Baker v Lombard Continental Insurance Plc and Another

COURT OF APPEAL (CIVIL DIVISION)

(Transcript: Smith Bernal)

 

HEARING-DATES: 24 JANUARY 1997

24 JANUARY 1997

 

 

COUNSEL:

A Neish for the Applicants

 

PANEL: PHILLIPS, MUMMERY LJJ

 

JUDGMENTBY-1: PHILLIPS LJ

 

JUDGMENT-1:

 

PHILLIPS LJ: The plaintiffs, Lloyd's Syndicate 126, for the 1982 year, seek leave to appeal against an order made by Mr Justice Colman on 7 June 1996. On the paper application Lord Justice Brooke directed an oral hearing.

 

The background to this application is as follows. In 1982 Syndicate 126, through its brokers, Jardine Thompson Graham ("JTG"), concluded a treaty of quota share re-insurance in relation to 7.5 % of the Syndicate's 1982 whole account with the reinsurers. At that time Syndicate 126's active underwriter was Mr Ian Posgate. In 1990 the reinsurers ceased to pay claims and when sued pleaded misrepresentations as to the nature of the business reinsured, allegedly made to them by JTG on behalf of Syndicate 126 as grounds for avoiding the reinsurance. In those circumstances Syndicate 126 sued JTG for breach of duty in failing properly to represent the business.

 

In March 1993 JTG amended their points of defence to plead non-disclosure by Syndicate 126 of the moral hazard constituted by the involvement of Mr Posgate in what has been referred to as the Alexander Howden affair in and before 1982, alleging that that was a separate ground which entitled the reinsurers to avoid the re-insurance and, even if JTG had been negligent in placing the re-insurance, it followed that their negligence was not the cause of any loss. The reinsurers then climbed on to this bandwagon, amending their own points of defence to assert that, in so far as JTG established its moral hazard case at trial, the reinsurers would rely upon this non-disclosure as an additional ground entitling them to avoid the cover. At that time JTG's moral hazard case depended entirely on the alleged knowledge of those involved in what was alleged to be illegal conduct, namely Mr Posgate, Mr Grob, Mr Carpenter, Mr Comery and Mr Page.

 

By an order dated 27 January 1995 on application by JTG, Mr Justice Rix ordered wide-ranging specific discovery of documents relating inter alia to the plea relating to the Alexander Howden affair and this led Syndicate 126 to expend very considerable time and a great deal of money complying with their discovery obligations under that order. Then came the decisions of the Court of Appeal in PCW Syndicates v PCW Reinsurers and Group Josi v Walbrook [1996] 1 All ER 774, [1996] 1 WLR 1136 and 791 of the former report respectively. Those decisions clarified the law in relation to allegations of non-disclosure based upon moral hazard. In the light of those decisions Syndicate 126 issued a summons, dated 27 November 1995, seeking an order striking out the moral hazard case pursuant to Ord 80, r 19 or the inherent jurisdiction of the court and the variation of the specific discovery order to remove from it the documents relating to moral hazard.

 

The hearing of the summons was adjourned on 1 March 1996 and restored on 21 March. By that date the House of Lords had dismissed a petition by the reinsurers in PCW. On the restored hearing of the summons JTG did not consent to the order sought by Syndicate 126 but issued its own summons seeking leave further to amend the points of defence to plead a proposed new case on knowledge of moral hazard based, first, on the knowledge of officers of Alexander & Alexander (Alexander Howden's parent) and a separate case based on the alleged knowledge of Mr Tudor Williams in relation to one aspect of Mr Posgate's alleged improper conduct, namely his conduct in relation to what has been called the "Wigham Poland roll-over fund". I shall call that particular amendment the "Tudor Williams defence". So far as the reinsurers are concerned they attended the summons on the basis that, if JTG were granted leave to amend its points of claim, they would once again climb on the bandwagon by seeking leave to make identical amendments of their own.

 

Mr Justice Colman gave judgment on 22 April 1996. He dismissed that part of JTG's application for leave to amend which related to introducing a new case based on the knowledge of Alexander & Alexander, but granted JTG leave to amend to introduce the Tudor Williams defence. The matter was adjourned to see if agreement could be reached between counsel as to the terms of the order. There was substantial but not complete agreement and after further argument Mr Justice Colman made the order against which Syndicate 126 seek leave to appeal.

 

The most significant part of that order is that giving leave to JTG and the reinsurers to plead the Tudor Williams defence. I say "and to the reinsurers" because, although strictly the leave was not granted to them, counsel for the Syndicate, Mr Neish, has invited me to proceed on the basis that leave to the reinsurers had been given, thus obviating any wasted costs that would attend the formality of leave being obtained. I am prepared to proceed upon that basis.

 

The other part of the order that the syndicate seeks to attack is that whereby Mr Justice Colman ordered that the plaintiffs should recover only half their costs of the abortive discovery relating to the old moral hazard plea which was struck out to be replaced by the Tudor Williams defence. I turn first to the application in relation to the Tudor Williams defence.

 

The claims by the plaintiffs against JTG form part of the global Lloyd's settlement so that this application is now only effective in relation to the amendments which have now been made by the reinsurers. The essential facts alleged, which form the basis of the Tudor Williams defence, are as follows: (i) Mr Tudor Williams was at all material times the managing director of Alexander Howden Underwriting Limited ("AHUL"), the Syndicate's managing agents; (ii) at all material times Mr Posgate was the syndicate's active underwriter; (iii) in or about April 1982 Mr Tudor Williams learned that Mr Posgate had improperly diverted a roll-over fund of 2,635,000 which was largely the property of the Syndicate to another syndicate of which he was the active underwriter; (iv) shortly thereafter Mr Posgate instructed JTG to place the re-insurance under which the plaintiffs now claim; (v) neither the plaintiffs nor JTG nor the reinsurers were informed of Mr Posgate's impropriety; (vi) Mr Posgate's impropriety was a material fact so far as reinsurers were concerned. On the basis of these facts Mr Justice Colman held that there was an arguable case that the reinsurers were entitled to avoid the cover for non-disclosure of Mr Posgate's impropriety and that accordingly the amendment should be allowed.

 

Mr Neish advances essentially a single, simple ground of appeal that the Syndicate seek to pursue in challenging the judge's decision. He submits that Mr Justice Colman was wrong to conclude that the amended pleading avers a viable defence of non-disclosure. The amendments made pursuant to the leave granted by the judge make this central allegation in relation to the knowledge of Mr Tudor Williams:

 

"Mr David Tudor Williams was aware that Mr Posgate had procured the payment to Lloyd's Syndicate No. 700 of the sum of 2,635,000 in December 1981 and that that sum represented the proceeds of rollover policies and that Lloyd's Syndicates Nos. 126 to 129 had contributed 98% of such proceeds. Mr Tudor Williams possessed this knowledge from at least about April 1982 when he had a meeting with Mr Posgate at which the aforesaid matters were discussed. Mr Tudor Williams either knew or ought to have known from the same date that Mr Posgate, in procuring the payment of the said sum of 2,635,000 to Lloyd's Syndicate No. 700 had acted in breach of the fiduciary and/or common law duties owed by him to names belonging to Lloyd's Syndicate Nos. 126 to 129 and/or in a manner that was discreditable for the purposes of section 20 of the Lloyd's Act 1871 and section 1(e) of Lloyd's Byelaw No.5 of 1982: 'Misconduct Penalties and Sanctions'."

 

There are two bases upon which the reinsurers allege that the Syndicate was in breach of the duty to disclose the facts known to Mr Tudor Williams, notwithstanding that the members of the Syndicate were unaware of those facts: first, by virtue of the principle embodied in s 18(1) of The Marine Insurance Act, 1906 which provides:

 

"Subject to the provisions of this section, the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract."

 

The defendants' argument in relation to the manner in which this section operates in their favour was summarised by the judge as follows:

 

"...because [Mr Tudor Williams] was managing director of AHUL, with a duty to report to that company, the knowledge that he [acquired] at his April 1982 meeting with Mr Posgate is deemed to be that of the company. He was the 'directing mind and will' of the company and accordingly, his actual knowledge was the actual knowledge of the company. Since the company was the managing agency of Syndicate 126 it was clearly the duty of the company to pass on that information to the names in that syndicate because it was directly material to their interests. Hence, the information is deemed to be the knowledge of the names by reason of section 18(1) - because it ought to have been known to them in the ordinary course of business."

 

The alternative basis is by virtue of the principle embodied in s 19 of the Marine Insurance Act, 1906 which provides:

 

"...where an insurance is effected for the assured by an agent, the agent must disclose to the insurer-

 

(a) Every material circumstance which is known to himself, and an agent to insure is deemed to know every circumstance which in the ordinary course of business ought to be known by, or to have been communicated to, him;"

 

The defendants' argument in relation to the manner in which this section operates in their favour was summarised by the judge as follows:

 

"...given that the information was material to the placing of the risk under the reinsurance contracts placed with the reinsurers, it ought in the ordinary course of business to have been communicated by AUHL, which ex hypothesi had knowledge of it, to JTG prior to effecting the reinsurance. Accordingly, by reason of section 19(a), it ought to have been disclosed to the reinsurers."

 

Mr Neish does not seek to challenge the general validity of the propositions relied on by the judge to which I have just referred. He contends, however, that they are subject to a crucial reservation flowing from the decisions of the Court of Appeal in PCW and Group Josi. Those cases established that the general principles to which I have referred will not apply so as to fix a syndicate or its agent with deemed knowledge that an employee has acted fraudulently or with impropriety simply because the employee is aware of his own misconduct. Mr Neish contends that on analysis the pleaded Tudor Williams defences can never produce the result that the names or their brokers are held to have failed to disclose Mr Posgate's misconduct. The argument runs as follows. There are only two possible alternatives: (i) Mr Tudor Williams was aware that Mr Posgate's conduct was improper; in that event his failure to communicate the impropriety made him complicit in it, at least to the extent of being guilty himself of irregularity, and it follows that his silence cannot found a plea of non-disclosure; alternatively, (ii) Mr Tudor Williams was unaware of any impropriety, in which case there is no knowledge of material facts on his part which can be deemed to be shared with the Syndicate or its brokers.

 

In finding that there was a possibility that Mr Tudor Williams's knowledge was innocent knowledge, the judge referred to the findings of a Lloyd's disciplinary committee which, he said:

 

"...suggest that the facts relating to the conduct of Mr Tudor Williams relating to the claim and funds paid under the rollover policy are complicated. The auditors of Syndicate 700/701 (Neville Russell & Co) and 126 (Futcher, Head & Gilbert) were in contact in February 1982 as to whether Syndicate 126 had any claim under that policy. In April 1982 at a meeting attended by a representative of Syndicate 126 auditors, as well as Mr Tudor Williams, Mr Posgate made a promise to repay the fund to Syndicate 126, but on 19th April 1982 Mr Tudor Williams wrote to Neville Russell stating that Syndicate 126 had no claim under section A of the policy - the section in respect of which Syndicate 700/701 had been paid. At a meeting of July 1982, attended by both Mr Tudor Williams and the Syndicate auditors, Mr Posgate promised to give Syndicate 126 'their ball back', the understanding being that they would get back 90 per cent of the total payment. The disciplinary charges against Mr Tudor Williams were dismissed after they had been conceded by Lloyd's to be unsustainable on the evidence.

 

In my judgment it cannot be said in this case that there is an irresistible inference on the assumed facts that Mr Tudor Williams was acting in furtherance of any joint malpractice complicitly with Mr Posgate or indeed that he was otherwise perpetrating or furthering a fraud on the syndicate or acting in such a way as to amount to the intentional furtherance by AHUL of an irregularity not amounting to fraud against the syndicate."

 

Mr Neish argues that the judge should not have had regard to the disciplinary committee report in this way, but should have considered the implications of the pleading itself. For myself, I do not see that the two are inconsistent. It seems to me that Mr Tudor Williams could have learned of Mr Posgate's impropriety, appreciated its implications and taken no positive steps to communicate this information to the names or their broker without necessarily becoming complicit in it or guilty of the type of irregularity that would prevent his knowledge being treated as the knowledge of AHUL. The disciplinary report recalls that the facts were explored by Mr Tudor Williams in the presence of the auditors of the syndicates involved and that Mr Posgate undertook to reverse the objectionable transaction. It seems to me that if this was the position then it is at least arguable that Mr Tudor Williams was not in any way complicit in Mr Posgate's impropriety.

 

I have reached these conclusions quite firmly and I am confident that the consequence is that there would be no reasonable prospect of persuading the Court of Appeal that the judge had erred in his discretion in granting leave to amend as he did. Accordingly, I would dismiss the application in relation to the grant of the amendment.

 

I turn now to the issue of the costs. No reasons were given by the judge for only allowing the plaintiffs to recover 50 % of the costs incurred in abortive discovery pursuant to a plea which the judge had ruled was bad in law. We have seen the skeleton arguments advanced before the judge on this issue. The principal point that appears to have been made against ordering that the Syndicate should recover all their costs of this exercise was that the decisions of the Court of Appeal in PCW did not change the law but merely clarified the law as it had always been, and in those circumstances the syndicate should immediately have applied to strike out the moral hazard plea on the ground that it disclosed no valid defence and was objectionable, rather than taking no such objection until the decisions of the Court of Appeal. It is not clear whether that argument found favour with the judge, but Mr Neish would seek to argue that the argument in question was not one which could properly in the exercise of the judge's discretion have led him to do other than order that costs follow the event.

 

It seems to me that there is an arguable case here that only one order in relation to costs should properly have been made in the circumstances of this case, which was that the Syndicate should have the costs wasted as a result of the abortive discovery exercise pursuant to the mistaken plea.

 

In those circumstances I would grant leave to appeal in relation to the order made as to costs.

 

JUDGMENTBY-2: MUMMERY LJ

 

JUDGMENT-2:

MUMMERY LJ: I agree.

 

DISPOSITION:

Application allowed.

 

SOLICITORS:

Davies Arnold Cooper