Truth of the Representation
61. The representation must be untrue or, in other words, false.
iv) Lloyds knowledge, belief or recklessness
62. If a representation is shown to be untrue or false, it must further be shown that Lloyds knew or believed it to be false or that Lloyds made it careless whether it be true or false. As the judge put it, in order to prevent a false statement from being fraudulent, there must be an honest belief in its truth. The position was summarised thus by Lord Herschell in his classic statement in Derry v Peek (1889) 14 App Cas 337 at p 374:
I think the authorities establish the following propositions: First, in order to sustain an action in deceit, there must be proof of fraud, and nothing short of that will suffice. Secondly, fraud is proved when it is shewn that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false. Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement from being fraudulent, there must, I think, always be an honest belief in its truth. And this probably covers the whole ground, for one who knowingly alleges that which is false, has obviously no such honest belief. Thirdly, if fraud is proved, the motive of the person guilty of it is immaterial. It matters not that there was no intention to cheat or injure the person to whom the statement was made.
63. There is a further principle which may be of relevance here. In the 18th edition of Clerk & Lindsell the editors say:
15-07 Continuing Representations The tort is complete only when the representation is acted upon. Where there is an interval between the time when the representation is made and the time when it is acted upon, and the representation relates to an existing state of things, the representation is deemed to be repeated throughout the interval. . If, during the interval of time between making the representation and the plaintiff acting upon it, the defendant perceives the statement to be false or circumstances change to render it false, liability may be incurred.
15-22 Defendants later knowledge where the defendant does not acquire knowledge of the untruth of his statement until after it has been made, but comes aware of it before the plaintiff has acted upon it, it follows from general principle that he is bound to communicate the truth and will be answerable in damages if he does not.
15-23 Statement becoming untrue ex post facto Where the statement complained of was in fact true at the time when made, but before being acted upon by the party to whom it was made had been rendered untrue by reason of a fact coming into existence to the knowledge of the party making it, the balance of authority is in favour of regarding it as deceit.
Those paragraphs seem to us accurately to summarise the relevant principles and are potentially relevant on the facts here because one view of the facts is that some of the representations in the brochures may have been true when they were made but may have become untrue subsequently. We shall return to these principles below, in so far as necessary in the light of our conclusions on the facts.
64. As to the standard of proof, in Goose v Wilson Sandford & Co (No 2)  Lloyds Rep PN 189, Morritt LJ, giving the judgment of the court, said in paragraph 39 at p 198:
In considering whether the elements in the tort of deceit had been established the judge correctly directed himself as to the relevant standard of proof by reference to the statement of Lord Nicholls of Birkenhead in Re H (Minors) (Sexual Abuse: Standard of Proof)  AC 563, 586 that:
the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability. Fraud is usually less likely than negligence.
65. Where an individual has the relevant knowledge, belief or recklessness, before that knowledge, belief or recklessness could be imputed to Lloyds it would be necessary to identify the legal basis upon which it could be so imputed to Lloyds as a corporate body. The names allege fraud against a total of 33 individuals identified above. We shall return, so far as necessary, below to the question whose knowledge, belief or recklessness would be the knowledge, belief or recklessness of Lloyds, and to the associated question whether Lloyds is liable in deceit in respect of the deceit of any one or more individuals. It is convenient, before doing so, to consider the facts in detail and to set out the conclusions which we have reached as to the facts relevant to these questions.
v) Lloyds intention
66. This is an important ingredient of the tort because it is one of the features of the tort which has led to it being considered as involving fraud on the part of the tortfeasor. As the judge observed in chapter 9(2) under the heading the Tort of Deceit, the tortfeasor does not have to be dishonest in the sense in which that word is used in the criminal law. On the other hand it is no defence to a charge of knowingly making a false statement that the person who made it believed that he was justified in doing so or that no harm would come of it or that it would be for the best: see eg Standard Chartered Bank v Pakistan National Shipping Corporation (No 2)  1 Lloyds Rep 218 per Evans LJ at 221.
67. The tortfeasor must intend the representation to be acted upon: see eg Clerk & Lindsell at paragraph 15-27 but compare Chitty at paragraph 6-42. Moreover, in Goose v Wilson Sandford & Co (No 2) Morritt LJ said in paragraph 41 at p 199:
To establish liability in deceit it is incumbent on the representee to show that the representor intended his statement to be understood by the representee in the sense in which it is false.
The court relied upon Akerhielm v De Mare  AC 789, per Lord Jenkins, giving the advice of the Judicial Committee of the Privy Council , at 805 and upon Gross v Lewis Hillman Ltd  Ch 189. Thus, if the representor honestly believes the statement to be true in the sense in which he intended it to be understood it he will not be liable in deceit.
68. Each of the three particular names must establish that he or she relied upon the representation concerned in the sense that he or she was influenced to become or remain a member of Lloyds in reliance upon it. It is not necessary for us to discuss here any distinction that there may be between inducement and reliance: cf Downs v Chappell per Hobhouse at p.433.
69. In order to recover damages each name would in the future have to establish that he or she suffered loss as a result. We are not, however, concerned with the question of loss in this appeal.
Corporate knowledge, intention and bad faith
70. The allegation of deceit is made against the Corporation of Lloyds itself, that is as a body corporate incorporated under the Lloyds Act 1982 (the 1982 Act) and earlier legislation. The names case does not depend on vicarious liability. That brings into play the 'rules of attribution' as explained by Lord Hoffmann giving the opinion of the Privy Council in Meridian Global Funds Management Asia Ltd v Securities Commission  2 AC 500, 506:
Any proposition about a [body corporate] necessarily involves a reference to a set of rules. A [body corporate] exists because there is a rule (usually in a statute) which says that a persona ficta shall be deemed to exist and to have certain of the powers, rights and duties of a natural person. But there would be little sense in deeming such a persona ficta to exist unless there were also rules to tell one what acts were to count as acts of the [body corporate]. It is therefore a necessary part of corporate personality that there should be rules by which acts are attributed to the [body corporate]. These may be called the rules of attribution.
71. As appears from our analysis of the tort of deceit, the state of mind of a person alleged to have made a fraudulent misrepresentation may arise on more than one point (in addition to the bare fact of whether the defendant was the person who made the representation, on which no issue arises here):
i. Did the defendant intend the representation to be understood in a particular way?
ii. Did the defendant intend the representation to be acted on? iii. Did the defendant know that it was false, or was the defendant reckless as to its truth or falsity?
72. As indicated in paragraph 65 above, we think it better to reach our conclusions on a number of factual issues before going far into the rules of attribution as they would apply to the allegations made against Lloyds in this case. But it may be useful to give a brief summary of the opposing submissions. In this context it must be borne in mind that (as explained below in more detail) the governing body of Lloyds was, until 31 December 1982, the Committee. Thereafter it was the Council, but much of the important decision- making was delegated to the Committee, which consisted of the members of the Council other than the external members (that is Council members who were not working names).
73. Both sides have accepted that the general principles which apply are those stated by the Privy Council in Meridian Global, as anticipated, to some extent, by this court in El Ajou v Dollar Land Holdings plc  2 AER 685. But the names have in their submissions put forward alternative tests with the common characteristic (as stated in their skeleton argument, paragraph 153) that
they identify those people with de facto control over the insertion, or not, [in the brochures and the globals] of any health warning or qualification: the people with knowledge of the systemic defects in asbestos reserving, who chose not to disclose that to the members of the Committee and Council who were reliant on them.
The names have criticised the judge for equating the positions of the Council and the (post-1982) Committee because the external members of the Council were in a state of ignorance, since asbestos-related problems were never discussed in Council.
74. Lloyds on the other hand, have submitted that the names would have to establish the relevant state of mind in a majority of the members of the Committee or Council present when the decision was taken to approve any particular brochure or set of globals. For this they rely on the decision of the House of Lords in Jones v Swansea City Council  3 AER 737 and on The Ardent  2 Lloyds Rep 547. In Jones the claimant brought an action for misfeasance in public office (a tort involving dishonesty) against the Swansea City Council, alleging bad faith against every member of the Labour group on the council. This court (by a majority) reversed the trial judge and the House of Lords restored his judgment. The case turned ultimately on a pleading point and the assistance which it gives is therefore limited. If it were necessary to go further into this point we would start from a position of some scepticism as to whether a process of counting heads would be the right approach.
Approach of the Court of Appeal
75. In this case the judge acquitted of fraud both Lloyds and all the individuals against whom allegations of fraud had been made. The names say that he was wrong to do so. They invite us to say that, contrary to the conclusions of the judge, who had the advantage of seeing many witnesses give evidence over a number of days, many of the individuals were guilty and so was Lloyds as an institution.
76. The correct approach of the Court of Appeal to this kind of case has been considered many times in the past. It is, we think, sufficient to refer to the way in which this court identified the approach in The Ikarian Reefer  1 Lloyds Rep 455, where in the event the court reversed the decision of the trial judge that the plaintiff insured shipowners had not deliberately scuttled their vessel or cast her away. Giving the judgment of the court, Stuart-Smith LJ addressed the correct approach as follows (at pp 458-9):
(1) The burden of showing that the trial Judge was wrong lies on the appellant.
(2) When questions of the credibility of witnesses who have given oral evidence arise the appellant must establish that the trial Judge was plainly wrong. Once again there is a long line of authority emphasizing the restricted nature of the Court of Appeals power to interfere with a Judges decision in these circumstances though in describing that power different expressions have been used. In SS Hontestroom v SS Sagaporak  AC 37 at p 47 Lord Sumner said: SU11None the less not to have seen the witnesses puts appellate Judges in a permanent position of disadvantage as against the trial Judge and unless it can be shown that he has failed to use or has palpably misused his advantage, the higher Court ought not to take the responsibility of reversing conclusions so arrived at merely on the results of their own comparisons and criticisms of the witnesses and of their own view of the probabilities of the case.
Finally in Mersey Docks and Harbour Board v Proctor  AC 253 at p 258, Viscount Cave LC said: SU11In such a case it is the duty of the Court of Appeal to make up its own mind not disregarding the judgment appealed from and giving special weight to that judgment in cases where the credibility of witnesses comes into question, but with full liability to draw its own inferences from the facts proved or admitted and to decide accordingly.
(3) When a party has been acquitted of fraud the decision in his favour should not be displaced except on the clearest grounds. This proposition is not in contest and is supported by the House of Lords in Akerhielm v De Mare  AC 789 at p 806, where the earlier authority of Glasier v Rolb (1889) 42 ChD 436 is cited.
77. Another way of putting essentially the same approach is to say, as was said in Gross v Lewis Hillmann  Ch 445 at 459C-460B, that the Court of Appeal must be completely satisfied that the judge was wrong. It follows that the names have a difficult task in front of them, but that does not mean that in an appropriate case it is not the duty of this court to reverse a trial judge who has acquitted a party of fraud. As already stated, it did so in The Ikarian Reefer. Another example of a well-known case in which this court reversed the conclusions of the trial judge based on the credibility of the witnesses is Armagas Ltd v Mundogas SA, The Ocean Frost,  1 Lloyds Rep 1.
78. We recognise that all those cases were decided when the Rules of the Supreme Courtwere in force, which provided by RSC Order 59 rule 3that an appeal to the Court of Appeal shall be by way of rehearing. The present appeal is governed by the CPR , which by rule 52.11(1) provides:
Every appeal will be limited to a review of the decision of the lower court unless --
(a) a practice direction makes different provision for a particular category of appeal; or
(b) the court considers that in the circumstances of an individual appeal it would be in the interests of justice to hold a re- hearing.
Neither party invited the court to say that it should hold a re-hearing within the meaning of rule 52.11(1)(b) (and not a review).
79. Equally neither party submitted that the traditional principles stated above should not apply, or that the approach should be different depending on whether the appeal were treated as a review or a re-hearing. We are inclined to think that in this class of case the position should be the same. In any event we shall follow the principles stated above in our approach to this appeal.
III The Facts
80. In the following sections of this judgment we identify the individual protagonists and other important witnesses on both sides, and proceed to a chronological summary of the development of asbestos-related claims and losses. Changes in the governance of Lloyds, and other important events, are noted as they occurred. The chronological summary starts before the beginning of the relevant period and continues (with some digressions and deviations from strict chronological sequence) until the inception of this litigation. It is largely drawn from undisputed documentary material, although there are many disputed issues as to the inferences which the judge did or did not draw from the documents. Parts of the summary are covered again, in more detail, in Parts IV, V and VI of this judgment. But some degree of repetition is unavoidable in such a complex case.
The claimants and their witnesses
81. There were 216 claimants (almost all of whom were in fact counterclaimants in actions commenced by Lloyds) concerned in the threshold fraud issue. Under the case-management orders directing that issue three individuals Captain Donald Hindle, Sir William Jaffray Baronet and Mrs Dona Evans were selected as sample cases for the issue of reliance. Sir William has appeared as a litigant in person and so have some other appellants who were not selected as sample cases: Mrs Heather Adams (appearing by her husband), Mr Sydney Butler, Mr Richard Carter, Mr Cary Harrison and Mrs Ann Strong. We summarise the circumstances in which these persons became names, and then identify the most important non-party witnesses who gave evidence for the claimants.
82. Mrs Adams was admitted as a name in 1977 and started underwriting in 1978. She did not give evidence at trial but according to her husband she asked to be put on low-risk syndicates but found herself on the Merrett and Outhwaite syndicates. Mr Adams made well-structured and moderate submissions to the court.
83. Captain Hindle had a distinguished career as a sea captain, commanding the two biggest ships in the world. He stopped going to sea in 1979 but continued working as an expert consultant, based in Malaysia. He was admitted as a name in 1978 with an initial premium limit of £100,000 spread equally between three marine and two non-marine syndicates. The judge doubted whether he was ever an appropriate candidate for membership of Lloyds. Captain Hindle frequently increased his premium limit, ultimately (in 1989) to £1.5m. He made profits for every year until 1986 for which he had records (those for 1981 and 1982 were lost).
84. Sir William Jaffray, Baronet (who was born in 1951 and succeeded his father in 1953) was admitted as an external name late in 1981. He began underwriting in 1982 with a premium limit of £200,000 (increased to £300,000 in 1985 and later further increased). Initially he made some profits but he suffered substantial losses in numerous years from 1983, particularly on Gooda Walker syndicates. He made submissions which were carefully prepared and eloquently delivered, but not always relevant to the issues before the court.
85. Mr Butler became a name in 1986 and began underwriting in 1987 on a Poland syndicate which had no E & O cover. He did not give evidence at trial but he made clear and forceful submissions in this court.
86. Mrs Evans became a name in 1987 and began underwriting in 1988, with R W Sturge as her members agent. She was then married but she has since divorced. She has been a prominent member of names action groups. She gave evidence at trial. The judge doubted whether she was ever an appropriate candidate for membership of Lloyds.
87. Mr Carter is a chartered surveyor and property consultant. He became a name in 1988 and began underwriting in 1989. His first and worst losses arose in his first year of underwriting from his participation in the parallel marine and non-marine Feltrim syndicates. He made clear submissions which were no less effective for being moderately expressed.
88. Mr Harrison is an American resident in London. He is retired. He has a liability to a bank which guaranteed, and has discharged, his liability to Lloyds. He forcefully submitted that he would have preferred to conduct his own case separately rather than being what he called a 'free rider' in the group litigation.
89. Having identified the sample names and the litigants in person who appeared in this court we will mention briefly some of the most important witnesses for the names. Mr Christopher Stockwell became a Lloyds underwriter in 1979 and joined the Outhwaite (Combined) Agency. He was the first-named claimant in the action against Mr Richard Outhwaite which Saville J tried in 1991 (and which was settled before judgment). He was a prominent campaigner throughout the Lloyds litigation. The judge had serious reservations about his evidence and gave substantial reasons for his reservations.
90. Mrs Catherine Mackenzie-Smith became a name in 1974. She is a member of the bar and has also been prominent in Lloyds action groups. Her evidence was directed mainly to her contact with, and information which she derived from, another barrister who was also a name, Mr John Osbrey-Taylor (who died in 1999). The judge said that Mrs Mackenzie-Smith found it difficult to distinguish between the role of a witness and that of an advocate.
91. Mr Roger Bradley was a working name who joined Janson Green in 1967. In 1977 he became an equal partner and joint underwriter in the Bryan P Barrie Underwriting Agency, on syndicates 901 (marine) and 921 (non-marine). From 1993 he began to work (after some years of hardship) for the Names Defence Association. The judge found his evidence unsatisfactory (for reasons set out at some length in the judgment).
92. Mr Colin Mackinnon was the active underwriter on marine syndicate 927 and was also underwriter on two specialist stop-loss syndicates. Mr Mackinnons witness statement was quite short (relating to his having no recollection of seeing the Murray Lawrence letter before 1995) but he did in the course of his cross-examination answer many questions about practice and procedures at Lloyds. The judge described him as an articulate witness.
93. Mr Robin Kingsley became a working name in 1959. In 1976 or 1977 he became founder chairman of three members agencies. He was also from 1977 to 1989 a director of Hardcastle Underwriting Agencies Ltd, a managing agency later renamed Cutler. One of his members agencies arranged for Sir William Jaffrays underwriting between 1982 and 1987, when Sir William changed his members agent. Mr Kingsley was cross-examined on various topics. He stated in his witness statement that he did not see the Murray Lawrence letter until the early 1990s.
94. Mr Anthony (generally known as Charles) Sturge left A L Sturge & Co in 1972 and formed Chatset (a specialised information service about Lloyds syndicates) in 1981. He gave evidence about the markets perception at different times of asbestos-related problems. The judge described him as a careful witness who gave a reasonably balanced account.
95. There were numerous other witnesses for the names including two individuals who were the first external names to serve on the Council of Lloyds after the coming into force of the Lloyds Act 1982. They were Mr Dennis Fredjohn, whom the judge described as a distinguished industrialist and a generally reliable witness, and Sir Eddie Kulukundis, a well-known philanthropist whom the judge described as an impressive witness.
Working members of the Lloyds community
96. The reamended defence and counterclaim (quoted in paragraph 17 above) names 33 individuals, all working members of the Lloyds community at some time during the relevant period, whose knowledge ought (it is pleaded) to be imputed to the Society of Lloyds so as to arrive at a finding of bad faith against the corporation itself. Nine of these individuals are dead. All but five of them were at some time members of the Committee or (after its institution in 1983) the Council of Lloyds and some served as Chairman or as one of the two Deputy Chairmen (after 1983 the Chief Executive was also designated as a third Deputy Chairman). Six of them gave oral evidence at trial (and the witness statement of Mr Rokeby-Johnson was admitted under CPR 33.2). Others had made witness statements which were exchanged (and were, it seems, read by the judge) but they were not in the event called to give evidence. In the following paragraphs we identify, in alphabetical order, some of the working members of the Lloyds community who appear most frequently in our chronological summary. Those who are impugned in the pleadings are denoted by an asterisk. The specialised committees established by Lloyds at different periods are summarised in paragraph 188 below.
97. Mr Frank Barber* was on the Committee of Lloyds in 1978-80 and 1982 and on the Council and Committee in 1983-5 and 1987. He was Deputy Chairman in 1983-4. He was a member of the Membership Committee in 1978. He was on the Committee of LUNMA (Lloyds Underwriters Non-Marine Association) in 1978-80.
98. Mr Arthur Chester* (deceased) was on the Committee of Lloyds in 1978 and 1980-2 and on the Council and Committee in 1983. He was on the Audit Committee in 1980-3, chairing it in 1980, 1982 and 1983.
99. Mr Michael Cockell* was on the Council and Committee of Lloyds in 1984-7 being Deputy Chairman in 1986. He was on the Audit Committee in 1984. He was on the Committee of LUNMA in 1978-85 and 1987, being Deputy Chairman of LUNMA in 1982 and Chairman in 1983.
100. Mr David Coleridge* was on the Council and Committee of Lloyds in 1983- 6 and 1988, being Deputy Chairman in 1985 and Chairman in 1988. He was on the Committee of LUNMA in 1978-85 and 1987, being Deputy Chairman in 1982 and Chairman in 1983.
101. Mr Ian Hay Davison was appointed as the first Chief Executive of Lloyds in 1983, the year in which the Lloyds Act 1982 came into force. He was an accountant who had had a distinguished business career. His appointment was widely believed to have been influenced by the Bank of England, which was concerned to improve and modernise the regulation of the Lloyds market. Relations between Mr Davison and the Council of Lloyds were not entirely harmonious and he resigned early in 1986 (being succeeded by Mr Alan Lord). Mr Davison subsequently wrote a book entitled 'A View of the Room' about his time at Lloyds. A copy of this book was provided to the court (as it had been provided to the judge) but (like the judge) we have not read it (except for a few excerpts which were actually put to witnesses in cross-examination, and so appear on the transcript).
102. Mr Charles Gibb* (deceased) was on the Committee of Lloyds in 1978-81, being Deputy Chairman in 1978-80. He was on the Membership Committee in 1978.
103. Sir Peter Green* (deceased) was on the Committee of Lloyds in 1979-82, being Deputy Chairman in 1979 and Chairman in 1980-2. He was then the first Chairman of the newly-instituted Council and Committee in 1983. He was therefore very closely involved in the promotion of the Bill which became the Lloyds Act 1982. He was knighted in 1982. Subsequently disciplinary proceedings were taken against him over a matter in which he had a serious conflict of interest and he was censured and resigned from Lloyds.
104. Mr Robin Jackson* was never on the Council or Committee of Lloyds but he was between 1980 and 1988 a leading member of LUNMA (of which he was Chairman in 1986) and of the AWP (Asbestosis Working Party) of which he was Chairman from 1984 to 1988. He began his career in 1956 with C T Bowring Group, a firm of Lloyds brokers. He worked in the United States from 1960 to 1971 underwriting reinsurance of liability business (referred to in the United States as casualty business). He returned to England in 1971 as chief underwriter for an American insurer. In 1976 he became the active underwriter for the Merrett non-marine syndicate (later called syndicate 799). He stopped full-time underwriting in 1988 but remained as a consultant until 1990. During the relevant period he was very closely involved in the problems of asbestos- related claims, and from 1994-6 he worked on the Equitas Project. It was suggested to the court, without contradiction, that he and Mr Rayment (see paragraph 117 below) were probably as knowledgeable about asbestos-related claims as anyone at Lloyds. Mr Jackson gave evidence which the judge summarised without any comment (whether favourable or adverse).
105. Mr Richard Keeling was during the 1970s deputy underwriter to Mr Lawrence (see paragraph 108 below) on syndicate 360 (a composite syndicate which later split, the non-marine element becoming syndicate 362). As Mr Lawrence took on other commitments Mr Keeling assumed more responsibility and was formally appointed active underwriter of syndicate 362 in 1984, a position he occupied until the end of 1996. Mr Keeling gave evidence and the judge described him as a particularly astute underwriter. His evidence covered, among other topics, the allegations made against Mr Lawrence, including the reinsurance which Mr Lawrence effected with the Outhwaite and Meacock syndicates and disputes which arose over that reinsurance cover.
106. Mr Bryan Kellett* was a member of the Members Solvency and Security Committee (MSSC the successor of the Audit Committee) of Lloyds in 1985- 6. He was a leading member of the Committee of LUNMA in 1983-88, being Chairman in 1987. He was on the Council and Committee after the end of the relevant period. He had set up his own non-marine syndicate 993/994 in 1973 and he was an active underwriter until the end of 1989. He gave evidence about his own underwriting activities (which included writing run-off policies) and about a meeting with the Inland Revenue in 1984. The judge made no particular comment on his evidence except to say that his remarks to the Inland Revenue (we are under-reserved) had to be seen in the context in which they were made.
107. Mr Robert Kiln* (deceased) was on the Committee of Lloyds in 1978, 1979 and 1981. He was on its Audit Committee in 1979, 1981 and 1982, being Chairman of that committee in 1979 and 1981. He had set up syndicate 510/511 in 1963 and was its active underwriter until 1974, with Mr Murray as his deputy. In his witness statement Mr Murray described Mr Kiln as a man of the highest integrity and 'the least greedy of men', a view supported by a statement of Mr Holman put in by Mr Harrison.
108. Mr Murray Lawrence* is of central importance in this matter, since it was he who as Deputy Chairman wrote the 'Murray Lawrence letter' dated 18 March 1982 in indirect response to the 'Neville Russell letter' dated 24 February 1982. Mr Lawrence was on the Committee of Lloyds in 1979-82 (being Deputy Chairman in 1982) and on the Council and Committee of Lloyds in 1984-8, being Deputy Chairman in 1984-7 and Chairman in 1988. He was also on the committee of LUNMA in 1978-83, being Chairman in 1978. He had become active underwriter on composite syndicate 360 in 1970 and from 1980 (after syndicate 360 split) he was active underwriter of syndicate 362. In 1979 Mr Lawrence became Chairman of the Computer Leasing Working Party. In 1982 he placed an unlimited liability run-off policy (with an excess of $55m) with the Outhwaite and Meacock syndicates (which underwrote two-thirds and one-third respectively). This later led to disputes and arbitrations. In 1985 Mr Lawrence set up his own managing agency, Murray Lawrence and Partners, which was incorporated in 1989. Mr Lawrence gave evidence and was cross-examined over four days. The judge summarised his evidence and expressly accepted his evidence as to the distribution of the Murray Lawrence letter but did not otherwise comment on its quality.
109. Mr Alan Lord became Chief Executive of Lloyds in March 1986 in succession to Mr Davison. He held that position until 1992. He had (as the judge said) previously had a distinguished career with the Inland Revenue, the Treasury, the Department of Trade and Industry and Dunlop, as well as serving on the Court of the Bank of England. The judge described Mr Lord as an impressive witness.
110. Mr Stephen Merrett* was a leading underwriter whose agency was successfully sued for negligence by names who were on his syndicate. He was on the Committee of Lloyds in 1981-2 and on the Council and the Committee in 1983-4 and 1987-8. He was on the Audit Committee (or its successor the MSSC) in 1982-5 and 1988 (being Chairman in 1985 and 1988) and on the Membership Committee in 1981. He was on the committee of LUNMA in 1981-3.
111. Sir Peter Miller* began work with Thomas R Miller & Son, a Lloyds broking firm concerned with marine business, in 1954. Throughout his career he was mainly concerned with marine liability broking, and he became Chairman of the Committee of Lloyds Insurance Brokers in 1976. He was on the Committee of Lloyds in 1978-80 and 1982 and (after the Lloyds Act 1982 came into force) on the Council and Committee of Lloyds in 1983-88. He succeeded Sir Peter Green as Chairman and held that office in 1984-7. He was on the Membership Committee in 1979-80. He gave evidence at trial and the judge described him as an articulate witness.
112. Mr Colin Murray* was with C T Bowring from 1953 to 1963 and then joined Mr Kilns agency as deputy underwriter to syndicate 510/511 (set up by Mr Kiln). Mr Murray became active underwriter in 1974. He was on the Committee of LUNMA from 1979 to 1984. He was on the Council and Committee of Lloyds in 1983-6, and on the MSSC in 1985-6 (being Chairman in 1986). He gave evidence at trial. The judge described him as a highly professional and skilled underwriter and said that he was assisted by his evidence. He attached particular importance to Mr Murrays evidence about the influential character of the Conning Report (a report produced in 1982 on the impact of asbestos-related diseases on the insurance industry).
113. Mr Edward Nelson* was closely involved in the problems of asbestos- related diseases between 1978 and 1983. He was on the Committee of Lloyds in 1980-2 and on the Council and Committee in 1983. He was on the Audit Committee in 1982-3 and on the Membership Committee in 1980-3 (being Chairman in 1983). He was a founder member of the AWP (1980-3) and its first chairman (1980-1). He was on the committee of LUNMA in 1978-83 being Deputy Chairman in 1978 and Chairman in 1979. Later a disciplinary committee of Lloyds found him guilty of discreditable conduct.
114. Mr Alan Parry* was on the Committee of Lloyds in 1979-82 and on the Council and Committee in 1987-8, being Deputy Chairman in 1987-8.
115. Mr Ian Posgate* was a controversial figure who was implicated in some of the more serious scandals at Lloyds. He was on the Committee of Lloyds in 1982 and on the Council and Committee in 1983-4.
116. Mr Kenneth Randall* was a senior employee of Lloyds who was in that capacity in attendance at the Audit Committee in 1980-4 and the Membership Committee in 1984. He was closely involved in the preparation of the Murray Lawrence letter in March 1982. He was perhaps the most surprising of those whose witness statements were exchanged but who were not in the event called to give evidence.
117. Mr Keith Rayment worked in the claims department of R W Sturge, a Lloyds underwriting agency, from 1969 to 1990. He was concerned with non- maritime business, primarily that of syndicate 210, and in 1979 he became claims director of that syndicate. From 1980 he was concerned almost exclusively with long-tail United States casualty business. He was a member of the AWP from 1983 (having joined its claims sub-committee in 1981) and he also sat on its reinsurance sub-committee. He was a director of Topliss & Harding (Asbestos Services) Ltd, a service company established by the AWP. He was involved (between 1982 and 1985) in negotiations for the Wellington Agreement which was finally concluded in June 1985. He had an exceptional knowledge of the insurance implications of asbestos-related diseases. He was himself a name from 1980 to 1990. The judge spoke most highly of his evidence:
Mr Rayment struck me as a highly conscientious claims man who worked tirelessly to assist the market in relation to the handling of asbestos-related and other long-tail claims. I was greatly assisted by his evidence.
118. Mr Ralph Rokeby-Johnson* was a leading underwriter who was active underwriter of Sturge syndicate 210 from 1974 to 1987. He was a member of the AWP from its inception in 1980, being Deputy Chairman in 1981-2 and 1983-8 and Chairman in 1982-3. He was on the committee of LUNMA from 1978 to 1987, being Deputy Chairman in 1983 and Chairman in 1984.
119. Sir David Rowland* began working at Lloyds with Matthews Wrightson, insurance brokers, in 1956. From 1964 he was involved in the management of Matthews Wrightson and other companies with which that company merged. He was on the Council and Committee of Lloyds in 1987-90, and then served on the task force investigating the future capital structure of Lloyds. He was Chairman from 1993 to 1997. In the early part of 1995, as Chairman, he gave evidence to the House of Commons Select Committee which in May 1995 produced a report entitled 'Financial Services Regulation: Self-Regulation at Lloyds of London'. It was under his chairmanship and guidance that R&R took place. Sir David Rowland gave evidence at trial and the judge described him as a highly articulate witness.
120. Mr Charles Skey* was a member of the Committee of Lloyds in 1978-81. He was a founder member of the AWP and was on the committee of LUNMA from 1978-85.
121. Mr Don Tayler* (deceased) was a member of the AWP from 1980 to 1983. He was its first deputy chairman (1980-1) and its second chairman (1982). He was the active underwriter of Pulbrook syndicate 90 and as such he effected reinsurance (early in 1982) for the syndicates old years. It was suggested that he used 'inside' information for this purpose. Sir David Rowland (who was chairman of the holding company of the Pulbrook managing agency) described him as a sensible, serious and cautious underwriter. Mr Tayler died in 1983.
122. The other individuals impugned in the pleadings were Mr Richard Ballantyne, Mr David Barham, Mr Richard Beckett (deceased), Mr Ivor Binney, Mr Patrick Bird, Mr Brian Brennan (deceased), Mr Peter Daniels, Mr Charles Gilmour, Mr Richard Hazell, Mr Alec Higgins (deceased) and Mr Michael Williams.
Chronological summary: before 1982
123. Asbestos is (as the judge stated in chapter 3),
A fibrous silicate material which achieved wide usage by reason of its physical properties such as the ability to withstand fierce heat, corrosion and decay under almost every condition of temperature and moisture. Its uses included roofing, plasterboard and fireproof wallboard, floor tiles, an ingredient in paints and sealants, car brake linings and clutch facings.
Exposure to asbestos is a causative factor in many diseases, including mesothelioma, lung cancer, gastric cancer and asbestosis. These diseases are typically contracted by workmen who have been exposed to asbestos at their workplace, especially in shipbuilding and the construction, insulation and demolition of buildings of all sorts. Some conditions developed only after prolonged exposure but the most serious (mesothelioma) could result from even a single brief exposure. An important epidemiological study was published in the United States by Dr Selikoff and others in 1964.
124. Claims by workers against their employers for asbestos-related injury were covered by Lloyds under third party general liability policies extending to cover product liability. Until the advent of asbestos-related claims, such policies had been profitable for underwriters. That changed dramatically with the rapid growth in the manifestation of asbestos-related diseases and changes in tort law in the United States. The first landmark case establishing strict liability was Borel v Fibreboard 493 F2d 1076, decided by the Federal Court of Appeals for the Fifth Circuit in 1973. But during the 1970s the number of claims was still relatively small and most were settled for modest sums. Rather under 1000 had been filed in US Federal Courts by 1980 (that figure must be compared with about 100,000 claims by the end of the relevant period in 1988, and about 450,000 claims by 2000).
125. Mr Bradley gave evidence of a conversation at a golf match in 1973 at which Mr Rokeby-Johnson spoke of asbestos as going to change the wealth of nations but the judge found his evidence to be unreliable. Mr Rokeby-Johnsons own evidence (given in 1996 to the Syndicate 210 Loss Review Committee) about his perception in 1974 was as follows:
Q Do you remember whether pollution was one of the concerns that you had when you were arranging the run-off reinsurance in 1974, or were you worried about particular types of liabilities or at that stage were you thinking that you wanted to deal with the whole of the back years?
A I think my -- I cannot call them doubts certainties about the likely run-off of casualty underwriting in the United States overall more than any specific thing. I do not believe that we were aware of the depths and heights and horrors of asbestos, for instance, back then. The potential in this new law was there so it would have been part of it, but I think you were thinking about medical malpractice, trains, cars, all the contractors, all the stuff that had been written quite gaily for all these years, I was thinking much more of that. The overall rather than the particular.
126. Not all experienced lead underwriters took a pessimistic view during the 1970s. Between 1974 and 1982 three well-known underwriters, Mr Outhwaite, Mr Merrett and Mr Meacock wrote run-off contracts which involved heavy exposure to asbestos-related risks. In consequence several syndicates including Outhwaite syndicates 317 and 661 incurred very heavy losses which were the subject of an inquiry conducted by Freshfields. Claims in respect of run-off losses featured largely in litigation brought by names against managing agents and members agents. The first case which went to trial was Stockwell v Outhwaite, which went to trial in October 1991 but was settled in January 1992 before judgment. Three of the cases went together to the House of Lords and have contributed to the development of the English law of tort (Henderson v Merrett Syndicates  2 AC 145).
127. The run-off contracts (and in particular those written by Outhwaite syndicates 317 and 661) are covered in chapter 17 of the judgment. They are an important strand in this tangled story, because as well as producing very large losses they led to suspicions of malpractice by insiders, including those who had special knowledge of asbestos-related problems from their work on the Asbestos Working Party (see paragraph 138 below). These suspicions were raised by a working member of Lloyds, Mr John Donner, and were investigated by Lloyds during November and December 1989. (Mr Donner was to have been called by the names but his ill-health prevented that. His witness statement was put in evidence but Lloyds attacked its credibility.)
128. The investigators appointed by Lloyds did not find the suspicions substantiated but the interviews which were conducted are a valuable source of evidence which can be tested against the contemporary documents. At a meeting on 20 December 1989 Mr Donner said that his real concern was not to suggest conspiracy:
He had been concerned for some time, having known Mr Outhwaite, Mr Merrett and Mr Meacock as intelligent underwriters, that he could find no answer to the question of why they wrote the run-off policies. He could only conclude that they had written those policies on the basis of certain information, which raised the question of whether all information that was in the hands of those that ceded the run-offs was made available to Mr Outhwaite. This was one of the specific questions raised in the early days of Mr Donners enquiries. He emphasised that the doctrine of caveat emptor was not relevant in the context of insurance, although it had been suggested to him at a previous meeting that it did apply. Mr Donner said that he believed that he now knew approximately what had happened and that he would explain this to Mr Lord and would be able to produce corroborative evidence. Focusing on the period of 1981 and 1982, Mr Donner recalled that the insurance market worldwide faced an unparalleled series of losses from asbestos- related diseases. Some American insurance companies talked openly of going into liquidation and Lloyds also faced a difficult position. At the time that the 1979 account was being closed at December 1981, there were two practical alternatives available to underwriters with an asbestos involvement. The first was to make full provision for the losses in line with information then available which would have resulted in many syndicates remaining open and some going out of business. The alternative was to roll the losses forward so that claims arose in the future and future Names had to pay. This involved massaging the audit at December 1981. The Lloyds panel of auditors made clear their view of the gravity of the situation to some individuals in senior positions of authority at Lloyds and there was general talk of these losses breaking Lloyds. Senior people in the Market concluded that they could not face this and there was a considered decision by some of those in authority, underwriters and auditors to view the 1979 account as far as asbestos claims were concerned in the most favourable light possible. The result of this would have been to roll forward the losses to later years.
This passage gives the general flavour of actual and alleged events (especially during 1981 and 1982) which this court, like the judge, has had to look at in some detail.
129. On 28 October 1977 the active underwriters of over fifty syndicates initialled a memorandum of agreement as to the negotiation of a settlement of claims in respect of asbestosis made against Bell Asbestos. This document was relied on as showing that in 1977 the market already had general knowledge of asbestos-related risks. In February 1979 there was produced the first edition of the Asbestos Litigation Report, a publication which subsequently appeared at monthly intervals.
130. The growth in asbestos-related claims gave rise to acute differences of legal opinion as to whether liability under general liability policies was related to the period of exposure or to the time when the disease manifested itself (after a time lapse which could be as long as 20 years). The impact of these developments was discussed at an important meeting held on 19 June 1979 at the offices of US attorneys (referred to for reasons of confidentiality as H) instructed on behalf of Lloyds underwriters. Representatives of attorneys G, K and I were also present. The attorneys made a joint recommendation of a gross reserve of $75,000 for every claim. Their summary stated:
The one certain fact about the asbestos litigation is that at present we cannot estimate the number of claims that will eventually be brought against your assureds. We do know that the number of lawsuits has increased dramatically each year since 1973. While some experts believe the number and severity of claims will peak within the next year or two, there are others such as The National Cancer Institute who estimate more than two million people will die from asbestos-related cancer. It should be noted that anticipated claims were taken into account to some extent in arriving at the figures recommended above.
131. By the end of 1979 (the year in which Captain Hindle began underwriting) there were several declaratory actions on foot seeking to clarify the basis of liability. A letter dated 10 December 1979 to Mr Nelson (as chairman of LUNMA) referred to
the Market split into two camps; one supporting the manifestation approach and the other that of exposure.
This letter may reflect the genesis of the Asbestos Working Party (AWP) which was formed in 1980 (see paragraph 135) and of which Mr Nelson was a leading member.
132. At a meeting of the Committee of Lloyds on 14 December 1979 Mr Lawrence (who later became a Deputy Chairman and in 1988 Chairman) drew attention to the problem of long-tail business being aggregated with other types of business under the rubric of All other business. The minutes record that
He suggested that consideration should be given to breaking down the All Other Account in order to extract the very Long Tail business and that premium income was not the appropriate yardstick upon which to base the reserves for the older Accounts.
133. In the five years spanning the start of the relevant period the results of general liability insurance at Lloyds were in striking contrast to the general profitability of all classes of business combined. That appears from the five-year summary set out in Lloyds global accounts 1982, the first to appear in the new format. (In considering these and other tabulated figures it is necessary to keep constantly in mind the built-in time-lag resulting from the Lloyds system of keeping every accounting year open for a further two years, followed normally by RITC into the next open year. So when new names were shown the results for the last seven closed years the figures would be between four and ten years old.)
TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE
134. These figures also show how far the overall profit was coming to depend on investment income and gains. Sir Peter Green (who was Chairman from 1980 to 1983 inclusive and was knighted in June 1982) wrote in his statement preceding the accounts:
135. To those whose business is insurance these figures are something of a paradox. While satisfactory enough as a return on capital they are, from a professional point of view, a cause for some concern. It is a sobering thought that pure underwriting profit in 1980 accounted for only £22 million or 8.25% of the overall profit and did not cover the management expenses.
136. The documentary evidence shows that during the 1970s the problems on the general liability side were identified primarily with computer leasing rather than asbestos-related risks. A Computer Leasing Working Party (chaired by Mr Lawrence) was formed in 1978. But by 1980 that had changed. Computer leasing problems were mostly in the past by about 1982. Mr Rokeby-Johnsons evidence in 1996 put it as follows:
Q: Can I ask you one thing linked to that. At the time when the placing was taking place the ultimate position on the 1969 and previous liabilities looked very much more like a banking operation for a payment of, say, I think it was in the region of $20 to 25 million, there was an ultimate liability of $35 million
A: A perceived ultimate liability, not an ultimate liability.
Q: Yes. A projected ultimate of $25 million [?$35 million] and that was projected to be reached by about 1980. Then by 1977 or 1978 that ultimate position had been projected to reach $90 million. There was a sort of sea change in the projection within a reasonably short time of its placement. Do you recall any underlying reason for that dramatic change?
A: It is called asbestos.
Q: Had that just come into a
A: I think if you look, as I recall, at Hady Wakefields projections, take out asbestos and they were about right. They were remarkably accurate. The thing that turned the coracle upside-down was asbestos, which was enormous.
137. The appellants have drawn attention to numerous documents dating from 1980 and 1981 (including both internal Lloyds documents and letters from attorney G, attorney H and other attorneys) showing that asbestos-related claims were by then being recognised as a very serious and unpredictable problem. At the end of 1980 claims were being filed in the United States at the rate of about 100 a month (although a letter dated 24 December 1980 from attorney H to Mr Nelson reported that 286 claims had been filed so far that month, and by 1982 the monthly average was about 400; the letter identified three categories of claim and suggested settlements of up to $50,000, $100,000 to $250,000 and up to $450,000 for the three categories).
138. On 27 March 1980 Mr Jim Ayliffe of Merrett-Dixey syndicates (who was very knowledgeable about asbestos-related risks and later was on the claims subcommittee of the AWP) wrote to Mr Jackson reporting on his visit, shortly before Christmas 1979, to a meeting of the Non-Marine Association. He stated that it became apparent that that associations committee did not fully appreciate the impact which asbestos-related disease would have. Mr Ayliffe wrote that so far reserve recommendations had been based on known cases only. American attorneys were seeking guidance and support from the market to
their putting up reserves which do take into account a projection of something in the region of four years. Not unnaturally the size of the figures that would then be recommended would be very large and if indeed the Market wishes that the matter be dealt with in this manner it is also necessary that people such as [attorneys H and I] and others also approach the problem in the same way. Inevitably the impact of projected reserves on our Market will be substantial and I feel that it would be extremely difficult for the leads to make this type of determination by reason of the implications which it carries.
139. On 1 April 1980 the Manager of Lloyds Underwriting Agents and Audit Department wrote to panel auditors in the following terms:
The Deputy Chairman, Mr Gibb, has requested that Auditors be informed of the following facility which has been offered to certain Syndicates in Lloyds and which was intended as a form of reinsurance when a Syndicate was closing its Accounts, particularly those with a long tail element where the settlement in respect of the year-end provision might not be made for many years. The following is an example of how the reinsurance would operate:--
A Syndicate had known outstandings of £100,000 and an IBNR Load of the same amount total provision £200,000. On the basis that the top 10% slice of the reserve (£20,000) would not be needed for (say) 10 years £10,000 the Syndicate would be indemnified for £ 20,000 in excess of £180,000 aggregate losses after 10 years. The anticipated reinsurance recoveries of £20,000 would be deduced from the total audit provision for an outlay of £10,000. Payment of the recovery would be guaranteed by a Letter of Credit for £20,000 payable in 10 years time.
I am to advise you that the Audit Committee does not consider such a reinsurance recovery can be used to reduce a Syndicates Audit provision because all anticipated recoveries brought into account at the end of the third year must be immediately available.
The appellants case is that this letter was describing so-called 'time and distance' (T and D) policies and was expressing disapproval of their use for the stated purpose; nevertheless, the appellants say, they continued to be used for that purpose to the knowledge of members of Lloyds Committee and (after 1982) Council.
140. In August 1980 some leading non-marine underwriters formed the AWP. This was an unofficial but influential group whose primary function was to collect and disseminate information about asbestos-related claims and problems. Another function was to work towards a common market view on problems about coverage (these problems included, but were not limited to, the exposure/manifestation debate). The AWP had no agency or other formal relationship with Lloyds and its membership was not limited to those working in the Lloyds market (although its chairman regularly wrote, as he was entitled to do, on Lloyds headed writing paper) and some members of the Lloyds community appeared to think that it had official status. It continued in existence until 1996. Most of its early meetings were attended and minuted by Mr Stephen Mitchell, a solicitor and partner in Elborne Mitchell. Much of the work was carried out by the claims subcommittee (later called the direct claims subcommittee) and the reinsurance subcommittee; these met more frequently than the full AWP committee.
141. The AWP was not a secret body indeed its purpose was to provide information but it had to respect the confidentiality of much of the information which it obtained. That is illustrated by a letter dated 16 February 1982 written to all interested underwriters by Mr Tayler, the chairman of AWP. The last three paragraphs of the letter were as follows:
As matters continue to develop, and indemnity payments are claimed from the levels of coverage underwritten in London, a record will be maintained by the LUNCO [Lloyds Underwriters Non-Marine Claims Office] of the transactions that take place. It will be apparent to you that there is a need to observe confidentiality in respect of the information which is available, and for this reason when your representative visits the LUNCO office, it will be necessary for that person to identify the accounts in which you participate. Your auditors may also want to see the information, however, in view of the need for confidentiality, it will be necessary for them to be accompanied by your own representative.
It was emphasised to you in the circulation of year end reserves that, in view of the uncertainties of the future, it is difficult at this stage to provide the Market with any meaningful projection of the developments that are likely to take place over the coming years in regard to this problem. However, the number of claims is likely to escalate and for this reason I must emphasise that future deterioration is inevitable.
142. On 30 September 1980 Mr Skey (who was on the Committee of Lloyds and the AWP) wrote in an internal memorandum (after stating other concerns)
3) On top of all this we have to absorb the impact of 'DES 'Agent Orange' and most important of all Asbestosis. We do not wish to go into the question of coverage and how it may or may not apply in this memorandum but suffice it to say that collectively they must make a major impact on the enclosed loss ratios and indeed probably on the pre-1966 figures as well.
4) The original premium base is being severely affected by competition and/or rate cutting.
5) If the 'exposure' theory is upheld in Asbestos cases we fear it will be impossible ever to close our books with any certainty.
The problem therefore is obvious how to rate contracts of this nature when you don't know the record for, say, 10 or even 20 years and on a reducing P.I. to boot. The easy (and maybe correct) answer is to say you can't and stop writing the class. If we did others in the London Market could follow suit to the detriment of the market place as a whole.
143. The minutes of an AWP meeting on 28 November 1980, chaired by Mr Nelson, record:
The Chairman proposed that the Meeting should discuss the desirability of circulating the Market with a report for the valuation of outstanding claims for audit purposes at year end. Mr Ayliffe believed that Attorneys should make recommendations for year end purposes but it was for the individual Underwriters to determine the figures used when closing the account. He was concerned that reserves currently carried on files, were lower than would have been the case under normal circumstances. Those concerned were looking for recommendations from the Working Party before final decisions were made. This view was supported by Mr Jackson, who thought that a figure of US$125,000 per average claim was more realistic than the present figure of US$75,000 currently used as a yardstick.
and at the end of the meeting
In summary, the Chairman stated:
a) The Audit Committee were reluctant to identify individual situations for audit purposes. The Asbestosis situation was well known in the Market and they believe that the Underwriters were aware of the potential problems.
b) Attorneys should be invited to give a view on the present valuation of an average, individual claim and should indicate an additional expense allowance. They should also provide information on the likely eventual number of claims which could develop.
144. The minutes of the first meeting of the AWP in 1981 are (for reasons which we need not go into here) available only in a severely redacted form. The parts which the court has been permitted to see show a general agreement that asbestos-related risks were quite different from those of computer leasing: when the floodgates open the syndicates would not be able to cope (Mr W W Maitland). It was thought appropriate for a member of the Committee of Lloyds to serve on the AWP; this had been agreed by the Audit Committee. Mr Ayliffe was recorded as thinking that there should be a bland report informing the market that all the information received from attorneys was available for inspection (but Mr Ayliffe is also recorded as taking the view, contrary to the majority, that figures should be published).
145. On 2 February 1981 Mr Randall (the manager of what was then the Underwriting Agents and Audit Department, and the only individual accused of bad faith who was at one stage an employee of Lloyds) wrote to all the members of the panel of auditors sending their formal instructions in respect of the accounts for 1980. In the covering letter he stated,
ii) Very Long Tail Business
Where a Syndicate underwrites a very long tail business such as product liability and excess casualty reinsurance business, Auditors are asked to pay particular attention to the effect that such business will have on the reserves to be created bearing in mind the greatly increased cost of claims on older years of account due to inflation etc.
This letter is significant because it marks the beginning of exchanges between the panel and the Committee which are of central importance to the case. (There had been comparable exchanges the year before in respect of the 1979 accounts, but there was a growing sense of concern which reached a peak by the time of the 1981 accounts.)
146. On 20 April 1981 attorney G wrote a long letter of advice to Mr Ayliffe. The letter is remarkable for suggesting what appears (by comparison with attorney Hs advice) a very low average cost per claim of $2,500. This appears to reflect the position of the particular insured (as one only of multiple defendants). But the letter also contained a dire warning about the scale of the problem:
There are numerous well informed people who profess to believe that claims filed to date represent only the beginning of a potential flood of asbestos litigation. The Secretary of Health, Education and Welfare of the United States recently stated that 67,000 people each year will die from exposure to asbestos products during the next thirty years. We know that between 8,000,000 and 11,000,000 workers have variously been exposed to asbestos in the United States since the beginning of World War II and of this group 4.5 million have worked in shipyards. Most of the shipyard workers have been exposed to asbestos and it is estimated by the United States Government that one third of all those heavily exposed to asbestos have died or are likely to die of asbestos-related diseases. Although the assureds involvement with products containing asbestos does not appear to be as substantial as other defendants in these matters, it may be that in the future the assured regularly will be included among the growing group of frequently named defendants.
147. In June 1981 the AWP sent out to over 150 syndicates (and also to over 50 insurance companies outside the Lloyds market) a form of general authority conferring on the AWP a limited power to handle and agree claims. By 22 June 1981 68 underwriters had signed unconditionally. Another 6 had signed conditionally and 8 had declined to sign.
148. In September and December 1981 two discussion documents on asbestos- related problems were produced. They were referred to at trial as the 'White Papers. Each was signed by ten leading members of Lloyds, including Mr Lawrence, Mr Murray and Mr Skey. They discussed the difficulties of key concepts (such as 'causative agency', 'common origin' and 'common cause') in the context of reinsurance in respect of latent risks. In that context the second paper observed,
Obviously claims from the asbestos-related diseases are catastrophic and disastrous so far as the whole Insurance Industry is concerned but this fact alone does not automatically qualify them to be treated as 'a catastrophe'
149. On 10 November 1981 there was an important meeting between members of the Committee of Lloyds (including Mr Kiln, in the chair, and Mr Lawrence, with Mr Randall also present) and representatives of 15 different firms of chartered accountants who were panel auditors. There are several sets of minutes of this meeting prepared by different participants. The Lloyds minutes record under the heading 'Any Other Business Asbestosis:
Mr Kiln reported that claims were being made on notices as far back as 1947 where underwriters had been involved in direct insurances or reinsurances of companies covering liabilities of companies subject to Asbestosis claims.
Mr Lawrence reported that a databank was being produced which would contain details in respect of the 10 or 12 major assureds with all years of cover. The loss adjusters would then be able to make some estimate of underwriters lines on such risks. Projections of claims for 3 or 5 years hence would be made, and also loss expenses for 2 or 3 years ahead; both such items would be in respect of direct business only. From the databank it would be possible to obtain a list of major companies and look at their reinsurers, to give a rough estimate as to the exposure in respect of reinsurance business.
Mr Kiln pointed out that he did not wish to see mention of these specific claims in the Audit Instructions.
Mr Holland [of Ernst & Whinney] requested that an indication should be given to Auditors as to how the databank report was fragmented, so that they may know what to look for. Mr Lawrence replied by stating that a Market Meeting would be held soon enabling all to be appraised of the situation.
It was agreed that there would be a further meeting of the Panel early next year to consider asbestosis and any other business not concluded at this meeting.
Another note of the meeting began this section
The potential claims in connection with asbestosis make computer leasing appear insignificant by comparison.
150. The databank referred to in these minutes was known as the Claims Information System. It was developed in 1981 by Alexander Grant & Co on instructions from the Claims Committee of the AWP. It stored information on US claims under more than 40 different heads, as described in chapter 16 of the judgment.
Chronological summary: 1982
151. 1982 was the year in which Sir William Jaffray began underwriting. It is also of central importance in this case. The first three months call for particularly close attention. Counsel for the appellants, and several of the litigants in person, referred to it as the pivotal period, and counsel for Lloyds did not dissent from this description. It was common ground that if at any stage there was a decision (for which Lloyds must bear responsibility) to mislead external names and prospective names about the unquantifiable risks of asbestos-related claims, or if there was ever a moment at which those at the centre of Lloyds should have appreciated that the audit system might not involve making reasonable estimates of outstanding liabilities, it must have occurred during the early months of 1982 when the Neville Russell letter and the Murray Lawrence letter were written.
152. In paragraphs 143 and 147 above we have noted exchanges between responsible officers and officials of Lloyds and the panel of auditors. At the meeting held on 10 November 1981 it had been agreed to hold a further meeting in the new year in order to consider (among other topics) asbestosis. The further meeting took place on 15 January 1982. Again, there are several different minutes of the meeting prepared by different participants.
153. One note (made on 25 January 1982 by Mr P B Milne of Littlejohn Fraser) recorded Mr Nelson as having advised the auditors in terms which the judge summarised as follows:
There are to be no specific audit instructions other than a reference to the incidence of late claims arising from product and disease insurance. There have been some 15,000 claims notified (increasing at the rate of 400 per month). By mid to end 1980s it is expected there will be some 25,000 claims in total. E E Nelson thought that the estimate by the Prudential of 2 million claims was well wide of the mark. The Committee of Lloyds has set up a database whereby the full details of all known syndicates liable are stated. At present loss reserves have been based on an average cost per claim of $125,000 plus expenses of £10,000 per claimant. Currently this means a total claim of $2.025 billion. On an exposure basis 40% is with the London companies and Lloyds, on a manifestation basis it is 10%. E E Nelson also reminded the Panel Auditors of three other product claims requiring consideration; Agent Orange; Love Canal; and DES.
154. The note also referred to three important legal decisions in the United States. These were the decision of the Court of Appeals for the Sixth Circuitin INA v Forty-Eight Insulations Inc (5 March 1981, 633 F 2d 1212) upholding the exposure basis of liability; Eagle-Picher Industries Inc v Liberty Mutual Insurance Company (14 August 1981, 523 F Suppl. 110) in which the District Courtapplied the manifestation basis; and Keene Corporation v INA (1 October 1981, 513 F Suppl 47) in which the Court of Appeals for the District of Columbia Circuit adopted the so-called 'triple trigger' basis of liability, which was more favourable to claimants than either the simple exposure test or the simple manifestation test. The note commented,
Clearly, the foregoing decisions are a bit of a nonsense and the London Market is currently in the process of appealing to the US Supreme Court to obtain a sensible ruling. But in the event the United States Supreme Court refused petitions in all three cases (an appeal to the Court of Appeals for the First Circuit in Eagle- Picher having been largely unsuccessful in June 1982).
155. By 3 February Neville Russell and three other firms of panel auditors had agreed a form of questionnaire which was distributed to underwriters. It should be noted that there were in all fifteen panel firms, but Neville Russell and the other firms who joined in the Neville Russell letter (mentioned below) had between them over four-fifths of the syndicate audit work. The questionnaire asked for information under five heads: (i) direct writing or reinsurance of main carriers; (ii) other exposure to asbestosis; (iii) IBNR (Incurred but not reported); (iv) reinsurances; and (v) other latent disease claims.
156. The general nature of the responses to the questionnaire appears from a memorandum sent by Mr A M Blake, the senior partner of Neville Russell to his syndicate partners:
From the replies that are coming in from our clients certain facts are emerging with great consistency:
1 A very few clients have probably very little exposure. 2 The remainder are unable to quantify their ultimate liability with even a remote degree of accuracy for the following reasons:
(i) Advices so far are 15,000 maximum would be 11,000,000.
(ii) Courts have not decided on whether exposure or manifestation basis is applicable.
(iii) The losses are being apportioned over carriers on an industry basis. If one of the carriers has losses going right through its insurance cover (as is highly likely) then it could well go into bankruptcy. That companys share of the industry loss would then be apportioned over the remaining companies.
(iv) Although many insurers are covered by reinsurance, I don't get the impression that many have been able to get very far with this.
(v) Similarly, Syndicates will pick up the losses on their own reinsurance writings, which are likely to fly round the market with some speed. None of these appear to be notified so far. One particular Syndicate has been mentioned more than once as being involved in writing the reinsurance of other peoples run-offs.
(vi) The data bank established has very little value so far.
Very early in March we will need to meet again with the other auditors to agree our approach.
157. Two days later Mr Blake wrote another memorandum to his partners:
Further to my memo of 17 February I think that we should pay immediate attention to the instructions contained within the document Instruction for the guidance of Lloyds auditors.
We never strictly follow this clause to the letter because if we did we would never get our audits complete, but in view of the Asbestosis problem I think we should follow the letter of the paragraph absolutely.
What I have in mind particularly is the instruction if there are any other factors which affect or may affect the adequacy of the reserves, then the auditor must report to the Committee and obtain their instructions before issuing his Syndicate Solvency Report.
This seems the obvious course of action in this particular case and I think we should proceed as soon as possible.
158. On 22 February Mr Randall sent a memorandum to Mr Lawrence headed 1982 Audit. The second item was:
Reserves for Asbestosis and other latent diseases
I have arranged for the item to be put on the Agenda of both the Membership Committee and the Audit Committee when further consideration will be given to the basis of reserving and whether new Names should be warned that specific syndicates are carrying a liability for such risks.
I will advise you of the outcome of these discussions.
159. That was the immediate background to the Neville Russell letter dated 24 February 1982 which Mr Blake wrote in his firms name to Mr Randall as manager of Lloyds audit department. Neville Russell stated that they were writing on behalf of five other firms of panel auditors. The main part of the letter was as follows:
A substantial proportion of our Syndicate clients have losses, or potential losses, arising from asbestosis and related diseases.
It appears that although, in respect of direct insurance of the main carriers and reinsurance of American insurers, Syndicates have received some notification of outstanding claims, they are unable to quantify their final liability with a reasonable degree of accuracy for the following reasons:
(i) You have informed us that there have been approximately 15,000 individual claimants. Total exposure to the problem appears to be considerably in excess of this figure.
(ii) The Courts have not yet finally decided on whether the exposure or manifestation basis is applicable.
(iii) The losses are being apportioned over carriers on an industry basis. If one of the carriers has losses in excess of its insurance cover (as seems likely) then it could go bankrupt. It appears that its share of the industry loss could be apportioned over the remaining companies.
(iv) Most Syndicates are not very certain of their reinsurance recoveries.
(v) Most Syndicates will incur losses on their own writings of reinsurance business. Very little of this has been advised so far.
The Audit Instructions (Clause 3) require that if there are any factors which may affect the adequacy of the reserves, then the auditor must report to the Committee and obtain their instructions before issuing his Syndicate Solvency Report.
We consider that the impossibility of determining the liability in respect of asbestosis falls into this category and we accordingly ask for your instructions in this respect.
160. This letter provoked a good deal of discussion, both formal and informal, and various views were expressed. The eventual consequence was the despatch of another important letter, the Murray Lawrence letter dated 18 March 1982, written by Mr Lawrence, then the Deputy Chairman of Lloyds. There was an issue at trial of who were the intended recipients of the letter, and whether it was in fact sent to them. It is also necessary to look closely at what happened in the period of about three weeks between these two letters.
161. On 1 March there was a meeting of the AWP chaired by Mr Tayler. The minutes record:
The Chairman raised the question of the letters which had recently been circulated to Underwriters by the Panel Auditors. He believed the Auditors appreciated that it was not possible for Underwriters to be precise in their reply although he was disturbed at the ignorance displayed by certain syndicates on the question of Asbestosis generally.
162. On the following day there was a meeting of Lloyds Audit Committee, chaired by Mr Chester, with Mr Randall present. The Neville Russell letter was at the top of the agenda. The minutes record the discussion as follows:
Mr Chester said that he had spoken to Mr Nelson with regard to this matter who had put forward the following suggestion:
a) with regard to direct business, underwriters should reserve their known claims plus a margin of 30% and their expenses.
b) with regard to reinsurance assumed they should allow for one loss per assured per each year of account.
c) on Underwriters own reinsurances it was suggested that they approach the matter on the same basis as (b) above; Mr Nelson thought that this would be the basis on which the excess of loss market would settle any claims.
With regard to the question of whether claims should be reserved on an exposure or manifestation basis it was considered that whichever basis produced the worst result should be adopted.
d) the letter from the auditors also stated that the losses were being apportioned over carriers on an industry basis. If one of the carriers had losses in excess of its insurance cover then it could go bankrupt. It appeared to auditors that its share of the industry loss might then be apportioned over the remaining companies.
e) the auditors letter also stated that many syndicates lacked information regarding their reinsurance recoveries. Mr Nelson considered that recoveries might be determined on the formula for reinsurance assumed business as set out above.
Having discussed Mr Nelsons views, the Audit Committee considered that it would not be possible or desirable for them to give a definite answer as to the amount or basis of reserves syndicates should carry. It was a matter for the underwriter of each syndicate to determine his potential liability and agree this with his auditor. It was, however, necessary for a full discussion to take place with Panel Auditors so that where possible general guidance could be given and it was agreed that a meeting should be arranged in this regard at the earliest opportunity.
Mr Chester then raised the question of the reinsurance of underwriters asbestosis liability in the Lloyds Market (ie effectively amounting to reinsurance of the Asbestosis tail) and expressed concern that such liabilities could fall on comparatively few syndicates. Mr Merrett considered that it would be inappropriate for such reinsurances to go unnoted and unreserved by Panel Auditors and that it would be improper for a syndicate taking such reinsurances without telling its own Names. It was stressed that auditors should make any enquiries they deemed necessary with regard to the open years and that they should ensure that whatever position they consider is necessary should be created over and above the minimum percentage reserves.
It was agreed that this matter should also be raised with Panel Auditors at next weeks meeting.
The appellants have suggested that Mr Merretts contribution, as recorded in the minutes, can now be seen to have been highly questionable.
163. On 9 March 1982 members of the Audit Committee (Mr Chester and Mr Nelson, accompanied by Mr Randall and his assistant) met with representatives of the six firms of panel auditors on whose behalf the Neville Russell letter had been written. The Audit Committee minutes record that Mr Nelson explained that the problem had three aspects:
(i) Business written direct by Lloyds
(ii) Reinsurance of asbestosis risks written by companies
i. Where Lloyds syndicates had reinsured their liability with outside companies.
Mr Nelson explained the controversy as between manifestation, exposure or a combination of the two. The minutes record the auditors views and the subsequent discussion:
The main worry raised by auditors was the widely differing views taken by syndicates and that the real purpose of their letter was an attempt to seek some uniformity in the Lloyds Market for dealing with this matter. They considered that it would be grossly unfair for syndicates on basically the same risk to treat their reserves on an entirely different basis. Auditors were also concerned that not only may they reserve too little but that they may ask the closing year to carry too great a reserve. Part of the auditors job was to ensure that there was equity between the account accepting the reinsurance and the closing account.
Mr Chester asked auditors for their opinion on leaving the 1979 account open. Auditors thought that although this would solve the problem of equity between years of account it would still leave the problem of quantification in that Names could still be asked to put up substantial sums of money.
Mr Nelson then said that in his view a figure of 50,000 new claims over the next 10 years would seem to be realistic and that the reports of up to 2,000,000 new claims could well be an exaggeration.
Mr Randall then said that perhaps Lloyds could consider issuing guidelines on the basis of the 50,000 figure and that where asbestosis formed a material part of a syndicates accounts (say 10%) then consideration should be given to leaving the account open.
Auditors said that they would be reassured with guidance of this sort. It was, however, suggested that in those cases where consideration was being given to leaving the account open applications should in any case be made to the Committee for instructions.
162. During the next few days Mr Randall had at least one further meeting with representatives of the six firms of panel auditors. On 12 March Mr Nelson produced an eight-page memorandum (headed strictly Private and Confidential -- Implications of Asbestosis Involvement for the Audit of Lloyds Syndicates at 31.12.81'). This document was considered and annotated by Mr Randall and then passed by him (on 15 March) to Mr Lawrence (then one of the two Deputy Chairmen of Lloyds) for a meeting of the 'O' Group (see paragraph 189 below) held on 15 or 16 March.
163. The opening paragraphs of Mr Nelsons memorandum were as follows:
The following is a personal appraisal and opinion regarding the Asbestosis problem and is based on my own experience as Chairman of the Asbestosis Committee in 1981, two formal meetings with the Panel Auditors and various private conversations which I have had with individuals in the Market. There is little doubt now that this problem is every bit as serious as was expected by the Asbestosis Committee, and the information on claims involvement which has been made available in the LUNCO office has identified the extent of Lloyds involvement.
There is no doubt in my mind that Panel Auditors are extremely nervous of their position regarding the audit at 31st December 1981. They consider the situation to be unique and not one where they alone should bear the responsibility of deciding the amounts which should be reserved at year end.
Whilst they would agree that most Underwriters are co-operating fully, there are some who by design or ignorance are not complying. Auditors are going so far as to suggest that all Syndicate accounts must be qualified and some seek an instruction that all accounts must be left open at this year end. To my mind, neither of these should be acceptable to the Committee [of Lloyds].
If this view is supported, then I believe it is incumbent upon us to give clear and concise instructions as to how the audit should be conducted in certain areas and thus bear a share of the responsibility to Names for which they are entitled.
164. The appeal bundles contain a copy of Mr Nelsons memorandum annotated by Mr Randall. Mr Randalls manuscript comments show some of his thinking at the time. He agreed with Mr Nelson that the final decision to leave a year open must be the underwriting agents. He wrote 'Expand?' against Mr Nelsons proposal,
Managing and Members Agents must advise their Names at year end of their Asbestosis position overall and the manner in which the claim has been handled by them.
At the end of Mr Nelsons proposals Mr Randall wrote,
+ ? Position of New Names.
165. On 15 March 1982 Mr Lawrence initialled a memorandum for consideration by 'O' Group. This is one of the very few documents in the appeal bundles which refer to 'O' Group as such. Its terms suggest that Mr Randalls comments on Mr Nelsons memorandum were approved by Mr Lawrence.
166. On the same day Mr Murray (then the active underwriter of the Kiln syndicates) wrote a letter headed '1979 Reinsurance to Close'. The letter was formally addressed to the Chairman of the Audit Committee (who was Mr Chester) but it begins 'Dear Murray' (Mr Lawrence being in 1982 the Deputy Chairman with responsibility for auditing matters). The letter began,
There has obviously been much discussion within the market regarding asbestosis and other potential loss developments on old years. These problems obviously present difficulties to the Underwriter closing the account, and to the Managing Agent and Panel Auditor. I have, however, heard that one or more Panel Auditors have approached the Lloyds Audit Committee for specific guidance with regard to the figures which should be allocated to asbestosis claims, and I am sufficiently disturbed by the possibility that this should be true for me to write this letter.
I am concerned because a request for your guidance in this matter seems to suggest:
a) that it is possible to set a figure to close an account that will be proved closely accurate in the future;
a. that one or more Panel Auditors may have lost confidence in their own abilities.
The letter strongly urged that RITC was ultimately a matter for the experience and judgment of the active underwriter,
but regardless of this all of us should surely acknowledge that even our best endeavours may be found to be far too much or far too little at some later date.
This letter has been referred to as the 'Bannockburn' letter from a postscript whose casual anti-semitism may or may not reflect the tone of Lloyds in the 1980s.
167. We have been shown no written record of what happened at the meetings of 'O' Group on 15 and 16 March. On 16 March there was a meeting of the Membership Committee, chaired by Mr Bird, which considered the topic (brought forward from a previous cancelled meeting) of what changes (if any) should be made to the standard questions put to candidates at Rota meetings. The minutes record two small changes which were agreed and then state,
The decision was taken not to refer specifically to Asbestosis risks in the Rota brief.
168. On 17 March there was a formal meeting of the Committee of Lloyds with Mr Peter Green in the chair. Committee members present included Mr Brennan and Mr Lawrence (the Deputy Chairmen) Mr Barber, Mr Barham, Mr Bird, Mr Chester, Mr A W Higgins, Mr Miller, Mr Nelson and Mr Posgate. The Committee had a memorandum and a draft letter prepared by Mr Randall, who was present for the relevant part of the meeting. The Committee did not, it seems, have copies of the Neville Russell letter itself. The final paragraphs of the memorandum stated,
The attached draft will, it is believed, assist Auditors in agreeing the reserves to be created at 31st December 1981, although it is still possible that a few individual syndicates may feel it necessary to approach the Committee for further instructions. It is also likely that a number of syndicate accounts will be left open at the discretion of the Managing Agent concerned.
The letter also covers the position with regard to the open years.
In all cases it is felt that Agents must advise Names regarding the basis of reserving and also advise Names on the open years which will assume the liability.
The Committee is asked to agree that a letter along the lines of the attached may be issued to Agents. Before publishing the letter, however, it is recommended that there should be further informal discussion with Auditors to confirm that the letter provides an adequate degree of comfort to enable them to complete their Audit discussions.
169. The minutes of the discussion and the Committees decision must be set out in full:
The Committee was advised that six firms on the Lloyds Panel of Auditors covering the large majority of syndicates had requested instructions, in accordance with Clause 3 of the Audit Regulations, as to the basis on which syndicates should provide for Asbestosis liabilities as at 31st December 1981.
The main area of concern centred around the need for syndicates to make searching enquiries regarding their potential exposure, both direct and by way of reinsurance written, to enable them to make adequate provision in their accounts at 31st December 1981. There appeared to be substantial differences in approach both as to the amount of research carried out and the intended IBNR loadings as at 31st December.
Without guidelines from the Committee, Auditors believe that there was a real danger that Managing Agents and Auditors would not be able to agree the closing reserves and that some syndicate results may be qualified by Auditors. It was also pointed out that there could be wide discrepancies regarding the approach adopted by individual syndicates.
A draft letter had been prepared for the Committees agreement and discussion ensued on its content.
It was pointed out that the draft had already been discussed with three of the Auditors concerned and that in the case of two firms it was regarded as of vital importance that the Committee should stipulate a minimum percentage for the IBNR loading. They also considered that the Committee should issue some guidance to Agents with regard to whether syndicates should close at the end of the third year or remain open. It was felt that the term a material proportion was too vague and that a specific percentage should be quoted.
In discussing this matter the Committee felt that it was in no position to stipulate a minimum percentage for the IBNR loading as this could vary from syndicate to syndicate depending on the cover given to insurers and its own reinsurance programme. Mr Nelson said that in respect of at least one large manufacturer syndicates had already reserved up to the policy limits and that no further IBNR would be necessary in this case.
Certain Members of the Committee were unhappy that the Committee was instructing Agents that they must tell their Names of their syndicates involvement in Asbestosis. It was therefore decided that the wording in this regard should be amended so that Agents would be strongly advised to inform their Names of their involvement in Asbestosis.
It was also pointed out to the Committee that certain syndicates had indicated their intention to discount the reserve for Asbestosis to reflect possible future investment earnings and that Auditors had requested a statement in any letter from the Committee specifically banning this practice. The Committee whilst agreeing that such practice should not be allowed in the case of Asbestosis decided that to refer to one particular part of the reserve might lead underwriters to take the view that such a practice of discounting was being encouraged or condoned by the Committee.
With the exception of the points mentioned above the Committee agreed that the draft letter should be forwarded as soon as possible to the Market but that a separate letter from the Manager of the Underwriting Agents & Audit Department should be sent to Auditors in reply to their letter requesting guidance. This would set out more fully the Committees reasons for the approach it had adopted to the problem.
170. The draft letter, which was approved with few amendments, became known as the Murray Lawrence letter, sent out signed by Mr Lawrence on 18 March 1982. It too must be set out in full:
Asbestosis Lloyds Audit at 31st December 1981
Potential claims arising in connection with Asbestosis represent a major problem for insurers and reinsurers. It is therefore all the more important that the reserves created in the Lloyds Audit at the 31st December 1981, fairly reflect the current and foreseeable liabilities of all syndicates.
I should stress that the responsibility for the creation of adequate reserves rests with Managing Agents who will need to liaise closely with their Auditors. Clearly, individual circumstances will vary, but it is felt that the following broad guidelines may be helpful to Underwriters, Managing Agents and Auditors in agreeing equitable reserves as at 31st December 1981, and ensuring, so far as possible, a reasonably consistent approach to this problem.
1. Reserves for Asbestosis liabilities should be separately identified and disclosed to Auditors. This applies for both the closing and open years.
2. Substantial information has been built up in the LUNCO Office regarding direct business and all Underwriters should check the information available to ensure that their own records are as complete as possible. This information should also be made available to the syndicate auditors.
3. It is in the area of reinsurance writings that the information available may be least complete. Nevertheless, the Committee believes that some information is now available within the Market and Underwriters and Managing Agents should discuss with their Auditors the steps they have taken to quantify and reserve for losses which may arise on an Excess of Loss or Pro Rata basis as a reinsurance of American or other insurers. In this connection, Underwriters should attempt to identify reinsureds on whom Asbestosis claims are likely to fall and to seek their opinion as to the basis on which they intend to submit claims on their reinsurance contracts together with the reserves which they are carrying at the present time and an estimate of possible future liabilities.
4. The Committee is aware of the legal argument whether liability arises on the basis of exposure or manifestation. It is not, however, for the Committee to express an opinion as to which is correct. For the purpose of reserves at 31st December 1981 Managing Agents are strongly advised to carry a reserve which is the higher of the alternatives.
5. An IBNR loading should be carried for those claims not specifically advised but which could come to light in the years ahead. The decision regarding the appropriate IBNR percentage is a matter for the Agent and his Auditor to resolve dependent upon the circumstances of each case. It would be inappropriate for the Committee to lay down a minimum loading but, it appears that this loading should be substantial to reflect unreported cases on the direct account and incomplete information on the reinsurance account. Credit may, of course, be taken in respect of reinsurance recoveries, but Agents should verify, so far as possible, that reinsurers have been identified and have agreed to accept claims on the basis submitted. In the event that there are any disagreements with reinsurers these should be discussed with Auditors. (The normal guidelines regarding the admissibility of reinsurance recoveries obviously will apply).
6. A syndicate which has written a run-off or stop loss in respect of an Asbestosis account which has been signed into an open year, should advise the details to its Auditors and where appropriate, the open year reserves should be increased.
7. A syndicate underwriting London Market Excess of Loss business should make particular and comprehensive efforts to ascertain the extent of its possible liability going beyond those claims which have been advised at 31st December 1981, and these should be fully disclosed to and discussed with Syndicate Auditors. The same requirement should apply to specialist Personal Stop Loss syndicates.
8. Where the reserve for Asbestosis represents a material proportion of the total reserves of the syndicate, Agents should consider whether or not to leave the account open. It is the Agents responsibility to ensure that the reserves provided for Asbestosis are sufficient to meet the Syndicates liabilities regardless of whether the account is closed or left open.
9. Managing and Members Agents are strongly advised to inform their Names of their involvement with Asbestosis claims and the manner in which their syndicates current and potential liabilities have been covered.
I would urge you to discuss the contents of this letter with your Auditor before deciding what further action, if any, is necessary for you to take.
If you should have any enquiries with regard to this matter would you please contact Mr M Bowmer (Extension 3299) or Mr K E Randall (Extension 3124).
This letter has been sent to all Underwriting Agents and Active Underwriters, with copies for information to all Panel Auditors.
171. Mr Randalls accompanying letter of 18 March (sent to panel auditors only) was as follows:
Asbestosis Lloyds Audit at 31st December 1981
Several Panel Auditors have approached the Committee for instructions under Clause 3 of the Instructions for the Guidance of Lloyds Auditors regarding the basis on which syndicates should provide for Asbestosis liabilities in their accounts at 31st December 1981.
I attach a copy of a letter which is being circulated to all Active Underwriters and Underwriting Agents setting out broad guidelines which should be followed in this regard. The Committee has decided that it is inappropriate to specify a minimum IBNR loading to apply across the Market; the IBNR loading is regarded as a matter for Managing Agents to resolve depending upon the particular circumstances of each syndicate. Nevertheless the Committee wishes me to stress that, unless there are sound reasons to the contrary regarding any specific case, the loading should be very substantial to reflect unreported cases on the direct account and, possibly, incomplete information on the reinsurance account. The Committee also believes that the reserve (including the IBNR loading) should be maintained in full and not discounted to reflect possible future investment earnings.
One of the main reasons why the Committee does not feel it is appropriate to lay down a specific IBNR loading factor is that in a number of cases syndicates will have reserved up to the maximum of policy limits and a substantial IBNR loading, in addition to this figure, might be regarded as excessive.
Auditors will no doubt give special attention to the question of whether or not the Agent has decided to leave an account open in cases where the reserve for Asbestosis represents a material proportion of the total reserves of the syndicate or where there is a wide margin for error in the basis of calculation of the closing reserves due to a lack of current information.
Where it is decided that an account should be left open, your attention is particularly drawn to Clause 6 Note 1 of the Instructions for the Guidance of Lloyds Auditors regarding the reserves which are being created for the purposes of assessing Members solvency.
If you should have any queries with regard to this matter would you please contact Mr M Bowmer (Extension 3299) or myself (Extension 3124).
This letter is being sent to all Panel Auditors.
172. One immediate reaction from a panel auditor appears from an internal memorandum made on 19 March by Mr Holland of Ernst & Whinney:
Herewith the latest epistle on Asbestosis. I cannot believe that at some stage we are not going to find a Syndicate where this is a major problem. If any partner is unhappy about a particular situation I suggest he lets me know and we will try and organise a PSP type meeting so that a view can be formed and the partner can then talk to his client knowing that he has the full backing of his colleagues.
Of the Syndicates I have seen so far I am pleased at the very responsible manner shown by our clients in dealing with this problem and I am even more delighted at the amount of reinsurance protection that is available.
173. On 2 April 1982 Mr Lawrence wrote an internal memorandum, marked private and confidential, to senior staff at his agency. He referred to the problems of asbestosis and (without going into detail) to the reinsurance protection which he and his colleagues had recently arranged. He wrote,
We regard these reinsurances very much as sleep at night' cover as, in spite of the complexity of the situation (21 major assureds with identifiable insurers into 3 figures) we feel our reserving is conservative in light of the information available to us at this moment in time.
174. On 6 April there was a meeting of the Audit Committee. Mr Randall reported that
a letter had been sent to all Underwriters with regard to Asbestosis. Since that letter had been circulated there had been little or no reaction from the Market.
However the statement of agreed facts (as to the chronology of asbestos- related claims) cites numerous syndicate reports, published during May 1982, which give information as to asbestos-related claims and reserves. Some refer to the advice given by the Committee of Lloyds in the Murray Lawrence letter.
175. On 28 June 1982 attorney H wrote a long letter to Mr Tayler (as chairman of the AWP) referring to the enormity of the asbestos problem. The letter stated that there were about 15,000 pending lawsuits and that they were increasing at the rate of 500 a month. Most of these lawsuits had multiple defendants (the average number of defendants was twenty, according to a later letter). All the correspondence from attorneys at this time reflected the difficulty and expense of managing the claims, especially because of uncertainties as to the principles on which liability and coverage were to be determined. Efforts to resolve these difficulties eventually led (although only after long and complex negotiations) to the establishment of the Asbestos Claims Facility under the so-called Wellington Agreement (see paragraph 230 below).
176. In August 1982 Johns Manville, an industrial company which was facing more claims than any other assured, sought protection under Chapter 11 of the United States federal bankruptcy law. In the following month Conning & Company, an American investment analyst, published a report 'The Potential Impact of Asbestos on the Insurance Industry'. This was a detailed study which appears to have been read, and highly regarded, by many members of the Lloyds community.
177. The Conning report estimated the entire insurance industrys ultimate liability at
between $4 bn and $10 bn with the lower end of this range appearing most probable at the present time
Our work suggests that the primary companies which are involved have already done significant reserve strengthening on currently known claims and have also established loss reserves for incurred-but-not- reported claims. In the light of emerging knowledge on the business, we anticipate that additional reserve strengthening may be required in the future. On the other hand we believe that there is a possibility that numerous excess and reinsurance carriers may be greatly understating their potential liabilities for this exposure at the present time.
It identified the American insurance companies thought to be the primary carriers with the largest exposure and added that on an excess basis Lloyds might have a potentially large exposure. It predicted that claims would peak during the 1980s and would be minimal by 2010.
178. On 1 October 1982 Mr Rokeby-Johnson succeeded Mr Tayler as chairman of the AWP. At about the same time Mr Lawrence made a speech in Chicago to the American Management Association. The speech (as reported in the Lloyds Log for November 1982) contained an ambiguous reference to
under-reserving particularly due to the problems of latent disease and other late developing problems
as one of 'various scenarios which 'we can all dream up'. He referred to the risk of major insolvencies among insurers as being likely to lead to
increased regulation of our business, which I believe would be extremely harmful to our industry.
179. On 9 December 1982 the Committee of Lloyds considered the wording of the instructions to auditors. The minutes record,
The Committee was informed that, for a number of years, comment had been received from Panel Auditors that it was inappropriate to draw their attention to specific Market problems thereby encouraging Auditors to rely upon these advices rather than their own auditing enquiries with their clients. In view of these comments, the Audit Committee had recommended that a number of the items which appeared under Clause 3 of the White Regulations should be either deleted or amended.
Certain of the relevant subparagraphs were amended or deleted but that referring to latent diseases was left unaltered.
180. On 10 and 11 December there was a conference at Leeds Castle attended by all or most of those who were to form the first Council of Lloyds on the coming into force of the 1982 Act on 1 January 1983. The conference appears to have been concerned largely with questions of governance and procedure. There seems to have been no formal discussion of asbestos-related problems.
The Lloyds Act 1982
181. In this section we cover, with some deviation from chronological sequence, the enactment of the Lloyds Act 1982 and associated matters. At the beginning of the 1980s the statutory framework regulating Lloyds was under review. The Society of Lloyds traced its origins to the 17th century and was formally established by a deed of association in 1811. Before the enactment of the 1982 Act it was regulated by the Lloyds Act 1871 as supplemented and amended by three later Acts. Its affairs were managed by its Committee, subject to the ultimate control of the Society in general meeting. The constitution and operation of Lloyds and its insurance market have been the subject of three inquiries and reports by committees chaired by eminent persons, namely Lord Cromer (1969), Sir Henry Fisher (1980) and Sir Patrick Neill (1987). There have also been numerous internal inquiries, reviews and disciplinary proceedings. The Cromer report (which was not published generally until 1986) was the precursor to a significant increase in the number of external names. The Fisher report was delivered in May 1980 and was the precursor to the 1982 Act, following on an extraordinary meeting of Lloyds held on 4 November 1980.
182. It is convenient to mention here two topics discussed in these reports which, while not directly relevant to the issues in the appeal, recur frequently in the documentary evidence. These are 'divestment' and 'divorce', as they were often referred to (see paragraphs 8.5 to 8.22 of the Neill report, in a chapter headed 'Conflicts of Interest'). Divestment referred to the separation of ownership and control of managing agents from ownership and control of Lloyds brokers, and divorce referred to the separation of managing agents and members agents (whose functions were often combined in a single firm).
183. As regards brokers and managing agents, Cromer had noted conflicts of interest which could not be ignored, but made no firm recommendation for divestment. Fisher discussed the matter at length (chapter 12) and made firm recommendations to achieve, within five years, that no managing agency company should be recognised if there were direct or indirect shareholding links between it and non-Lloyds insurance interests. Neither Cromer nor Fisher dealt with divorce of managing and members agents.
184. The Neill report recorded (paragraphs 8.6 and 8.7) the outcome of the Fisher recommendations. When the Bill which became the Lloyds Act 1982 was before the House of Commons Sir Peter Green argued for the issue of divestment to be left to the new Council, which might be able to avoid conflicts of interest without complete divestment. But that was not accepted and a mandatory provision for divestment within five years was included.
185. As regards divorce Neill did not make any specific recommendation. But the report made a general recommendation which is very pertinent to this appeal (paragraph 8.22):
Nevertheless, the principle that Names should be able to make fully informed decisions, on the basis of full disclosure by agents of the limits of their independence, is a vital one. We dealt at some length in chapters four and five with the improvements we would like to see in the recruitment process.
186. Those chapters had repeatedly stressed the need for prospective names, and external names after admission, to have access to information and advice. It was stated in paragraph 4.8:
From the evidence submitted to us, however, we have identified six aspects of the current system about which there is concern on the part of Names and others closely associated with the Lloyds market. These are:
(i) the effectiveness of the existing controls over commissions in relation to those introducing new Names:
(ii) the quality of the basic introductory information about membership provided by Lloyds to prospective Names:
(iii) the sufficiency of the information available to assist Names in making informed choices between agents:
(iv) the level of the means test set by Lloyds:
(v) the absence of any formal 'know your client' rules: and
i. the efficacy of the Lloyds procedures (and in particular the Rota committee interview) in ensuring that prospective Names are fully aware of the consequences of their decision to join the Society.
187. The 1982 Act (which came into force on 1 January 1983) made extensive changes in the constitution of Lloyds. It provided for a Council to manage the Societys affairs and to regulate the business of insurance at Lloyds. The Council was empowered to make byelaws for the proper and better execution of the Societys statutory functions (subject to challenge at a general meeting). The Council at first consisted of 16 working names, 8 external names and 3 names nominated by the Council and confirmed by the Governor of the Bank of England. The 1982 Act also provided for the continuation of the Committee, which consisted of the working names on the Council and to which the Council could delegate certain of its functions.
188. There were also numerous specialised committees whose responsibilities broadly reflected the departmental organisation of the Societys staff. Until 1983 Lloyds had a department for membership services, whose responsibilities included the introduction of new names, brokers and underwriting agents, and audit. After 1983 these responsibilities (together with regulation) became those of the head of regulatory services. The specialised committees with responsibilities in these areas were as follows:
i. The Audit Committee was a policy and advisory committee reporting to the Committee of Lloyds on matters affecting the solvency of members and the security of policies. It existed from 1960 until 1983 when it was replaced by the Members Solvency and Security Committee (renamed in 1986 as the Solvency and Security Committee).
ii. The Membership Committee existed from 1977 until the end of 1985 as a policy and advisory committee on matters relating to membership requirements.
iii. The Accounting and Auditing Standards Committee was set up in 1983, effectively taking over the work of two bodies known as the Fisher task groups 4 and 15. Its functions included defining required standards for accounting and auditing, for reporting of information to names. It was also concerned with the introduction of manuals.
189. There was also an unofficial committee or group known as the 'O' group consisting of the Chairman, the Deputy Chairman, the Chief Executive and heads of departments. It met from time to time and its meetings seem not to have been minuted. Some witnesses suggested that important and confidential matters were considered at its meetings.
190. Section 14 of the 1982 Act conferred on Lloyds a qualified immunity from suit which has had an important impact on all the litigation against Lloyds. The relevant provisions of section 14 are as follows:
(1) This section shall only exempt the Society from liability in damages at the suit of a member of the Lloyds community.
(2) [defines 'Lloyds community' so as to include current and past members]
(3) Subject to subsections (1), (4) and (5) of this section, the Society shall not be liable for damages whether for negligence or other tort, breach of duty or otherwise, in respect of any exercise of or omission to exercise any power, duty or function conferred or imposed by Lloyds Acts 1871 to 1982 or any byelaw or regulation made thereunder
(a) in so far as the underwriting business of any member of the Society or the costs of his membership or the business of any person as a Lloyds broker or underwriting agent may be affected; or
(b) in so far as relates to the admission or non-admission to, or the continuance of, or the suspension or exclusion from, membership of the Society; or
(c) in so far as relates to the grant, continuance, suspension, withdrawal or refusal of permission to carry on business at Lloyds as a Lloyds broker or an underwriting agent or in any capacity connected therewith; or
(d) in so far as relates to the exercise of, or omission to exercise, disciplinary functions, powers and duties; or
(e) in so far as relates to the exercise of, or omission to exercise, any powers, functions or duties under byelaws made pursuant to paragraphs (21), (22), (23), (24) and (25) of Schedule 2 to this Act;
unless the act or omission complained of
(i) was done or omitted to be done in bad faith; or
(ii) was that of an employee of the Society and occurred in the course of the employee carrying out routine or clerical duties, that is to say duties which do not involve the exercise of any discretion.
(4) [no exemption for death or personal injury]
(5) [no exemption for defamation]
(6) ['the Society' includes its officers, employees and delegates]
191. The position of the Lloyds market under the general law regulating the conduct of insurance business was covered by special provisions (sections 15(4) and 83 to 86) in the Insurance Companies Act 1982, replacing comparable provisions in the Insurance Companies Act 1974(which remained in force until 28 January 1983). The most important provisions, so far as now relevant, were in section 83, subsections (4) to (6) of which (as in force during the relevant period) provided as follows:
(4) The accounts of every underwriter shall be audited annually by an accountant approved by the Committee of Lloyds and the auditor shall furnish a certificate in the prescribed form to the Committee and the Secretary of State.
(5) The said certificate shall in particular state whether in the opinion of the auditor the value of the assets available to meet the underwriters liabilities in respect of insurance business is correctly shown in the accounts, and whether or not that value is sufficient to meet the liabilities calculated
(a) in the case of liabilities in respect of long term business, by an actuary; and
(b) in the case of other liabilities, by the auditor on a basis approved by the Secretary of State.
(6) Where any liabilities of an underwriter are calculated by an actuary under subsection (5) above, he shall furnish a certificate of the amount thereof to the Committee of Lloyds and to the Secretary of State, and shall state in his certificate on what basis the calculation is made; and a copy of his certificate shall be annexed to the auditors certificate.
Section 84(1) provided for the general solvency requirements in sections 32, 33 and 35 to apply to the members of Lloyds taken together subject to modifications made by statutory instrument (from January 1983 the Insurance (Lloyds) Regulations 1983). This was sometimes referred to as the global annual solvency test. Section 86 required an annual statutory statement of business (SSOB) to be filed.
192. Throughout the 1970s and 1980s the number of underwriting names increased year by year. The following figures give a general picture of the increase.
TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE
193. By the beginning of the 1980s the Committee of Lloyds had some concerns about the manner in which external names were recruited. That is reflected in the revised version of its Manual for Underwriting Agents published in 1980:
The Committee of Lloyds has been gravely concerned in the past when organisations unconnected with Lloyds have distributed literature relating to Underwriting Membership and offered to introduce the recipients to Underwriting Agents. There can be no objection to the publication of articles about Lloyds, provided that the information given is factually correct, but the Committee considers that any attempt to introduce applicants for Membership of Lloyds other than by the traditional method of personal recommendation by existing Members can do Lloyds nothing but harm.
It is very important that prospective Members are correctly advised from the time when they first show an interest in Membership. The attention of Underwriting Agents is drawn to the danger of legal action if a Member maintains subsequently that he or she was misinformed at the time of making application.
This part of the Manual also drew attention to regulatory requirements in other jurisdictions.
194. The procedure for candidates admission as names had always included a personal interview, called a Rota interview (although increasing numbers of candidates led to this procedure being abbreviated at one period). The general purpose of the interview was to ensure that the candidate understood what he or she was undertaking, and to assist in this process Lloyds produced an official brochure (the terms of which, in successive editions, are relied on by the appellants). Many names referred in their evidence to the formality and solemnity of the interviews; some described them as intimidating.
195. In 1980 there had been discussion as to whether computer leasing problems should be specifically mentioned to candidates who were proposing to join non-marine syndicates, and the practice was changed so as not to mention them. In 1982 a similar question arose in relation to asbestos risks, and it was a subject of discussion early in 1982, in particular at a meeting of Lloyds Membership Committee held on 16 March 1982. We will return to this episode.
196. Soon after the 1982 Act had received the Royal Assent, and before it came into force, Lloyds was shaken by the first two of a series of scandals which came to light between 1982 and 1986. One was the scandal concerning the Alexander Howden group which led to claims for breach of fiduciary duty and misrepresentation against Mr Kenneth Grob and Mr Allan Page (the Chairman and Finance Director respectively of Howden) and other colleagues of theirs. The other, even more notorious, and generally referred to as 'PCW', was concerned with the activities of Mr Peter Dixon and Mr Peter Cameron-Webb and dealings (ostensibly by way of reinsurance) with offshore companies in which they and their associates were interested. It was estimated that at least £29m was misappropriated in this way.
197. The Neill report recorded the investigations established by Lloyds and commented (paragraph 3.22)
Apart from these particular matters, however, the investigations drew attention to an absence of understanding on the part of many working members of the principles of the law of agency. The Lloyds investigators into PCW told the Corporation (in a letter dated 20 January 1984) that it was apparent to them that many members of the Lloyds community in senior positions 'were not even vaguely aware' of the legal obligations on agents to act at all times in the best interests of their principals, not to make secret profits at their principals expense and to disclose fully all matters affecting their relationship with their principals.
198. These matters, and the negligence and mismanagement of many Lloyds agents, are covered in some detail in chapter 24 of the judgment. The Howden and PCW scandals are not directly in issue in these proceedings. But it is easy to understand that the indignation of non-working names who have been ruined should have been further inflamed by the very large sums misappropriated by a handful of Lloyds insiders. Moreover dealing with these scandals may have made it easier for the authorities at Lloyds to overlook other problems, and the adverse publicity may have made them preoccupied with their public image.
199. As the judge described in chapters 13 and 14 of his judgment and as we describe below in more detail, insurance business at Lloyds is undertaken on an annual basis, and the accounts for each year are normally kept open for the next two years and then closed by the process of RITC. If at the end of those two years it is decided not to close the account (normally because it is impossible to make any reasonable estimate of the outstanding risk) the year remains open and the account is said to go into run-off. The traditional Lloyds system was therefore well-adapted to short-tail' business but not well adapted to 'long-tail' business, as asbestos-related risks showed themselves to be.
200. The number of open years increased steadily during the relevant period, especially for non-marine syndicates subject to asbestos-related liabilities. That appears from the following figures (which would need various qualifying footnotes for complete accuracy, but give the general picture without the need for footnotes):
201. ( ) denotes minimum with known latent liability
202. The same trend was reflected in the global results for 1981 to 1985, which (in the same format as at paragraph 133 above) can be summarised as follows (with a repeated caveat as to the time-lag before the results were known):
203. Thus for each year of account the market as a whole made a profit, after inclusion of investment income and gains, but general liability business produced a substantial loss even after crediting investment income and gains.
204. Chronological summary: 1983-8
205. The 1982 Act came into force on 1 January 1983. Sir Peter Green was the first Chairman of the newly-constituted Council with Mr Brennan and Mr Barber as Deputy Chairmen. Mr Ian Hay Davison became the first Chief Executive (as well as being a third Deputy Chairman). He remained in post until 1986 when he resigned in circumstances which the Neill Report described as a matter of ' fresh controversy'.
206. In April 1983 the Chairman wrote to all managing agents, members agents and panel auditors setting out a new scheme for the disclosure of reinsurance arrangements. This required managing agents to disclose particulars of reinsurance contracts and arrangements, including 'related party' arrangements which conferred an element of discretion on the managing agents or the underwriter.
207. By mid-1983 the number of asbestos-related claims had risen to over 27,500 (and it was to continue to rise relentlessly, repeatedly falsifying all previous estimates). The judge devoted a section of chapter 16 of his judgment to what he referred to as
the interlinked reasons why things looked so different at the end of the 1980s and in the early 1990s, from the way in which they had looked in the early 1980s.
The judges account has not been challenged in this court. In brief summary he identified the following reasons:
i. Various defences which had been regarded as likely to negative liability in many cases proved to be of little assistance in United States courts.
ii. The sheer volume of claims made it increasingly difficult to scrutinise claims in depth.
iii. Insured producers were increasingly reluctant to contest liability in case publicity led to more claims against them (the judge instanced Keene Corporation which was forced into bankruptcy though it had, according to its management, never sold as much as $1m-worth of asbestos products). iv. Insurers had little success in disputes with their insured on issues of coverage.
v. Asbestos-related litigation was very lucrative for American lawyers, who actively recruited claimants (even to the extent of installing mobile x-ray units in workplaces) and cast their nets wider and wider to bring in new categories of defendants.
vi. Some producers (notably Owens Corning) contributed to this process and themselves encouraged the joinder of other defendants in order to spread the liability. The 14 defendant producers identified by the London market early in 1982 eventually increased to over 250.
vii. Apart from claims for bodily injury, there were also (from about mid-1983) an increasing number of property damage claims based on the proposition that the use of asbestos in building had reduced the value of the building so as to amount to an actionable loss. In June 1983 two actions for property damage were commenced against Dana Corporation. One was brought on behalf of all schools in Pennsylvania, and the other on behalf of over 100,000 public and private schools in other parts of the United States.
208. In September 1983 Lloyds presented its global results in a new and clearer form (the globals) which was used throughout the rest of the relevant period. The globals included a statement by the Chairman and separate reports by the chairmen of specialised associations of underwriters. Mr Cockell, the chairman of LUNMA, referred in rather guarded terms to asbestos-related risks and then commented:
It takes a brave man, or a foolish one, to forecast the outcome of the open years. For what it is worth I would personally expect the bottom line on each to show a deterioration on the preceding one.
209. In October 1983 a question arose as to what should be said at Rota interviews to prospective Names who were intending to commence underwriting through an agency which was the subject of investigation. It was decided that the prospective Names should be given this information. There was no change of policy as regards information about asbestos.
210. Also in October 1983 the secretary of LUNMA wrote to Mr Chester (as chairman of the Audit Committee) giving the views of a LUNMA working party on the proposal (which Mr Lawrence had raised in 1979) for the subdivision of the All Other category of business. The LUNMA working party did not recommend a split.
211. In 1984 Mr Miller became Chairman with Mr Barber and Mr Lawrence as Deputy Chairmen. During this year the Inland Revenue took an increasingly active interest in Lloyds reinsurance practices (and especially roll-over policies) as a means of avoiding or evading tax. Mr Miller took a personal interest in this matter and began by meeting with the Chairman of the Board of Inland Revenue and the Governor of the Bank of England. Mr Miller aimed at negotiating a general settlement of a large number of protective assessments to income tax made on both working and external Names.
212. Mr Barber was also concerned in preparing for negotiations with the Inland Revenue. He prepared a memorandum dated 19 January 1984 after interviewing several underwriters (including Mr Skey, Mr Chester, Mr Outhwaite and Mr Murray) and brokers. He also interviewed Mr Holland of Ernst & Whinney. In his memorandum he described roll-over policies as
policies which parade as ordinary reinsurance policies but which, either by their express terms or as a result of some undisclosed understanding between the parties, in fact contain no genuine or significant element of risk. In their most extreme form they enable a Syndicate from time to time at its discretion to place funds by way of 'premiums with a reinsurer, usually overseas, with the right for the Syndicate at any time to call for repayment of those funds, together with interest, by way of 'claims.
213. The memorandum identified another form of policy, a funding policy. In his memorandum Mr Barber commented on this type of policy:
The obvious case for such a policy would be for a Syndicates asbestosis liabilities. These losses are coming in at a frightening rate and for many Syndicates a full reserve would bring massive losses to Names in 1981/1982 Accounts. This type of loss may settle very slowly if every case is contested through the Courts OR it may settle very quickly as Underwriters attempt to reach a compromise with their assureds or re-assureds. In the former case, the Reinsurer will make profits, in the latter, there exists the probability of severe losses.
It cannot be too strongly stressed that had these policies not been available there is a question as to whether some Syndicates could have survived. If they are ruled as being inadmissible and funds have to be brought back at a time of bad results, then some may well go under.
These policies must be fought for. The effect of bringing back a 'roll- over' is one thing. This would be quite another.
214. Also on 19 January 1984 attorney H reported in a long letter to Mr Jackson (as chairman of the AWP). The letter covered many topics in detail, including the following:
i. It reported the formation of Toplis & Harding (Asbestos Services) Ltd as a service company, initially in order to avoid attorney reports being passed through brokers (with adverse implications for discovery of documents in actions in the United States).
ii. Attorney H emphasised that its recommendations for reserving were based on known claims outstanding and no attempt has been made to project an IBNR factor. iii. The letter explained the unique practical and logistical problems of handling asbestos-related claims and referred to continuing negotiations (which eventually led to the Wellington Agreement and the establishment of the Asbestos Claims Facility).
215. On 8 February 1984 there was a meeting between the panel auditors and Mr Lawrence (as Deputy Chairman with responsibility for audit matters) and Mr Jackson (as chairman of the AWP). The purpose of the meeting was to inform panel auditors of the latest position and enable them to ask questions.
216. On 9 February the Chief Executive wrote an internal memorandum in response to one from Mr P A R Brown, the Head of External Relations. Mr Browns memorandum had included the following outspoken passage:
The evidence can only be anecdotal, but it seems to me (and to others with whom I have discussed the question) that market members are beginning to think that, having kept their heads down and let the blast of the past 18 months blow over them, and having taken a great deal in the way of uprooting and rearranging from an imposed outsider you they can now successfully fight back in defence of their traditional ways of work, that by obstinacy they can blanket your reforming power, and in short that they can dive back into a cosy system that will be not much noticed by Press and Parliament or, one supposes, the Names. If anyone is thinking like that and I believe that more and more people are they are profoundly wrong, and in my judgment most dangerously so for the future. I hope that I do not need to emphasise the consequences of, for instance, disappointing the Revenues expectations in the matter of disclosure, or conniving at the concealment from Names of information which, if they were company shareholders, they would be statutorily entitled to have.
217. Mr Davisons more measured response stated, among other things:
As to syndicate accounting I believe in all honesty it can be said that we have made great progress in arranging for the publication of syndicate accounts and by incorporating by byelaw certain basic essentials which will go to Council on 13 February. I do not share your view that the AASC memorandum represents a substantial defeat. Disclosure is the name of the game and disclosure is what we are achieving. There is an inevitability about the work of accountants in this field which even the high Tories on the Committee know they cannot reverse.
It would be wrong to attach much weight to these observations by individuals who did not give evidence, but they give something of the flavour of the position a year on from the coming into force of the 1982 Act.
218. Negotiations between Lloyds and the Inland Revenue continued throughout 1984. Over 17,000 Names (about 92 per cent of the membership for the 1981 year of account) received provisional assessments. By April 1984 the Inland Revenue had set up a separate Lloyds unit of its Special Investigation Section.
219. In July 1984 there was an overall settlement of insured claims against Johns Manville. The total settlement was for $ 315m of which the London markets share was $94m. Mr Rayment stated in his witness statement that this had proved to be a good deal. From the insurers point of view that must be correct, since the insureds projection (as at mid-1984) of a total of 40,000 claims has proved to be far too low.
220. In August 1984 the globals for 1983 were published showing an overall profit for 1981 of £152m but a pure overall underwriting loss (the first for many years) of about £43.5m. Mr Rokeby-Johnson, the chairman of LUNMA, said in his report,
It is rapidly becoming apparent that the potential claims arising from asbestos will dwarf any claim in the history of our industry. It is very sad that in the United States to date under half of the money paid by our industry has ended in the hands of the injured party, the balance is in the capacious coffers of the more rapacious lawyers: for this reason we support, and I very much hope all our industry will support, the concept of a claims handling facility set up by the insurers and manufacturers to look after the interests of the injured.
We will come back to this report and to other reports by LUNMA chairmen in considering the globals (paragraphs 326ff below).
221. On 2 November 1984 there was a presentation to the Inland Revenue by a team representing Lloyds. The speakers were Mr Tony Parkington, Head of the Members Solvency and Security Department; Mr Merrett and Mr Kellett as underwriters with marine and non-marine experience respectively; and Mr Holland of Ernst & Whinney. The appellants have drawn particular attention to a passage near the end of Mr Kelletts address:
In virtually every year since I became an underwriter the committee have found it necessary to increase the [minimum recommended] percentages. When one considers the billions of dollars now being paid out, on claims such as asbestosis, claims totally unprovided for out of the years in which they fell. When one considers further, such losses as environmental pollution claims, now beginning to be presented in respect of waste, haphazardly dumped over decades. When one considers the ever changing attitudes of courts, especially in the USA, but also here, and around the world, towards all accepted ideas of negligence and the duty of care owed to others, towards the interpretation of policy forms, towards our right to rely on exclusions, all of which will affect unsettled claims currently being handled.
When one considers all these factors, it is clear that what properly concerns underwriters is not the question of whether we are over, or under reserved. We are under reserved. What concerns us is, how the industry can survive its under reserving.
222. On 6 December Mr Kiln gave a lecture on 'Reserving Reinsurances to Close and their Effect on Profits at the Insurance Institute of London (subsequently reprinted as a chapter in his book on reinsurance). He expressed the view that many syndicates writing long-tail business were regularly under-reserved:
I can think of no syndicate since 1946 with a volume of business in long-tail which has stopped underwriting and on which the run-off has been contained within its original RITC taking interest into account.
223. Earlier in the lecture Mr Kiln had said,
It is vital that Underwriters and management do study and understand the problem in a technical sense. The days are gone when reserving can be done on a case-by-case basis plus something extra for luck. Our industry must cope if it is to continue to serve society in the way society demands of us and we are to remain solvent.
At the end of his paper he acknowledged the assistance of a distinguished actuary, Mr Sidney Benjamin. It is apparent that during the relevant period active underwriters, claims directors and auditors were becoming more aware of the assistance which they could obtain from actuaries in reserving for non-life business.
224. At the panel auditors meeting on 19 December 1984 members of the MSSC spoke about factors affecting reserving as at 31 December 1984. Manuscript annotations on a copy of the agenda indicate that Mr Jackson spoke on asbestosis and latent diseases, but there is no further record of what he said.
225. In 1985 the Lloyds office-holders were the same except that Mr Lawrence became senior Deputy Chairman and Mr Coleridge became junior Deputy. Early in the year there was a perceived problem of under-capacity in the non-marine market. This was discussed at a meeting of the LUNMA committee, attended by Mr Miller, on 10 January. The minutes of the meeting show that some of those present (including Mr Skey and Mr Cockell) thought that the market had begun to turn in favour of underwriters, and that underwriters wished to take advantage of this.
226. The MSSC was asked to consider the problem of capacity and reported on it to the Committee of Lloyds in a paper dated 8 February 1985. The MSSC put forward no specific recommendation beyond its view that deliberate over- writing (that is, deliberately ignoring premium limits) could not in any circumstances be acceptable.
227. On 19 March 1985 Mr Jackson, as Chairman of the AWP, gave written testimony to the United States Senate Sub-Committee on Labor chaired by Senator Nickels. His testimony was mainly directed to explaining the need for the Asbestos Claims Facility. It began as follows:
1. The number of present and expected asbestos related claims is enormous, and the problems they are creating for the producers and insurers are unprecedented, both in terms of the total dollars involved and of the human resources needed to handle these claims.
2. The considerable liberalisation and wide divergence in judicial interpretations on such critical issues as coverage triggers and continuing defence obligations have shaken insurers confidence in their traditional approaches to policy wordings and risk evaluation.
3. The emergence of complex multiparty litigation drawing in laundry lists of producers and their insurers has escalated the cost of pleading and defending each aspect of each claimants case to the point where it now takes nearly $2.00 of costs to recover $1.00 of damages.
4. Against this background of judicial uncertainty, already catastrophic losses, and the reality of massive property damage claims yet to come, the task of fixing meaningful reserves and managing cashflow to pay claims will continue to demand virtual clairvoyance and a near reckless courage from executives involved at primary level, as well as from their reinsurer counterparts.
You might well ask if we are getting it right. I will show you how we propose to do just that.
He then went on to explain about the AWP and the proposed Asbestos Claims Facility.
228. On 12 April 1985 Mr Randall (who had ceased to be employed by Lloyds and was with Merrett syndicates) disclosed to Lloyds the disastrous results of eleven run-off policies written by Merrett syndicates 418/417. About two-fifths of Merrett personnel were on these syndicates. Nevertheless the 1982 year was closed into 1983. The judge, who as trial judge in Henderson v Merrett Syndicates  Lloyds LRLR 265 was uniquely knowledgeable about this part of the litigation, commented in chapter 19 of his judgment:
I suspect that if 418/417 had left its 1982 year open, this would have had a marked effect on the Lloyds market and underlined the depth of the problems represented by asbestos-related and pollution claims. The extent to which subsequent events would have taken a different course is a matter of speculation, but the effect would have been significant.
229. On 19 April 1985 Mr Davison gave a lecture to the conference in Paris of the National Association of Accountants. In his talk he spoke of the great drive for new Names but he described it as having begun in the mid-1970s (not the early 1980s). He also spoke of scandals at Lloyds:
But the fact remains that poor accounting practices and inadequate audits, together with a tax climate that encouraged sub rosa arrangements, had all contributed to a situation in which a few Lloyds agents milked their Names of up to £100m. Many at Lloyds have asked where were the auditors?, in the second part of this talk I propose to address that question.
230. The second half of the lecture was devoted to the reforms of accounting and auditing practice. Its criticisms of the earlier position deserve to be set out at some length:
For a number of reasons, therefore, there was a continuing risk, not always avoided, that the panel auditors at Lloyds lacked independence from their clients: some kept the books; some were too dependent upon Lloyds for their fee income; together they formed a small group specialising in an arcane area of accounting work; and the different interests of Names and their agents were not necessarily adequately reflected in the audit arrangements.
But there was a more difficult problem, the panel auditors were not in fact charged with carrying out an audit at all. Their duty was to assist by providing the Annual Solvency Certificate which merely shows that each Name has sufficient assets to meet his liabilities calculated in accordance with the formulae laid down by the Committee of Lloyds. Agents, underwriters and the Committee of Lloyds were all under the misapprehension that the work done by the panel auditors was an audit in the sense which you and I would understand it. But it was not, a fact which the auditors themselves, to give them their due, had protested from the very beginning. The accounts of an underwriting syndicate, and the determination of its profit, depends upon how much reserve is necessary to close the account. The figures for the closing reserve is provided by the underwriter in the form of the reinsurance to close. Some of the panel auditors at Lloyds were still living in the days of inventory at directors valuation which used to be the way in which profit was calculated in manufacturing companies in the UK 30 years ago: they did not consider it part of their duty to audit the reinsurance to close.
231. On 13 May 1985 there was a meeting of the Council at which the Chairman, Mr Miller, spoke to the agenda item 'Attraction of New Names. The minutes record that he referred to
the need for increased membership as a result of the shortage of capacity and the conflicting adverse publicity arising from reported underwriting losses for recent years.
232. The markets recent losses were the focus of attention the very next day, when a meeting (minuted as 'Lloyds Most Sensitive Outhwaite') was told that the Outhwaite Agency intended to close the 1982 year of account for syndicate 317, but that Ernst & Whinney could not give an unqualified syndicate solvency report. (Syndicate 317 had written numerous run-off contracts as explained in chapter 17 of the judgment; see also paragraph 127 above). There was a further meeting on 17 May (with the two Deputy Chairmen) at which allegations were made of undue pressure being put on auditors by Lloyds staff. The outcome was that on 1 July 1985 Mr Outhwaite decided to leave the 1982 year open, while still expressing the view that it would prove profitable.
233. On 19 June 1985 the Wellington Agreement was signed on behalf of 30 United States insured producers, 16 United States insurance companies and all interested Lloyds syndicates. There is a full description of the agreement in chapter 16 of the judgment. It emphasises that although the Asbestos Claims Facility (the ACF) was terminable (and was in fact terminated after a few years) the compromise of rights and obligations effected by the agreement was permanent.
234. The ACFs opening inventory of claims was about 25,000. Mr Jackson and the other members of the AWP most closely concerned with the Wellington Agreement believed (as Mr Rayment put it in his witness statement) that
Although we believed that this would take some years, the end was now in sight, and the way in which we would reach the end had been put in place. No-one foresaw the way in which asbestos claims would take off, as they did, in the years following the Wellington Agreement.
235. Claims did indeed take off after the signing of the agreement. Having run at a steady monthly rate of 500 or so for about three years, they increased rapidly to 1000 a month in the latter part of 1986 and 2000 a month in 1987 (with 3000 claims being filed during the month of August 1987).
236. On 5 July 1985 Sir Peter Green, the retired Chairman, began a letter (the fishing trip letter) to Mr Miller. He completed it, it seems, during the course of the next ten days while he was on a fishing trip. In the letter Sir Peter Green gave his successor the benefit of his views (which Mr Miller in cross-examination said he found irritating) as to the terms on which they should settle with the Inland Revenue. He concluded with his views on the situation generally:
There are plenty of horrors in the pipeline and they must be reserved even if figures are not available. The 'true and fair' requirement should assist in this.
It is perhaps fortunate that the overpayment of past profits is falling for recoupment from a far larger number of current Names. This may not always be the case and if new Names won't join, or old Names resign from the old syndicates which have back year problems the situation may become critical.
237. At a meeting of the MSSC held on 19 August 1985, chaired by Mr Merrett, there was a discussion on RITC in the context of the new syndicate accounting byelaw. Mr Murray is recorded as having said,
In the past, Underwriters had used inadequate techniques, resulting in inadequate reserving. The Market had been saved' by high interest rates and a soft reinsurance Market and it was vital that Lloyds became more professional in its approach, in particular by taking actuverdana advice.
238. In September 1985 the globals for 1984 were published. The modest overall profit concealed a pure overall underwriting loss for the 1982 year of account equivalent to 6.5 per cent (against 1.9 per cent for 1981). The general (non-marine) liability account showed a pure underwriting loss of £ 425m. In his chairmans statement Mr Miller described this loss as enormous and stated,
Figures such as these make it obvious that underwriters must take stringent remedial action as indeed they are. It is worth repeating that a combination of three things is needed, particularly in the all- important American casualty business; first, a realistic rating level; second, a reformed policy wording embracing, where needed, a claims- made basis for claims and an overall limit, including legal costs; and third, a measure of tort law reform. Without real progress in all three areas, it is hardly to be wondered at if underwriters increasingly withdraw from this class of business, with the result that certain industries will be left without the insurance coverage which they need to continue in business, to the detriment of society in general.
It will be apparent that all those proposals related to future underwriting, rather than to the past. Mr Hazell, the chairman of LUNMA, made similar observations (but referred to the ACF as a hopeful development).
239. In October 1985 there was an overall settlement with the Inland Revenue. All the outstanding assessments were withdrawn in consideration of a sum of £ 43.5m paid to the Inland Revenue out of central assets of Lloyds. Sir Peter Miller said in his witness statement (perhaps with a degree of understatement) that there was a considerable amount of discussion at Council before agreement was reached that it was appropriate for this payment to be made out of the Central Fund (corrected in his oral evidence in chief to 'central assets). He does not seem to have been cross-examined on this point.
240. On 11 November 1985 Mr Davison gave notice of his resignation as Chief Executive at the expiration of his minimum term of office (he had been appointed for an indefinite term of three to five years). He had carried through many changes but he felt that the organisational structure was unsound. He said in his published letter, after referring to a working party chaired by Sir Kenneth Berrill (one of the nominated members of the Council),
My own views on the paramount necessity of an independent Chief Executive, with appropriate terms of reference, responsible directly to the Council have not changed and, therefore, I would find it impossible to continue in office were those terms to be significantly altered. At the same time, the argument is a perfectly proper one for a self- regulatory body and, by resigning at this time, I remove an obstacle to the Councils freedom of discussion and to my freedom to argue for the retention of the position of the Chief Executive with independent powers without any suggestion of self-interest.
241. The report of a working party established in November 1985 to consider discounting of reserves for solvency purposes a common topic of discussion at this period -- referred to the continuing requirement to expand the capital base of Lloyds from sources not already exposed as a reason for assurance that all undischarged liabilities have been fully reserved.
242. In 1986 Mr Miller continued as Chairman with Mr Lawrence and Mr Cockell as Deputy Chairmen. Mr Alan Lord took up his duties as Chief Executive in March. On 10 January 1986 the Secretary of State (Mr Leon Brittan) announced the appointment of a Committee of Inquiry into Regulatory Arrangements at Lloyds under the chairmanship of Sir Patrick Neill QC. Its terms of reference were:
To consider whether the regulatory arrangements which are being established at Lloyds under the 1982 Lloyds Act provide protection for the interests of members of Lloyds comparable to that proposed for investors under Financial Services Bill.
243. On 29 January 1986 there was the usual annual meeting of auditors (now termed recognised auditors). Again they were briefed by Mr Jackson on asbestos- related claims. He described the establishment and operation of the ACF, stating that there were 46,000 known claims and new claims were running at 1000 a month. He referred to the Johns Manville settlement and also to new categories of defendants (such as railroads and manufacturers of brake linings) against whom claims were being made.
244. During June and July 1986 Mr Miller and other members of the Lloyds hierarchy gave oral evidence to the committee of inquiry chaired by Sir Patrick Neill. The transcripts contain many candid exchanges. There was ample material on which the committee could reach its conclusion about the absence of understanding on the part of many working members of the principles of the law of agency.
245. In 1986 an American bankruptcy court made an order ensuring wide publicity for the scheme which it was being asked to confirm. At that time the projection of 44,000 claims (made in 1984) was revised to between 83,000 and 100,000 claims. In the event 240,000 claims had been received by 1995 and over 400,000 by 2000.
246. The globals for 1985, published in September 1986, showed an overall profit for the 1983 year of account of £36m (or £179m if PCW losses were disregarded). In his Chairmans statement Mr Miller commented that the general liability account generated about 12 per cent of the premium income but 100 per cent of the losses. The pure underwriting loss on general liability business was £384m (that is about 10 per cent less than for 1982). Mr Jackson, the chairman of LUNMA, said in his statement,
The US based liability account has yet again been the cause of most of the markets difficulties as, once again, it was necessary for underwriters to increase reserves for asbestos related losses. Although the Asbestos Claims Facility -- set up with the support of Lloyds is making significant savings in the legal costs involved, this is to some extent offset by there being no slowing down in the number of new suits being brought.
It is also encouraging that most observers believe that, at least as far as Lloyds is concerned, 1983 could be seen as the beginning of the end of the really bad results. Whilst I would not anticipate that my successor would be able to report an underwriting profit for 1984 I would expect an improvement over the past few years. The very badly needed premium rate increases were beginning to take effect by the middle of 1984. These increases, which have been more obviously applied on US business than in the rest of the world have become, as each successive month passed, more substantial.
247. On 2 December 1986 Mr Murray, as chairman of the SSC, wrote formally to the Chairman of Lloyds, Mr Miller, under the heading solvency & Security'. He said that his committee had not yet made formal recommendations but that he wanted to pass on his personal concerns. Having identified five areas of concern he proposed five possible changes of practice. On one of these (RITC) he observed,
Part of the premium paid for the Reinsurance to Close may correspond with known, noted and quantified losses and therefore the element of risk assumed by the Reinsuring syndicate may be minimal. A significant part, however, of the Reinsurance to Close relates to an assessment of likely future claims or expenses which by their nature cannot be quantified within a narrow margin with any proven degree of certainty. This pure risk premium is at present assumed by Names with no requirement for related assets of any sort. I believe that a figure corresponding to 25% of the Solvency test minimum percentages would probably be an appropriate figure to deem to be Premium Income for Premium Income limit purposes when such Premium is received as Reinsurance to Close premium.
248. In 1987 the office-holders were the same except that Mr Parry replaced Mr Cockell as junior Deputy Chairman. Early in the new year Sir Patrick Neills Committee of Inquiry presented their report, making 70 recommendations for changes in the constitutional framework and operating procedures at Lloyds. The judge quoted the general commendation in paragraph 1.4 of the report but not the next two paragraphs:
1.5 Progress achieved, however, is not by itself enough unless it leads to an affirmative answer to our question do the regulatory arrangements now in place at Lloyds provide protection for Names comparable to that proposed for investors under the Financial Services Act? Our answer to that question is that, notwithstanding the major progress made by the Council of Lloyds since January 1983, they do not.
1.6 We have detected a number of shortcomings in particular areas of regulation at Lloyds. Here, Lloyds arrangements fall below the standard that will be acceptable elsewhere in the financial services field. More fundamentally, the constitution of Lloyds does not currently provide for that degree of involvement of independent outsiders and that degree of detached scrutiny of the activities of market practitioners that will be a feature of the regime under the Financial Services Act. The checks and balances at Lloyds are not, in our view, so firmly in place. The balance of initiative rests too much with the working members.
249. The core recommendation, for reducing the number of working members on the Council and increasing the number of nominated members, was accepted at a special meeting of the Council on 22 January. The minutes indicate that acceptance was less than whole-hearted on the part of Mr Miller (who said that the logic of the recommendation was open to challenge) and Mr Lawrence (who said that it was a shock, but could have been very much worse).
250. At the end of January the affair of the Outhwaite run-off policies took a new turn when Mr Outhwaite announced that he was challenging the basis on which some of the policies had been effected. This led to some contentious arbitrations (and litigation which reached the House of Lords after the English arbitrator signed his final interim award in Paris: see Hiscox v Outhwaite  2 Lloyds Rep 1, 435).
251. The briefing for recognised auditors took place on 4 February. Again Mr Jackson spoke and answered questions on asbestos-related claims and associated matters. He reported that there had been no drop in claims: 1500 claims had been made in each of November and December 1986. The ACF was achieving settlement of claims at a faster rate than had been expected. Known claims would account for 25 to 30 per cent increases in asbestos reserves at 31 December 1986. Much of that increase would come from reinsurance and retrocessional contracts.
252. On 12 May 1987 Mr R R S Hiscox, the senior director of Roberts & Hiscox Ltd, wrote to the Chairman protesting at the leniency of the sentence which had been imposed, in disciplinary proceedings, on Sir Peter Green. The judge quoted briefly from the letter but its raw eloquence deserves to be set out in full as the view of one very experienced Lloyds insider:
Thank you for your letter of the 7th May. I was stating the outside or Revenue view of the reinsurance to close which did appear to them an incredible privilege. It was abused by some underwriters as the mass of rollovers demonstrated and some underwriters were carrying forward large sums of money more based on a wet finger in the wind than on any statistical basis.
However, that was not the point of my letter, neither was the alarm at the growing regulations within Lloyds. That is a necessary result of having relatively poor Names with unlimited liability. Of course they need massive protection -- especially given, as you say, the ignorance of the basic tenets of the laws of agency of some very senior agents including your predecessor in office. I find it a pity that you should preach to me on this subject considering my long opposition to the business methods of the man you used to refer to as my illustrious predecessor and to Posgate and others.
Just when the press was beginning to be more favourable to Lloyds it is a tragedy that Sir Peter Greens sentence should be announced and be so light which has been very rightly criticised. I know that you will rush to state that this was the sentence of an independent regulatory authority but it should have been different. No charge against Sir Peter and Peter Valentine involved dishonesty or lack of good faith or deliberate or knowing misconduct I read in my newspapers. Why not?
We have seen people severely punished for repairing yachts at their syndicates expense and other similar trivial offences and yet we are seen to slap the wrist of a major offender. Clearly nobody tried to press the case against Sir Peter and when I read in my newspaper that Langton stated that such behaviour was common practice in the 1970s and was not then regarded as serious enough to constitute discreditable or disgraceful misconduct I am speechless. There were agents and underwriters who did not have baby syndicates or interests in off-shore reinsurance companies and I suspect that they were in the majority. But to have the fact that many were breaking the law as any form of mitigating circumstance is deeply offensive to those that chose not to break the law. I always thought that ignorance of the law was no defence.
We have this new definition of negligence in Lloyds. Posgate was found guilty of gross negligence for removing money from one syndicate which he did not own and paying it by way of reinsurance to the syndicate in the management of which he had a significant interest, and now Sir Peter Green is similarly found guilty of serious or gross negligence for allowing syndicate money to line his own pocket. When will somebody say theft and press the proper charges. Enough of that matter. You state that the Council has debated the question of unlimited liability twice and committed itself to its continuation. The Council and former Committee of Lloyds have a track record second to none for lack of foresight which has been well illustrated by the recent debacles in Lloyds. Radical reform is out of the question until forced by circumstances, so let us continue to raise our capital from housewives with bank guarantees on the family home and suffer from the consequences at each downturn in the market.
253. The Council of Lloyds met on 5 August 1987 with Mr Miller in the chair and the Committee of Lloyds met on 19 August with Mr Lawrence in the chair. The minutes of these meetings illustrate what had since 1983 become the practice as to approval of the globals. The Council considered a paper on this subject and then delegated formal approval of the globals to the Committee. The Committee received coloured proofs of the final document but was in a position to require changes (for instance on 19 August 1987 there was discussion about a passage in the Chairmans statement dealing with tort reform; we shall return to this below -- paragraph 463).
254. The globals disclosed an overall profit for the 1984 year of account of £279m (or £300m excluding PCW) and a pure overall underwriting profit of £ 138m. But for general liability business there was a pure underwriting loss of £257m (and a net loss of £170m). In his Chairmans statement Mr Miller repeated what he had said about the account producing 12 per cent of the premiums and 100 per cent of the losses. He also observed that also exactly half of the RITC (£2,000m out of £4,000m in round figures) was for general liability claims. Mr Kellett, the chairman of LUNMA, said in his statement,
This class of business, much of which comprises policies issued to insureds in the United States of America, continues to be adversely affected by certain features of the legal system of that country.
One such feature is the contingent fee system whereby lawyers are rewarded by sharing in the damages which they are able to secure for their clients, often leading to spurious cases being pursued. Another is the system of awards by juries in civil damages cases where they are encouraged to think of the insurance industry as having a deep pocket from which victims may be compensated, regardless of whether or not there is fault on the part of insured defendants.
255. At meetings of the SSC on 17 September and 12 October 1987, chaired by Mr Lawrence, there were discussions about problems with the solvency test. At the September meeting the minutes record Mr Lawrence suggesting that almost every old non-marine syndicate would be expected to have shown inadequacies in reserves of some degree. At the October meeting the SSC were told of LUNMAs view that
the Solvency Test Instructions should stress more firmly than currently that the minimum percentage reserves are the absolute minimum to be reserved and that most syndicates should be reserving at levels significantly above the minima particularly in the case of 'long' long- tail business.
256. In 1988 Mr Lawrence was Chairman with Mr Coleridge and Mr Parry as Deputy Chairmen. Mr Lord continued as Chief Executive (and was also a Deputy Chairman). This was the year in which Mrs Evans began underwriting. She had been admitted in 1987 having seen a brochure dated December 1986 and the previous two or three years globals.
257. At a meeting of the Committee on 27 January 1988 Mr Merrett expressed concern that the AWP was reporting substantial increases in asbestos-related and pollution-related claims, but that the SSC did not have access to figures showing the overall position. It could rely only on reports of individual syndicates. Mr Merrett said that Lloyds needed greater comfort that agents were adopting adequate figures, and that this was a problem that needed to be addressed centrally.
258. Mr Merrett spoke again about these claims at a Committee meeting on 10 February 1988. The minutes record:
Mr Merrett reported that the Annual meeting of the recognised Auditors had recently taken place and had seemed to have proceeded satisfactorily. Mr Robin Jackson, however, had been referred to as a pessimist as regards Asbestos/Environmental pollution. Mr Merrett had tried to explain that Mr Jackson was in fact being optimistic considering the background against which he was working.
Mr Jacksons anxieties at that time appear from a paper dated 7 March 1988 which he wrote on 'Asbestos Related Claims The Reinsurance Response'. He was concerned at the prospect of a general failure of reinsurers to honour their commitments promptly.
259. On 16 March 1988 Mr Hiscox had a meeting with the Chief Executive, Mr Lord, to express his concerns about the Outhwaite syndicates unwillingness to meet run-off claims. Mr Hiscox suggested some form of central settlement, since in his view the Outhwaite problem was potentially far more serious than PCW. On the following day he wrote to Mr Lord:
I enclose the latest report from the Asbestos Working Party which illustrates that that area of claims is still accelerating. You will also be aware that pollution claims are now coming in thick and fast and as further illustration I enclose a graph of our outstandings on our policy with Outhwaite.
I think these figures demonstrate that within a month or two Outhwaites auditors must blow the whistle. I think that the Regulatory Authorities at Lloyds should get a firm grip of this before the media does and before the solvency of the Lloyds policy is brought into serious question.
260. The Outhwaite problem was considered at a Council Meeting on 13 April when the Chairman (Mr Lawrence) reported the Committees unanimous view
that as regards the solvency position Lloyds should not double guess the auditors, and that there were no grounds to justify Lloyds intervention on 'fit and proper' criteria, and that it was an unattractive option for Lloyds itself to intervene and offer a cap on the policies.
261. On 8 June 1988 LUNMA (in the person of Mr M V Williams) made its first- ever presentation to the full Council of Lloyds. The text of the presentation is remarkable for containing no single reference to asbestos-related claims, and only one reference to long-tail claims. Nor does there seem to have been any mention of the matters in the ensuing discussion. The minutes of the meeting also show one of the earliest mentions in Council of the possibility of switching from unlimited to limited liability. A working party was established to consider this topic.
262. On 20 June 1988 Freshfields circulated to the steering committee of members agents a report on Outhwaite syndicates 317/661. They criticised Mr Outhwaite but expressed the view that an action against him or his agency would be unlikely to succeed. The steering committee provided a forum for members agents and their Names, many of whom were asking questions about Lloyds regulation (as appears, for instance, from a letter to the Chairman written on 24 June 1988 by Mr Peter Rawlins of Sturge).
263. In July 1988 the Piper Alpha oil production platform in the North Sea suffered a disastrous explosion and fire with heavy loss of life. Within days it was declared a constructive total loss and the total liability was later estimated at £1.4bn. This summary has concentrated on asbestos-related claims but it must be borne in mind that in the late 1980s the Lloyds market had to deal with several other catastrophic losses.
264. At its meeting on 27 July 1988 the Committee had before it a paper on run-off years of account as at the end of 1987. The paper stated that (with certain exceptions) there were 76 syndicates with years in run-off, the total open years being 120. Of these 56 per cent were attributed to asbestos-related and other United States general liability business, and a further 13 per cent to Outhwaite and Merrett run-off policies. (These figures match roughly but not precisely with those at paragraph 200 above, which are taken from a detailed document in the 'Open Years bundle prepared by Freshfields).
265. The paper on open years was fully discussed by the Committee (the minutes of the discussion occupy four closely-typed pages). The first three points noted in the minutes were as follows:
5.6.1 the problem of open years affected the membership as it existed at the moment. Though Names were informed when they joined the Society as to the possibility of open years it had never been considered much of a problem. However, Agents should take the problem more seriously now and make their Names aware of the likelihood of open years;
5.6.2 it was symptomatic of the Society as a whole that the Underwriters of the time did not really know the full implications of the business that they were writing and to a certain extent the whole Society was now at risk from events since the 1950s;
3. Managing Agents would continue to see open years as an easy way out provided they were allowed to continue in business whilst managing syndicates with open years. The Society may be able to live with the events of the past, but if Managing Agents were allowed to continue trading it was essentially the same as allowing Names to pay for their losses by instalments;
263. At a Council meeting on 3 August 1988 there was discussion of adverse press publicity about the resignations of Names. During 1988 994 Names had given notice of resignation so far. The Chairman (Mr Lawrence) and Sir Peter Miller spoke of using the forthcoming globals press conference as an opportunity to counter adverse publicity.
264. The globals for 1987 disclosed an overall profit of £211m for the 1985 year of account. General liability business showed an overall loss of £268m and a pure underwriting loss of £354m (of which the Outhwaite syndicates produced about £84m). Mr Lawrence said in his Chairmans statement:
The difficulties associated with long tail liability business highlighted by the chairman of the non-Marine Association have resulted in both an underwriting loss and an overall loss. This business is now, however, being written at rates that better reflect the present climate and with policy wordings appropriate to the changed circumstances.
Mr Williams, the chairman of LUNMA said in his statement:
Our two main areas of difficulty are in asbestos-related claims and environmental impairment.
The rate of new asbestos-related claims rose steeply, from an average 700 per month in 1985 to 2,000 per month in 1987, due largely to intensive publicity from the plaintiff bar and the seeking out of new industries with an asbestos connection. There are, however, grounds for future optimism as the rate of increase has declined markedly in recent months.
Again, about half of the entire RITC of £4bn was in respect of outstanding liability claims.
265. In October 1988 Mr C W Rome, the chairman of the Lloyds Underwriters Association, was asked to justify changes proposed by his committee to the minimum percentage reserves for the marine liability account. In a letter dated 5 October to the Members Security and Solvency Department he wrote,
First I should make it absolutely clear that I make no pretence whatsoever that the reserves my Committee accepted last year, or the alterations we propose now, are correct. All that can be said with certainty is that in no area of their business have Lloyds Underwriters been so substantially and so consistently under-reserved as in the liability accounts.
Asbestos related claims have been with us for some time now, but only recently has there been a serious threat of a substantial volume of such claims falling on marine policies. At present, the P & I Clubs appear to be in the front line, but to what extent they and their reinsurers in the marine market at Lloyds -- will eventually be involved is unknown. Asbestos was widely used in the construction of ships, but to what extent and over what policy years ship builders and ship repairers policies will be involved no one knows.
266. At a Committee meeting on 12 October 1988 Mr Merrett raised a topic minuted as 'Aggregation of Liability'. After referring to Hurricane Alicia (in 1983) the October storms (of 1987) and Piper Alpha he stated, as recorded in the minutes,
5.13 The LMX market had made the position much worse. The basis upon which reinsurance claims were paid on Alicia and the October storms was slower than on any other claims in the market because the brokers obligation to fund had been removed and there was practically no pressure for special settlements. Each turn of the payment cycle took at least two or three months, ie the time between payment by an underwriter and collection from his reinsurer. This operated to delay the time when the ultimate payers became aware of their obligations.
5.14 The burden of the three losses was now beginning to come together with the same syndicates, and thus the same Names, being affected. The amounts involved were immense in relation to the syndicate cash balances and those syndicates had a heavy drain upon their resources for the three separate losses. The position had been reached where some syndicates were significantly through their reinsurance protection for three successive years and yet their Names knew nothing about it.
5.15 The answer was not to be found through the regulatory route but by managing agents establishing the position of their managed syndicates by requiring the underwriters of those syndicates to produce a worst case scenario. This information could then be passed on to the members agencies. Agents should be made aware of the questions they needed to ask and reminded that, whilst it was natural to focus upon Piper Alpha, the same questions were relevant to Alicia and the October storms. If there was a heavy un-notified net loss to Names for three years then the Names should be told. This was a clear warning of the 'LMX-spiral' which became an increasingly obvious problem after the end of the relevant period.
Chronological summary: since 1988
267. Events since the end of 1988 are not strictly relevant to the issue raised in this appeal. But the judge summarised the salient events in his judgment (chapter 20) and we should do the same.
268. There are some general themes which are constantly reflected in the documentary evidence from 1989 and the early 1990s. These are a rising tide of continuing losses, with direct liabilities on asbestos-related and other long- tail business being caught up or overtaken by LMX and personal stop-loss liabilities; a comparable rising tide of litigation as claims for breach of duty were made by names against managing agents (for negligent underwriting) and members agents (for negligent portfolio selection); and increasing disquiet about the constitution and governance of Lloyds, especially in relation to unlimited liability of names, the management of the market, and self-regulation.
269. 1989 was dominated by the continuing controversy over the Outhwaite run- off policies and there was an unusually large number of questions at the Societys general meeting on 28 June 1989. One of the most persistent questioners was Mr John Donner, whose concerns and circumstances in which the run-off policies were written led to the Council establishing a panel (chaired by the Chief Executive, Mr Lord) to investigate the allegations. We have already set out (in paragraph 128 above) the substance of Mr Donners complaint as he explained it to the panel on 20 December 1989.
270. The panel interviewed a number of key witnesses who had been concerned with the Neville Russell and Murray Lawrence letters, including Mr Randall, Mr Lawrence, Mr Holland, Mr Mitchell and Mr Ayliffe. It concluded that no prima facie case of misconduct had been made out, and the matter was dropped. It was raised again in 1995 when there was a further inquiry by Freshfields, whose conclusions (coinciding with those of the original panel) were reviewed and upheld by Mr Gordon Pollock QC.
271. In November 1990 the outgoing Chairman, Mr Lawrence, and the incoming Chairman, Mr Coleridge, joined in asking Mr David Rowland to lead a Task Force. Its purpose was to identify the framework within which the Society should, ideally, be trading in 5-7 years hence [with] regard particularly for the long-term competitive position of the Society.
272. The Task Force made its report ('Lloyds: A Route Forward') in January 1992. It recommended far-reaching changes including the introduction of limited liability capital alongside the unlimited liability of names. It also recommended a high-level central stop-loss scheme in order to cap losses for names with unlimited liability. It recognised what it called 'the old years problem' as one of the gravest threats to the future of the Lloyds market.
273. In the course of its deliberations the Task Force (assisted by McKinsey & Co) attempted to quantify the markets ultimate liability for asbestos-- and pollution-related claims. It concluded that it would be very difficult to carry out that exercise at a market level, and that the uncertainties were too great to make a reliable estimate simply on an overview. In the event it took three years of work, and cost more than £100m, to reach a reliable estimate as part of the basis for the Reconstruction and Renewal Plan ('R&R').
274. The Task Force rejected any central solution to the old years problem. It needed the trauma of further losses and further litigation before a central solution was recognised as a necessity. By early 1992 there was a great deal of litigation on foot but most judgments were still on interlocutory points (for instance, in April 1992, that of the House of Lords in Ashmore v Corporation of Lloyds  1 WLR 446 and that of Saville J in Boobyer v David Holman & Co  1 Lloyds Rep 96).
275. There were several other important inquiries and reports, including the Walker Report (June 1992) into allegations about discrimination against external Names and the operation of the LMX spiral; the Morse Report (June 1992) into the future governance of Lloyds; and the Open Years Panel Report (March 1993). The Morse Report recommended the replacement of the Committee by two boards, a Regulatory Board and a Market Board, both reporting to the Council. This recommendation was accepted and put into effect at the start of 1995.
276. The Open Years Panel (which was chaired by Mr Stockwell, who gave evidence for the claimants) identified six major causes for the ever-increasing number of open years. Latent liabilities were the single largest cause, responsible for 42 per cent of open years by number and 60 per cent by stamp capacity. 26,000 Names were exposed to open years with asbestos and pollution liabilities and (as Mr Stockwell wrote to the Chairman of the Market Board in a letter dated 15 March 1993) some 15,000 to 17,000 were by then engaged in litigation against Lloyds agents and underwriters.
277. In April 1993 Mr Rowland (as Chairman of Lloyds, with Mr Peter Middleton as the new Chief Executive) published a document called 'Planning for Profit: A Business Plan for Lloyds of London'. It carried forward the Task Forces proposal for the introduction of corporate, limited liability capital into the market, and this took effect at the start of 1994.
278. The Business Plan also broke new ground in proposing to manage the old years problem by a general scheme for reinsurance of liabilities for 1985 and earlier years through an adequately capitalised reinsurance company. The plan (called the 'NewCo Project') eventually came to fruition with the establishment of Equitas as part of the R&R Plan, and with the scope of the scheme expanded to cover liabilities for 1992 and all earlier years. The necessary reserving project was not completed until May 1996. It involved many leading firms of actuaries and accountants.
279. In July 1993 the Council appointed an independent Legal Advisory Panel (consisting of Sir Michael Kerr, Mr Stewart Boyd QC and Mr Stephen Tomlinson QC) to investigate and report on 31 specific claims against agents in respect of specified syndicates and years on account. The judge quoted two paragraphs of the panels report, made in October 1993:
14.8 We have carefully considered all the events in 1980 to 1982 on which the Names rely in support of their contentions that 1979 should have been kept open, culminating in the Neville Russell letter in February and the Murray Lawrence letter in March of 1982. But we are not persuaded that these arguments fairly or adequately reflect the overall market perception (or lack of perception) of the likely future dimension of the asbestosis claims experienced at the time The choice appears to us therefore to lie between the conclusion that the entire market with long-tail US liabilities was negligent in closing 1979 or that the allegation of negligence in this regard is based on hindsight. In our view the latter conclusion is more likely to be correct. 14.9 Looking at the matter broadly, we have therefore concluded that Names are unlikely to establish that the 1979 year of account ought not to have been closed into 1980 in the calendar year 1982 and we have reached the same conclusion in relation to the closure in 1983 and 1984 of the years 1980 and 1981. From the calendar year 1985 onwards the closure of earlier years for syndicates with accrued long-tail liabilities arising out of US casualty business gradually became more questionable, although the circumstances varied as between different syndicates, and the case against closure was not necessarily progressively uniform. In this connection it must be remembered that the full impact of asbestosis and pollution liabilities for the market was only felt in the late 1980s.
The judge noted that the report did not suggest that the Council or the Committee had been at fault, let alone guilty of dishonesty. (To have done so would not have been within the panels terms of reference.)
280. The first proposal for an overall settlement was rejected early in 1994. The troubles at Lloyds were again becoming a subject of political controversy and more and more cases were coming before the court, either at first instance or on appeal (in appendix 1 to his judgment the judge lists 13 judgments given during 1994, including the decision of the House of Lords  2 AC 145 in the Merrett, Feltrim and Gooda Walker cases; he lists 25 in 1995 and 16 in 1996). Early in 1995 the House of Commons Treasury and Civil Service Select Committee began hearings into regulation at Lloyds. In May 1995 it produced a report ('Financial Services Regulation: Self-Regulation at Lloyds of London') which was critical of Lloyds. In particular it stated that those becoming Names from the mid-1980s were not given full information as to the nature of the risks which they were undertaking. However the report rejected the so- called conspiracy theory of a dishonest policy of recruitment adopted by the central authorities at Lloyds.
281. After the failure of the earlier settlement plan Sir David Rowland put forward a new plan in a document entitled 'Lloyds: Reconstruction and Renewal' published in May 1995. In the introduction he wrote,
Unless we take radical action now to produce a solution which is acceptable to our policy holders, our regulators, and to you, our membership, I do not believe that the Society will be able to survive in anything like its present form.
282. The judge (in chapter 20) described the R&R Plan as follows:
The key elements of the R&R Plan were providing all Names with the opportunity of finality through an acceleration and expansion of the Equitas project (as the NewCo project was, by then, known) and a settlement which would include an estimated £2 billion of debt credits to reduce the cost of finality. The proposals as set out in the Settlement Offer document in July 1996 were accepted by almost 95% of the Names. Between May 1995 and the making of the Offer in July 1996 various committees were established to review the proposals from the Names standpoint. These included the Names Committee, under the chairmanship of Sir Adam Ridley (Deputy Chairman of the Association of Lloyds Members), which considered how to achieve a fair allocation of the debt credits. The Validation Steering Group was also established under the chairmanship of Sir David Berriman, representing the Association of Lloyds Members, and including representatives of the Litigating Names Committee and the Lloyds Names Associations Working Party. Its terms of reference included an evaluation of the comparative advantages and disadvantages of alternatives to the R&R Plan and an examination of the powers of Lloyds to implement R&R and of the Councils duties to members and policyholders in so doing. The Group was independently advised by Slaughter and May.
283. The formal R&R settlement offer was sent to names on 30 July 1996 requiring acceptance by 28 August 1996 (although this time limit was subsequently extended). The value of the offer had by then been increased to £ 3.2bn. This total included litigation settlement funds of about £1.1bn, representing funds paid in settlement of claims against agents and E&O insurers (£981m) and claims against auditors (£156m, of which £116m was contributed by five firms of accountants). Every name who accepted R&R gave up all claims of any sort in respect of 1992 and earlier years, including claims against Lloyds.
284. As the judge recorded (chapter 1) only 1,752 names (out of over 33,000) did not accept R&R, and since then Lloyds has settled with others. The 216 former names interested in this litigation are the group who have resisted Lloyds to the last, in almost all cases by counterclaiming against Lloyds in proceedings for recovery of the Equitas premium (which is recoverable, as Lloyds has successfully contended, even from former names who did not accept R&R).
IV The Alleged Representations
Recapitulation of pleaded case
285. The names case is that the brochures and globals issued from time to time by Lloyds contain fraudulent representations upon which they relied when deciding whether to become names. In chapter 22, the judge correctly identified the alleged representations in the brochures as representations to the effect that a name joining Lloyds:
(i) could have confidence in Lloyds as an institution to safeguard his/her interests;
(ii) could trust those who were chosen by Lloyds to regulate the Lloyds market and manage its affairs;
(iii) because of the way in which Lloyds regulated and monitored underwriting accounts year by year:
(a) could rely on syndicate accounts;
(b) could in underwriting and/or in deciding whether to remain a member of Lloyds have confidence in the audited syndicate results, for results of past years;
(c) could be sure that Lloyds as part of its regulatory duties would ensure that when prospective liabilities were reinsured by one syndicate year into another, such liabilities were being fairly assessed and quantified as between two syndicate years.
286. The judge correctly identified the alleged representations in the globals as at 31 December 1981 to 1987 as follows:
(a) that the Lloyds market was in a sound financial condition; and
(b) that names could safely join Lloyds and/or continue their membership of Lloyds and/or increase their Premium Income Limit with confidence that known and projected claims has been prudently and adequately reserved to ultimate.
287. The judge held that neither the brochures nor the globals contained any of the alleged representations, whether express or implied. It seems to us to be appropriate to consider the brochures and globals in turn. We begin with the brochures.
288. In the 1970s the Committee of Lloyds issued a document each year which was entitled Notes for Applicants for Underwriting Membership. Of those, we have seen the 1975 and 1977 editions, which were in very similar terms. The first brochure was dated January 1979. We have seen both the 1979 brochure and a number of later ones, each of which is based on its immediate predecessor, although changes were made to the text from time to time. Since the high watermark of the names case on the facts is to be found in the events of 1982, it seems sensible to focus on the brochures which were issued at about that time.
289. We refer first to the brochure dated December 1981, which was no doubt prepared for the consideration of prospective names during 1982. Those becoming members of Lloyds in 1982 began underwriting in 1983. The 1981 brochure contains Lloyds crest on the front and is entitled Brochure for Applicants for Underwriting Membership. It includes the word FIDENTIA, which we were told by Mr Goldblatt was defined by Cicero as meaning confidence and hope in great and honourable undertakings. The brochure describes itself as follows:
This confidential brochure is intended for the sole use of the person to whom it has been issued by the Committee of Lloyds and may be shown by the recipient only to his personal advisers. The brochure is intended to inform the recipient and his advisers of many general facts concerning the organisation and operation of Lloyds and is not intended to be an offer of Membership of Lloyds nor the solicitation of an application for Membership of Lloyds. This brochure should be read in conjunction with other materials provided to the recipient in the process of his application for Membership of Lloyds. Any question with respect to materials contained herein should be addressed to the Agent and/or Member who is sponsoring the application for Membership of Lloyds.
290. Section 1 sets out Matters for Special Consideration. In paragraph 1.1 it stresses the unlimited liability of each name and paragraph 1.2 is in these terms:
1.2 Insurance is a risk businessAlthough the Lloyds market as a whole has produced an overall profit during each of the previous five closed years, there have been years in which the market as a whole has suffered an overall loss. However, even in years when the market makes an overall profit, some syndicates show losses. The insurance business is a risk business and is cyclical in nature. There can be no assurance that any Member will make a profit in any given year, and over a period of years a Member must be prepared to incur a loss in one or more of those years.
291. Section 2 sets out the History and Organisation of Lloyds and, against the side note Responsibilities of the Committee, says:
2.4 The Committee deals with all matters affecting the general interest of Lloyds eg the provision and maintenance of suitable premises including the Underwriting Room for the purpose of carrying on the business conducted at Lloyds: the prescribing of conditions governing Membership: the framing of rules relating to the stringent security requirement with which all Members must comply: supervision of the overall conduct of the Annual Audit of Underwriters Accounts: the maintenance of a system of worldwide shipping intelligence: and the monitoring of legislative, regulatory and judicial development in most countries of the world. To this end, the Committee is served by a staff of about 2,000, comprising administrative, clerical, printing, catering, liveried and artisan personnel.
292. Against the side note Underwriting Agent there appears:
2.7 Whilst in the early days of Lloyds each Underwriter underwrote his own risks, the development of Syndicates resulted in the current practice of each Member appointing an Underwriting Agent or Agents, who employ an Underwriter to write business for all the members of the Syndicate or, alternatively, delegate the underwriting to another Underwriting Agent under a Sub-Agency Agreement. The functions of the Underwriting Agent are of vital concern to Members because the Agent is in complete control of the underwriting affairs of his Names, and has to deal with the complications of taxation, reserves, investments and the running of the Agency, in addition maintaining accounting procedures and statistical data on the current trends of underwriting. The Underwriting Agent is responsible for advising the Member as to which syndicates to join and conducting his Lloyds business on his behalf, which involves, among other things, keeping him fully informed of the progress of his underwriting activities, as well as keeping regularly in touch with the syndicates to which the Member belongs. The Agent will also be responsible for the investment of premium income received for the Members account. (See Investment of Premiums at 9). The Agent may however make arrangements for some of his duties to be carried out by another agent. The Underwriting Agent has a duty to his Names on the one hand to conduct the underwriting affairs in as efficient a manner as possible, and to the Committee of Lloyds on the other to see that its requirements are complied with on behalf of the Names of whom he acts.
The remainder of paragraph 2 describes the underwriting agency agreement and the roles of syndicates and Lloyds brokers.
293. Section 3 contains a description of the business being carried on by Lloyds, section 4 gives statistics as to the size of the Lloyds market and section 5 simply states that underwriters are subject to regulation in the United Kingdom and elsewhere. Section 6 contains information about becoming a member of Lloyds. Paragraphs 6.1, 6.3, 6.5 and 6.6, which appear against the side notes Application for Membership, Means Test, Rota Committee and Choice of Underwriting Agent respectively include the following:
6.1 In order to be eligible to underwrite insurance at Lloyds, an individual must apply and be accepted as a Member of Lloyds. An application is made through an Underwriting Agent with the sponsorship of an existing Member of Lloyds, to whom the potential Member is well known. The potential Member must also be known to at least one other Member, who may be his proposed Agent. Not all those who seek to become Members of Lloyds are admitted. Applications for Membership must be completed by a date set each year, generally in the early summer
6.3 The Means Test is a continuing requirement during the time a Member remains active in underwriting at Lloyds and the Member is required to confirm his means every four years and to notify the Committee of Lloyds should his net worth fall below the required level as a result of his own voluntary act.
6.5 If the Means Test is passed and the other aspects of the potential Members application are in order, he will be asked to travel to London to be interviewed by members of the Committee of Lloyds who form the Rota Committee. Among other things, the Rota Committee inquire as to, and assure themselves of, the applicants awareness and understanding of the concept of unlimited liability. They request the applicant to reaffirm that he is possessed of the assets set forth in his application. Additionally, the Rota Committee will assure themselves that the applicant appreciates that there is no guaranteed return and that he understands that underwriting is a high risk business which can bring losses instead of profits. They will also stress the importance the Committee attaches to the applicant meeting the active underwriters of the syndicates he is joining before he commences underwriting. Those applicants who are approved by the Rota Committee must thereafter be elected by the full Committee of Lloyds.
6.6 In applying for Membership of Lloyds it is most important that a potential Member should choose an Underwriting Agent whose view of the manner in which he should conduct his insurance business is compatible with that of the potential Member. Each Underwriting Agent at Lloyds will provide a potential Member with a description of his agency as well as the syndicates which he is considering recommending to the potential Member and the policy for the investment of premium income which is adopted by the syndicates Managing Agent. Once an Underwriting Agent is chosen he will help the potential Member through the application procedure. He will also advise the potential Member on which syndicates to join for his first year at Lloyds and the maximum premium income to accept on each syndicate. These syndicates must be named during the application procedure and their financial results for the past seven closed years provided in the form set out at the end of this brochure. Although the Agent is in complete control under the terms of the Underwriting Agency Agreement and must have a free hand in order to conduct the business efficiently and, to the best of his ability, profitably, the Member is always free to raise with him any questions about his Underwriting affairs.
Section 6.2 deals with sponsorship and section 6.4 defines what are readily available assets for the purposes of the means test.
294. Section 7 is concerned with fees and deposits required by the Committee of Lloyds, section 8 describes the security to be provided by names, including the premium trust fund, reserves deposits and section 9 relates to investment of premiums.
295. Sections 10, 11 and 12contain what, in our view, are the crucial paragraphs of the brochure for present purposes. Section 10 describes Lloyds system of accounting. It includes the following:
10.3 The Lloyds system of accounting is on a three-year basis. This means that the profit or loss with respect to a given syndicates year of account is determined only as at the end of the third year of its life when a reasonable estimate can be made of the ultimate income, claims and expenses which will be received or incurred with respect to policies signed during the year of account. The year of account is opened on January 1st. Insurance policies are then signed on behalf of the syndicate during the entire year. Premiums on these policies may be received during the first year or they may be received during the second, the third or future calendar years. They will then be allocated back to the appropriate open year of account provided they are received before the account is closed at the end of the third year. Regardless of when they are collected they are considered income for that year of account. Likewise, expenses and payment of claims with respect to the policies written during that year of account are allocated to the year of account, provided this has not been closed. At the end of each of the first and second calendar years of an account, an estimate is made of the anticipated liabilities (see Lloyds Audit 12.3), in order to determine whether the account concerned is projecting a surplus or deficiency based on the income received and claims made at those stages. A similar exercise is carried out in respect of the account which is at the end of its third calendar year.
10.4 The estimated outstanding liability is calculated in accordance with the provision of the Audit Instructions. The estimate must provide for liabilities in respect of claims reported but not settled, and claims, which may have been incurred but have not yet been reported with respect to policies attaching to the year of account. Once this liability has been estimated on the account at the end of its third calendar year, it must be reinsured by a valid policy of reinsurance before the account can be closed. The reinsurance will normally be accepted by the syndicates next year of account, but provision can be made for the reinsurance to be placed in the market or the account to remain open for a further year or years. Once the closing reinsurance is effected, the profit or loss for the year of account is determined and, if there is a profit, it is credited to the members of the syndicate, but if there is loss, members are debited with their share of the loss.
10.5 During the three-year period before the profit or loss with respect to a year of account is determined and before all liabilities are paid on behalf of the syndicate for such year of account, the premiums are held or invested on behalf of the members of the syndicate. Such investments generally earn capital appreciation and income which is taken into account in determining the profit or loss for the year of account.
296. Section 11 provides:
11. Closing Reinsurance
When the estimated outstanding liability on a year of account is determined at the end of the third year pursuant to the provisions of the Lloyds audit, a syndicate will usually close the account by reinsuring such liability into a later year of the syndicate. This is accomplished by the members of the old syndicate paying a reinsurance premium to the new syndicate. The new syndicate then assumes any further liability which may be incurred as a result of claims on the policies written by the old syndicate. Being an estimate of future liability, the reinsurance premium may or may not eventually be proven accurate. In certain cases it has been inadequate and the new syndicate has suffered losses in excess of the reinsurance premium received; in such cases Members in the new syndicate would suffer a loss on the reinsurance to close.
297. Section 12 is entitled LLOYDs AUDIT and includes the following:
12.1 Pursuant to the United Kingdom Insurance Companies Act under which Lloyds operates, each Members underwriting accounts must be submitted annually as at each December 31 to a rigorous audit conducted by a member of a panel of chartered accountants approved by the Committee of Lloyds. This audit is carried out in accordance with the Instructions for the Guidance of Lloyds Auditors (referred to as the Audit Instructions) issued annually by the Committee of Lloyds with the approval of the British Department of Trade. If, after taking into account all assets including those referred to in Description of Security at 8 (but excluding the Central Fund and Guarantee Policies), a Members accounts do not conform to the standard of solvency required, he will be obliged to provide additional funds, or to cease underwriting. In conducting the annual audit, the Managing Agent and active underwriter of the Syndicate together with the panel auditor, determine the reserves necessary to be created on the syndicates accounts including the amount required to close the account at the end of its third year. Once this latter amount is determined, the account may be closed and reinsured into a later year of the syndicate, as described under Closing Reinsurance at 11.
12.2 The Audit Instructions, the provisions of which are reviewed each year by the Committee of Lloyds, set out the basis upon which the syndicate auditor must carry out the annual audit of Underwriters accounts. The Lloyds Audit is primarily a test of solvency and the Audit Instructions deal, in particular, with the method to be adopted in calculating the outstanding liabilities as at the year end (i.e. the audit reserves) and the assets which may be taken into account to meet those estimated liabilities.
12.3 For the purpose of estimating liabilities, Underwriting accounts are divided into audit categories representing subdivisions of the business underwritten in the four main markets (i.e. Marine, Non- Marine, Motor and Aviation) and scales of audit reserves, expressed as percentages of premium income, are set out in the Audit Instructions for each of the audit categories. These percentage reserves, which are based on the general claims experience of the markets, are an absolute minimum requirement and if the claims experience of a syndicate demonstrates that a higher provision is needed, it must reserve that higher figure. In addition, an alternative audit test based on the syndicates estimate of the outstanding liabilities as at December 31 (which must include a provision for unknown and unnoted losses) is prescribed in respect of the third and subsequent years of an account should this prove to be higher than the percentage reserves.
12.4 The Audit Instructions require that the assets taken into account for the solvency test are valued at the year end. In the case of the Premiums Trust Fund, these may include cash with approved Banks or Discount Houses, certain types of investment specified in the British Trustee Investment Act and their equivalent where the funds are invested in the non-U.K. obligations. Premiums Trust Fund moneys may also be invested in other securities which are readily realisable. These latter securities may not, however, exceed 40% of the Trust Fund, plus net amounts due from Lloyds Brokers. Other assets which may be taken into account include balances due from Lloyds Brokers and the Members personal funds, e.g. Special Reserve Fund, personal reserves and Lloyds deposits, but, in the case of the Lloyds deposit, subject to the restrictions referred to under Description of Security 8.3.
The judges reasoning
298. The judge rejected all the representations based on the brochures which were advanced on behalf of the names. He gave these reasons.
(i) The whole of each brochure must be considered. (ii) The starting point is the actual words used in the brochures.
(iii) A useful question is as follows: what would a reasonable applicant for membership of Lloyds or name understand when reading the brochure as a whole?
(iv) The alleged representations are not contained in any of the express words used in the brochures.
(v) The alleged representations (a) are not necessary to give business efficacy; (b) do not represent the obvious, but unexpressed, intentions of the parties; and (c) are inconsistent with the express words used in the brochures.
(vi) In [Clementson] the names argued that their contract with Lloyds was subject to implied terms, such as
(1) that Lloyds would regulate and direct the business at Lloyds with care and diligence and/or lawfully;
(2) that Lloyds would manage and superintend the affairs of the Society with care and diligence;
(3) that Lloyds would advance and protect the interests of members of Lloyds in connection with the business carried on by them with care and diligence and/or lawfully.
The alleged (derived) representations are re-workings of the implied terms rejected in Clementson.
299. The judge then quoted from the judgments of Saville J at first instance and of Sir Thomas Bingham MR and Steyn LJ in this court in Clementson and, as we understand his judgment, he rejected the implied representations alleged by the names for essentially the same reasons as the names case based on the implied terms was rejected in Clementson.
300. The judge continued:
(vii) As to the first alleged representation (could have confidence as an institution to safeguard his/her interests) it is (a) unclear in its terminology; (b) does not accord with the administrative structure and governance of the Lloyds market and the regulatory background for the auditing and accounting regime at Lloyds; and (c) is inconsistent for example with the following express statements in the brochures.
The judge then quoted from paragraph 2.7 of the 1980 brochure, which described the functions of the underwriting agent and was in almost identical terms to paragraph 2.7 of the 1981 brochure quoted above. The judge concluded subparagraph (vii) as follows:
See further for example Membership The Issues December 1986 under the heading Key Membership Issues.
See also Gatehouse J in Ashmore (No 2).
The reference to the 1986 document is a reference to the 1986 brochure, by which time rather more elaborate brochures were issued by the Council of Lloyds but had the same purpose as the earlier brochures, which was to provide information to potential new members. They contained much the same information. Although the judge did not quote from the 1986 brochure, it seems to us that he probably had in mind in particular a similar passage about the role of the members agent as appears in the earlier brochures.
301. The judge continued:
(viii) Similarly the second alleged representation (could trust those who were chosen by Lloyds to regulate the Lloyds market and manage its affairs) and the third alleged representation (because of the way in which Lloyds regulated and monitored underwriting accounts year by year, (a) could rely on syndicate accounts; (b) could in underwriting and/or in deciding whether to remain a member of Lloyds have confidence in the audited syndicate results, for results of past years; and (c) could be sure that Lloyds as part of its regulatory duties would ensure that when prospective liabilities were reinsured by one syndicate year into another, such liabilities were being fairly assessed and quantified as between two syndicate years) are (a) unclear in their terminology; (b) do not accord with the administrative structure and governance of the Lloyds market and the regulatory background for the auditing and accounting regime at Lloyds; and (c) are inconsistent for example with the following express statements in the brochures.
302. The judge then quoted section 11 of the 1979, 1980 and 1981 brochures with regard to the RITC process which we have quoted above. He also set out the similar section of the 1983 brochure, which is in similar but not identical terms as follows:
11. Closing Reinsurance
Whilst paid claims will, of course, be known and information available on known (but unpaid) claims, it will also be necessary to estimate the value of any unknown claims which may arise in the future and be attributable to that year of account. The computation of the overall figure of outstanding claims is a major exercise for the managing agent and his underwriter and will be a crucial element in determining whether that year of account shows a profit or a loss. Once this liability has been estimated it must be reinsured by a policy of reinsurance in order that the account can be closed. The reinsurance will normally be accepted by the syndicates next year of account, but provision can be made for the reinsurance to be placed with other syndicates or for the account to remain open for a further year or years. The latter course will be adopted where the agent and his underwriter feel that it is not practicable, at that time, to predict with any reasonable degree of certainty the future claims which will arise on that year of account The quantification of the reinsurance to close is an estimate of future liability and the reinsurance premium may or may not eventually be proved accurate. In certain cases it has been found to have been inadequate and Members participating on the account which has accepted the reinsurance have suffered a loss on the reinsurance to close.
Finally the judge set out similar parts of the December 1986 brochure to which we refer briefly below.
303. The judge held that the alleged representations could not be spelled out of the express words of the brochures, that it followed that the names had to show that the allegations were to be implied from the brochures and that there was no room for any of the implied representations alleged. In deciding whether representations should be implied, the judge appears to have adopted the same test as is used for deciding whether a term is to be implied into a contract.
304. That can be seen from the passages which he quoted from the judgments in Clementson. His quotation from the judgment of Saville J at first instance included the following, reported at  CLC 71 at 76:
it seems to me that whatever test is applied, there is no need for the implication of any of the suggested terms. The undertaking is wholly efficacious as it is expressed and wholly carries through its object, namely contractually to bind the individual to the rules etc of the Society. Since this was the bargain that the parties were making, they could not on any sensible view have regarded the suggested implied terms as a necessary part of the individuals promise to comply with the rules. The contract is not incomplete; its nature does not require that further unexpressed rights and obligations should be implied into it.
The judge quoted a further passage in Saville Js judgment in which, albeit obiter, he rejected what he called the unfounded assumption that Lloyds was in some way responsible for a names underwriting.
305. The judge also quoted from the judgments in this court, which are reported at  CLC 117. The judges quotations included the following from the judgment of Sir Thomas Bingham MR at p 122:
I would be content to accept the judges reasoning as my own. It was in no way necessary to the efficacy of the contract that Lloyds should regulate and direct the business in its market with reasonable care Mr Mason was subjecting himself to the regulatory jurisdiction of a body of which he was becoming a member and consisting of his fellow members. For the management of his underwriting business he would look to his own agents and not to Lloyds. In contractual terms there was no more to it than that
The judges quotation from the judgment of Steyn LJ included the following at pp 132-3:
I take the view that there are four reasons which cumulatively make it impossible to imply any of the suggested implied terms Thirdly, the Lloyds system operates on the fundamental premise that a name entrusts his affairs, and in the process his fortune, to his managing agents. The name has remedies both in contract and in tort against the managing agent: Henderson v Merrett Syndicates Ltd Names assume substantial risks but at all material times names have done so in return for the advantage of their money, by way of underwriting and investment, working twice, added to which there have been the prospects of substantial taxation advantages. Historically becoming a name at Lloyds proved very profitable business. But the negative side of the bargain has always been that the name relies on, and assumes the risk of, the honesty and skill of his managing agent. Manifestly in the Lloyds system there is no assumption of responsibility by Lloyds to supervise the investment or underwriting decisions of managing agents That does not mean that Lloyds has a licence to act in bad faith, for improper purposes or otherwise in an unlawful manner. But that merely means that such action would be ultra vires
I would reject the argument that any of the terms put forward in this case are capable of being implied. I am driven to this conclusion by three distinctive features of the relationship between a name and Lloyds: namely (1) that the sole purpose of the general undertaking is to commit a name to the regulatory system of Lloyds; (2) that it is prima facie inappropriate to imply such terms in a relationship between names inter se; and (3) that the Lloyds system operates on the basis that names look for protection of their interests solely to their managing agents and not Lloyds. While the Council and Committee of Lloyds are empowered to regulate the market Lloyds does not assume any responsibility to protect names from the breaches of duty of their agents. The suggested implied terms are not needed. On the contrary, the Lloyds system, as underpinned by the Lloyds Act, would be rendered unworkable if such terms were to be implied.
306. Mr Goldblatt submitted that the legal tests governing the implication of a term in contract, with which the court was concerned in Clementson, are irrelevant to the question whether the brochures contain the representations alleged. We agree. As already stated under the head of the tort of deceit, in our view the question is not, for example, whether it is necessary to imply the representation alleged, but simply whether, fairly read and in all the circumstances, the brochure contains (whether explicitly or implicitly) the representation alleged.
307. We agree with the judge that the starting point is the actual words used in the brochure and that the whole of each brochure must be considered because each statement in the brochure must be considered in its context, which includes the brochure as a whole. We further agree that it is useful to ask what a reasonable applicant for membership of Lloyds would understand when reading the brochure as a whole. That will of course involve a consideration of the surrounding circumstances, which include the role of the applicants underwriting agent.
308. Mr Aldous correctly accepted in the course of argument on behalf of Lloyds that the brochures were intended to be read and relied upon by prospective names because each brochure expressly so states at the beginning: see paragraph 289 above. It is, we think, important to observe that each brochure (including the 1981 brochure, which we take throughout this discussion as an example) stresses, as did the court in Clementson in the passages quoted above, the distinction between the regulatory role of Lloyds and the role of the names underwriting agent: see eg paragraphs 2.4, 2.7 and 6.6 of the brochure quoted in paragraphs 291-293 above.
Representations as to the audit system
309. The question is what role in the audit system the brochures attributed to Lloyds. In our view the way in which the names case can best be put in this regard is along the following lines. Lloyds knew that prospective names would rely upon Lloyds itself as well as upon their agents. The purpose of the brochures was to spell out the role of Lloyds in some detail. While Lloyds was not responsible in any way for the underwriting, which was left to the names agents, it made clear in the brochures that it had responsibilities for supervising the market, including the approval and monitoring of the accounting system. Moreover it made specific representations of fact relating to the accounting and auditing system, including in particular the way the RITC operated, which is central to the names case and to this appeal.
310. Thus, for example, in paragraph 2.4 the role of the Committee of Lloyds includes supervision of the overall conduct of the Annual Audit of Underwriters Accounts. The system of accounting is described in paragraphs 10.3, 10.4 and 10.5 of the brochure, quoted in paragraph 295 above. In paragraph 10.3 it is stated that an estimate is made of the anticipated liabilities at the end of each of the three calendar years of account and in paragraph 10.4 it is stated that the estimated outstanding liability is calculated in accordance with the provisions of the Audit Instructions.
311. Paragraph 10.4 states what must be (and by implication is) included in the estimate of outstanding liability, namely liabilities in respect of claims reported but not settled, and [our emphasis] claims, which may have been incurred but have not yet been reported with respect to policies attaching to the year of account. Those are the claims said to be IBNR, incurred but not reported. It is implicit, if not explicit, in those statements that the system in place for identifying the IBNR claims is a satisfactory one because of the obvious potential importance to new names of underestimating such claims. It is true that the RITC system is described in section 11 (see paragraph 296 above) and that it is there stated that, since the RITC premium is an estimate of future liability, it may or may not prove accurate and that in certain cases in the past it has proved inadequate with the result that the new syndicate has suffered loss. However, that underlines the importance of the accuracy of the estimated future liabilities and therefore the importance of putting in place a reliable system of estimating them with reasonable accuracy. It thus strengthens the inference to be drawn from the brochure that there was such a reliable system in place.
312. Those conclusions are reinforced by the express statements in section 12, under the heading LLOYDs AUDIT. Paragraphs 12.1, 12.2 and 12.3 (quoted in paragraph 297 above) include these express representations:
(1) Pursuant to the Act each Members underwriting accounts must be submitted annually as at each December 31 to a rigorous audit conducted by a member of a panel of chartered accountants approved by the Committee of Lloyds.
(2) This audit is carried out in accordance with the Audit Instructions issued annually by the Committee of Lloyds with the approval of the Department of Trade.
(3) In conducting the annual audit, the Managing Agent and active underwriter of the Syndicate together with the panel auditor, determine the reserves necessary including the amount required to close the account at the end of the third year.
(4) The Audit Instructions, the provisions of which are reviewed each year by the Committee of Lloyds, set out the basis on which the syndicate auditor must carry out the annual audit of Underwriters accounts.
(5) The Lloyds Audit is primarily a test of solvency and the Audit Instructions deal, in particular, with the method to be adopted in calculating the outstanding liabilities as at the year end (ie the audit reserves) and the assets which may be taken into account to meet those outstanding liabilities.
(6) Percentage reserves are an absolute minimum requirement and if the claims experience of a syndicate demonstrates that a higher provision is needed, it must reserve that higher figure. (7) An alternative audit test based on the syndicates estimate of the outstanding liabilities as at December 31 (which must include a provision for unknown and unnoted losses) is prescribed in respect of the third and subsequent years of an account should this prove to be higher than the percentage reserves.
313. Although paragraph 12.2 of the brochure stresses that the Lloyds Audit is primarily a test of solvency, and there are indeed a number of statements making it clear that its purpose is to identify whether each particular name has personal assets and reserves which are sufficient to meet his or her prospective liabilities, it is not a fair reading of the brochure, considered in context, that the brochure states that that is the sole reason for or basis of the audit. On the contrary the brochure makes clear that the audit forms the basis upon which each syndicates accounts are to be signed off each year and that one of the principal purposes of such an audit is to ascertain the premium to be required for the next years syndicate in order to close the relevant year of account. The brochure further makes it clear that the whole Lloyds accounting system depends upon closing one years account into the next year, which in turn depends upon having a reliable system in place for estimating outstanding liabilities, including claims which are IBNR.
314. That conclusion is underlined by representation (7), which is derived from paragraphs 12.1 to 12.3 of the brochure, namely that an estimate of the outstanding liabilities as at December 31 including unknown and unnoted losses must be made every year. Those unknown and unnoted losses must be the same potential liabilities as the claims, which may have been incurred but have not yet been reported with respect to policies attaching to the year of account referred to in paragraph 10.4 of the brochure.
315. In short a central representation in the brochure is that there was in existence a rigorous system of auditing which involved the making of a reasonable estimate of outstanding liabilities including unknown and unnoted losses. The brochure further contained a representation that Lloyds believed that that was the case. Furthermore those at the centre of Lloyds must have intended it to be understood in that way, and it was material. In these circumstances the judge should have held that that the brochure contained representations by Lloyds to that effect.
316. As we have said under the heading the tort of deceit, the question is how the ordinary prospective name would reasonably understand the brochure. In our view, in deciding that question it is not relevant to consider the evidence as to how the brochures came into existence since prospective names would not know that. Nor is it necessary or helpful in deciding what representations were made to analyse the documents referred to in the brochures. Thus it does not seem to us to be appropriate to consider the terms of the Audit Instructions. The brochures must be considered through the eyes of those by whom they were intended to be read, namely prospective names. It is unrealistic to suppose that most prospective names would obtain copies of the Audit Instructions and consider them, or indeed take advice from an accountant or other expert as to the strengths and weaknesses of the Audit Instructions. Such documents would not be included within the other materials provided to the recipient in the process of his application for Membership of Lloyds contemplated in the introduction to the brochure. That is in our view so, even though the introduction makes it clear that any question with respect to the materials contained herein should be addressed to the Agent and/or Member who is sponsoring the application.
317. It will be observed that the case which we have summarised above is not quite that pleaded and considered by the judge. The representations considered by the judge are set out in paragraph 285 above. As to the first two, we entirely agree with the judge that they are not contained in any of the brochures. They are in very wide terms and, in our judgment, there is no warrant for the conclusion that the brochures contained representations that a name could have confidence in Lloyds as an institution to safeguard his interests or that he or she could trust those chosen by Lloyds to regulate the market and to manage its affairs. Those suggested representations are very vague and in our view insufficiently precise to support a claim for deceit. Moreover, we accept Lloyds submission that they are not statements of fact.
318. If the names are to succeed in establishing the tort of deceit based on the brochures they must identify specific representations of fact in the brochures. In our view the third alleged representation, or more accurately set of representations, set out in paragraph 285 above comes nearer to satisfying the relevant test. However, they also are in our view much too widely drawn. Moreover, they also are expressed in terms of what names could do, ie in the future. There is nowhere a statement that names could rely upon their syndicate accounts if, by that, is meant that names could rely upon the accuracy of syndicate accounts. The brochures make it clear that the syndicate accounts are prepared by the syndicate and that it is the managing agent and the active underwriter together with the panel auditor who conduct the annual audit. We do not think that the brochures can fairly be read as containing the kind of promise alleged in each of the pleaded representations set out in paragraph 285 and considered by the judge.
319. It appears to us, on the other hand, that the brochures do contain a number of statements of fact including statements as to the system of accounting in operation at Lloyds. Indeed, the purpose of the brochure was to describe the system in operation and an important part of that system was the accounting system. The system of accounting included three year accounting and the closing of one year into the next. It follows that the RITC premium and the way it was calculated were central to the system and, since the premium depended upon a fair assessment of future liabilities, the system required a workable method of calculating not only liabilities in respect of claims which had been notified, but also the IBNR liabilities or, in the words of paragraph 12.3 of the brochure unknown and unnoted losses.
320. In all these circumstances we have reached the conclusion that the case set out in paragraphs 309 to 315 above should be accepted. In our view the 1981 brochure does contain the representation set out in paragraph 315, namely that there was in existence a rigorous system which involved the making of a reasonable estimate of outstanding liabilities including unknown and unnoted losses. It seems to us that an ordinary person applying to become a name would reasonably reach that conclusion by reading the 1981 brochure. The language of the brochure would lead the prospective member to conclude that Lloyds, who (as Bowen LJ put it) knew the facts when the prospective member did not, knew facts which justified the statement that the accounts were submitted annually to a rigorous audit in accordance with appropriate instructions approved by Lloyds which included proper provision for unknown and unnoted losses. To answer the question posed by Lord Evershed, that is the effect that the language of the 1981 brochure would have had upon the mind of a potential name.
321. We stress that we are not saying that the 1981 brochure contained representations that syndicates accounts were, as a matter of fact, all prepared in accordance with the Audit Instructions. Our conclusion is simply that the brochure contained a representation that there was in place a rigorous system which involved the making of a reasonable estimate of outstanding liabilities which, as it was put in paragraph 10.4 of the 1981 brochure, must provide for liabilities in respect of claims reported but not settled, and claims, which may have not yet been reported with respect to policies attaching to the year of account. Thus we would express the representation as being that there was in existence a rigorous system of auditing which involved the making of a reasonable estimate of outstanding liabilities including unknown and unnoted losses. The brochure further contained a representation that Lloyds believed that that was the case.
322. Although all the brochures were not in precisely the same terms, we do not think that any different view would be taken by a prospective name reading any of the others. We therefore refer to them only briefly. From 1986 the brochures were in a somewhat different format, although their substance was much the same.
323. There was a brochure issued in February 1986 and a further similar, but slightly different, document issued in December 1986. The judge quoted some extracts from it. It no longer referred to the audit as rigorous but stated that the purpose of the audit was to produce a true and fair view of the profit and loss in respect of a closed year. It included the following statements:
Major Financial Aspects
Occasionally, an account is left open at the end of the third year and is not closed by reinsurance. This may happen for a number of reasons, but will primarily result from major uncertainty as to future levels of liability. Full liability remains with the members participating in such accounts even if they resign from Lloyds or die, until the accounts are closed by reinsurance: this may take years.
The past results of the market and of individual syndicates must be regarded as a historic record and may be a poor guide to future prospects. Previously profitable business may subsequently lose money and vice versa; the nature of business written changes; reserves created against future claims may prove inadequate, as may a syndicates reinsurance protection.
Accounting and Information to Names
A package of detailed rules has been established by the Council of Lloyds governing the form and manner in which managing the members agents are required to account and report.
Each calendar year, managing agents must produce financial statements in respect of each syndicate they manage. These financial statements comprise a syndicate annual report made up of :
. underwriting accounts covering the closed year and each open year,
. a balance sheet,
. a seven year summary of results,
. accompanying notes including disclosure of interest information;
. a personal account for each member showing his own result;
. a managing agents report; and
. an underwriters report covering closed and open years and future developments.
Lloyds requires that the syndicate annual report shall give a true and fair view of the profit or loss for a closed year of account and that a Names personal account shall give a true and fair view of the members net result. The requirement to report in true and fair terms does not extend to the open years accounts because the figures showing the open years merely reflect cumulative cash transactions to date.
Syndicate annual reports are subject to independent audit. The syndicate auditors who must be approved by Lloyds are appointed by the managing agent to act on behalf of the Names.
The reinsurance to close represents a premium payable under contract by Names in one year of account to a succeeding, usually the next, year of account of the same syndicate or (rarely) some other syndicate. The contract transfers by reinsurance all outstanding risks and benefits relating to the closing year and all previous years of account to the succeeding year, in consideration for which an equitable premium is paid.
The calculation of the premium for the reinsurance to close involves the exercise of significant professional judgment and draws on the full experience of the active underwriting in assessing the outstanding known claims, claims incurred but not reported to the syndicate any further claims which are likely to arise. Each year the Council of Lloyds sets minimum percentages of premium income which must be reserved for each category of business and which are approved by the Department of Trade and Industry.
In determining the reinsurance to close, the managing agent and active underwriter must have regard to the interests of the Names paying the premium and those of the Names accepting the premium: the premium must be equitable between the different groups of members. The syndicate auditor is required to pay particular attention to the calculation of the reinsurance to close in drawing up his report.
324. It is not necessary to set out any further extracts from that brochure because we have formed the view that, although the language was not identical to that quoted from the 1981 brochure, the substance of the representations contained in the December 1986 brochure was the same. We do not think that the removal of the adjective rigorous or the introduction of the concept of true and fair would affect the construction which a prospective name would put on the brochures. We therefore proceed on the basis that throughout Lloyds was making the representations which we have identified in paragraph 321 above, that they intended them to be understood and acted upon in that sense. We should add that the representations were also material in the sense used by Hobhouse LJ in Downs v Chappellat p.433 in the passage quoted in paragraph 60 above.
325. It is true that, so stated, those representations are much more limited than the representations considered by the judge, even representation (iii). Nevertheless, they are representations which in our judgment were espoused in the various ways in which the names argument was advanced in this court and was in effect addressed in argument by both sides.
326. What have been described as the globals are global results which Lloyds published from time to time in various ways. As stated in paragraph 286 above, the representations relied upon were said to be contained in various reports relating to the position as at the end of each year between 1981 and 1987. The reports typically included statements by the Chairman of Lloyds and by the chairmen of each of the market associations, namely marine, non-marine, aviation and motor. They also included the three year accounts and a five year business summary.
327. The judge held that the globals did not contain the alleged representations. He gave a number of particular reasons for his view. The first five reasons were mutatis mutandis the same as in the case of the brochures, as quoted in paragraph 298 above. He added two further reasons as follows:
(vi) The alleged representations are (a) unclear in their terminology; (b) do not accord with the administrative structure and governance of the Lloyds market and the regulatory background for the auditing and accounting regime at Lloyds; and (c) are inconsistent with express statements in the documents. By way of example I refer to the passages quoted in chapter 19 from the Aggregate Results/Global Reports and Accounts as at 31.12.81 to 31.12.87.
(vii) As to the second alleged representation, Lloyds accepts that a representation was made that such figures represented an accurate aggregate of the audited trading results of all syndicates in the market. The Notes to the Accounts in the Globals made it quite clear that the figures were no more than an aggregate of such syndicate results.
328. In paragraph (vi) the judge was, as we understand it, responding to the submission that the globals contained representations that the Lloyds market was in a sound financial condition throughout the period. The point he was making is that there are important qualifications in the globals which show that it is too simplistic to say that the globals contained representations that Lloyds was in a sound financial condition. The particular parts of the globals to which the judge was referring were those set out in chapter 19 of the judgment.
329. The Lloyds Log of October 1982 contained a report from the Chairman of Lloyds, Mr Peter Green, entitled Lloyds Announce Profit of £172.9m on 1979 account. An accompanying report from Mr Richard Ballantyne, the Chairman of LUNMA, included the following:
Probably no report of this nature would be complete without some reference to the serious problems which have arisen and which are likely to persist arising from asbestosis.
Many commentators have tried to put a figure on how much this will actually cost but in my opinion it is totally impossible to quantify. Policy wordings have been construed in many different ways, most of them to the detriment of insurers. Many of the syndicates in Lloyds started underwriting after the asbestosis losses had become apparent and so should be unaffected, whilst others may well have seen the danger coming and have taken steps to minimise the total impact.
One thing is certain and that is the fee bills will be enormous; for instance, in respect of one of the assureds, for every $1.5m being paid in indemnity, $2.4m is being paid in fees. There is some indication, however, of a slowdown in advice of new claims, so we are hoping that the peak has passed.
330. In his statement as Chairman of Lloyds in Lloyds Global Accounts 1982, which was published in August 1983 but related to the 1980 year of account, Mr Peter Green said:
I am pleased to say that this year we are presenting Lloyds Global figures in a much improved and more comprehensive form
Another important innovation is the inclusion in the underwriting accounts of separate figures for the reinsurance provision made to close the 1980 and previous accounts. At £2113 million, this is the underwriting agents best assessment of the outstanding liabilities of the syndicates under their management.
The figures show that for the 1980 year of account Lloyds made a profit of £264 million.
It will be noted that the known assets of Lloyds at present exceed the statutory requirement by more than five times.
One aspect of the Lloyds figures which is indicative of confidence in Lloyds is the ratio of membership to premium income. In 1970, 6,000 members earned premiums worth just over £786 million. Ten years later, although the membership has tripled, Lloyds premium income had gone up by nearly five times.
331. An accompanying report by Mr. Michael Cockell (Chairman of LUNMA) included the following:
I look at 1980 as the worst non-maritime underwriting result since the mid-1960s, brought about by the gradual decline since those days in commercial sanity bolstered by the insidious buffer of historically high interest rates.
It may prove in time that 1980 was the year when many syndicates were able to reserve for their asbestos and trauma-related potential. It would be appropriate if I explained how difficult it is to comment on the asbestos situation in a way that would be useful. It must be understood that extremely onerous and sensitive discussions and negotiations are continually taking place. There is always the potential danger of punitive damages, so I cannot helpfully comment in detail on these subjects. It takes a brave man, or a foolish one, to forecast the outcome of the open years. For what it is worth I would personally expect the bottom line on each to show a deterioration on the preceding one.
332. In his statement as Chairman of Lloyds in Lloyds Global Accounts 1983, which was published in August 1984 and related to the 1981 year of account, Mr Peter Miller said:
I am pleased to report Lloyds Global results for 1981 it is pleasing to be able to record a substantial profitable result for 1981 of almost £152 million the reinsurance to close increased from £2.1 billion to £2.7 billion. It is easy to be pessimistic in todays insurance world. I remain an unrepentant optimist I believe that while we still have to go through the troughs of 1982 and 1983, Lloyds will emerge having avoided the worst of the losses now being reported by so many of its competitors, particularly in the US market. I predict a future in which Lloyds will maintain and improve its position in the insurance industry.
333. An accompanying report from Mr Ralph Rokeby-Johnson (Chairman of LUNMA) included the following:--
We who underwrite at Lloyds have certain advantages over our competitors for instance our business is truly international and we have the ability to change the content of our account swiftly. Nevertheless, it is impossible for most of us to perform entirely differently from others in our market place with the exception of small specialists. It is well known that non-marine underwriting has been very difficult and over-competitive in the early 1980s and our results demonstrate this. I will be surprised if my successors have better results to show for the underwriting years 1982 and 1983 when they are closed
It is rapidly becoming apparent that the potential claims arising from asbestos will dwarf any claim in the history of our industry. It is very sad that in the United States to date under half of the money paid by our industry has ended in the hands the injured party, the balance is in the capacious coffers of the more rapacious lawyers: for this reason we support, and I very much hope all our industry will support, the concept of a claims handling facility set up by the insurers and manufacturers to look after the interests of the injured.
All these subjects require a re-appraisal of the reserve set up in the past to deal with future claims and it will not have escaped your notice that these reserves are constantly being strengthened by Lloyds underwriters and the more prudent members of our industry.
I believe we are on the threshold of a time of opportunity for sensible underwriting: the ignorant or innocent capacity has been taught its lesson again. I only hope that this time we will not see the usual peaks and troughs and that common sense will have greater longevity. I fear that my hopes will not be well founded.
334. In his statement as Chairman of Lloyds in Lloyds Global Report and Accounts 1984, which was published in September 1985 and related to the 1982 year of account, Mr Peter Miller said:
Of the seven major classes of business, three show a substantial improvement as compared with last year, three show a substantial deterioration and one a modest deterioration. While the marine account is the best for some years and four of the other six major accounts show reasonable profits, the general (non-marine) liability account shows an enormous loss. One wonders what Mr Micawber, with his nose for which side of the financial line happiness lay, would have made of that particular result. Certainly his recipe for putting things to rights by waiting in case anything turned up cannot commend itself to the underwriters whose duty it is to correct this disastrous state of affairs. Figures such as these make it obvious that underwriters must take stringent remedial action as indeed they are. It is worth repeating that a combination of three things is needed, particularly in the all important American casualty business; first, a realistic rating level; second, a reformed policy wording embracing, where needed a claims made basis for claims and overall limit, including legal costs; and third, a measure of tort law reform. Without real progress in all three areas, it is hardly to be wondered at if underwriters increasingly withdraw from this class of business, with the result that certain industries will be left without the insurance coverage which they need to continue in business, to the detriment of society in general.
335. An accompanying report from Mr Richard Hazell (Chairman of LUNMA) included the following:
The figures produced for the close of the 1982 Account do not make happy reading from the non-marine markets viewpoint, producing an overall loss of £219m after taking into account substantial investment earnings. It must be remembered when reviewing these figures that they relate to the experience of the insurance market of three years ago when the insurance industry generally was at it lowest ebb for very many years, if not in its entire history.
Undoubtedly, much of the blame for these poor results can be attributed to the need for underwriters to increase reserves for outstanding losses in the light of the more liberal attitudes adopted by the American courts, very often in pursuit of the deep pocket theory. This is particularly apparent, but is not unique, in relation to those claims affecting asbestosis and pharmaceutical products. New laws regarding liability following pollution and other forms of environmental impairment could also produce problems for underwriters as these new laws appear to apply retroactively, thus making it very difficult to underwrite against such circumstances. It is to be hoped that the newly formed asbestosis facility, which after many years of being discussed has now been established, will enable settlement of claims to be made as a faster rate with a consequent saving of legal expenses.
A document entitled 'ALM. 1982 Lloyds Syndicate Results published in September 1985 stated that Lloyds Global Report and Accounts 1984 have been distributed to all Names this year for the first time.
336. In his statement as Chairman of Lloyds in Lloyds Global Report and Accounts 1985, which was published in August 1986 and related to the 1983 year of account, Mr Peter Miller said:
While 1983 is still within the trough of poor results it is nevertheless pleasing to be able to report at least an overall profit of £36 million or £179 million excluding the PCW syndicates
For 1983, of the nine statutory categories in which we make our returns, eight show an overall profit ranging from the modest to the satisfactory. The ninth tells a different story. As last year, the general liability account generates approximately 12 per cent of the total premium income for 1983 and, for the same year, produces 100 per cent of our losses. Were the underwriting environment for this class of business not to have improved it would be inconceivable that any underwriter would remain in the class.
337. An accompanying report from Mr Robin Jackson (Chairman of LUNMA) included the following:
It is disappointing to report that, once again, the non-marine market has produced an overall loss after taking account of investment earnings. The loss of £231 million is somewhat higher than 1982 and represents a loss of 21 per cent on a total non-marine premium income of £1,074 million. Although the overall market results of the year 1983 on its own were thoroughly unsatisfactory, they have been exacerbated by the need of a number of syndicates to set aside additional reserves in respect of latent disease claims such as asbestos for the prior closed years of account. The year also suffered a number of catastrophes including winter weather losses and Hurricane 'Alicia' in the United States. Hurricane 'Alicia' may untimely turn out to be the largest loss yet suffered by the market from one storm.
The US based liability account has yet again been the cause of most of the markets difficulties as, once again, it was necessary for underwriters to increase reserves for asbestos-related losses. Although the Asbestos Claims Facility -- set up with the support of Lloyds is making significant savings in the legal costs involved, this is to some extent offset by there being no slowing down in the number of new suits being brought.
In summary, after some very gloomy reports from my predecessors, I genuinely believe I can be considerably more optimistic than has been possible for a long time. I hope that over the next few years the non- marine market will be able to return to the kind of results of which underwriters may be proud. It should not be assumed, however, that non- marine underwriting has suddenly become easy: it is just that some badly needed corrections have been made and will continue to be made enabling underwriters to be more in control of their own destinies.
338. In his statement as Chairman of Lloyds in Lloyds Global Report and Accounts 1986, which was published in August 1987 and related to the 1984 year of account, Mr Peter Miller said:
the overall results for 1984, constitute a record profit for the Lloyds market of almost exactly £300 million, excluding PCW, while the outlook for 1985, at least overall, looks likely to improve on that figure and 1986 is spoken of, almost reverently, as a vintage year
However, there is one factor which continues to dominate the whole Lloyds market and indeed it is perhaps no exaggeration to say it continues to dominate the whole world insurance scene. I refer, of course, to the general liability account. I have in previous years drawn attention to the enormous losses made in this area and I must do so again. The overall loss on this account shows a welcome reduction from last years figure. However, I have to say that the problems facing those underwriting this account, while perhaps reduced as a result of the reforms in the law of tort in the United States, are nevertheless far from solved. Two facts seem to me to stand out; first, that this account produces 12 per cent of Lloyds premium income and almost 100 per cent of our losses. Second, almost exactly 50 per cent of our reinsurance to close (£2,000 million out of £4,000 million in round figures) has to be devoted to the claims outstanding within this account; on a premium income base of some £400 million any under- reserving must have a sharply disadvantageous effect. In spite of all the efforts that have been made, quite extraordinary court awards and judicial interpretations continue to come from, in particular, the American scene.
There are two quite different problems in the whole of this area. First, whether the amounts put aside to meet these claims will be sufficient, a problem of the past which underwriters must do their best to solve. Second, how far it is prudent to commit underwriting resources in the future to a class of business hedged about with such dangers and uncertainties. The problem extends beyond the insurance industry; society, that is to say the general public and its political leaders, will have to reflect and should, sooner rather than later act to clarify how they feel that their damaged citizens should be fairly compensated.
339. An accompanying report from Mr Bryan Kellett (Chairman of LUNMA) included the following:
The results of the non-marine market are, once again, dominated by the loss in the general liability section, which for the 1984 year of account amounts to £170 million on a premium income of £365 million. A substantial proportion of that loss results from the need, as in previous years, to add to the reinsurance to close item as the result of reassessment of liabilities on business written in prior closed years of account. This class of business, much of which comprises policies issued to insureds in the United States of America, continues to be adversely affected by certain features of the legal system of that country. One such feature is the contingent fee system whereby lawyers are rewarded by sharing in the damages which they are able to secure for their clients, often leading to spurious cases being pursued. Another is the system of awards by juries in civil damages cases where they are encouraged to think of the insurance industry as having a deep pocket from which victims may be compensated, regardless of whether or not there is fault on the part of insured defendants.
The problems are considerably compounded by the time which may elapse between the occurrence giving rise to injury and an eventual court ruling that this was in some way due to the negligence of the policyholder. Thus, underwriters of this class of business are faced with two problems. Firstly, they are being called upon to indemnify insureds in respect of losses for which they had not expected to be held liable. Secondly, the computations of the amounts which will be needed to pay losses already incurred and which should be charged as premium on new business will be based on an inadequate and unreliable data
340. In his statement as Chairman of Lloyds in Lloyds Global Report and Accounts 1987, which was published in August 1988 and related to the 1985 year of accounts, Mr Murray Lawrence said:
Over the past twelve months, two events have served to emphasis the vital role played by insurance and by the Lloyds market in particular. The devastation created by the storm of October 1987 which cut a swathe across southern England and Western Europe is being described as the worlds largest insured loss, estimated to be 3 billion US dollars. More recently, in July this year, the dangers inherent in offshore oil production were brought into stark focus by the explosion which destroyed the North Sea oil production platform, Piper Alpha, involving tragic loss of life. The deterioration in the claims experience over the past twelve months, together with the need to provide for the development of past year claims, especially in relation to long-tail liability business in the United States, have particularly affected the 1985 account results. This emphasises the crucial need to provide for future liabilities by way of full and appropriate reinsurance to close at the end of each year. The same problems are also reflected in the number of syndicates with years of account left open at the end of 1987. At the end of December 1987 there were 76 syndicates with a total of 120 years of account left open. Problems associated with asbestosis and pollution risks, together with other US liability business appear to account for the vast majority of the run-off years. To have so many syndicates left open must be considered unacceptable to underwriters, members and agents alike. Consideration is, therefore, being given by the Council of Lloyds to ways of dealing with this problem.
The difficulties associated with long-tail liability business highlighted by the Chairman of the Non-Marine Association have resulted in both an underwriting loss and an overall loss. This business is now, however, being written at rates that better reflect the present climate and with policy wordings appropriate to the changed circumstances.
It is clear that Lloyds faces an abundance of opportunities in the years ahead
I am, therefore, optimistic for the future of Lloyds market place.
341. An accompanying report from Mr Michael Williams (Chairman of LUNMA) included the following:
The 1985 result is, disappointingly, a deterioration on 1984, showing an overall loss of £5.3 million equivalent to 0.4 per cent on an income of some £1,331 million and an underwriting loss of £84.2 million. The result includes the well-publicised Outhwaite syndicates 317/661 for the 1982 account in run-off, accounting for some £85.4 million of losses without which the 1985 results would have shown a profit.
Our two main areas of difficulty are in asbestos-related claims and environmental impairment.
The rate of new asbestos-related claims rose steeply from an average 700 per month in 1985 to 2.000 per month 1987, due largely to intensive publicity from the plaintiff bar and the seeking out of new industries with an asbestos connection. There are, however, grounds for future optimism as the rate of increase has declined markedly in recent months. The second major factor in the development of back years is the incidence of environmental pollution claims in the US. Claims for clean-up costs of dump sites are being made for circumstances in which it was never the intention of the insurer or the expectation of the insured that coverage should apply; in many cases insureds deliberately dumped waste knowing it to be harmful to the environment; in other cases dumping occurred at sites licensed for the purpose at the time. Depressing though this may sound, I should point out that underwriters are confident that there are excellent defences to these claims and they will oppose them with the utmost vigour.
342. It is, in our judgment, apparent from those extracts that the judge was correct to hold that the globals did not contain the first representation asserted by the names, namely that the Lloyds market was in a sound financial condition. The reports, especially those from successive chairmen of LUNMA, contained a series of warnings about the problems associated with asbestos related claims.
343. As to the second allegation (that names could take up or continue membership with confidence that known and projected claims were reserved for), it is apparent that the judge was right in his conclusion on this also. We have reached the firm conclusion that, if the names cannot succeed on the basis of the representation as to the auditing system in the brochure, they cannot succeed on the basis of the contents of the globals. The most that could be said is that the globals did not correct any misrepresentation about the audit system which had been made in earlier brochures.
V The Audit System: Was the Representation True?
344. In this section we consider the question raised by the first representation which we have identified, namely was there in existence a rigorous system of auditing which involved the making of a reasonable estimate of outstanding liabilities, including unknown and unnoted losses. We also consider whether the answer to that question would be different if the word ' rigorous were removed. We thus address the third ingredient of the tort of deceit identified in paragraph 49 above. We do not address here the question whether the second representation was true because that involves a consideration of the question whether Lloyds believed that such a system was in place, which we consider in section VI.
Reserves and RITC
345. There undoubtedly was a regulated audit system dealing with such matters as the production of annual accounts, the RITC and solvency. In considering the RITC and solvency, outstanding liabilities were a key feature to be assessed. In making the relevant assessments a syndicates active underwriter and its auditors each had a role.
346. Before the judge the names, represented by Mr Goldblatt, appear to have run a case that there could be no audit as such until 1985, when following the Fisher Report and the 1982 Act, auditors were obliged to certify that syndicate accounts showed a true and fair view. They relied on material which suggested that it had been appreciated that the word 'audit' was a misnomer. On that basis in so far as any representation was to the effect that an audit was taking place, it was said to be untrue for that reason and that reason alone. But that over simplistic case is not the case made on appeal. The fact that the word audit was used is not unimportant however because it indicates that the system was one (as the quotation in paragraph 312(3) above makes clear) under which the underwriter together with the panel auditor would determine the reserves.
347. The regulation by statute, instructions and later bye-law relating to the audit as a whole changed from time to time over the relevant period, but so far as making the assessment of what were termed audit reserves the principles seem to have remained much the same. The full history of regulation, instruction and bye-law over the period is set out in the agreed statement of facts (D2, 3, 4 and 4A) and has been summarised by the judge in chapter 11 of his judgment. For our purposes we have thought it convenient to attempt to trace how the system operated as at a fixed point in time, indicating the part we understand the underwriter and the auditor would have played. We can then indicate in broad terms any relevant changes that there may have been either from the previous period or in the period thereafter. We have chosen 31 December 1982.
348. For each year Lloyds issued a solvency letter and audit instructions. It was standard to include in the audit instructions clause 3:
3. The Syndicate Auditor is required to examine the settlements on the Underwriting Accounts for 1981 and each previous year in relation to the reserves previously created to wind up such Accounts. If the result of that examination shows that the general pattern of claims experience on the Underwriting Accounts for the years in question is such as to demonstrate that the reserves previously created are likely to prove inadequate to meet the cost of winding up those Accounts, or if there are any other factors which affect or may affect the adequacy of the reserves, then the Auditor must report to the Council and obtain their instructions before issuing his Syndicate Solvency Report.
The Syndicate Auditor should take such steps as he considers requisite to obtain the authority of those interested to make any reports which may become necessary by reason of this instruction.
349. This clause was expanded on in standard terms in the solvency letter which was sent out to auditors and underwriters as a covering letter to the audit instructions. Thus the solvency letter relating to 31 December 1982 expanded on clause 3 in the following terms:
(i) This Clause, the provisions of which apply to the reserves to be created on all years, is regarded by the Council as being one of paramount importance and syndicate auditors are therefore requested to pay particular attention to its provisions.
(ii) Syndicate auditors are required, in addition, to report all cases where it appears at 31st December, 1982 that the reinsurance premium charged to close the 1979 Account (and all previous years reinsured therein) at 31st December, 1981 has been inadequate. Similar reports are also required where it appears at 31st December, 1982 that the audit reserve created as at 31st December, 1981 on an Account which has not been closed, has been inadequate. In order to demonstrate the extent of the apparent inadequacy, such reports are to be supported by figures showing (a) the reinsurance to close the 1979 and previous years Accounts at 31st December, 1981; or, in the case of an Account which has not been closed, the reserve created as at 31st December, 1981; (b) the settlements on those Accounts during 1982 and (c) the reserve created on those years at 31st December, 1982.
Such reports, which are for the information of the Council, are on a purely mathematical basis and in no way remove any responsibility from the Auditor in carrying out his examination under Clause 3 of the Audit Instructions and making whatever reports he considers necessary under that Clause. (iii) Underwriters and Underwriting Agents must bring to the attention of their Auditors any factors which affect or may affect the adequacy of the reserves to be applied as at the 31st December, 1982 including:--
(a) Risks which include liability for latent diseases and products liability.
(b) Cases where a Syndicate has taken over the run-off of another Syndicates accounts.
(c) Any reinsurance recoveries in dispute where credit has been taken for the recovery and where there is any doubt over the collectability of reinsurance claims submitted.
350. It also contained clause 6 which provided for the creation of audit reserves. The agreed statement of facts summarises conveniently the effect of clause 6 at paragraph 7.3:
7.3 The tests for the audit reserves in relation to each category of business were set out in clause 6 of the Audit Instructions. For the year then in its third year of account at 36 months of development and any years of account in run-off, including, in each case, all years reinsured into it, the audit reserves were required (for most categories of business, including non-marine all other business) to be the greater of the following:
(i) the application of a specified multiple to the net premium income for the respective year of account. The multipliers were known as the minimum percentage reserves [MPRs]. (For the oldest year of account specified in the Audit Instructions, which was expressed to include all previous years of account, there was an alternative test of outstanding liabilities, including IBNR);
(ii) the total of the outstanding liabilities on each year of account in question as at the year end for the solvency audit, including IBNR; or
(iii) the amount of the RITC for the closing year of account, including any previous years reinsured into that account. (This test did not apply to years of account in run-off).
It is to be noted that:
(i) there was little practical distinction between tests (ii) and (iii);
(ii) the calculation of the reserve figure under test (ii) (or the amount of the RITC under test (iii)) required consideration of the ultimate cost of settling the syndicates liabilities; and where a year was not being closed, because it was considered that an equitable RITC could not be set, audit (i.e. solvency) reserves nonetheless had to be calculated.
351. MPRs were reviewed each year. All agents were required to see that run- off statistics were kept for each syndicate in which their names underwrote. They had to be kept for the fourth and subsequent years of each year of account until such times as the settlements ceased to be material.
352. Between May and July agents would supply settlement statistics to Lloyds. These statistics would then be passed by Lloyds to the DTI and the market associations (and by the DTI to Government Actuaries Department (GAD)). During October and November comments would be received by the Audit Department at Lloyds who would make recommendations to the Audit Committee as to the MPRs, and as to the audit instructions which were to be sent to underwriters and auditors.
353. The Review of Audit Instructions and Regulations for 31 December 1982 provides an example of the procedures. It proposed setting the date for the completion of that years audit as 30 April 1983, and solvency by the end of May 1983. It continued the requirement under the audit instructions that auditors should report all cases where the reinsurance to close an account (or the reserves created at the end of the third year of an account) had appeared, after 12 months, to have been inadequate; and it noted that as to 31 December 1981 audit there was an increase in the number of cases where after 12 months the RITC was apparently inadequate (a point to which we will return). It referred in relation to clause 3 of the Audit Instructions to the fact that particular matters had been referred to in previous audit instructions as matters to which underwriters should draw the attention of auditors as factors which might affect reserves and suggested that some Panel auditors thought it misleading to point to particular problems (thereby encouraging auditors to rely on those problems rather than make their own inquiries). It made a recommendation as regards MPRs including a suggestion that a different scale might be used for non-marine All Other business (which included long-tail business) depending whether the business was U.S. dollar or non-U.S. dollar.
354. These recommendations were considered by the Audit Committee and then dealt with by the full Committee on 9 December 1982. It approved the date for completion of audit as 30 April 1983 and for completion of solvency as the last day of May. It recommended that there should be a review in June 1983, following completion of the solvency test, of those accounts where an inadequacy in the RITC had been demonstrated. It recommended that a number of specific items should be excluded as matters to which the auditors attention should be drawn under clause 3, but it maintained the reference that the underwriter should bring to the auditors attention Risks which include liability for latent diseases and products liability.
355. Clause 6 was in fact later amended to provide more precisely for the respective roles of the managing agent and the auditor, although no suggestion was made during the appeal that these roles were not already the reality. The amendment was in the following terms:
6. It is the responsibility of the Management Agent to establish reserves in respect of both the Open and Closed years in order to ensure that adequate funds are maintained to discharge all liabilities. The Auditor must ensure that the Agent has discharged his responsibility in this regard in a reasonable manner consistent with available information on outstanding losses, statistics of underwriting performance, market experience and any relevant information and explanations.
356. As regards MPRs, since the U.S. dollar MPRs involved a considerable increase Mr Nelson was asked to address the Committee and he explained:--
Mr. Nelson advised the Committee that, with regard to Direct business, there was now a sophisticated and meaningful computer system for all asbestosis business written on a Direct basis. This information was available to both Underwriters and Auditors. With regard to the number of cases being advised this had risen from the original estimate of 15,000 to approximately 25,000 but the average cost, whilst being eroded due to inflation was still within the original estimate of $125,000 plus $10,000 expenses. He also advised the Committee that the controversy as to whether claims will be settled on an exposure or manifestation basis had still not been resolved. With regard to reinsurance business, due to time constraints, there was little information at present available from the computer but it was hoped that more meaningful figures would be produced next year.
357. There was some protest because it was said that the new scales impacted on rather shorter-tail business and the minutes record the following:--
The Audit Committee had recommended large increases in the U.S. Dollar scale of reserves and whilst a number of Committee Members considered these increases to be realistic, Mr. Murray pointed out that it could pose problems to Underwriters who wrote a short All Other Account. Mr. Chester said that the Audit Committee had spent a considerable time looking at the division of the All Other Account but that until further audit codes were available there was little likelihood of further divisions. He said that the Audit Committee would need the assistance of the Non-Marine Association in progressing this matter.
358. Between January and April work on the audit would be carried out by syndicates and their auditors. The Manual paragraph 4 and paragraph 8(i) and (ii) at this stage provided:
4. The date decided on by the Committee for the completion of the Audit will be given in the Audit Instructions. Agents should see that everything is done to enable their Auditors to sign the Audit Certificate by the prescribed date. This involves the Agent ensuring
(i) that the Books of Account are written up and balanced.
(ii) that the information required by Auditors to enable them to satisfy themselves as to the proposed Reinsurance to close on Account is available by early April.
(iii) that in the case of a Composite Group Syndicate, all information required by Agents and Auditors to sections of the Group is made available well in advance of the Audit date.
(iv) that, where necessary, Names Audit surpluses in other syndicates under the same Agency are taken into account.
(v) that in the likelihood of a loss or Audit deficiency, reserves have been valued well in advance of the prescribed date.
(vi) that Names are given adequate notice of any additional moneys which may be required for Audit purposes. Whilst it is desirable that a request for additional funds should be accompanied by audited Accounts, this is often impracticable. In the circumstances, a Certificate of Loss, signed by the Auditor, will serve as a temporary substitute for the Accounts. The Accounts, or the Certificate of loss, must be sent to the Name well in advance of the published Audit date.
1. During the course of the Audit, .
(i) the Certificate of Outstanding Liabilities (other than unknown and unnoted losses) at the previous year end. This Certificate is needed to calculate the Audit Reserves; it will be supplied to the Agent by the Auditor and must be completed and returned to the Auditor by the end of March each year.
(ii) the Certificate regarding the adequacy of the Audit Reserves which are being created. This document is of great importance. Before signing it, the Agents should examine the Audit Reserves in the light of past run-off statistics and other relevant facts available to them.
359. The audit reserves had thus to be calculated so far as the 1980 account (which as at 31 December 1982 would be expected to be closed into the 1981 account) at the greatest of the MPRs, RITC premium or total estimate of outstanding liabilities. This would be calculated by the underwriter and put on a form and provided to the auditor. Our understanding is that as at 31 December 1982 the underwriter would use an AU form 17.
360. The underwriter had to calculate a premium which was equitable to the names on the year being closed and equitable to the year which was to take on the liabilities. This was ultimately made explicit in Bye-Law no 7 of 1984, but it had always been the requirement, and would have been the requirement as at 31 December 1982. Known claims had to have a proper estimate put on them, and the underwriter had to exercise his judgment in determining the IBNR element. In assessing the IBNR he would take into account the size and relative importance of the IBNR element, the syndicates loss experience, and its reinsurance protection. These factors appeared expressly in the Explanatory Notes to Bye-Law no 7 of 1984. From November 1980 onwards, underwriters at interest had available to them the information of the AWP in the form of (inter alia) attorneys reports; market letters from the AWP; (from late 1981) computer print-outs produced from the database created in the United States; and other information contained at (initially) the offices of Elborne Mitchell, and subsequently the offices taken by the AWP and then Toplis and Harding (Asbestos Services) Ltd. So far as the history of the business was concerned the underwriter would have the statistics demonstrating how each year of account had progressed.
361. In Henderson v Merrett, Cresswell J, in considering the duties of auditors, said this ( LRLR 265, 315):
(vii) the auditor would need to be satisfied that the premium for the reinsurance to close a year of account was equitable as between the Names on that account and those on the accepting year of account. The determination of the premium for the reinsurance to close involved the exercise of significant professional judgment and drew on the full experience of the underwriter.
(viii) since, from at least 31 December 1985, the audit report on syndicate financial statements was to be expressed in true and fair terms, the auditor would need to ensure that he had gathered evidence of sufficient quality to support such an opinion.
(ix) in relation to the reinsurance to close, the audit approach should recognise that the objective was to ensure that the reinsurance to close was within a zone of reasonableness rather than an arithmetically accurate figure;
(x) the auditor would need to consider such matters as the nature of the syndicates business, the overall size of the syndicate, the impact of the reinsurance protection programme, and the accuracy of previous estimates as a part of his assessment of the appropriate range within which he would expect the premium for the reinsurance to close to fall;
(xi) the results derived from statistical techniques should be treated with a degree of caution, since historically derived date might not be an accurate guide to uncertain future events. The auditor should, therefore, ascertain from the underwriter the underlying basis for his estimate of claims incurred but not reported (IBNR), so that appropriate additional evidence could be collected to support the computation; and
(xii) other matters the auditor might consider as a part of the audit of the reinsurance to close included matters specific to the particular syndicates business, for example, the syndicate might have reinsured the run-off of other syndicates or companies and the auditor must satisfy himself that due account had been taken of the liabilities which were likely to arise under such contracts. This evidence would usually take a similar form to that relating to the syndicates own business.
It was the duty of the auditor to satisfy himself as to the adequacy of the RITC.
362. Sir Henry Fisher in his report at paragraph 23.14 and paragraph 23.15 also commented on this aspect in the following terms:
23.14 Valuations of this nature depend to a very great extent upon commercial judgments, as to such matters as the volume and value of claims to be expected and as to the quality of reinsurances placed by the Syndicate. A particularly important aspect is the Reinsurance to Close and, although the audit reserves laid down in the Lloyds Audit Instructions provide minimum percentages, the Managing Agent and Underwriter have to make a proper commercial estimate of the outstanding liabilities to arrive at the premium. Even though the membership of the Syndicate in any two consecutive years may be to a great extent the same, the reinsurance must be regarded as an arms length transaction. 23.15 All these judgments can only be made by the Managing Agent or Underwriter. They have the primary responsibility and it cannot be delegated to, or assumed by, the Auditor. However, the Auditor is bound to form his own view on all these matters. He will take account of the particular circumstances relevant to that year and will draw on his own experience and judgment. He will make his own tests as to the adequacy and basis of the provision which has been made by the Reinsurance to Close. In doing so he should have regard to the past history of the Syndicate so far as settlements are concerned and the adequacy or otherwise of past Reinsurances to Close. In addition, he will consider the history of the Syndicate and any changes in Underwriter or underwriting policy.
363. Section 73(4) of the Insurance Companies Act 1974 was by this time section 83(4) of the Insurance Companies Act 1982. This section provided:
(4) The accounts of every underwriter shall be audited annually by an accountant approved by the Committee of Lloyds and the auditor shall furnish a certificate in the prescribed form to the Committee and the Secretary of State.
1. The said certificate shall in particular state whether in the opinion of the auditor the value of the assets available to meet the underwriters liabilities in respect of insurance business is correctly shown in the accounts, and whether or not that value is sufficient to meet the liabilities calculated.
(a) in the case of liabilities in respect of long term business, by an actuary; and
(b) in the case of other liabilities, by the auditor on a basis approved by the Secretary of State.
364. The certificate which had to be signed by the auditor provided:
IN THE NAMES OF
Through the agency of
To the Council of Lloyds and to the Secretary of State
INSURANCE COMPANIES ACT 1982
We have examined the accounts relating to the insurance business carried on by the above-mentioned Underwriters through the above-named Agency during the year ended 31st December 19 , in accordance with the current Instructions for the guidance of Lloyds auditors drawn up by the Council of Lloyds and approved by the Secretary of State.
In connection with our examination, we have relied upon a report in respect of the underwriting accounts from accountants approved by the Council of Lloyds as auditors of each syndicate in which each underwriter has participated during that year stating that in their opinion all assets have been valued and all liabilities have been calculated in accordance with the said Instructions (liabilities in respect of long term business having been calculated by an actuary) and that the profits or losses arising on the closed accounts and the surpluses or deficiencies arising on the open accounts have been allocated to each Underwriter in accordance with the arrangements for his participation in each such account.
In our opinion the value of the assets, valued in accordance with the said Instructions (in the case of each Underwriters Lloyds Deposit, as certified by the Council of Lloyds), available to meet each Underwriters liabilities in respect of his insurance business is correctly shown in the accounts and is sufficient to meet his liabilities in respect of that business.
Dated this day of 19
Accountants approved by the Council of Lloyds.
365. A syndicate Solvency Report also had to be produced which it is unnecessary to quote, but which confirmed the position as it related to the syndicate in similar terms. On the basis of the certificates produced in relation to each name and each syndicate, Lloyds was able to satisfy the global test pursuant to section 84(1). It is unnecessary to go into the details either of that test, or the statutory statement of business which became mandatory as at 31 December 1982. That is not to belittle their importance. Full details appear in the agreed statement at D2. The key point so far as this appeal is concerned is that a critical element in the calculation of the RITC and in assessing solvency was the assessment of outstanding liabilities including IBNRs.
366. It is important to stress that the auditor also checked the adequacy of the previous years RITC, which would be an important factor in considering the likelihood of the adequacy of that for the year under consideration. Clause 3 of the instructions, as expanded on in the solvency letter, has already been quoted. Ultimately this information was recorded on forms AU 38 and AU 38(A) to which reference will be made hereafter.
367. The agreed statement in D3 contains details of changes over the years. The most significant change was the requirement for accounts of syndicates to show a true and fair view. That became a requirement as from 31 December 1984 although many syndicates had adopted the standard voluntarily for the previous year. In a letter dated 8 April 2002, received after completion of submissions, Mr Adams sought to make something of a change in the wording of the audit certificate in March 1983. He suggested that the change was intended to reduce the obligation on auditors in assessing audit reserves. Freshfields, on behalf of Lloyds, responded by letter dated 23 April 2002. The point sought to be made by Mr Adams has apparently not been made before. It appears to be contrary to the agreed statement of facts, and, in any event, the evidence simply does not support the view that there was any change in the role of the auditor in relation to the calculation of reserves by virtue of any change in the wording of the audit certificate. Save for this letter from Mr Adams it has not been suggested on this appeal that the approach to reserving or the RITC or solvency altered in any fundamental way. It is therefore possible to refer to the changes quite shortly.
368. Prior to the 1982 Act (which received the Royal Assent on 23 July 1982 and came into force on 1 January 1983) Lloyds statutory duties in relation to the solvency audit and the preparation of the SSOB were exercised by the Committee of Lloyds. The audit department supported the Audit Committee which in turn supported the full Committee.
369. Sir Henry Fisher in his Report published in May 1980 had made certain recommendations for improving the accounting regime and recognition of auditors. Pursuant to his recommendations certain Task Groups were set up including Task Group 4 in September 1980, whose terms of reference were directed towards considering the provision of information to existing names, with particular reference to syndicate accounts and accounting standards.
370. In November 1982, Lloyds , with the approval of the Bank of England and the DTI, set up a working party under Mr Ian Hay Davison, to review the requirements of the Lloyds solvency audit with particular attention to both the information which should be sought by auditors and the information which underwriting agents and underwriters should provide to their syndicate auditors. The working party was also required to review the audit instructions for the solvency audit. It was intended that the working party should consider urgently what changes should be implemented for the solvency audit as at 31 December 1982; it was announced that the working party hoped to provide some input for the 1982 audit while completing its study during 1983. Mr Ian Plaistowe replaced Mr Davison in February 1983, and the work of that working party was built upon by the Accounting and Auditing Standards Committee (AASC). In October 1983 the Audit Department and Audit Committee were replaced by the Members Solvency and Security Department and Committee, which took over the definition of the accounting and related auditing requirements. On 2 December 1983 Lloyds published a Provisional Accounting Manual, which relied heavily on a draft manual produced by Task Group 4 in December 1982, and the work done by the Plaistowe working party.
371. It was the changes adopted during this period which led to auditors having to certify from 31 December 1984 that accounts of syndicates showed a true and fair view. Many auditors had already adopted that as the standard, but it was from the above date that it was compulsory to do so.
372. We should add that solvency certificates could only be produced by an auditor on a panel approved by Lloyds. In practice the panel auditors were also those who audited syndicate accounts. On 10 December 1984 the Council passed The Syndicate Audit Arrangements Bye-law (no 10 of 1984) which set out arrangements for a new list of registered auditors, containing all persons entitled to act as syndicate auditors. Again the change from panel to registration has little significance. The important point is that throughout the relevant period auditors were essentially Lloyds approved.
373. There was thus a regulated audit system. It is of some interest to see the way that Mr Outhwaite viewed the system particularly as regards assessing reserves. It is true that we take this description from a document (his witness statement dated 24 June 1991 in Stockwell v RHM Outhwaite (Underwriting Agencies) Ltd) in which Mr Outhwaite was seeking to defend himself against claims that he was negligent in the writing of run-off policies, and he thus had an axe to grind, but we do not think this overall description of the basics will be far from how the system was intended to operate.
The expression (IBNR) was current at least by the 1970s; before, people talked about loadings. The Underwriter calculates the IBNR required, having regard to the type of business he engages in and the length of time experience has shown it takes for claims of that description to taper off to extinction. Having thus ascertained the reserve necessary to pay for outstandings and IBNR claims, the Underwriter is in a position to carry out the reinsurance to close. This involves the Underwriter paying the reserve so established as premium to the next open year of the Syndicate, which in return accepts the prior years run off liabilities to extinction. Any balance is allocated to the closing Syndicate as profit (or loss). The process is repeated 12 months later for the next year, and so on. In performing the RITC the Underwriter is monitored by Auditors appointed by the Agency to safeguard the interest of the Syndicates Names. The processes that I have described in this paragraph and will describe later in this section have been followed by Underwriters at least back to the early years of this century.
Having said that, there were no rules as such as to the calculation of RITC in 1981 and the approach of the Auditors was to seek to ensure that the Syndicates reserve was not going to prove inadequate to deal with the liabilities transferred to the open year. In practice, the RITC was closely linked with the Solvency Test. The Auditors were obliged to certify the solvency of each Name on the open years and this test relied in part on the assumption that the RITC of the closing year was adequate. These alternative tests were therefore laid down in the Audit Instructions issued annually by Lloyds. I append at RHMO 6 a bundle of instructions from 1979-1982. At the relevant time (1981/1982) the tests were
(i) the aggregate of different percentages calculated on net premium income. These percentages varied according to the type of business written and year of account and were known as Lloyds minima. These were set on the basis of general market experience with the knowledge of the DTI.
(ii) Estimated outstanding claims including an element to take care of IBNR.
(iii) The amount of the RITC.
The tests were designed inter alia to establish solvency by a comparison between the assets of the Syndicate and cost of winding it up (represented by the highest of the three tests above).
It was feasible to apply to Lloyds for leave to undercut even the Lloyds minima where it produced an unrealistically high result. This could happen on, for example, yachting risks.
However, as will be apparent, the Solvency Test and RITC, while theoretically distinct, were in practice closely linked.
The underwriter has an unusual form of dual responsibility as Agent to both the closing Syndicate and the Syndicate reinsuring it to close, which is commented upon elsewhere. His duty is to gauge the reserves as accurately as possible, so that the reserves are sufficient to pay losses but no more. However, on behalf of the new Syndicate he should ensure that the premium they receive does not fall below the required sum. Before 1984, I would have said that the Underwriter had a duty to err on the side of caution in his reserving. In practice, of course, most of the Names on the incoming Syndicate were also on the previous year and the objective was to avoid having to top up those reserves when reserving them in future RITCs. Since 1984, with the introduction of Accounting Bye Law No.7, the true and fair test demands that premium and run off liabilities be as nearly matched as possible. This has not really changed the objectives of those concerned as much as caused the Auditors to discharge their role more rigorously. However, although technically this was the Underwriters duty, it was for many years the practice at Lloyds to build up reserves. Names by definition are likely to pay the highest rate of tax and especially in the days when that rate was high there was some resistance to distributing high profits most of which went to the Exchequer. A means of avoiding this was to make a generous assessment of the RITC premium, thus carrying forward the profit into the open year in the form of reserves. Therefore there was a distinct tendency to err on the side of caution in assessing the RITC premiums.
In 1982 and 1983, this practice was very widespread but as income tax was reduced the practice became less prevalent. In April 1984 the Inland Revenue set its face against what they considered the practice of over conservative reserving, particularly where a rollover (which permitted the return of those reserves at will) was concerned. The current attitude and methodology requires very specific calculation of reserves necessary.
The RITC process described above will not apply only if the run off of the would be closing Syndicate is too uncertain to enable the Underwriter to estimate it. In those circumstances, although as the Agent of the closing Syndicate, the Underwriter devoutly wishes the year to be closed, he cannot in conscience accept on behalf of the incoming year liabilities for which a safe premium (i.e. one which he believes should ensure at least that no loss is sustained by the incoming Syndicate) cannot be assessed. Furthermore, as Agent for the ceding Syndicate he would know that a closing could not be fairly achieved. Accordingly, instead of closing after 36 months, such a year would have to be left open until the outcome became sufficiently certain to allow an RITC to take place.
The point cannot be too strongly emphasised: an Underwriter who does not believe that he can estimate the premium for his RITC (i.e. that he cannot estimate liabilities due on notified claims and the IBNR claims for the ceding year) cannot properly close that year. Conversely, if he does close it, that means that he has, to the satisfaction of himself and his auditors, been able to assess and to provide for all future liabilities, including those not yet known to him, and has been able to arrive at a figure that properly reflects all such liabilities.
374. It is clear that detailed consideration was given each year by the audit department at Lloyds, the Audit Committee, and the Committee as to the instructions to be given to underwriters and auditors. All this was intended to produce a system that enabled proper RITCs to be produced and proper certification of solvency. But was the system actually producing a result where audit reserves were being calculated in a way that involved the making of a reasonable estimate of outstanding liabilities including IBNRs?
375. We have felt obliged to consider the system in detail but we can answer these questions quite shortly because the facts simply speak for themselves. The mere fact that ultimately, when the R&R was carried out, so many syndicates were shown to be massively under-reserved demonstrates that the system simply had not been producing reasonable estimates of outstanding liabilities over the years. The liabilities which ultimately had to be paid had in fact been incurred before the period with which this litigation is concerned. With the benefit of hindsight it is clear that IBNRs were grossly underestimated throughout the relevant period. This is not an indictment of particular underwriters or particular auditors. We have not explored the way in which estimates were made by individual syndicates or individual auditors. The simple fact is that as it turned out most syndicates were under-reserved. Mr Murray in his evidence said there was no doubt he was under-reserved, and all those involved in the writing of business which included asbestos would, unless they were covered by reinsurance, have to accept the same.
376. In short, through the relevant period the system did not involve the making of a reasonable estimate of outstanding liabilities including unknown and unnoted losses. It follows that the answer to the question posed in paragraph 344 above, namely whether there was in existence a rigorous system of auditing which involved the making of a reasonable estimate of outstanding liabilities, including unknown and unnoted losses, is no. Moreover, the answer would be no even if the word 'rigorous were removed. The first representation which we found to exist in paragraph 321 above is therefore untrue.
377. In these circumstances the critical question in this appeal is whether Lloyds had the relevant state of mind. In the case of the first representation Lloyds state of mind arises in deciding whether the fourth of the ingredients of the tort of deceit set out in paragraph 49 above is established. In this regard the names must establish that when it made the representation Lloyds knew or believed that the representation was untrue or made it recklessly, careless whether it be true or false.
378. The second representation identified in paragraph 321 above, is that Lloyds believed that such a system of auditing was in place. Lloyds state of mind is therefore relevant to the question whether that representation was true. That is essentially the same state of mind as just identified in relation to the first representation. In order to decide whether Lloyds had that state of mind, it is convenient to consider first the state of mind of those close to the centre of Lloyds at the relevant time.
VI Lloyds State of Mind
379. It is clear that there did come a stage when those at the centre of Lloyds must have appreciated that it was impossible to assess outstanding liabilities for US$ long-tail business including the IBNR factor. Sir David Rowland in his evidence when talking of the dilemma of establishing correct reserves said And it is obvious to all of us looking backwards that it was not possible. The question is whether the impossibility was appreciated at any stage during the relevant period with which this appeal is concerned. This part of our judgment must be read in conjunction with the summary of facts, and in particular undisputed contemporaneous documents, in Part III above. Some key documents are referred to again and some others are cross-referenced. In addition we have referred to further material, especially from the audit files.
Before the Neville Russell letter
380. The main plank of the names case is the Neville Russell letter dated 24 February 1982 (see paragraph 157 above). That letter from auditors refers to the impossibility of determining the liability in respect of asbestosis. Before that date and receipt of that letter there is, as we see it, no sufficient evidence that anyone at the centre of Lloyds appreciated that the system was not capable of working properly. Salient parts of the evidence relating to this period are mentioned at paragraphs 124 to 148 above.
381. One of the most striking pieces of evidence, if accepted, was Mr Bradleys alleged conversation with Mr Rokeby-Johnson (paragraph 125 above) as to how asbestos was going to change the wealth of nations. The judge did not accept that evidence. Sir William Jaffray sought to persuade us to reverse the judges findings relating to the evidence of Mr Bradley. He indeed sought leave to have fresh evidence admitted including a further statement from Mr Bradley supported by statements from Mr Donald Chandler, Mr Alan Richards and Mr Rosenblatt. It was also on this aspect that Sir William put in a detailed attack on the statements of Mr Rokeby-Johnson and Mr Hitchcock which had been admitted at the trial. Reading Mr Bradleys evidence on the transcript we think it is inconceivable that any judge would have placed any weight on what Mr Bradley said. Any attempt to persuade this court to reverse the judges rejection of Mr Bradley was doomed to failure. We have read the further statements of Mr Bradley, Mr Chandler, Mr Richards and Mr Rosenblatt. Nothing they say would lead us to alter our view as to Mr Bradleys evidence, even if such statements were to be admitted in evidence in the Court of Appeal. It is in any event clear that on the principles in Ladd v Marshall  1 WLR 1489 as now applied under the Civil Procedure Rules these statements ought not to be admitted in the Court of Appeal. The evidence could have been obtained with reasonable diligence for use at the trial.
382. It is true that in 1979 the Committee was advised that auditors had advised that as at 31 December 1978, there were 57 cases where the reinsurance premium charged to close the 1975 and previous years accounts as at 31 December 1977 had been inadequate; in 1980 the report was of 40 such cases in relation to the next year, but also at the end of 1980 in the context of a discussion at a meeting of the Panel of Auditors in relation to the outstanding liability test, it was reported that
Auditors were confident, however, that with their overall knowledge of the run-off experience of the market as a whole, adequate reserves could be calculated
At the Audit Committee Meeting on 11 December 1980 discussion is recorded of suggestions by Mr Lawrence, Mr Skey, and Mr Barber concerning reserving for asbestosis, and indeed their concerns (inconsistent it should be emphasised with any lack of good faith) about reserving, and the recommendation was that Auditors attention should be drawn to the effect on reserves of very long- tail business ..
383. This led to Mr Randalls letter dated 2 February 1981 quoted at paragraph 143 above, and the beginning of exchanges between the Panel and the Committee. The build up of concern during 1981 is recorded in the chronology. It is sufficient for us in this context to draw attention to the following. As at 31 December 1981 it was reported that
as at 31 December 1980 Audit, there was an increase in the number of cases reported, there being 48 cases where the reinsurance premium charged to close the 1977 and previous years accounts appeared to be inadequate after 12 months; this compared to the 40 cases reported at the audit as at 31st December 1979. Where the deficiencies have been substantial, the Deputy Chairman will be writing to the syndicates concerned to obtain explanations for the inadequacies.
It was also at this stage that in relation to clause 3 of the Audit Instructions it was recommended that the solvency letter should contain specific mention of the current problem with regard to latent diseases (including asbestosis) and products liability, although the decision ultimately was to refer to latent diseases but make no specific mention of asbestosis.
384. The decision not to make specific mention of asbestosis in the Audit Instructions has caused suspicion amongst names, and we can understand why. However, there simply cannot have been any doubt in any underwriters mind or any auditors mind that latent diseases included asbestosis. During this period auditors sent a questionnaire to their syndicates expressly referring to asbestosis. That demonstrates that the decision not to confine consideration to asbestosis was intended to make sure that underwriters and auditors examined latent diseases generally and did not just concentrate on asbestosis.
385. Thus during the period before 1982 it is clear that the Audit Committee was monitoring inadequacies in the RITCs, and considering the impact of asbestosis on reserving for very long-tail business. To this should be added that although some years had been left open by this stage (see paragraph 200 above) there was nothing to indicate that any unusual number had been left open because of latent liabilities. We accordingly conclude that there is no case that anyone at the centre of Lloyds appreciated, prior to the receipt of the Neville Russell letter, that even if the system was followed, reasonable estimates of outstanding liabilities simply could not be made. There were undoubtedly concerns about asbestos-related risks, but it was thought that the reserving system would be able to cope
After the Neville Russell letter
386. The background and terms of the Neville Russell letter have been set out at paragraphs 153 to 157 above. It will be in mind that its last paragraph contained an unqualified reference to the impossibility of determining the liability in respect of asbestos. It was a formal communication sent to the manager of the audit department. The names case is that from receipt of the Neville Russell letter those who read the letter did realise that there was no way in which the system would allow for a proper estimate of outstanding liabilities because the assessment was simply impossible. In relation to this case they have to say (and do say) that the Murray Lawrence letter of 18 March 1982 to agents (and also the Randall letter to auditors) were written without any honest belief that by following it underwriters and auditors could make proper decisions as to estimating outstanding liabilities, or closing or leaving open accounts or assessing solvency. That would be (and is) an attack on the honesty not only of Mr Lawrence and Mr Randall but of others who attended the Committee meeting on 17 March 1982 and took a decision to send the letters (see paragraphs 168 and 171 above).
387. At the trial the names sought to support the case of dishonesty by suggesting that in fact the Murray Lawrence letter had a limited circulation; that aspect was examined in detail by the judge and rejected on the facts. Some effort has been made to revive the point. It was dealt with in Mr Goldblatts written submissions, but not pursued by him orally with much enthusiasm. It was also pursued by Sir William Jaffray and Mr Adams. We are unpersuaded that the judges findings on this aspect can be attacked, but in any event do not feel that the allegation goes to the nub of what is the names case. Their case has to be that even though the letter was sent to underwriting agents, those sending it appreciated that even if followed, the result would not be the production of reasonable estimates of outstandings, would not be the taking of proper decisions on the RITC and would not lead to the production of accurate solvency certificates.
388. A further point sought to be made by the names was that a decision was taken at this time that Lloyds should be kept afloat at all costs, and that the policy should be not to deal with the asbestosis problem once and for all by fixing reserves by reference to the very high figures being suggested by some, but that reserves should be increased progressively over the years stairstepping, and that in the meanwhile new recruits should be sought recruit to dilute. Some support for the stairstepping was obtained from the plain fact that on many syndicates reserves were increased from year to year and from some evidence given by Mr Posgate in Hongkong Bank of Canada v Levin on 27 September 1994 . Support for the recruit to dilute theory was said to be provided by simply looking at the figures of new names joining and to certain passages in documents where Lloyds were talking of achieving targets for new names, or seeking to persuade names to join. For instance in an address given by Mr Peter Miller to the General Meeting of Members on 26 June 1985 he is recorded as saying:
The current turn in the market and our new regulatory regime will be seen by many as compelling reasons for participating in this market. Indeed it seems that is how most perceive the matter. The latest figures show that new applications for membership for 1986 continue to run 20 per cent above the numbers for 1985. At the same time, about 9,000 existing members are asking to increase their premium income limits for next year. It is, as we all know, almost impossible to speak of the right time to join the market. That said I believe that this is one of those times.
389. These allegations if right would suggest some form of conspiracy amongst those at the centre. They were rejected by the judge, and on the appeal the conspiracy allegation has not been pursued (at any rate, by the represented names). It is of course right as a matter of fact that if the letters sent by Mr Lawrence and Mr Randall were dishonest in the sense we have suggested, the object would have been to attempt to keep the market going and that would have led to new names being recruited and to the very real possibility that new names would take on the liabilities from the very long-tail business. If there were some separate evidence of a conspiracy, that might go to support the view that the Murray Lawrence letter was written without an honest belief that the system if followed would work. But if there is no such evidence, it adds little to suggest some conspiracy with the objects alleged. If the letter was dishonest it would not matter whether it was sent for good motives i.e. to seek to save the market, and those names already caught by the asbestosis problems in the past years, or whether the motive was to deceive prospective names and so bring in more names to share the burden.
390. Is there any support for the names case that when the Murray Lawrence letter and the Randall letter were sent, those authorising them did not have an honest belief that the system would work? It is important not to confuse the case on the sending of the Murray Lawrence letter with what the case becomes once that letter is sent. The second aspect of the names case which relates to the period after March 1982 can accept that the letter was sent in good faith, but involves an examination of how the years then progressed. The question in relation to later years is whether following the sending of the two key letters, further events demonstrated that the system was not working. Thus reliance on what people said or did during the years following March 1982 is of little assistance in answering the question whether the Murray Lawrence letter was sent in good faith or in bad faith.
The names case (summary and discussion)
391. The names rely on the matters summarised in this and the following paragraphs. In summarising them it is convenient to add some discussion and to reach some conclusions, although our main conclusions on this period are at paragraphs 427ff below. In the first place the names rely on the wording of the Neville Russell letter itself the impossibility of determining the liability in respect of asbestosis. The names say that Mr Lawrences attempt to explain in evidence what auditors were concerned about (i.e. that the concern was over the lack of uniformity in the ways in which syndicates were dealing with the matter) simply should not be accepted, and should discredit him as a witness.
392. In mid-February 1982 Mr Tayler in his role as chairman of the AWP wrote to underwriters stating it is difficult at this stage to provide the market with any meaningful projection. No projections were done by the attorneys; how then were underwriters to be able to calculate IBNRs with any degree of accuracy? The only method would be by reference to how years had progressed historically.
393. Mr Randall, according to a note of his evidence at the Donner Inquiry in December 1989, recalled discussing the auditors concerns with Mr Murray Lawrence, and that there was great concern that full reserving could bankrupt many syndicates, that many syndicates might have to leave their accounts open and that losses could bust the market; and (although this may be more relevant to consideration of the position after March 1982), he had been unable to understand how the results reported in 1982 were not as bad as he had expected in the light of the views expressed by the auditors. Mr Randall in a signed statement dated 25 August 1993 said this:
The Panel Auditors expressed grave concerns regarding the question of reserving for asbestos related claims. They commented that if a proper view was taken of reserves needed by syndicates at December 1981 auditors would not be able to sign off the reinsurance to close for the 1979 account of many syndicates which would have to be left open. Alternatively there would need to be such large provisions for future asbestos claims that the market would effectively be bankrupt. They said they wanted to give me advance notice of a formal approach to Lloyds for guidance under Lloyds audit instructions. I reported on the issues raised by Panel Auditors to Mr Robert Kiln who was or had just ceased to be the chairman of the Lloyds Audit Committee, and to Murray Lawrence, who was then the Deputy Chairman of Lloyds with responsibility for matters concerning the annual solvency test of Names.
The suggestion is that these passages support the view that the letter was sent to underwriters and auditors (1) appreciating that they would understand that if insolvency was to be avoided a calculation would have to be done (even though actually impossible) and (2) that if some calculation had to be done anyway, then accounts may as well be closed even though no-one could tell whether the RITC premium was fair.
394. The names rely on the decision not to refer in the Rota briefs specifically to asbestosis risks. We have already referred to and dealt with the decision not to refer to asbestosis as such in the audit instructions (see paragraph 383 above), but the decision not to refer to asbestosis in the Rota brief is clearly of much greater concern. The judge found that this was an honest decision (chapter 19, page 328). It is said by Lloyds that the background to this decision was the letter from Mr Langton (Chairman of the LUAA) on 5 March 1980 in relation to the fact that computer leasing was a matter to which reference was made in the Rota brief. He hoped that questions about computer leasing or any other specific claims would be avoided at Rota. The thinking behind such a request was explained by Mr Colin Murray, if we had mentioned some issues and not others this might have been misleading and the subject of criticism.
395. At the time of the decision not to refer to computer leasing at Rota a letter (dated 26 March 1980) was sent to underwriting agents reminding them of their duties to keep names informed of past and future matters which might affect their underwriting. That recommendation was then incorporated into the manual for underwriting agents. The thinking was that it was for members and managing agents to advise about the risks and about which syndicates to join. This view was supported by Sir Peter Miller, Mr Lawrence, Sir David Rowland, Mr Bird, Mr Lord and Mr Pollard. Indeed it was, and is, a significant aspect of Lloyds case that the names case ignored the fundamental importance of the role of the members and managing agents in advising and informing the prospective name on issues such as whether to join Lloyds, what portfolio of syndicates to join, and what the risks and advantages of particular types of business and particular types of syndicates were.
396. This may well accord with any relevant legal duties i.e. no duty of disclosure on the regulator but duties on the members agents. But it is not easy to see why some check at Rota that the duties of agents were being complied with would have conflicted with that thinking. Time and again the names forcefully made the point about the lack of any warning emanating from the centre, and we have found it compelling. Sir William Jaffray made the point in his response to Lloyds skeleton of 4 March 2002. Mrs Ann Strong made the point that her Rota interview was in August 1982 without any questions being raised on asbestos. Mr Sydney Butler, who joined Lloyds in 1986, put the argument in favour of disclosure most forcefully and eloquently in paragraphs 5 and 14 of his written submissions. Mr Adams and Mr Richard Carter also made the same point.
397. But the question for the court is whether the decision not to refer to asbestos in the Rota brief in March 1982 supports the case that those who sent out the Murray Lawrence letter believed that despite its terms the result would be a suppression of the asbestos problem, and that consistent with that suppression, nothing should be said to new names at Rota. There is the note by Mr Randall on the Nelson memorandum (paragraph 164 above) at about this time ? Position of new names and before then (indeed, even before the Neville Russell letter had arrived) Mr Randall had on 22 February 1982 (paragraph 152 above) written to Mr Lawrence:
I have arranged for the item to be put on the Agenda of both the Membership Committee and the Audit Committee when further consideration will be given to the basis of reserving and whether new Names should be warned that specific syndicates are carrying a liability for such risks.
398. This would seem to indicate that the decision not to raise the matter with new names at Rota was taken in conjunction with the sending of the Murray Lawrence letter, and not simply coincidentally. Neither Mr Randall nor Mr Nelson gave evidence at the trial and thus their explanations are unknown. The matter was explored shortly with Mr Lawrence on day 39 pages 6014-5 where he explained that computer leasing was a very easy subject to address and that in any event the problem there was the premium transfer. We are of the strong view that the decision not to refer to asbestosis at the Rota meetings was misguided, and so misguided as to have given rise to suspicion as well as resentment in many names. But it does not follow that the decision was dishonest nor does it necessarily lead to the conclusion that Lloyds was guilty of any dishonest representation.
399. The names further suggest that it is necessary to examine the knowledge of those responsible for sending the Murray Lawrence letter, and any evidence relating to their credibility. In this regard it is convenient to identify those present at the Committee meeting on 17 March 1982. Thirteen members of the Committee were present, and Mr Randall and Mr Bowmer attended for the discussion of the draft letter. Of the thirteen, eleven are within the 33 charged with dishonesty, and Mr Randall is also so charged.
400. Of the eleven, the names suggest that there are reasons to doubt the integrity of certain of them in any event. Sir Peter Green was ultimately censured, being found guilty of serious professional misconduct. Mr Posgate was involved in the Alexander Howden scandal. Mr Nelson was found guilty of discreditable conduct.
401. The names further suggest that there was evidence to support the view that Mr Lawrence had not been frank in February 1990 (during the Donner Inquiry), when questioned about the reinsurance his syndicate took out around the time that the Murray Lawrence letter was sent. The notes of the Inquiry record the following interchange:
Mr Lord asked when a decision in principle to accept the policy had been reached. The Chairman said that he could not be precise about this but referred to the schedule of dates that had recently been prepared for him by Winchester Bowring and which showed that this must have occurred in the period between about 19 February and 1 March.
Mr Lord referred to concerns that had been expressed to Lloyds by the panel auditors at about that time concerning reserves for the 1979 account and asked whether the Chairmans decision had been affected in any way by knowing of these concerns. The Chairman said that their decision to take the cover under the run-off policy was purely as a precaution against some development that could not possibly be foreseen at the time, for example the possibility that fluorescent bulbs might suddenly be found to cause eye damage or something of that sort.
402. The names suggest that the reality was that the reinsurance was being taken out because of a fear that the asbestos problem might explode and the failure even to mention asbestos demonstrates a guilty mind. At the trial Mr Lawrence was taken to his note prepared in 1989 where he suggested that the policy was to cover an Armageddon situation and asked what he meant. His answer was as follows:
Well, I regarded the fact that if, when we bought this contract in 1982 that if it was ever going to get affected we bought it as a catastrophe contract, if I can use that in general terms, something quite catastrophic had to happen to make that contract be effective and that catastrophic happening could be one of two things. It could be some new situation coming to light which no-one could have foreseen and I use somewhere else, just to show the sort of stupidity of it; I think it could have been light bulbs that would blind us or it could have been mobile phones, it could have been anything; I want to make the point it could have been something unheard of at that time. The other way it could have been affected would be a catastrophic deterioration of something that was already over the parapet that we didn't expect. Those were therefore the two things I thought could have affected this contract and, as it happened, we got affected by both. Asbestos catastrophically deteriorated and we had pollution.
403. It was put to him that he in fact always had in mind at the time of entering into the run-off contract, that asbestos might explode, and his answer was that he did not otherwise I would have bought the first quote excess of $37.6 and why would I have left $18m in the middle (day 42 page 6383). Mr Adams, in a written submission received after the appeal hearing, has referred to a quotation from an annual statement of the syndicate and has also supplied a letter from Bowring Reinsurance to Firemans Fund Insurance Co dated 20 October 1981. They demonstrate that asbestos was in mind when the cover was negotiated and that it did in fact cover asbestos losses. But that is not really the point. What is sought to be extracted from the above is (1) that Mr Lawrence felt guilty that he had taken out the reinsurance at all at the time of the Murray Lawrence letter and that he was prepared to be economical with the truth at the Donner Inquiry, and (2) the reason he felt guilty was (so the names allege) because he appreciated that such reinsurance was the only basis on which a syndicate could protect itself because in reality there was no way of calculating IBNRs.
404. The suggestion has to be that Mr Lawrence was also not telling the truth at the Donner Inquiry in the following interchange:
Mr Lord asked whether the Chairman could recall discussions that took place early in 1982 with Mr Nelson and Mr Randall about how the market might react to the concerns expressed by panel auditors. The Chairman said that he could barely recall the meetings at all, though he had recently refreshed his memory by seeing documents that Mr Hewes had listed for him.
Mr Lord asked whether in any sense the letter of 18 March 1982 which the Chairman had signed in his then capacity as Deputy Chairman had been for the record with the expectation that the market might still fail to reserve adequately. The Chairman said that this was not the case. At the time there was great uncertainty within the market as to which syndicates and reinsured companies would be affected by asbestosis claims, for which years and on which basis, given that the Keene decision had not yet been finalised. In no sense was the letter written for the record. He could not speak for the view that individual underwriters in the market might have taken. He simply recalled that the market was advised to take especial care in the matter. Mr Lord noted that it had been suggested that Lloyds could not face the losses that might have been involved and that there was a decision to let the future pay. The Chairman said that he could not speak for what views individual underwriters in the market might have taken. He could speak for his own position. He had taken over the syndicate in 1968 and had concluded that the syndicate was severely under-reserved for the past. He had cancelled a lot of contracts with effect from 1 January 1969 and thereafter the syndicate was not heavily involved in US liability business until the 1970s when they had some involvement in relation to medical malpractice insurance. He had not been in close touch with the way that American casualty business had developed in the intervening period as others in the market might have been.
405. It is also suggested that he was not telling the truth at the trial when cross examined on that passage (day 42 page 6384). The judge summarised Mr Lawrences evidence and referred to the reinsurance that his syndicate took out (chapter 15, pages 226-229). He did not however make any findings about the nature of Mr Lawrences evidence to the Donner Inquiry, and why he appeared reluctant to mention asbestos at that inquiry when dealing with the reinsurance. The judge did not in fact make any express finding about the credibility of Mr Lawrence (although by his conclusions he must have accepted that the letter was written in the honest belief that underwriters and auditors could make an assessment of syndicates reserves). We have serious reservations about the veracity of Mr Lawrences evidence to the Donner Inquiry in so far as it was seeking to give the impression that asbestos and its uncertainty was not a factor in the mind in arranging the reinsurance. It is fair to say that in addition to Mr Lawrences evidence, there was the evidence of Mr Keeling and Mr Archard which supported the view (a) that the policy was not primarily a guard against the syndicates asbestos exposure and (b) that Mr Lawrence was not himself the key influence in the taking out of the policy and thus it was not taken out because of some 'insider knowledge' on the part of Mr Lawrence.
406. Mr Randall was not called to give evidence. It was somewhat unsatisfactory that a statement by him had been prepared and placed before the judge for his pre-reading. This case had many problems for the judge in terms of simply managing the case and, as explained in Part VIII below, he held that he had no power to compel Lloyds to call those witnesses whose statements had been read by him and that the appropriate course was to put the statements out of his mind, and treat the witnesses as uncalled. There was no challenge to his ruling on this aspect by the names represented by Mr Goldblatt. Certain of the names in person have drawn attention to this aspect in their contention that the trial was unfair. We will deal with the ruling under that section of the judgment. But that still leaves the question of whether the judge should have drawn an adverse inference against Lloyds. It seems to us that on aspects where the evidence points in a direction against Lloyds in an area which could have been dealt with by Mr Randall the judge should have drawn an adverse inference from Lloyds failure to call Mr Randall to deal with it. This does not mean that any allegation that the names make against Mr Randall must be accepted because he did not give evidence. It simply means that where the evidence points in a certain direction an adverse inference can be drawn from a failure to call the witness to deal with it.
407. This conclusion seems to us to be in accord with the principles as to the drawing of adverse inferences summarised by Brooke LJ, after an extensive review of the authorities, in Wisniewski v Central Manchester Health Authority  PIQR 324:
From this line of authority I derive the following principles in the context of the present case:
(1) In certain circumstances a court may be entitled to draw adverse inferences from the absence or silence of a witness who might be expected to have material evidence to give on an issue in an action.
(2) If a court is willing to draw such inferences they may go to strengthen the evidence adduced on that issue by the other party or to weaken the evidence, if any, adduced by the party who might reasonably have been expected to call the witness.
(3) There must, however, have been some evidence, however weak, adduced by the former on the matter in question before the court is entitled to draw the desired inference: in other words, there must be a case to answer on that issue. (4) If the reason for the witnesss absence or silence satisfies the court then no such adverse inference may be drawn. If, on the other hand, there is some credible explanation given, even if it is not wholly satisfactory, the potentially detrimental effect of his/her absence or silence may be reduced or nullified.
408. As to the knowledge of the eleven and Mr Randall, the position is as follows:--
a. Mr Murray Lawrence certainly had knowledge of asbestos as a problem; the white papers dated September 1981 and 4 December 1981 signed by him (see paragraph 146 above) record Obviously claims from the asbestos related diseases are catastrophic and disastrous so far as the whole insurance industry is concerned .. There is then the series of meetings with panel auditors, the Neville Russell letter, the Nelson memorandum, and possible discussions with Mr Randall as recorded by Mr Randall.
b. Sir Peter Miller as far as we can see it is not suggested that Peter Miller had knowledge of anything of relevance as at this stage. He was a marine broker.
c. Mr Frank Barber-- he would have the circular letter establishing the AWP, and was at the meeting at which a decision was taken not to mention asbestosis in the audit instructions on 7 December 1981. He must have been generally aware of asbestosis as a market problem.
d. Mr David Barham -- from Cuthbert Heath who had a long acquaintance with US casualty business.
e. Mr Patrick Bird a director of the Kiln Agency, and likely to be aware of the extent to which the Kiln syndicate was affected by asbestos. He was a member of the Membership Committee which decided that asbestosis should not be on the Rota brief.
f. Mr Edward Nelson he was member of the AWP; he addressed the auditors in March 1981, and 1982; he wrote the Nelson memorandum; there can be no doubt about his in-depth knowledge of the asbestos problem as it appeared in 1981, and his influence as to how to deal with the anxieties of the auditors is clear.
g. Mr Ian Posgate he must have had some awareness of asbestos as a problem, and it was his evidence given in 1994 which is referred to above.
h. Mr Brian Brennan he was deceased by the time of the trial; he was on the Audit Committee in 1980 and 1981; he would have been aware of asbestos as a problem since he was a party to the decision (at the meeting on 7 December 1981) that it should not be referred specifically to in the audit instructions.
i. Mr Harry Chester-- deceased by the time of the trial; he was on the Audit Committee 1980 -- 1983. He was at the meeting of that Committee when the Neville Russell letter was discussed on 2 March 1982; he attended the Auditors Panel meeting on 9 March 1982, and he asked the opinion of the auditors on leaving the 1979 account open.
j. Sir Peter Green deceased by the time of the trial; he was Chairman; Mr Posgate in his 1994 evidence suggested that he had spoken to Sir Peter Green about dealing with the asbestosis problem gently; Mr Lawrence gave evidence that Janson Green was a leader in US casualty business; and Mr Lawrence in evidence suggested that in December 1982 Sir Peter wished to be up-dated on the whole question of asbestosis indicating a degree of knowledge prior to that time.
k. Mr Alfred Higgins deceased by the time of the trial; he was very senior and thus likely to know of problems with US long-tail casualty business.
l. Finally there is Mr Kenneth Randall as drafter of the Murray Lawrence letter and author of his own, the position of Mr Randall is central. He was recipient of all material documents during the relevant period, and it is unnecessary to recite them again at this juncture.
409. Sir William Jaffray and other litigants in person relied on a speech of Miss Plumptree made on 5 December 1990 in which she was highly critical of the way in which the RITC was calculated and in which she posed this question : with the advent of ever increasing and ever more unquantifiable long-tail risks, can any underwriter today honestly and fairly quantify his outstanding liabilities with any degree of accuracy? Miss Plumptree, we were told, was a solicitor who had worked in the legal department in Lloyds from 1978 to 1988. She was at Titmus Sainer and Webb at the time that she made her speech. Sir William sought to suggest that her words could be imputed to Lloyds and that what she said in December 1990 could be taken to be the view of Lloyds during the whole of the relevant period, including 1982. The views expressed by Miss Plumptree are of some interest but it cannot be said that they reflect the view of Lloyds and it cannot be said that they reflect the views of Lloyds throughout the relevant period.
410. Lloyds submit that the evidence points to those at the centre (and particularly those on the Committee who approved the sending of the Murray Lawrence letter) believing that the system was working and believing that it could work. The following factors they suggest support that view.
411. In the first place they rely on the terms of the interchanges between auditors and Lloyds at this time and the terms of the letters themselves. It is submitted that the documents show that what was concerning auditors was the attitude, and indeed the difference in attitude, of different underwriters to their exposure to asbestosis. The following question and answer between Mr Goldblatt and Mr Lawrence provides the flavour:
Q It is saying, isn't it, we consider it impossible to determine the liability in respect of asbestos; this is a factor which may affect the adequacy of the reserves. Please, Committee, tell us what to do. It is as simple as that, isn't it?
A No. My reading, Mr Goldblatt, is: they summarise on the first page, points that have been made to them in previous meetings with the representatives of the Audit Committee. They have said that those are difficult to do because they had certainly indicated to either the Corporation people, people concerned, that what was worrying them was the complete difference, different ways that syndicates were approaching the sort of problems that had been set out on page 1, and that if they didn't have guidance on those points how to deal with them then they would have an impossible task in finding the right results for the syndicates, because they found syndicates on the same risks dealing with them in totally different ways. So this was the guidance that they were seeking under Clause 3.
Q That is a gloss which you put on the letter, maybe from subsequent talks, but it is not what the letter says is it? A Well, in my memory, Mr Goldblatt, it was made clear to us by either Mr Randall or somebody else, that having talked with the auditors this was the problem; it was the total lack of common approach across the market to these problems that made their task impossible.
412. That inconsistency was a concern is reflected in the contemporaneous notes. The minute of 9 March 1981 contains the following:
The main worry raised by the auditors was the widely differing views taken by syndicates and that the real purpose of their letter was an attempt to seek some uniformity in the Lloyds market for dealing with the matter.
In any event it is said the Audit Committee were not prepared to accept it was impossible to calculate reserves. The Murray Lawrence letter stressed asbestosis as a major problem for insurers and reinsurers; the importance of reserves fairly reflecting the current and foreseeable liabilities of all syndicates; that an IBNR loading should be carried for those claims not specifically advised but which could come to light in the years ahead; the decision for the IBNR percentage was for the agent and his auditor to resolve; where the reserve for asbestosis represents a material proportion of total reserves of the syndicates, Agents should consider whether or not to leave the account open. The Randall letter to the auditors drew attention to the guidelines of the Murray Lawrence letter; stressed that the [IBNR] loading should be very substantial to reflect unreported cases on the direct account and, possibly incomplete information on the reinsurance account; it should not be discounted to reflect possible future investment earnings; special attention would have to be paid to the assessment of reserves in the situation in which an account was left open, and where they were being created for the purposes of assessing a members solvency. Taken together, the letters read as if it was believed that there was a system that could be applied and would work provided people realised the seriousness of the problem, and the letters did not read as if accounts must be closed at all costs nor as though certificates of solvency must be produced at all costs. Further, they gave clear instructions that names should be informed.
413. That they did believe that the system worked is supported by the fact that following receipt of the Murray Lawrence letter and the Randall letter, no auditor or underwriter suggested that dealing with the 1979 year and its exposure to asbestosis was impossible. The auditors who had been parties to the Neville Russell letter were themselves approving the premiums for RITCs as fair and certifying solvency. Cresswell J found no negligence on the part of Mr Merrett or his auditor in closing the 1979 account in 1982; the Kerr Committees view was that either everyone was negligent or no-one was negligent in closing the 1979 accounts in 1982, and preferred the view that no-one was.
414. If those responsible for sending the Murray Lawrence letter were of the view that the system no longer worked and that reserves for asbestosis were unquantifiable, the expectation would be that they would not continue to underwrite on syndicates exposed to asbestosis, certainly would not increase their exposure, and would take out stop-loss policies to protect themselves. In fact 13 of the 33 were on the Merrett syndicate which ultimately was forced to leave its 1985 year open (those 13 included Mr Lawrence, Mr Nelson, and Sir Peter Miller who were on the Committee that approved the sending of the letter, and also Mr Rokeby-Johnson, Mr Skey, and Mr Jackson); and 5 were on the Outhwaite syndicate that left its 1982 year open (including Mr Nelson, Sir Peter Miller, Mr Rokeby-Johnson, and Mr Skey). Mr Lawrence increased his underwriting from £265,000 to £1.3m over the relevant period; Mr Rokeby-Johnson increased his from £468,000 to £1.3m; Mr Colin Murray increased his; Sir Peter Miller increased his lines and his family increased their lines; and Mr Kellett, Mr Jackson, Sir David Rowland, and Mr Bird all increased theirs. Twenty one of those accused of being dishonest did not have a stop-loss policy in relation to their own underwriting, including Mr Lawrence. A note prepared by those representing Lloyds provides the complete picture. Sir William Jaffray contended that Lloyds misled the court over the underwriting losses suffered by the 33. This submission was particularly aimed at Sir Peter Miller, a point to which we will return hereafter.
415. Insurance companies were managing to calculate reserves including IBNRs. They, as history shows, were getting it as wrong as the syndicates at Lloyds, but it is only hindsight that demonstrates that fact.
416. Many underwriters, whether or not on the full Committee or any of the sub-committees at Lloyds, thought that the figures on which the names now rely (taken from the Califano statement, Dr Selikoffs research, and the Commercial Union), as the forecast of the number of possible victims, were exaggerated. Mr Nelson for example is recorded as expressing the view at the Audit Committee Meeting of 9 March 1982, that in his view a figure of 50,000 new claims over the next 10 years would seem to be realistic and that the reports of up to 2,000,000 new claims could well be an exaggeration. The names case is that Mr Nelson was dishonest, and he was one of those witnesses not called against whom it is said the judge should have drawn adverse inferences. The names place some reliance on the fact that Mr Nelson was ultimately found guilty of discreditable conduct by a disciplinary committee. That finding was not a finding of dishonesty, but even if it had been it would have related to one matter the writing of policies to confer benefit on himself and his family. That would not establish dishonesty of any other kind. Mr Nelson as previously indicated was on both Outhwaite and Merrett syndicates that reinsured the run-offs of other syndicates with long-tail US liabilities. He increased his underwriting from £202,500 on 10 syndicates in 1979 to £ 312,500 on 11 syndicates from the 1982 to 1987 years. He was caught on the Outhwaite 1982 open year and the Merrett 1985 open year. Lloyds submit that that is simply inconsistent with dishonesty on the part of Mr Nelson, and in particular inconsistent with him having deliberately scaled down his predictions.
417. Lloyds also rely on the fact that other experienced underwriters gave evidence that they could calculate reserves; for example the names called Mr Mackinnon who wrote stop-loss policies during the relevant period. He had all the information from attorneys reports and the AWP. He thought he had his reserving right; took out a limited run-off policy and declined greater protection in 1982. He did not think the market was under-reserved, otherwise he would not have gone on writing stop-loss policies until 1988. Mr Jackson (underwriter for syndicate 799), and Mr Rayment (claims manager for Sturge), accepted by the judge as being amongst the most knowledgeable in relation to asbestos, also gave evidence as to how the problem developed in unexpected ways.
418. Mr Aldous also relied on passages from the evidence of Mr Keeling and Sir David Rowland. One passage from Mr Keelings evidence relating to the Commercial Union report is worth quoting:--
There are several of these reports out there that were certainly written the one I can remember is the Commercial Union one was really, I think, written to try and accelerate tort reform in the United States of America. I think you had some agenda setting out there other than actually finding out what the ultimate figure was. It is quite interesting that the Commercial Union figures You see the figures out of the Commercial Union report. I am not sure there were 11 million, but there were quite lurid figures out there that was not the figures Commercial Union reserved on. They were not the figures Commercial Union reported to their reinsurers.
419. Reference was also made by Mr Aldous to the Conning & Co report produced in September 1982 which put the range of successful claimants as between 40,000 and 90,000. Furthermore, there were other estimates being made outside Lloyds. Even in 1984 a projection was being made for the purpose of the Johns Manville reorganisation of 44,000 claims; that was revised in 1986 to between 83,000 and 100,000 claims, and approved by the US bankruptcy court in those terms. In the event 240,000 claims had been received by 1995 and over 400,000 claims by 2000. Sir William Jaffray suggested that Lloyds gave a misleading impression to the court of the effect of asbestos being worse than expected. Lloyds may have sought to underplay how serious the problem was perceived to be in 1982, but there is no doubt that there were two views as to how serious the problem was likely to become and there is no doubt that the problem became more serious than many persons at the centre contemplated.
420. In any event sheer numbers of claimants generally could not ultimately assist in assessing how individual syndicates would be affected. What they do not tell you is firstly who will bring a claim; secondly whether that will be a product liability claim or a workmans compensation claim; thirdly who they will be bringing a claim against; fourthly the defences available to those insureds; fifthly how much insurance those insureds may have, for what years and on what terms; sixthly the defences that may be available to their insurers; seventhly what reinsurance those insureds have; and eighthly what proportion of the insurers total reserves concern exposure to this type of claim (which may be important when a determination is being made of the impact of the possible adverse development in one type of claim to its whole book of account).
421. Mr Aldous submitted that there had never been any suggestion by names that syndicates were under-reserving for pollution. He submitted that if syndicates were deliberately under-reserving for asbestos there was no logic in their taking a different approach to pollution. The Inland Revenue, even in 1984, were suggesting that syndicates were over-reserving, and were unconvinced that the large sums which were being set aside in the RITC process could be justified. A settlement was ultimately negotiated with the Inland Revenue at the beginning of 1985 under which Lloyds paid £42.5m.
422. Mr Aldous also referred to the run-off policies written by Outhwaite, Merrett and Meacock. In essence Mr Aldous made three points in relation to these policies. First, they demonstrated a different view being taken by those underwriters towards long-tail business. Second, when their view turned out to be wrong and when claims far exceeded the premiums received they made allegations of non-disclosure and those allegations failed. They failed in the case of Cockell, Hampton and Hiscox so far as Outhwaite was concerned. They failed in the case of Pulbrook so far as Meacock was concerned and in Judd and Gooda Walker so far as Merrett was concerned. Third, although at one time an allegation was maintained that it was insiders who were placing these run-off policies e.g. Cockell and Lawrence, the truth was that many policies were placed by persons who could in no way be described as insiders. The information that was available to those at the centre was also available to underwriters and claims staff generally.
423. It was not possible for anyone at the centre of Lloyds to carry out a global calculation at the beginning of 1982. There were far too many unknowns. For the purpose of the R&R in the 1990s it took three years and cost many millions. The matter had to be dealt with at syndicate level, each syndicate having all the relevant information available (including such reinsurance as it possessed) in order to assess its own position. It was reasonable to send the Murray Lawrence letter and the Randall letter in order to make syndicates and auditors deal with their individual positions. That might have led to syndicates leaving their accounts open or auditors being unable to approve RITCs or certify solvency. Those possibilities were left open.
424. Mr Rayment (a witness who much impressed the judge) gave powerful evidence in relation to calculating an equitable RITC. Certain questions and answers (on day 38 page 5792) are worth quoting:
Q. Did you feel I know you were not involved in the exercise, but did you feel that Mr Rokeby-Johnson in conjunction with his auditors, was in a position to set an equitable RITC in order to close the accounts of that syndicate?
A. I would spend a considerable amount of my time leading up to the end of the year in conjunction with the auditors, almost permanently based in our office, and I believe we did a very thorough and exhaustive job in, I believe, putting all the facts before Mr Rokeby-Johnson and the auditors for the purpose of the RITC.
Q. I understand that. Following that exercise, were you aware that Mr Rokeby-Johnson is closing the year of account in conjunction with the auditors having set an IBNR?
Q. Did you personally feel that although you were not involved in the exercise Mr Rokeby-Johnson in conjunction with the auditors could arrive at an equitable RITC?
A. I believe so, yes. Mr Aldous also referred us to the evidence of Mr Murray, Mr Jackson, Mr Keeling and Mr Archard.
425. Mr Aldous also relied on the fact that auditors were amongst those who supported the reform which brought about the obligation to certify accounts as showing a true and fair view. That, he submitted, was inconsistent with the notion that there was already something impossible in the calculation of outstanding liabilities. Panel auditors, including for example Mr Blake of Messrs Neville Russell who had signed the Neville Russell letter, gave evidence to Sir Patrick Neill in relation to the preparation of his report and did not suggest that there was any impossibility in calculating or certifying reserves.
426. Mr Lawrence (and Mr Rayment and Mr Jackson) gave evidence and refuted the suggestion that they had been dishonest. Mr Jackson concluded his statement powerfully in the following way:--
I would like to conclude this statement on a personal note. I fully understand and can appreciate the upset felt by the names in this action. Like them, I too joined Lloyds after the majority of the insurances and reinsurances which caused losses had been underwritten. For me, it was made worse in that I had spent nearly twenty years attempting to sort out the problems we had or inherited, rather than enjoying the results of the business. Like the names I also lost a lot of money. When I gave up the chairmanship of LMCS in October 1988 I decided I would have no further involvement in past problems. I was therefore very reluctant to become involved in this action. However, I did not feel I could allow the appalling allegations against me and others to go unchallenged. It is difficult, in a matter of pages, to explain just how much time and effort I gave to the problem of asbestos, writing to and talking to the market and its insureds and reinsureds about asbestos problems, to make sure that as many people as possible understood the seriousness of the issues at stake.
To be involved in this action after these efforts is insulting. I categorically deny that I made any efforts or took any actions to withhold information from anybody on this subject, nor did anybody suggest I should do so, to allege otherwise is outrageous.
As I have said, like others in the insurance industry, we at Lloyds in good faith, underestimated the ultimate cost of asbestos losses. Nobody denies that. What I do strongly deny is any wrongdoing in any of my dealings in asbestos matters.
Mr Aldous also relied on the evidence of Mr Lord, ultimately Chief Executive of Lloyds and not charged with dishonesty, and the evidence of Mr Fredjohn called by the names, who gave evidence of the integrity of the persons at the centre of Lloyds with whom they were involved.
Conclusions as to the position in 1982, and the Murray Lawrence letter
427. Some justified criticism can be made of the judge in relation to his assessment of the witnesses. For example, in relation to Mr Lawrence the names attacked his credibility in relation to his syndicates run-off and his reluctance to accept that asbestos was in his mind. The judge did not say expressly what view he formed about that, and, as indicated, we have our reservations about it. Furthermore, having summarised his evidence, the judge made no comment whatever about it. In addition some witnesses were not called who could have assisted the judge in building up an accurate picture of the period just prior to the sending of the Murray Lawrence letter. Mr Randall is the prime example, but there is also Mr Nelson. If the evidence demonstrated that there were matters pointing to dishonesty, which those witnesses might have dealt with if they had been called, then clearly, as it seems to us, an adverse inference should have been drawn by the judge from the decision not to call them, and it is a legitimate criticism of the judge that he did not deal with this aspect. But that said, it must be stressed that (a) if an adverse inference is to be drawn, there must be some evidence which required dealing with before that adverse inference can be drawn; and (b) the task set for this judge was enormous, and it would be astonishing if some errors could not be detected in his judgment; any such errors must be viewed in the context of the whole.
428. We have also already expressed our anxiety about the decision taken by the Membership Committee, two days before the Murray Lawrence letter was sent, not to mention asbestosis in the Rota brief. Furthermore we do not find convincing the explanation as to what it was that the auditors were saying about their concerns in the Neville Russell letter i.e. the lack of uniformity in the ways in which different syndicates were reserving. Could the Murray Lawrence letter have spelt out more clearly the obligation to reserve to ultimate, including for example an instruction not simply to load the estimates of known claims but to make some estimates of future claims and assess their likely worth as Sir William would suggest? (See paragraph 18 of Sir Williams reply). Do these factors demonstrate a guilty mind? Was the position that Mr Lawrence and others believed (i) that reserving for the IBNR element of asbestosis losses was actually impossible; (ii) that whatever the terms of the letters both to underwriters and auditors, underwriters would continue to make assessments which would enable them to close their accounts with auditors being satisfied of the RITCs and auditors certifying solvency; and (iii) that as long as Lloyds continued to represent all was well, the market would be kept afloat, names would not resign and new members would not be put off joining provided they were not told? Does the fact that Mr Randall in particular was not called to deal with the discussions at the time, add support for that scenario?
429. We have found these questions worrying. We can well understand the names suspicions. But we have come to the clear conclusion that the names case at trial fell far short of the heavy burden of proof required to establish dishonesty. The submissions made by Mr Aldous (summarised at paragraphs 410 to 426 above) are very powerful.
430. The terms of the Murray Lawrence letter and the Randall letter themselves are the starting point. There is no vestige of a suggestion that underwriters and auditors should do otherwise than make a proper attempt at assessing RITCs. It is made clear that syndicates may have to leave their year open. The underwriters are being told that they must inform their names. The reports of the syndicates quoted in section W of Lloyds closing submissions at the trial consistently refer to asbestosis and to reserving for asbestosis. Of course (as one finds in the internal documents, and as is supported by what Mr Randall was apparently saying at the time of the Donner Inquiry), there was anxiety as to what might follow if many years were left open and if (of even more importance) certification of solvency could not take place. But the letters were in clear terms, and if auditors and underwriters had taken the view that they could not make an assessment of outstanding liabilities, the outcome would have been the very result about which anxiety was being expressed. That is inconsistent with the sending of the letters being dishonest.
431. Furthermore, the conduct of persons such as Mr Lawrence and Mr Nelson in relation to their own underwriting, after the letters were sent, supports the view that they did believe that the system was working and that liabilities were being properly assessed. They must have thought that the RITC premium which was being received by the years in which they were still underwriting or increasing their share was being assessed fairly. If no case of dishonesty can be made against Mr Lawrence (or Mr Nelson), then it is difficult to see how any case could be made against others on the Committee at that time.
432. We have to remind ourselves that the judge did see Mr Lawrence in the witness box over a period of days. If the letter he wrote was dishonest, then (as we have said) he must be the key person against whom that charge must succeed. We have had anxieties (and as it would seem more anxieties than the judge), but the names have not succeeded in establishing that the Murray Lawrence letter and the Randall letter were sent out without an honest belief that the audit system could assess reserves, and have not succeeded in demonstrating as at March 1982 that they did not believe what was being represented in the brochures at that time, let alone that they knew that the representations were untrue or were reckless as to their truth.
Evidence as to 1983-8
433. We now go on to consider whether there came a point during the period following the sending of the Murray Lawrence letter when any one of those charged with dishonesty appreciated that the representation that the system was producing reasonable estimates for reserves was untrue. We repeat what we have said in paragraph 379 above as to the need to read this part of the judgment in conjunction with the chronological summary in Part III.
434. Having regard to the view which we have just expressed, our starting point must be that the representation was believed to be true when the Murray Lawrence letter was sent out, in other words, that it and the Randall letter were honest letters. What followed the sending of the Murray Lawrence letter and the Randall letter was the finalisation of syndicate accounts in April and May 1982. No underwriter or auditor suggested that reserving was impossible. Furthermore, the reports to the names, set out in section W of Lloyds closing submissions, consistently refer to asbestosis and to the reserves made for asbestosis. The open year file would indicate that 5 or 6 1979 accounts containing latent disease risks were left open (as at 31 December 1981, but reported on in 1982) but the vast majority were closed (see paragraph 200 above). That would not provide an indication that the system was not working, if anything it would suggest that it was. Furthermore, pursuant to Clause 3 of the Audit Instructions, auditors were bound to report on inadequacies as between premiums paid to close the 1978 accounts and those paid to close the 1979 accounts.
435. At the end of the year the Audit Committee reviewed Instructions for 31 December 1982 and recommended once again that reports on inadequacies in the premiums to close accounts should be provided by the auditors. It recommended as follows:
Reports on Inadequate Reinsurance
Auditors are required to report all cases where the reinsurance to close an Account (or the reserves created at the end of the third year of an Account) has appeared, after 12 months, to have been inadequate.
As at the 31 December, 1981 Audit, there was an increase in the number of cases reported, there being 63 cases where the reinsurance premium charged to close the 1978 and previous years Accounts appeared to be inadequate after 12 months; this compared with 48 cases reported at the Audit as at 31st December, 1980. Of the 63 reported cases 19 revealed an inadequacy of 15% or over and it is intended that these be followed up to ascertain the reason for the inadequacy.
436. On 9 December 1982 the Committee is recorded as resolving:
Report on Inadequate Reinsurances
THE COMMITTEE CONFIRMED the recommendation of the Audit Committee that, as soon as possible after the 31.12.82 Solvency Test had been completed, a review should be carried out of all those Syndicates where a report had been received in respect of an inadequacy in the reinsurance to close from the previous year, 31.12.81. It was expected that this review would commence at the end of June and, having first been considered by the Audit Committee, would be submitted to the Committee of Lloyds.
At that Committee were present 15 persons including eleven against whom charges of dishonesty are made. At first sight it may seem strange that the review was not to take place until June 1983, but it would seem that that was dictated by the fact that the Solvency Test and RITC for the current year should be completed first.
437. During 1983 the Minutes of the Audit Committee indicate concern over the calculation of the RITC. At a meeting in September 1983 Mr Nelson pointed out that LUNMA at the request of the Audit Committee, was looking into the question of long-tail reserving, and that a Sub-Committee had been set up . At a Special Meeting on 26 September 1983 a Report on the Inadequate Reinsurances was considered. The note of the meeting records:
Report on Inadequate Reinsurances (Clause 3)
At a previous meeting of the Audit Committee, a report was circulated setting out those Syndicates which appeared to have created inadequate audit reserves on the Accounts which had closed at the previous 31st December. The Audit Committee had requested that for those Syndicates which had reported a figure of 15% or over, the inadequacy should be looked at in relation to the capacity and premium income of the Syndicate concerned.
The information was then laid before the Committee.
On consideration of the figures, the Audit Committee felt that although in some cases the figures appeared to be extremely high, it was, in general, felt that the circumstances and reasons for these figures had to be taken into account. One of the main reasons for the high apparent inadequacies was the asbestosis increase on closing reinsurance. The MSS Committee did, however, feel that where an apparent inadequacy arose and the Syndicate had also an overwriting situation, this should be followed up.
438. Furthermore, on 22 December 1983 the DTI wrote to Mr Parkington, Members Solvency and Security Department. Amongst many other matters he said this (in the context of the MPRs being set):
Non Marine All Other U.S. Dollar
The reserves for this exceptionally long-tailed account look very weak indeed, particularly at the end of years 1 to 4 but also throughout the tail. There is prima facie evidence in Table 3 that the minimum reserves have not been shown to be adequate, and the full picture is yet to emerge, as the estimated ultimate cost as at years 7, 8, 9 etc based on the minimum audit reserves will probably be shown to be too optimistic. GAD believe that strengthening is needed in the tail, and also in the first four years. Objections to minimum reserves of more than 100 per cent of premiums received would need to be resisted: the premium rates and the actual experience are both relevant. To the extent that there is implied discounting for future income (as was discussed at your meeting with Vernon Lane) we think it better to face this openly and declare the underlying assumptions.
I should however be grateful if you would confirm that the comments in this letter will be taken into account in reviewing the reserving system. I understand from our conversation that Lloyds has commissioned a report from a consulting actuary on this subject. As the Secretary of State has a statutory duty to approve the basis of the calculation of general business liabilities at Lloyds, I think it would be desirable for the Department to be consulted about the proposals at an early stage, as you have done in respect of the Premium Trust Deed.
439. The response to the above on 16 April 1984 was as follows:
Non-Marine All Other U.S. Dollar
It is agreed that the scale of audit reserves looks weak compared with the run-off date in the Tables and the observations made by G.A.D. have been noted. As you know, it has been argued that it is reasonable to keep the reserves at or around their present level, having regard to the future earnings on the retained fund. It is acknowledged that this avoids declaring the underlying assumptions and does not deal with the problem of the wide mix of business comprised in this category. We are continuing to examine the means by which this account may be subdivided, but it has not yet been possible to agree appropriate groupings of the sub-classes to which separate scales of audit reserves might be applied. It is also hoped that the studies which are being conducted under the guidance of Mr Sidney Benjamin (consulting Actuary) will help to overcome the problem of those Syndicates whose accounts do not follow the pattern of the overall settlement figures for the Market.
I confirm that the comments in your letter will be further considered when the reserves to be applied to Underwriters accounts as at 31st December 1984 are reviewed. As you know, we carried out the review last year at an earlier stage than in previous years. It is very important for the Market that this exercise is carried out at the earliest possible stage and I think you should be aware that we are aiming for an even earlier review this year. The prompt attention your Department has given this matter has been greatly appreciated and I trust it will be possible for this to continue.
I have mentioned above the review that is being carried out by the Working Party under the chairmanship of Mr Sidney Benjamin into possible alternate methods for determining the minimum audit reserves. The initial report of the Working Party has been presented to the members of the Members Solvency & Security Committee who have decided that the proposals should be further tested before any recommendation is made with regard to their implementation.
440. In February 1984 there was the usual meeting between the auditors and what had by now become the Members Solvency and Security Department where the auditors were brought up to date with the position on asbestosis by Mr Jackson, Chairman of the AWP. During 1984 there were serious problems with the Inland Revenue who were challenging the use of roll-over policies, and the size of RITC premiums. It was in this context that Mr Barber is quoted as saying in relation to asbestos liabilities, These losses are coming in at a frightening rate and for many syndicates a full reserve would bring massive losses to names in 1981/82 Accounts. This loss may settle very slowly if every case is contested through the courts or may settle very quickly as underwriters attempt to reach a compromise. In the former case, the reinsurer will make profits, in the latter there exists the probability of severe losses.
441. The difficulty so far as roll-over policies were concerned was that, as one document put it, they parade[d] as ordinary reinsurance policies (see paragraph 209 above) whereas in many cases they were not, in that they were placed with captive entities, and represented no more than funds, placed usually overseas, which could be called on at any time to pay losses. There were instances where these policies were used to the detriment of names but the Inland Revenues attack was on the use of such policies taken out for the benefit of names. So far as the RITC was concerned the Inland Revenues attack was that syndicates were simply building up reserves rather than paying out profits on which names would otherwise have had to pay tax.
442. It was in this context that Lloyds made its presentation to the Inland Revenue in November 1984. The papers presented contained a detailed description by Mr Parkington of how the RITC was intended to be calculated and carried out. There was a paper from Mr Stephen Merrett describing the RITC as the largest single risk in most cases. There was a paper from Mr Kellett, much relied on by the names, in which he explained why syndicates could not simply use the MPRs recommended by Lloyds; how year on year the Committee at Lloyds had found it necessary to increase the MPRs providing conclusive evidence of the unreliability of using past statistics to estimate future development; and how in his view we are under reserved, what concerns us is how the industry can survive its under reserving.
443. We have already quoted part of this paper (paragraph 218 above) but it is worth adding a further passage:
Despite the difficulties, the underwriter will eventually, after detailed study of the figures and in consultation with his staff, arrive at a figure, which I can only describe as being his assessment of the real worth of the reinsurance he is to effect. As with any other reinsurance, he must know what he thinks its worth, in order to know what he is prepared to pay for it. Performing, as I have said, his last duty for the Members of the closing years syndicate, he must endeavour to pay no more than this price, and if possible less. If he could effect a reinsurance to close with another party, for less than his assessment of its worth, he should do so and will be in breach of his duty if he pays more to any other party, including the following years syndicate.
The reality, however, is that any third party would inevitably want more. It is in the nature of one underwriter, looking at anothers account, to take a hard view of all the evidence that points to deteriorating results, and to pay scant regard to factors seeming to show improvement.
I have, myself, written the run-off of other syndicates where they have been unable for various reasons to effect it with a following year. Free from the normal constraints I have taken a commercial view and loaded on every bit I could before setting the premium. In all cases the original underwriters have thought mine a very high price, but these run-offs cost me dearly, before I in turn reinsured them with yet another syndicate at what I thought was a very high price, paid only because there was no alternative market. The losses are now costing them dearly.
And the underwriter certainly won't be doing his duty to the assuming years members, if he, as their underwriter, takes on the liability at less than his assessment of its worth.
Thus the reinsurance to close, would, in most cases continue to be placed with the following year of account. At what the underwriter believes to be its true worth, and what history will more probably show to be too little.
444. With the above in mind it is relevant to quote the speech of Mr Peter Miller at the General Meeting of Members on 28 June 1984:
we are working, through our Accounting and Auditing Standards Committee towards a comprehensive and more stringent approach to the auditing of Syndicates. The number of underwriting Members at 1st January 1984 was 23,438 and the signs are that more than 4,500 will come forward for Membership in 1985. At the same time, approximately 5,500 existing Members increased their underwriting commitments with effect from 1st January 1984, at which date the total of Members deposits and Special Reserve Funds amounted to £1,289m. This amounted to 38% of overall Premium Income Limits and may be compared favourably with the figures ten years ago when the corresponding amount represented 17.1% of Premium Income Limits. As the Market turns, Lloyds is therefore well placed to take proper commercial advantage of that turn. I ask you to remember who will be responsible for that success which lies within our grasp. It will not be the Council, it is not the activity of regulation which creates wealth but rather the activity which is being regulated . I cannot end this section of my address without a mention of reinsurance to close. The Revenue has a right and duty to satisfy itself as to the validity of the sums of money involved. The Underwriter has a right and duty to try to ensure that an adequate premium is charged for the transfer of obligations from one set of Names to another. The problem of adequate reserves for past liabilities is critical for the whole insurance industry. This is an age when no mere extrapolation of past claims experience has validity the reinsurance to close is fundamental and in these circumstances, Underwriters must pursue a prudent reserving policy. At the same time Underwriters must not use purely arbitrary or speculative judgments and I welcome the increased sophistication of the calculations leading to the final figure for the reinsurance to close.
445. We have already referred (paragraph 216 above) to the Johns Manville settlement reached in July 1984. Although the London market paid US$ 94 million, Mr Rayment in his witness statement said The settlement has proved to be a good deal, such was the explosion in claims in the latter part of the 1980s.
446. On 15 October 1984 at an MSSC Meeting chaired by Mr Lawrence and attended by Mr Cockell, Mr Coleridge, Mr Merrett and Mr Randall (who was by then employed by Merrett syndicates) but with Mr Parkington, Mr Bowmer, Mr Tovey and Mr Mehta in attendance, there was considered the report on inadequacies of the RITC as at 31 December 1983 for those accounts closed the previous year. The Committee agreed that:
a) where satisfactory explanations had not been given, letters should be sent to the Managing Agents of the Syndicates where the inadequacies exceeded 15%, requesting a full explanation of why the inadequacies had occurred and what steps had been taken to avoid a recurrence.
b) in all cases where the inadequacies were greater than 30%, and for Syndicate 702, the active Underwriter and a Director of the Managing Agency should be interviewed by the Chairman of the M.S.S. Committee.
447. On 12 November 1984 by the letter to auditors, their attention was drawn to the following:
Scales of Percentage Reserves
a) The scales represent the absolute minimum requirement for any Syndicate.
a. The percentages must be regarded as the base to which additional provision must be made to take cognisance of a Syndicates own experience, its estimated outstanding (included I.B.N.R.), the mix of the account between the longer and shorter tail elements, changes in portfolio, etc.
b. In view of this position it is proposed to add the following to Note 1 of Clause 6 of the Instructions for the Guidance of Lloyds Auditors:-- SU11The Auditor must also have regard to the fact that the scales of percentage reserves set out in this Clause represent the absolute minimum requirement for any Syndicate and have been compiled on this basis. Where professional judgment and statistical evidence so suggest, provision must be made over and above the minimum percentage reserves to take account of the particular circumstances of individual Syndicates.
c. As a result of the above factors some Syndicates will be required to reserve sums greatly in excess of the percentages.
d. Any syndicate reserving at or near the minimum percentage will need to demonstrate to their Auditors that this represents an adequate provision.
448. On 17 December 1984 there was a meeting of the MSSC, at which were present not only Mr Lawrence the Chairman and Mr Coleridge of those charged with dishonesty, but also others including the permanent staff, Mr Parkington, Mr Bowmer, Mr Tovey and Mr Mehta. There was considerable discussion on the RITC and whether the Council should have to approve an RITC closing below the MPRs. Mr Lawrence stated Lloyds should avoid having to pass judgment on syndicates reinsurance to close. On the same day a letter was sent by Mr Frank Barber (as Deputy Chairman) to underwriters warning them that if their RITCs were to survive a challenge by the Inland Revenue the calculation must be supported by full records of the historical data taken into account, with supporting graphs and charts, and of the statistical or actuverdana techniques employed
449. On 5 February 1985 it was proposed and approved that the AU 38 Clause 3 reports should refer to inadequate reserves created for the 1981 and prior accounts instead of the reinsurance to close. Somewhat prophetically Mr Merrett protested at the word inadequate as implying that it should have been recognised previously, but Mr Tovey explained that it was apparent inadequacies the Committee was interested in, and that such were only followed up where explanations for the inadequacy were unconvincing.
450. On 12 April 1985 there was a meeting between Mr Randall and Mr Tovey (of MSSD) described by the judge at chapter 19, page 349 of his judgment. Mr Randall was reporting a serious problem for syndicates 418/417. A calculation of the IBNRs had been carried out since the previous Solvency Test; the claims were unlikely to come in for many years and Mr Randall was seeking assistance for his names in relation to the solvency requirement. He said that the 1982 year would not be closed until a more certain outcome could be established. In the event this year was closed into the 1983 year and Cresswell J in his Merrett judgment found that this should not have happened. Mr Merrett was Chairman of the MSSC at this time.
451. Mr Outhwaite was also in trouble. The run-offs had mostly been written for the 1982 year of account. Initially he wished to close the 1982 year into the 1983 year in May 1985, but if he had done so then Ernst & Whinney would have put a qualification on their audit report. That qualification would have related to the RITC only. They were satisfied so far as solvency was concerned. Following meetings between Mr Tovey and Mrs Shorthouse, two accountants from Ernst & Whinney and Mr Gilkes and Mr Hussey representing the Outhwaite syndicate, Outhwaite ultimately decided to leave his 1982 year open at this stage although when he wrote to his names on 1 July 1985 explaining the decision he expressed our considered view that the 1982 year will prove to be profitable. Many other syndicates exposed to latent liability claims including asbestos (at least 20 and probably more) left their 1982 years open in April/May 1985. There is however no suggestion that auditors could not sign solvency certificates.
452. On 19 March 1985 Mr Jackson as Chairman of the AWP gave testimony to Senator Nickles in which he referred to the problems being created for both producers and insurers in relation to asbestos. He further referred to the considerable liberalisation and wide divergence in judicial interpretations in relation to policy wordings. We have already quoted from his testimony but one passage bears repetition:
Against this background of judicial uncertainty, already catastrophic losses, and the reality of massive property damage claims yet to come, the task of fixing meaningful reserves and managing cash flow to pay claims will continue to demand virtual clairvoyance and a near reckless courage from executives involved at primary level, as well as from their reinsurer counter-parts. You might well ask if we are getting it right. I will show you how we propose to do just that.
453. The signature of the Wellington Agreement followed in June 1985 (see paragraphs 230-2 above). The evidence indicates a strong belief, at the time, that it marked the beginning of the end of the problem. In fact incurred claims were just at the beginning of their steep rise, as appears from the graphs for the various accounts for which Outhwaite reinsured the run-off.
454. It is clear that during this period Lloyds was encouraging new membership. At a Council Meeting of 13 May 1985, the new Chairman Mr Peter Miller referred to a paper to be circulated to Chairs indicating the line which would be taken in forthcoming speeches which will encourage applications for membership This will take account of the need for increased membership as a result of a shortage of capacity and the conflicting adverse publicity arising from reported underwriting losses for recent years. On 5 July 1985 Sir Peter Green wrote his fishing trip letter quoted at paragraph 233 above. The letter is much relied by the names because of its reference to the overpayment of past profits is falling for recoupment from a far larger number of current names and the reference to it being critical if old names were to resign or new names would not join. But the letter also reflects the difficulty with the Revenue and states that that there are plenty of horrors in the pipeline and they must be reserved for even if the figures are not available. The true and fair requirement should assist in this.
455. Mr Peter Miller delivered his speech on 26 June 1985 to the General Meeting of Members. He referred in detail to the PCW problem, the way Lloyds had dealt with it and the further problem which had occurred in relation to the syndicate that took over the run-off of Richard Beckett Underwriting Agency when further losses were discovered in April 1985. Richard Beckett Non-Marine syndicate 986 left its 1982 year open, this being an account affected by the asbestos and latent disease problem. In that context he stressed that insurance was a risk business but he also stressed that the Council had now evolved a regulatory system in which the current members of Lloyds and those seeking membership can fully place their trust.
456. He then went on to explain the reasons for confidence:
The 1982 Act gave us new and sufficient powers, so we must look at what we have achieved by passing byelaws in relation to the underwriting agency system. Firstly, we are insisting upon improvements in the auditing of syndicate accounts and in the reporting thereof. This will ensure that any improper behaviour or other problem are identified and, therefore, dealt with much more rapidly.
Secondly, by insisting upon very full disclosure, we have highlighted the accountability enshrined in the law of agency, which requires the agent to respond to his principal for his care over the principals interests. A central file of syndicate results is now available for inspection.
Thirdly, we have introduced a new standard agency agreement which must be used throughout the market from 1st January 1987.
Fourthly, we have codified and immensely strengthened our processes for the approval of underwriting agents. I believe that the impact and importance of the fit and proper test for directors and underwriters and Boards of directors cannot be over-estimated.
Next, we are insisting that each managing agent has a system to monitor his premium income and we review the results produced.
In all these matters, I consider that it is important to realise the essential difference between regulators like the Council of Lloyds or the Department of Trade, for that matter, and a monitor. There is and there must be a limit to what regulators can do. Neither the Department of Trade nor Lloyds set out to monitor the day to day activities of the market. A regulator generally works on a post-facto basis. Therefore the objectives of good regulation must surely be to try to ensure that the right controls are in place and functioning correctly and to see as far as possible that the individual syndicates and their managing agents are run by fit and proper people, fully accountable to the members for whom they are undertaking.
The measures I have listed and many other reforms add up, in my view, to a modern and efficient system of regulation in which Names may readily put their trust. The events of the pasty few months will have affected some peoples decision to become members of Lloyds. The current turn in the market and our new regulatory regime, however, will be seen by many as compelling reasons for participating in this market. Indeed, it seems that this is how most perceive the matter. The latest figures show that new applications for membership for 1986 continue to run 20 per cent above the numbers for 1985. At the same time, about 9,000 existing members are asking to increase their premium income limits for next year. It is, as we all know, almost impossible to speak of the right time to join the market. That said, I believe that this is one of those times.
The transcript of the questions and answers after the speech shows that many names raised concerns, especially in regard to PCW.
457. In the report from Mr Richard Hazell (Chairman of LUNMA) in Lloyds Global Report and Accounts 1984 which was distributed to all names during 1985 appeared the following (which we have quoted in paragraph 335 above, but repeat because of its importance):
The figures produced for the close of the 1982 Account do not make happy reading from the non-marine markets viewpoint, producing an overall loss of £219m after taking into account substantial investment earnings. It must be remembered when reviewing these figures that they relate to the experience of the insurance market of three years ago when the insurance industry generally was at its lowest ebb for very many years, if not in its entire history.
Undoubtedly, much of the blame for these poor results can be attributed to the need for underwriters to increase reserves for outstanding losses in the light of the more liberal attitudes adopted by the American courts, very often in pursuit of the deep pocket theory. This is particularly apparent, but is not unique, in relation to those claims affecting asbestosis and pharmaceutical products. New laws regarding liability following pollution and other forms of environmental impairment could also produce problems for underwriters as these new laws appear to apply retroactively, thus making it very difficult to underwrite against such circumstances. It is to be hoped that the newly formed asbestosis facility, which after many years of being discussed has now been established, will enable settlement of claims to be made at a faster rate with a consequent saving of legal expenses.
458. A memorandum for the MSSC dated 16 December 1985 reported on inadequacies as at 31 December 1984, and set out a table comparing the previous years. It analysed the reasons for inadequacies (there being 24 with significant inadequacies). The report concluded as follows:
In the main the syndicates identified were reasonably predictable, including syndicate 895, five former PCW managed syndicates (plus the two stoploss syndicates impacted by PCW losses) and two Robert Napier syndicates formerly managed by Oakeley Vaughan. Fifteen of the twenty- four syndicates affected no longer underwrite.
Of the non-marine syndicates, many explain the inadequacies as being due to under reserving in respect of latent disease, product and environmental liability and pollution claims. Furthermore, three of the six marine syndicates attribute the deficiencies in reserving to the same type of problems. Interestingly, three syndicates refer to a specific reinsurance contract with Transit Casualty Insurance Company of California. It is intended that letters will be sent, where appropriate, to those agents whose syndicate returns indicated apparent deficiencies greater than 15%.
These letters should express concern at the apparent deficiency and seek further, more detailed, explanations of the circumstances. Additionally the letter should request detail of what steps are being taken to improve reserving techniques in future years.
459. During 1986 evidence was taken by Sir Patrick Neill in connection with the Report he would produce in January 1998. In April/May 1986 Mr Merrett left his 1983 year open. Many continued to leave their 1982 years open and some (about 15 or so) did not close their 1983 years. On 1 December 1986 the Solvency & Security Committee considered the report on syndicate returns made by syndicate auditors in connection with the 1985 Solvency Test.
Mr Kellett drew attention to the section of the paper dealing with inadequacies of reserves and asked the SSC what further action should be taken in respect of those syndicates with large inadequacies. The secretary explained that the Department had written to the managing agents concerned and in some cases this would result in an interview with a Deputy Chairman
The Chairman of that Committee at this time was Mr Murray.
460. At the beginning of 1987 Lloyds reviewed the solvency of the 1982 year of Outhwaite syndicate 317. On 29 January 1987 Mr Outhwaite wrote to all his names informing them that We are obliged to question the basis on which certain of the run-off policies written by 317/661 were placed
461. Several syndicates again left 1984 years open including Warrilow Syndicate 553, and inadequacies on the RITC or reserves for solvency purposes were showing a number of serious deficiencies as between 1983 and 1984. The deficiency for Mr Outhwaite for example was over £14m, and Mr Pulbrook over £ 7.5m. According to the schedule with our papers (S1) the total inadequacy was about £79m.
462. The Committee of Lloyds further considered how time and distance policies should be treated in the annual report. In March 1987 the Report to the Panel of Auditors indicates that Mr Jackson reported on the asbestos position including the following:
Non-Marine Robin Jackson
It had been hoped that there would be a drop in claims in 1986 but this has not been evident; nine hundred new cases per month were reported in 1985, while fifteen hundred new cases per month were reported in November and December 1986.
463. On 19 August 1987 the Committee of Lloyds was requested to approve the Global Report and Accounts as at 31 December 1986, and it was in relation to the draft Chairmans account that Mr Merrett is recorded as saying that it was important to avoid the risk of alarming names as regards the US casualty scene. The statement ultimately read in this way:
the overall results for 1984, constitute a record profit for the Lloyds market of almost exactly £300 million, excluding PCW, while the outlook for 1985, at least overall, looks likely to improve on that figure and 1986 is spoken of, almost reverently, as a vintage year
However, there is one factor which continues to dominate the whole Lloyds market and indeed it is perhaps no exaggeration to say it continues to dominate the whole world insurance scene. I refer, of course, to the general liability account. I have in previous years drawn attention to the enormous losses made in this area and I must do so again. The overall loss on this account shows a welcome reduction from last years figure. However, I have to say that the problems facing those underwriting this account, while perhaps reduced as a result of the reforms in the law of tort in the United States, are nevertheless far from solved. Two facts seem to me to stand out; first, that this account produces 12 per cent of Lloyds premium income and almost 100 per cent of our losses. Second, almost exactly 50 per cent of our reinsurance to close (£2,000 million out of £4,000 million in round figures) has to be devoted to the claims outstanding within this account; on a premium income base of some £400 million any under- reserving must have a sharply disadvantageous effect. In spite of all the efforts that have been made, quite extraordinary court awards and judicial interpretations continue to come from in particular, the American scene.
There are two quite different problems in the whole of this area. First, whether the amounts put aside to meet these claims will be sufficient, a problem of the past which underwriters must do their best to solve. Second, how far it is prudent to commit underwriting resources in the future to a class of business hedged about with such dangers and uncertainties
We have already quoted from Mr Kelletts statement in these globals (paragraph 251 above).
464. In August 1987 an attorneys report drew attention to the total asbestos universe as it existed in 1986 54,058, and as at 1987, 80,003. In both instances the figures included a projection for further claims between June and December based on the number of filings over 6 months. The lines on the graph relating to Firemans Fund (reinsured by Mr Outhwaite) were continuing to rise in 1987 although they were to rise even more dramatically between 1987 and 1990.
465. In September 1987 Memorandum for Consideration by the MSSC reviewed the inadequacies of the previous years reserves and concludes as follows:
A large proportion of the over 15% inadequacies relate to the non- marine syndicates and 4 of the 7 marine syndicates relate to pollution and asbestosis claims. Once again the difficulty of providing the right level of reserves for longer tail business is highlighted. While syndicates must be careful not to over-provide for long-tail due to revenue investigations, under-reserving must be avoided to retain parity between Names where an account is closed to a more recent year of account.
Although the number of syndicates whose reserves appear inadequate has remained reasonably stable over the last three years including those greater than 15% (24, 26 and 22 in 1984, 1985 and 1986 respectively), the level of the inadequacies is worrying, particularly those greater than 40%. Approximately one-third of the syndicates with inadequate reserves last year greater than 15% have recurred in 1986. MSSD intends to write to the agents and their auditors and, if considered appropriate, request that a meeting is arranged with the Senior Deputy Chairman to discuss their reserving.
466. Minutes of a 27 January 1988 meeting of the Committee report as follows:
Mr Merrett expressed concern that substantial increases in asbestosis/pollution claims were being notified by the Asbestosis Working Party and Environmental Claims Group. However, the Solvency and Security Committee did not have access to figures showing the overall position but had to rely upon the reports of individual syndicates. The level of reserving could be anticipated to require significant increases for next year and future years and Lloyds needed greater comfort than at present that Agents were adopting adequate figures in their accounts. In Mr Merretts view this was a problem that needed to be addressed centrally In the ensuing discussion the following points were made: (v) The level of reserving was a matter for the Managing Agents and should not become a matter of instructions from Lloyds centrally. (vi) The political aspects of the matter should not be ignored and pressure should be maintained on Washington, on the basis of the basic question of Who should clean up America. At the conclusion of the discussion it was AGREED that:-- (iii) The Chairman, Mr Merrett and Mr Hazell would discuss the matter on an informal basis with the Chairmen of the Market Associations.
467. In February 1988 Mr Jackson once again addressed the panel of auditors. The Minutes of the Committee of 10 February report as follows:
Mr Merrett reported that the Annual meeting of the recognised Auditors had recently taken place and had seemed to have proceeded satisfactorily. Mr Robin Jackson, however, had been referred to as a pessimist as regards Asbestos/Environmental pollution. Mr Merrett had tried to explain that Mr Jackson was in fact being optimistic considering the background against which he was working.
During 1988 more syndicates left accounts open for example Mr Merrett left his 1985 year open. Inadequacies were again reported for 1984 as compared with 1985. The total (according to S1) was about £95m.
468. Concern was also being expressed during 1988 about the resignation of names and about talking ourselves into a crisis. On 8 June at a meeting of Council it is noted that concern had been raised as to the number of open years and this issue would be the subject of a paper to Council once the solvency position was known. The concern would appear to be that of names who were on open years an area of major discontent to names which might generate questions at the AGM. This led to suggestions that efforts should be made to close open years, and a paper so suggesting was introduced by Mr Steel at the Committee meeting of 27 July 1988.
469. On 19 May 1988 Freshfields produced their report to names relating to Mr Outhwaite. On 20 June 1988 it was supplied also to Lloyds and its conclusions, so far as material, were as follows:
Paragraph 1(d) of our Terms of Reference
2. We consider that Mr Outhwaite may fairly be criticised for:--
(a) failing to identify sufficiently precisely the basis of the figures, presented with the placing information supplied by the cedant for the purpose of writing the run-off policies, leading to inadequate analysis (Section V, paragraphs 51 and 52);
(b) not investigating more thoroughly the nature of the asbestosis problem and its potential magnitude (Section V, paragraphs 60-64); and
(c) writing a substantial number of run-off policies into Syndicate 661 without giving sufficient weight to the consequent aggregation of risks (Section V, paragraphs 74 and 75).
3. Having regard to these criticisms, we consider that a substantial case based on breach of duty could be made out in relation to the writing of the run-off policies. However, in the light of all the evidence, and the advice we have received from our expert advisers, it is our opinion that a court action against Outhwaites or Mr Outhwaite based on this cause of action, would be unlikely to succeed. It is ultimately for the Names and their advisers to decide whether or not to pursue any remedies. We hope that the material we have assembled will assist them in making their decision.
470. At the General Meeting on 28 June 1988 Mr Lawrence said:
Present market conditions, uncomfortable though they may be, are overshadowed by the need to provide for the development of past year claims, some as yet un-notified and unquantified, springing mainly from long-tail liability business in the United States. The deterioration in claims in this area over the past 12 months and the provisions that have had to be made as a result, have reduced in many instances the anticipated profit last year for the 1985 account. They are, in addition, responsible for the two current major problem areas in the market namely syndicate number 317 (Outhwaite) for the 1982 account and number 553 (Warrilow) for the 1984 account.
471. At a Committee meeting on 27 July 1988 was considered a paper which provided an analysis of run-off years of account as at 31 December 1987. The paper stated that there were 76 syndicates with years of account in run-off and a total of 120 years in run-off of which 23 showed a profit. The figures excluded Sasse and PCW. US liability explained 56% (67 in number) of the run- offs. In his Chairmans report Mr Lawrence said:--
Over the past twelve months, two events have served to emphasise the vital role played by insurance and by the Lloyds market in particular. The devastation created by the storm of October 1987 which cut a swathe across southern England and Western Europe is being described as the worlds largest insured loss, estimated to be 3 billion US dollars. More recently, in July this year, the dangers inherent in offshore oil production were brought into stark focus by the explosion which destroyed the North Sea oil production platform, Piper Alpha, involving tragic loss of life. The deterioration in the claims experience over the past twelve months, together with the need to provide for the development of past year claims, specially in relation to long-tail liability business in the United States, have particularly affected the 1985 account results. This emphasises the crucial need to provide for future liabilities by way of full and appropriate reinsurance to close at the end of each year. The same problems are also reflected in the number of syndicates with years of account left open at the end of 1987. At the end of December 1987 there were 76 syndicates with a total of 120 years of account left open. Problems associated with asbestosis and pollution risks, together with other US liability business appear to account for the vast majority of the run-off years. To have so many syndicates left open must be considered unacceptable to underwriters, members and agents alike. Consideration is, therefore, being given by the Council of Lloyds to ways of dealing with this problem.
Discussion as to 1983-8
472. The names case at the trial did not involve dividing the period before the Neville Russell and Murray Lawrence letters from the period after those letters. Events in the period after (and sometimes long after) March 1982 were relied on by them to support a case of dishonesty in actions taken shortly after the Neville Russell letter. But what we must consider, having regard to our conclusions in relation to the Murray Lawrence letter, is whether in the light of the information that people on the Committee and Council of Lloyds had, following the Murray Lawrence letter, it must have become apparent before the end of 1988 that the representation being made in the brochures, that there was a system which involved the making of reasonable estimates of outstanding liabilities, had become untrue.
473. The names rely on the following matters in particular:
i. The history of more and more years being left open must have brought home to Lloyds that syndicates could not in fact calculate reserves including IBNRs.
ii. In addition, the history of the year by year increase in the amount of reserves for past years exemplified by the annual analysis of the inadequacy in reserves reported by the auditors must have brought home to those at the centre that it was in fact impossible to calculate reserves.
iii. Mr Kelletts statement in his presentation to the Inland Revenue We are under reserved. What concerns us is how the industry can survive its under reserving.
iv. A draft paper dated 24 July 1985 prepared for O Group by Head of Finance and Market Services, Mr JAW Moir, suggested in the context of Outhwaite, PCW and the Solvency Test in 1985 that it was open to Lloyds to encourage, cajole, bully or instruct auditors to sign an unqualified solvency report on all troubled syndicates. Mr Lawrence in cross-examination stated that the passage did not reflect his experience of the relationship between the auditors and Lloyds, and further stated that it would have been quite unthinkable.
v. A conversation in November 1986 about which Mr Steel gave evidence in which Mr Lawrence was overheard to say (according to Mr Steel) You bloody brokers, Lloyds is nearly bust. The judge found it difficult to place reliance on this conversation and in particular as to its date. The judge also pointed out that Mr Steel increased his underwriting in 1986 and 1988.
vi. On 24 November 1983 it was minuted that the Lloyds Audit was a specific and limited exercise designed to monitor the solvency of syndicates and of the individual names It is now recognised that the Lloyds Audit is in this sense a misnomer, and it is now known as the Lloyds Solvency Test.
vii. On 26 July 1984 at a meeting of LUNMA Mr Smith, supported by Mr Hazell and Mr Jackson, affirmed that the standard of auditors was alarmingly low.
viii. In a speech by Mr Ian Hay Davison in Paris in April 1985, Mr Davison (who was not called to give evidence), is recorded as being critical of the standard of auditing. He suggested possible lack of independence and that auditors may just have been accepting the underwriters word for the RITC.
ix. Mr Randall was reported as expressing surprise at the position after the sending out of the Murray Lawrence letter, and suggested in evidence to the Donner Inquiry that panel auditors appeared to have turned a blind eye to the adequacy of reserves in the context of asbestos.
x. The names attacked the credibility of Mr Lawrence and Sir Peter Miller in particular. Sir William Jaffray produced a sustained and detailed attack on Sir Peter Millers evidence (see his statements of 9 and 30 January 2002). He suggested that Sir Peter was not frank with the court about the losses he had suffered over the relevant period and in particular about the effect of stop-loss policies. He was critical of the views expressed by Sir Peter on the brief for the Rota interview. He suggested many aspects on which the evidence of Sir Peter should not be accepted, including Sir Peters assertion that he had no reason to doubt the accuracy of the figures contained in the audited syndicated accounts, and that Sir Peter and others on the Council or Committee were unaware of the under-reserving for asbestos related claims. Sir William also produced a detailed attack on the statements of Mr Skey, Mr Parry and Mr Maitland (see Sir Williams statements of 4 and 5 February 2002). But, since none of those witnesses was called and their statements were thus excluded, the attacks are misplaced.
xi. Reliance was also placed by Sir William and Mr Adams in particular on certain triangulations. They referred us to the Annual Review of Lloyds Market Reserves for 31 December 1992. The explanatory notes explain the purpose of these triangulations. They explain first that they were produced to assist the Committee of Lloyds in reviewing the minimum scales of solvency reserves, details of premiums, claims and percentage settlement have been obtained in respect of syndicates (other than life syndicates where the percentage test is not applied) for 1991 and previous years according to class of business concerned. The notes then explain each of the tables and in particular, so far as concerned Table 2 (which was the table relied on by Sir William and Mr Adams), the note explains:-- SU11Table 2 sets out the cumulative settlement for each year of account as a percentage of premium income shown in Table 1. For year 3 and subsequent years the settlement is expressed as a percentage of the premium income at the end of year 3.
These figures were produced to assist Lloyds in calculating MPRs. They do show a dramatic deterioration. They do not however demonstrate what the reserving policy was in any syndicate at any particular time.
474. Lloyds, through Mr Aldous, relied on the same matters as already set out in paragraphs 410ff above to refute any dishonesty. But in addition he relied on the following matters:
i. He reminded us of the evidence of Mr Tovey and Mrs Stynes. Mrs Stynes was a Chartered Accountant with previous experience in the auditing of insurance companies and Lloyds syndicates between 1979 and 1981. In late 1981 she went to Ernst & Whinney where again, at least in part, her experience was in providing audit partners with support in the auditing of Lloyds syndicates. She joined the Corporation of Lloyds in February 1984 in the Accounting and Auditing Review Department. The whole of her evidence was relevant but in particular she said We believed that the syndicates themselves and their auditors were doing their job properly, and that the results could be relied upon for the purposes of the aggregation exercise which we undertook. Had I felt that the regime for production and auditing of accounts was unsound, or the syndicate results could not be relied upon, then I would not have been content to go forward as I did. Mr Tovey was also an experienced accountant who joined Lloyds in 1984. He refuted in his evidence any question of dishonesty as far as he was aware.
ii. Mr Aldous relied on the evidence of people who gave evidence on behalf of the names, notably Mr Fredjohn who never suggested that the Council of Lloyds, or any members of it, believed there was a systemic problem, or that auditors could not be trusted. He relied also on the evidence of Sir Peter Miller, Sir David Rowland, Mr Jackson, Mr Keeling, Mr Lawrence, Mr Kellett, and Mr Murray. He rejected the attack made on the credibility of these witnesses, particularly in respect of Sir Peter Miller. The information on his losses was originally supplied by his members agent and when supplied to More Fisher Brown by Freshfields, was expressly said to be subject to correction. Indeed Mr Aldous pointed out that when Sir Peter was cross-examined by Mr Goldblatt (day 31 pages 4802-4807) Mr Goldblatt, although somewhat sarcastic about the original production of figures without the stop- loss information in them, did not in fact suggest to Sir Peter that he had been untruthful.
iii. Mr Aldous in this context emphasised how the number of claims escalated over the years, rising between 1982 and 1984 and then rising even more dramatically thereafter. The market, he submitted, simply did not foresee that degree of escalation. The fact that reserves were shown to be inadequate does not show that the system was not working, indeed the fact that inadequacies were being monitored and consideration was given to concerns about those inadequacies demonstrates the opposite. The sheer detail of the documents recording the consideration given to auditing each and every year is quite contrary to any possibility that there was any person who simply did not believe that the system worked. As regards the triangulations, they demonstrate how a dramatic deterioration did occur on the old years in the late 1980s, but they do not demonstrate that the syndicates were under-reserving.
Conclusions as to 1983-8
475. Once again we remind ourselves that the case that we have to consider is whether a representation was being made which was not believed to be true, or was known to be untrue. Did any of those persons against whom dishonesty is alleged come to appreciate that the audit system no longer involved the making of reasonable estimates of outstanding liabilities (including IBNR)? Were they in the relevant sense reckless?
476. As more and more years began to remain open and inadequacies began to escalate a doubt must have come into the mind of those at the centre of Lloyds as to whether RITCs were producing a fair premium for those taking on the liabilities of past years. History was demonstrating that reserves were not adequate. But that doubt must have occurred to persons not accused of dishonesty as well as those who are accused.
477. We have great anxiety about the fact that names continued to join Lloyds and be placed on syndicates which were infected by the long-tail liabilities, where the premium received for the outstanding liabilities was in the event massively too little. The risk of that premium being inadequate must on any view have been increasing during this period, and we see no sign of anyone at the centre contemplating that a warning of the increased risk should be given (for instance, at Rota) to names, and particularly new names. The attitude was that it should be left to members agents. Relevant documents such as Sir Peter Greens fishing trip letter did not focus on the position of new names, (in the sense of future names) at all. So far as persons at the centre were concerned, they were faced with the following facts: profits had been distributed in the 1950s and 1960s, and it was people who had become members since those days who were going to have to pay the losses; in all cases the persons having to pay the losses could say that the premium received on the RITC had not as a fact covered the outstanding liabilities. Some would suffer when years were left open, and would feel that a proper assessment ought to be made for the RITC so that they could at least close their account. Others were suffering having taken on the liabilities when, as they could say, history demonstrated that the year of account should have been left open. Each time the assessment was made underwriters and auditors were thinking that this time they had got it right, only to find that losses had escalated. Sometimes that assessment was held to be negligent but never fraudulent. It is understandable that there was a desire not to have years kept open, and understandable that any thought that solvency certificates could not be produced was unacceptable.
478. The question is was there during this period a representation being made without an honest belief in its truth? There was, as the above history demonstrates, a close monitoring from the centre, including a monitoring of inadequacies and of open years. The system was one which employees such as Mrs Stynes and Mr Tovey believed was working. The underwriters and auditors were operating the system without suggesting that it was impossible to do so, and indeed in so far as there were arguments (for instance in the case of Mr Outhwaite) about leaving years open that would support the view that the system was working, and not the opposite. Auditors, including some who were involved in the production of the Neville Russell letter (such as Mr Holland, Mr Blake and Mr Milne) and other firms involved in the production of that letter (such as Ernst & Whinney, Arthur Andersen, and Spicer & Pegler), were issuing unqualified reports both immediately after receipt of the Murray Lawrence letter and for the years thereafter. Those auditors furthermore accepted the introduction of the requirement that an account should show a true and fair view. Some were members of the Task Groups 4 and 15, following the Fisher report, which were concerned with reporting to names and with solvency and at no time did the auditors suggest that there was any systemic problem. The persons present at Council, Committee, and sub-committee meetings consisted of a mixture of persons accused of dishonesty and those that were not.
479. The judge saw Mr Lawrence, Sir Peter Miller and others in the witness box and had a full opportunity to assess their credibility. The judge is criticised by Sir William for not finding Sir Peter guilty of perjury. Even if the judge had rejected part of Sir Peters evidence and found him less than frank in relation to any matters, it would not have been possible for the judge to find Sir Peter guilty of perjury, since that would have had to have been the subject of other proceedings. The position in any event is quite clear. The judge did not take the view that either Mr Lawrence or Sir Peter or indeed any other witness on behalf of Lloyds was guilty of lying to the court or of dishonesty.
480. Given our conclusion that the Murray Lawrence letter was an honest letter, it is impossible, and would indeed be quite unfair, to conclude to the high standard of proof required that any person at the centre of Lloyds ceased to have an honest belief that it was operating a system which did involve the making of a reasonable estimate of outstanding liabilities including unknown and unnoted losses.
481. In conclusion the names have failed to show to the necessary high standard that those at the centre of Lloyds did not believe throughout either that there was in place a rigorous system of auditing which involved the making of a reasonable estimate of outstanding liabilities, including unknown and unnoted losses, or that they at any stage knew or were reckless as to whether the representations in the brochures were untrue. We need not therefore go further into the difficult question of whether corporate dishonesty would have to be assessed by counting heads or by some other method, or into any question of whether the representation could have been intended to have some other meaning than its natural meaning.
VII Reliance and Inducement
482. The judge dealt very briefly indeed with whether any of the three sample names had relied on any of the pleaded representations during the relevant period. In his summary of the witnesses evidence (in chapter 15) he stated in relation to each of the same names, without giving reasons, that he was not persuaded that any of them relied on any of the alleged fraudulent misrepresentations. In chapter 21 he stated that the other ingredients of the tort (apart from misrepresentation) had not been made out, without adding anything on reliance.
483. Since the judge reached the firm conclusion that there was not any actionable misrepresentation it would be hard to criticise him for having dealt so briefly with what was, on his view of the matter, not so much an academic as a non-existent point. It would have been unreal to have considered whether the sample names relied on something which, on the judges findings, never occurred.
484. We have reached a different conclusion as to misrepresentation. If we had found that a misrepresentation was made dishonestly, we would have had to reconsider the issues of reliance and inducement. In doing so we would have had to consider much more closely whether the sample names relied upon the fact that the brochures were expressly intended to convey important information to prospective names, who were expected to read the brochures and take them seriously. The fact that the sample names also relied on other sources of information or advice may be immaterial. It would however also be necessary to review the oral evidence of the sample names to see whether (as Mr Aldous has contended) they themselves accepted in cross-examination that they did not rely on the brochures. But in view of our conclusion on dishonesty that would be an unnecessary prolongation of what is already a very long judgment.
VIII Fair Trial
485. Under CPR rule 52.11(3)(a) , this court will allow an appeal where the decision of the court below was wrong. For that reason, we have thus far been considering whether the decision of the judge was wrong. By rule 52.11(3)(b)the court will also allow an appeal where the decision was unjust because of a serious procedural or other irregularity in the proceedings. As we indicated earlier, the names seek permission to appeal against the decision of the judge on the basis that the decision of the judge was unjust on the ground that they did not receive a fair trial. On 8 October 2001 this court adjourned that question for consideration by the court hearing the substantive appeal.
486. The names say that they were entitled to a fair trial. We entirely agree. It matters not whether that right derives from the common law or from the overriding objective enshrined in rule 1.1 of the CPR of dealing with cases justly or from Article 6 of the European Convention on Human Rights (the Convention). The question is simply whether the names were afforded a fair trial.
487. Both the CPR and the Strasbourg jurisprudence relating to Article 6 of the Convention stress the importance of what has been called equality of arms, although the CPR do not use that expression. Rule 1.1 of the CPR provides:
(1) These Rules are a new procedural code with the overriding objective of enabling the court to deal with cases justly.
(2) Dealing with a case justly includes, so far as practicable
(a) ensuring that the parties are on an equal footing;
(b) saving expense;
(c) dealing with the case in ways which are proportionate
(i) to the amount of money involved;
(ii) to the importance of the case;
(iii) to the complexity of the issues; and
(iv) to the financial position of each party;
(d) ensuring that it is dealt with expeditiously and fairly; and
(e) allotting to it an appropriate share of the courts resources, while taking into account the need to allot resources to other cases.
488. Article 6 of the Convention, provides, so far as relevant:
Article 6 Right to a Fair Trial
1. In the determination of his civil rights and obligations , everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law.
No-one suggests that the trial in this case was not before an independent and impartial tribunal established by law, but it is submitted that an important feature of a fair trial is that there should be equality of arms. The approach of the European Court of Human Rights (the ECHR) to this aspect of Article 6 can be seen from its decision in Apeh †ldšzštteinek SzšvetsŽge v Hungary(Application no 32367/96) given on 5 October 2000 .
489. In that case the complaint was a failure to notify applicants of a submission made by the Attorney Generals office to a Hungarian court, which was said to be a failure to observe the principle of equality of arms. The judgment includes the following important paragraphs:
39. The Court recalls that under the principle of equality of arms, as one of the features of the wider concept of a fair trial, each party must be afforded a reasonable opportunity to present his case under conditions which do not place him at a disadvantage vis-ˆ-vis his opponent (see the Dombo Beheer BV v the Netherlands judgment of 27 October 1993, Series A no 274, p 19, ¤ 33). In this context, importance is attached to appearances (see, mutatis mutandis, the Borgers v Belgium judgment of 30 October 1991, Series A no 214-B, p 31, ¤ 24, and the authorities cited therein).
Article 6 ¤ 1 guarantees in principle the opportunity for the parties to a criminal or civil trial to have knowledge of and comment on all evidence adduced or observations filed, even by an independent member of the national legal service, with a view to influencing the courts decision (see, among other authorities and mutatis mutandis, the following judgments: McMichael v the United Kingdom, 24 February 1995, Series A no 307-B, pp 53-4, ¤ 80; KerojŠrvi v Finland, 19 July 1995, Series A no 322, p 16, ¤ 42; and Lobo Machado v Portugal , 20 February 1996, Reports, 1996-I, pp 206-207, ¤ 31).
42. As regards the failure to notify the applicants of the submissions by the Attorney Generals Office at second instance, the Court notes the Governments assertion that these submissions had no bearing on the merits of the case. However, it is to be recalled that the principle of equality of arms does not depend on further, quantifiable unfairness flowing from a procedural inequality. It is a matter for the parties to assess whether a submission deserves a reaction and it is inadmissible for one party to make submissions to a court without the knowledge of the other and on which the latter has no opportunity to comment. It was therefore unfair that the applicants were not notified of the submissions made to the Supreme Court by the Attorney Generals Office (see, mutatis mutandis, the Bulut v Austria judgment of 22 February 1996, Reports 1996-II, p 359, ¤ 49 in fine.).
The ECHR held that in those circumstances there was a breach of Article 6.
490. The principle of equality of arms does not, in our view, mean that litigants must all have the same resources because litigants very rarely do. However, it does mean that each party must have a reasonable opportunity to present his case under circumstances which do not place him at a disadvantage vis-ˆ-vis his opponent and each party must have a proper opportunity to comment on all evidence adduced and submissions made by his opponent. Moreover, in this regard the ECHR pays attention to appearances.
491. The names thus further stress the importance of the principle that justice must not only be done but be seen to be done. They draw attention both to decisions of the ECHR and to decisions of the English courts in the context of allegations that the tribunal concerned was not impartial or was biased, notably De Cubbers v Belgium (1984) 7 EHRR 236, Hauschildt v Denmark (1989) 12 EHRR, Borgers v Belgium (1991) 15 EHRR 92, In re Medicaments (No 2)  1 WLR 700and Porter v Magill  UKHL 67,  2 WLR 37.
492. In In re Medicaments Lord Phillips MR, giving the judgment of the court, after referring to the relevant decisions of the ECHR including those noted above, said this, with regard to the case in which no actual bias has been shown, at paragraphs 83 and 85:
83. (3) The court then has to decide whether, on an objective appraisal, the material facts give rise to a legitimate fear that the judge might not have been impartial. If they do, the decision of the judge must be set aside. (4) The material facts are not limited to those which were apparent to the applicant. They are those which are ascertained upon investigation by the court. (5) An important consideration in making an objective appraisal of the facts is the desirability that the public should remain confident in the administration of justice.
85. The court must first ascertain all the circumstances which have a bearing on the suggestion that the judge was biased. It must then ascertain whether those circumstances would lead a fair-minded observer to conclude that there was a real possibility, or a real danger, the two being the same, that the tribunal was biased.
That test was a modification of the test previously laid down in R v Gough  AC 646. It was a modification which was subsequently approved, subject to a further modification, by the House of Lords in Porter v Magill: Lord Hope (with whom the other members of the House agreed) put the question thus at paragraph 103:
The question is whether the fair-minded and informed observer, having considered the facts, would conclude that there was a real possibility that the tribunal was biased.
See also Taylor v Lawrence  EWCA Civ 90,  2 All ER 353 per Lord Woolf CJ, giving the judgment of the court, at paragraphs 60 and 61.
493. In our judgment, those principles are not directly applicable to the question whether a trial was fair, but they are of assistance. They are not directly applicable because the question is not whether there is a real possibility or real danger that the trial was unfair, but whether it was unfair. We can see no reason why this court (or any court of review) should not be able to judge whether or not the trial was in fact unfair, once it has considered all the relevant circumstances.
494. The principles are, however, of assistance because they stress that the question must be viewed through the eyes of the reasonable observer or litigant. The same principle seems to us to apply here. Thus the question is not whether a disappointed litigant thinks the trial was unfair, but whether a reasonable person in his or her position would think so, having regard to all the circumstances of the case. The circumstances are of importance because, before concluding that a trial is unfair, the court must consider all the relevant circumstances. As appears below, this is in our opinion important on the facts of this case.
495. In the light both of the provisions of the CPR and of the principles set out by the ECHR and this court, we accept the following submissions made by the names:
i. a party is entitled to present his case under conditions which do not place him at a disadvantage vis-ˆ-vis his opponent;
ii. in order to decide whether the trial has been fair or unfair, it is appropriate to take into consideration all the circumstances of the case, including differences between the resources of the parties and the importance of the case for them;
iii. the proper approach is to ask whether, on an objective appraisal, both a reasonable observer and a reasonable litigant in the position of any of the parties would be left with a legitimate fear that the conduct of the trial was such as to place that party at a disadvantage which was more than trivial or illusory, as in Kremzow v Austria (1993) 17 EHRR 322, paragraphs 73-75; and
iv. once inequality of arms in this sense is established, it is not necessary to identify further, quantifiable unfairness, in order to hold that the trial was unfair.
The alleged unfairness
496. The names case is summarised in paragraphs 12 to 15 of the grounds of appeal of the represented names as follows:
12. At the outset of the trial the learned judge expressed his determination that the hearing should conclude by the middle of July 2000. That decision placed unacceptable pressure on the Names and their small team of legal advisers who were unable within the available time scales adequately to consider and assimilate the documentation used at the trial (estimated at over 60,000 pages). The difficulty of assimilating documents was aggravated by extensive and unnecessary redaction.
13. The vast majority of the documentation was in the possession of Lloyds. In an order dated 30th June 1998 Mr Justice Colman ordered that disclosure was to be completed by 31st March 1999. Notwithstanding this order the learned judge permitted Lloyds to control the rate at which discovery, disclosure and the provision of copying documentation to the Names and their legal representatives was made. By way of example, as at 31st March 1999 Lloyds had listed 21,262 documents for discovery of which 20,120 were irrelevant. Between the deadline for completion of discovery and the commencement of trial, Lloyds listed a further 26,095 documents for inspection. During the hearing lists 24 and 33 were served as primary discovery more than 12 months after the final date for discovery. Thus, disclosure continued at all stages up to and throughout the hearing giving the Names and their counsel insufficient opportunity of assimilating (for the presentation of their case and the examination of the witnesses) the documents so disclosed.
14. During the hearing:
a. Equitas submitted figures to the Court relating to the quantum of asbestos-related liability affecting the Lloyds market, contending that the figures were commercially confidential and should not be disclosed in open court. The figures were revealed to the Names legal advisers under a confidentiality order which wrongly prohibited their disclosure to the lay client and to litigants in person. The Names legal advisers wished to make submissions in open court regarding the figures so disclosed but the learned judge wrongly refused to permit such submissions to be made.
b. Finality Statements relating to the underwriting of the 33 individuals set in paragraph 1 of the Re-Re-Amended Particulars of Claim were disclosed by Lloyds with the learned judges consent on condition that they could be seen by the litigants legal advisers but not by the litigants or their specialist advisers.
15. The learned judge:
a. wrongly treated the Minutes of Market Association Committee (and LUNMA in particular) as not being in the possession or power of Lloyds;
b. wrongly permitted Lloyds to select those Minutes of Committee and Council to be the subject of discovery, when all Minutes during the Relevant Period ought to have been available for inspection;
c. failed to draw adverse inferences against witnesses central to the case whom Lloyds elected not to call, notwithstanding that witness statements for such witnesses had been served on behalf of Lloyds and that the learned judge had refused to require those witnesses to be summoned to court to testify;
d. imposed a timetable for final submissions which required the Names to answer Lloyds closing argument without having heard, or read through, it;
e. substantially disregarded the submissions of litigants in person, notwithstanding that the material furnished, in particular by Mr Holman, was inconsistent with the distribution of the Murray Lawrence letter to members agents.
497. A number of further points were made by or on behalf of the names in the course of the argument but, before considering them, we think it important to set out briefly the relevant surrounding circumstances.
The relevant circumstances
498. These were set out in considerable detail by Lloyds in no less than 35 pages of its outline submissions. The underlying facts set out in those submissions are not in dispute. We therefore take this account largely from Lloyds account of them. In earlier actions involving a considerable number of names who sought to avoid their liability to pay Equitas premiums, namely Society of Lloyds v Leighs, Lyon and Wilkinson  CLC 759 and 1012 and Society of Lloyds v Fraser  LRLR 156, this court held that none of the matters relied upon by the names gave rise to an arguable defence, but that the claims for fraud which many of the names sought to advance should be pursued as independent claims or counterclaims.
499. The names accordingly pursued their allegations of fraud in a number of different actions, with the result that it became desirable that there should be a rationalisation of the position in order to ensure that there was only one determination of what was essentially the same issue in different actions. That rationalisation was carried out by Colman J at a hearing on 29 and 30 June 1998 which led to his order of 30 June which both formulated the threshold fraud issue and identified those who would be bound by the decision on that issue. The order also designated the action in which Sir William Jaffray was counterclaiming as the lead action. As we understand it, at that time all those affected by the order were members of the United Names Organisation (UNO). At a case management conference on 16 March 1999 Colman J ordered that names should only be severally liable for their proportionate share of Lloyds costs in the event that the action was not successful.
500. At a case management conference on 29 October 1999 Cresswell J, who was of course in charge of the Lloyds litigation, decided that any names who wished to reserve the right to advance a case that they had been induced to become or remain members of Lloyds by reason of Lloyds failure to disclose the nature and extent of the markets liability for asbestos-related claims must give notice that they intended to become parties to the litigation. He made an order to that effect. Such an order was plainly appropriate since it would be unthinkable for either names or indeed Lloyds to be able to use valuable court resources twice (or many times) in order to have the same issues determined.
501. That is, in our judgment, so even though some of the litigants in person, especially Mr Harrison, have expressed some unhappiness that they could not pursue their own actions on their own. Mr Harrison also submits that the judge should have advised him to take independent legal advice. However, it was not for the court to give Mr Harrison or anyone else advice. It must have been obvious to every name that it was desirable to take legal advice.
502. It was no doubt because there was no realistic alternative to a single determination of the threshold fraud issue which would be binding on everyone that both Lloyds and the represented names consented to such a course and no- one has since challenged the order to that effect. In our view, such an order and the subsequent control of the litigation was not only sensible but entirely consistent with the principles relating to group litigation which have been developed in recent years and with the provisions of CPR 19 Part III, which subsequently came into force on 2 May 2000. The order directed that a statement recording the terms of the order and the background to it be publicised on the Court Service website and Lloyds sent a copy of the statement to every name who had not accepted the R&R settlement offer.
503. At a further case management conference on 10 December 1999 the court considered the issue of the participation of the non-UNO names who had indicated that they wished to join the action pursuant to the order of 1 November but who did not wish to instruct More Fisher Brown. Until then More Fisher Brown had represented all the names in the action including Sir William Jaffray. A number of the non-UNO names, namely two represented names and five litigants in person, attended the hearing and made submissions to the court. The order of 10 December 1999 provided that:
(a) the deadline for notification by names who wished to join the action be extended to 5 January 2000;
(b) names considering participating in the trial should be permitted to inspect the pleadings;
(c) More Fisher Brown were to remain the nominated or lead solicitors in the actions;
(d) names who did not wish to instruct More Fisher Brown were entitled to instruct solicitors or counsel of their choice or to appear in person, provided that such names:
(i) would adopt the evidence adduced by the lead solicitors and would not adduce additional evidence;
(ii) would adopt the cross-examination of the lead solicitors and counsel;
(iii) would be permitted to make written closing submissions and such oral closing submissions as the trial judge allowed;
(iv) would be provided at Lloyds cost with access to a set of trial bundles and an office at Lloyds solicitors where the bundles could be reviewed;
(v) would become subject to the various confidentiality orders previously made in the proceedings; and
(vi) would have several liabilities for their proportionate share of Lloyds costs;
(e) joining names could seek any further directions that they saw fit to seek;
(f) any prospective name who joined the action and who did not formally instruct More Fisher Brown to act on his or her behalf had to communicate with More Fisher Brown to enable them to consider whether any additional point should be advanced as part of the threshold fraud issue; and
(g) a copy of the order was to be sent by Freshfields to all prospective names who had made contact with Freshfields, the court or More Fisher Brown to indicate an interest in joining the action.
504. Those directions were supported by all of the non-UNO names present or represented including Mr Evans, Mr Adams (for Mrs Adams) and Mr Harrison. The notification date was further extended at a case management conference on 14 January 2000.
505. Cresswell J also directed on 14 January 2000 that there should be a separate hearing before Colman J to determine the issue of what contribution the non-UNO names should make to the names costs in the action. At a subsequent hearing on 26 January at which Lloyds was not present Colman J made a costs-sharing order that provided for an equitable sharing of the costs in the action.
506. By the time of the hearing of 14 January, Sir William Jaffray had left UNO and had elected to be a litigant in person rather than be represented by More Fisher Brown. He did not, however, object to any of the orders that had previously been made regarding the case management of the action while he had been represented by solicitors and leading counsel. A number of the non-UNO names attended the hearing and made submissions to the court which were supportive of the directions given. They included Sir William Jaffray, Mr Evans, Mr Adams (for Mrs Adams), Mr Harrison and Mr Carter.
507. A yet further hearing took place on 11 February 2000 at which More Fisher Browns status as lead solicitors was confirmed. Provision was made for Grower Freeman and Goldberg to act for legally aided members of UNO and for their counsel to assist in the conduct of the trial. Provision was also made for any disputes that might emerge between any of the participating names as to the conduct of the action to be referred to another judge of the commercial court for directions, although in the event no such disputes arose. At that hearing Sir William Jaffray expressed his delight at the courts rulings on representation.
508. On the first day of the trial the judge addressed all non-UNO names and summarised the arrangements for trial that had been agreed in respect of such names to make sure that all names in person understand those arrangements and are content with those arrangements. The judge subsequently addressed each such name individually to confirm that he or she understood and was content with the arrangements, which those present, namely Mr Adams, Mr Butler, Mr Harrison and Sir William Jaffray, duly did. Thus the position as at the beginning of the trial was that 171 UNO names were represented by More Fisher Brown, Mr Simon Goldblatt QC and Mr Vincent Nelson (now Mr Vincent Nelson QC), 31 UNO names (who were in receipt of legal aid) were represented by Grower Freeman and Goldberg, Mr Patrick Talbot QC, Mr Giles Richardson, Mr David Drake and Mr David Craig and 15 non-UNO names acted as litigants in person although four of them had instructed solicitors, namely Mr Holman, Mr Troostwyk and Mr and Mrs Harper.
509. The names case was essentially presented by Mr Simon Goldblatt QC and Mr Patrick Talbot QC who shared much of the work between them. As just stated, they were supported by a total of four junior counsel and two firms of solicitors. In the course of the trial the various non-UNO unrepresented names frequently wrote directly to the judge, made submissions to the court and raised issues which were taken up by the court or by counsel. They each made written and oral closing submissions.
510. In the light of the submissions now made that the trial was unfair, it is a striking feature of the case that no complaint was made at the time and no-one sought to appeal any of the interlocutory rulings made by the judge or sought an adjournment of the trial. On the contrary Mr Adams, who represented his wife, expressed his gratitude to the judge and thanked all the UNO legal team and especially Mr Goldblatt and Mr Talbot, to all of whom we are extremely grateful for their masterly presentation of our case: see day 61 page 9073. Mr Harrison thanked More Fisher Brown for their diligence in keeping the Names bundles and transcripts up to date and added that he had become proud to be associated with Messrs Goldblatt, Talbot, Nelson, Drake, Craig and the Names solicitors: see day 61 page 9131. Mr Evans and Mr Troostwyk made comments to similar effect: see day 61 pages 9077, 9100 and 9111. We will return to particular aspects of the trial in the context of the individual points taken by or on behalf of the names, but we are bound to say that a review of the transcript shows, in our judgment plainly, that the judge took every step he could to ensure that the trial was fair and that he held the balance fairly between Lloyds on the one hand and the names on the other. We turn to the grounds of appeal set out above.
511. The names complain that, having regard to the inequality of arms between themselves and Lloyds, they were put under unacceptable pressure. In particular they complain that at the outset of the trial the judge expressed his determination that the hearing should conclude by the middle of July 2000 and that Lloyds produced a vast amount of documents in a plethora of lists of documents which made it very difficult, if not impossible, for them to cope. They emphasise that the process of disclosure continued during the trial. Thus, of the 34 lists of documents served by Lloyds, nos 24 to 33 were served during the trial. They also complain about access to witnesses.
512. In the course of his oral submissions before this court Mr Nardell said this (at day 6 page 100):
But by far and away our primary complaint, if it is necessary to identify a complaint about acts or omissions by the judge ; if there is a complaint to be made, if I can put it in this slightly colloquial way, the judge failed to get a grip at an early stage of the pre-trial process, and by the time we came in it was too late, the damage had been done.
It may well be that one can conceive of some Herculean effort that could have been made by a judge to rescue things; it was not made. So we say of the judge during the trial process that yes, he sought to achieve fairness, as Mr Goldblatt stresses, but in a sense he was condemned to making the best of a bad job. He had hobbled himself.
513. In short, Mr Nardell submits that by the time legal aid was granted and solicitors and counsel were separately instructed for the legally aided names, it was too late for a fair trial to take place. Yet no application for an adjournment was made at the time. In our judgment, that is little short of extraordinary. If solicitors and counsel take the view that it is not possible to have a fair trial it is their duty to apply to the court for an adjournment on that ground in order that the trial judge can decide whether or not there is a risk that the trial might not be fair and, if he decides that there is such a risk, to decide what should be done about it. Absent such an application, it is difficult to imagine a case in which it would be appropriate for this court to hold that the decision of the trial judge, while not wrong within the meaning of CPR rule 52.11(3)(a) , was unjust because of a serious procedural or other irregularity in the proceedings within rule 52.11(3)(b).
514. Save perhaps in very exceptional circumstances, in our view no sensible legal system could permit a party who was aware of the problems at the trial to allow a trial to proceed for days or weeks and then, having lost on the merits and having failed to persuade the Court of Appeal to hold that the judge was wrong in fact or law, to argue that the trial was unfair and to invite this court to order a retrial. The proper course in such circumstances is to apply for an adjournment at or before the trial.
515. In this case the names took no such step. On the contrary, from early 1998 they pressed for an early date for trial and, at the names request, on 15 March 1999 Colman J indicated what he later described as a very provisional trial date of 4 October 1999. In pressing for that date Mr Goldblatt said this:
It may be that Lloyds Names are putting themselves under pressure by propounding this timetable. There is no room for doubt about it: a trial date of 4 October is undoubtedly going to impose pressure on both sides. We recognise that. But we adopt the line that it is salutary for that pressure to be applied because it will enable the parties to concentrate on the things that matter and to discard the peripheral matters.
Lloyds said that it would not be ready by then and pressed for a date in November 1999 at the earliest. In the event by the order of 16 March 1999 the court provided for a trial window of 11 October to 8 November 1999. Mr Goldblatt at that time indicated that it was practicable to complete the trial within 12 weeks.
516. On 24 June 1999 Lloyds applied for the trial date to be put back. The names again said that they were anxious to see the trial come on at the earliest moment that the action could be fairly tried. Mr Goldblatt added that the names could manage whatever start time the court laid down and again said that the names were aiming at a three month trial and not a six month trial, which was suggested by Lloyds. There followed various further case management conferences at which directions of different kinds were made and the date was discussed. In the main it was the names who were pressing for an earlier date than Lloyds, although at the last the trial was delayed by a week at the names request.
517. The trial began on 28 February 2000. The names made oral opening submissions for eight days and Lloyds for two days. The witnesses gave evidence for over 40 days. The names witnesses gave evidence over about a month and the Lloyds witnesses over about two months. The timetable for the closing submissions was discussed on day 55 of the trial, which was 19 June 2000. The names were given two weeks in which to prepare written submissions. Although Mr Goldblatt initially expressed some concern about the timetable, he ultimately accepted that it sounded workable and it was agreed that the names would make their oral closing submissions on 6 and 7 July and Lloyds would then submit their written submissions on 11 July and make their oral submissions on 12 and 13 July. Mr Goldblatt was given a further half day in which to make oral submissions in reply. We should add that no attempt was made to revisit this timetable in the light of the fact that a number of interlocutory matters were discussed in the period between 19 June and 11 July.
518. In these circumstances we are unable to accept the submiss