Hiscox v. Outhwaite (No. 3)

HISCOX AND OTHERS v OUTHWAITE AND OTHERS (No 3)

QUEEN'S BENCH DIVISION (COMMERCIAL COURT)

[1991] 2 Lloyd's Rep 524

HEARING-DATES: 10, 11, 15, 16, 17 April, 24 May 1991

24 May 1991

CATCHWORDS:

Reinsurance -- Construction -- Asbestos claims in United States -- Wellington Agreement entered into -- dispute as to quantification of liabilities -- Whether reinsurers bound to follow reinsureds' agreement to settle original claim -- Whether payments made under Wellington Agreement payments "in settlement of losses" -- Whether reinsured could rely on estoppel.

HEADNOTE:

Syndicate 33 at Lloyd's, represented by Mr RRS Hiscox (the Syndicate) found itself exposed to the long term consequences of liability cover given previously to various assureds engaged in different ways in the asbestos injury. The assureds were faced with personal injury claims by sufferers of asbestosis, sometimes made long after the date of any exposure to asbestos dust for which the assured was responsible. In these circumstances the syndicate entered into a contract of reinsurance with the reinsurers, Syndicate 661 represented by Mr RHM Outhwaite, in order to obtain reinsurance cover. The contract was a treaty entitled "Aggregate Excess of Loss Reinsurance Agreement" and provided inter alia:

This agreement shall protect the Reassured in respect of all liability howsoever and wheresoever arising which the Reassured may incur in respect of their 1974 and all prior underwriting Years of Account and which is settled on or after the 1st January, 1982 . . .

Article 1

This Agreement is only to pay in excess of an "ultimate net loss" to the Reinsured of US$7,500,000 in the aggregate and the liability of the Reinsurers for the amount in excess thereof shall be unlimited . . .

Article 6

The protection afforded by this Agreement shall as far as applicable be subject to the identical periods, terms, clauses, conditions and warranties as contained in the original policies of Insurance or Reinsurance and/or contracts of Insurance or Reinsurance and in all things falling within the scope of this Agreement the Reinsurers shall share to the extent of their interest the fortunes of the Reassured.

Article 7

The Reassured shall exercise due diligence in dealing with all matters relating to this Agreement it being understood that all loss settlements made by the Reassured whether by way of compromise, ex gratia or otherwise shall in every respect be unconditionally binding upon the Reinsurers.

Article 3 defined "ultimate net loss" as:

. . . the sum actually paid by the Reinsured in settlement of loss or losses and shall include all legal costs and professional fees . . .

As the Syndicate made payment to or on behalf of its assureds so the Syndicate was entitled to recover equivalent sums from the reinsurers including all legal costs incurred in excess of the agreed limit. However, the sums involved were so large, the number of claimants and potential claimants so enormous and the damages awarded or likely to be awarded so great that in 1984 a number of asbestos producers and a number of their insurers' including the Syndicate, entered into the Wellington Agreement. From then until 1988 all asbestos related claims against any subscribing producer were handled by the Wellington Facility. The amounts paid in settlement of such claims to individual sufferers were shared rateably between all subscribing producers. Each subscribing insurer then became liable to pay the proportion due from each producer insured by it. In addition, subscribing insurers undertook to pay further sums in respect of the liabilities of its insured producers, where such further payments were necessary in order to complete the producer's insurance coverage even though the particular insurer would not have been liable to make such further payments under its policy.

During 1985 to 1988 the Syndicate made payments to the Wellington Facility rather than to its insureds as and when sums became due from it under the terms of the Wellington Agreement. Some of the payments made by the Syndicate were in respect of claims for which its insured producers were not and never could have been held liable to the individual sufferer. In those cases the Syndicate was liable under the Wellington Agreement to pay its proportion of claims made against other producers who were not insured by it but for which its insured producer became liable pro rata under the agreement.

Disputes arose as to the quantification of liabilities and was referred to arbitration. Reinsurers contended and the arbitrator declared that payments made under the Wellington Agreement were not reinsured save to the extent that they could properly have been made in discharge of liabilities or in settlement of claims made under the underlying insurance policies. The reinsurers contended that:

2. That the effect of Article 6 of the Reinsurance Agreement was to incorporate the provisions of the underlying policies of insurance and reinsurance into the Reinsurance Agreement, and this meant that the Respondent as reinsurer was liable only if and to the extent that there was a liability under the terms of those original policies of insurance or reinsurance.

3. That Article 7 of the Reinsurance Agreement imposed no liability on the Respondent to indemnify the Claimant in respect of any claims settled by the Claimant which were not as a matter of law within the risks covered by the insurance or reinsurance policies issued by the Claimant.

The Syndicate argued that the reinsurers were precluded from requiring the Syndicate to prove which Wellington Agreement payments represented payments which would have been made in any event in order to discharge liabilities to insured producers under their policies of insurance and that the reinsurers were not only precluded from treating --

. . . all Wellington Agreement payments as prima facie unreinsured, but is also precluded from challenging the inclusion of [such] payments in the ultimate net loss figure except insofar as he can show (at any given time) that the total amount [claimed by the Syndicate] is greater than the total amount [the Syndicate] would by then have paid [in any event] . . .

The arbitrator decided inter alia in favour of the reinsurers and the Syndicate appealed.

-- Held, by QB (Com Ct) (EVANS J), that (1) the reinsurer was always entitled to raise issues as to the scope of the reinsurance contract, and where the risks were co-extensive with those of the underlying insurance he was not precluded from raising such issues, even when there was a "follow the settlement" term in the reinsurance contract; this was the only sure protection which the reinsurer had against being called upon to indemnify the reinsured against payments which were not legally due from him to the original insured but the reinsurer might well be bound to follow the insurer's settlement of a claim which arguably as a matter of law was within the scope of the original insurance, regardless of whether the Court might hold that as a matter of law the claim would have failed;

-- The Insurance Co of Africa v Scor (UK) Reinsurance Co Ltd, [1985] 1 Lloyd's Rep 312 and Insurance Co of the State of Pennsylvania v Grand Union Insurance Co, [1990] 1 Lloyd's Rep 208, applied.

(2) the disputed payments were in respect of non-insured claims which by definition were not within the scope of the reinsurance contract; they did not become insured and therefore reinsured claims merely because the Syndicate agreed to treat them as if they were; the payments made in respect of claims asserted against non-insured producers were not within the scope of the reinsurance contract and the arbitrator was correct in holding that they were excluded from the calculation of ultimate net loss under art 7;

(3) payments made to the Wellington Facility could not properly be regarded as payments made "in settlement of loss or losses" for which the syndicate was or might become liable under the policies of insurance which it reinsured; they did not fall within the definition of "ultimate net loss" in art 3; the arbitrator's conclusion on this part of the case was clear and the appeal would be dismissed:

(4) as to the estoppel issue: the syndicate could not show that it had been prejudiced without identifying those claims which would have succeeded in any event; and the arbitrator's conclusions that the estoppel could not be made out was correct in law; the appeal would be dismissed.

CASES-REF-TO:

Amalgamated Investment and Property Co Ltd v Texan Commerce International Bank Ltd, (CA) [1982] 1 Lloyd's Rep 27, [1982] QB 84;

Combe v Combe [1951] 2 KB 215;

Insurance Co of Africa, The v Scor (UK) Reinsurance Co Ltd, (CA) [1985] 1 Lloyd's Rep 312;

Insurance Co of the State of Pennsylvania v Grand Union Insurance Co, (Hong Kong Ct) [1990] 1 Lloyd's Rep 208;

Lark v Outhwaite, [1991] 2 Lloyd's Rep 132;

Michigan Millers Mutual Insurers Co v North American Reinsurance Corporation, (1990) Court of Appeals of Michigan. [182 Mich.App. 410, 452 N.W.2d 841 (1990)]

Nema, The (HL) [1981] 2 Lloyd's Rep 239; [1982] AC 724;

Proodos C, The [1980] 2 Lloyd's Rep 390;

Robertson v Minister of Pensions, (CA) [1949] 1 KB 227;

State Trading Corporation of India v M Golodetz Ltd, [1989] 2 Lloyd's Rep 277;

Woodhouse AC Israel Cocoa Ltd SA v Nigerian Produce Marketing Co Ltd, (HL) [1972] 1 Lloyd's Rep 439; [1972] AC 741.

INTRODUCTION:

This was an appeal by the members of Syndicate 33 at Lloyd's represented by Mr RRS Hiscox from the interim arbitration award of Mr RA MacCrindle, QC dated Nov 20, 1990 made inter alia in favour of the respondent reinsurers, the members of Syndicate 661 represented by Mr RHM Outhwaite in a dispute as to the quantification of liabilities under a contract of reinsurance dated Mar 30/Apr 1, 1982.

COUNSEL:

Mr Anthony Colman, QC, Mr Jonathan Gilman, QC and Mr John Lockey for the appellants; Mr Bernard Eder, QC and Mr Christopher Butcher for the respondent.

JUDGMENT-READ:

Judgment was reserved. Friday May 24, 1991.

PANEL: EVANS J

JUDGMENTBY-1: EVANS J

JUDGMENT-1:

EVANS J: This is an appeal by leave of Mr Justice Hirst from the interim award of Mr RA MacCrindle, QC dated Nov 20, 1990 in a dispute as to the quantification of liabilities under a contract of reinsurance dated Mar 30/Apr 1, 1982. It is the latest to arise from the long line of asbestosis insurance disputes.

The appellants are the members of Syndicate 33 at Lloyd's, represented by Mr RRS Hiscox. They are the reinsured under the contract and the claimants in the arbitration. The reinsurers are the members of Syndicate 661, represented by Mr RHM Outhwaite. I will call them "the Syndicate" and "the reinsurers" respectively.

The Syndicate found itself exposed to the long-term consequences of liability cover given previously to various assureds engaged in different ways in the asbestos industry. The assureds were faced with personal injury claims by sufferers from asbestosis, sometimes made long after the date of any exposure to asbestos dust for which the assured was responsible. In these circumstances, the Syndicate entered into the contract of reinsurance with the reinsurers, in order to obtain what their Counsel described as "sleepeasy" (or sleepeezee) reinsurance cover. The contract is a treaty entitled "Aggregate Excess of Loss Reinsurance Agreement" and the preamble reads:

subject, of course, to the terms and conditions of the agreement. These showed that reinsurers undertook liability for an unlimited amount in excess of US$7,500,000 in the aggregate (art 1).

Provided the Syndicate complied with the terms and conditions, it seems to me that it probably did obtain effective insurance cover in excess of $7.5m under this contract. The contrary was not argued, and I assume in its favour that this is correct. As the Syndicate made payments to or on behalf of its assureds, in respect of damages claims brought by individual sufferers against those assureds, either directly or indirectly as when third party or contribution proceedings were involved, so the Syndicate was entitled to recover equivalent sums from the reinsurers, including all legal costs incurred (art 3), in excess of the agreed limit.

But the amounts involved were so large, the number of claimants and potential claimants so enormous, the damages awarded or likely to be awarded so great and, let it be said, in some States at least the assureds' and their insurers' liability was so wide, that in 1984 a number of asbestos producers, and of their insurers, including the Syndicate, entered into the Wellington Agreement, named after Professor HR Wellington of the Yale Law School. From then until 1988 (when a further agreement was entered into, with which I am not concerned) all asbestos-related claims against any subscribing producer were handled by the Wellington Facility, which acted as a clearing house for all parties to the Wellington Agreement. The amounts paid in settlement of such claims to individual sufferers were shared rateably between all subscribing producers. Each subscribing insurer then became liable to pay the proportion due from each producer insured by it but with certain safeguards resulting from policy limits. In addition to this, subscribing insurers undertook to pay, again within policy limits, further sums in respect of the liabilities (under the agreement) of its insured producers, where such further payments were necessary in order to complete the producers' insurance coverage, even though the particular insurer would not otherwise have been liable to make such further payments under its policy. To this, possibly limited, extent there was a second pooling arrangement between the subscribing insurers, as described by Lord Wilberforce in his award (see below).

The Wellington Agreement itself is not in evidence on this appeal. The arbitrator's summary in par 14 of his Reasons is accepted by both parties, and the short description which I have attempted above is not intended to detract from those findings in any way.

It follows that a distinction has to be made at the outset between those producers and insurers who were parties to the Wellington Agreement, the so-called subscribers, and those who were not. All contribution and similar claims against non-subscribers were unaffected by the agreement, and the obligation to pursue them remained (compare Reasons par 14(8)). But as between subscribing producers all such claims were replaced by a pooling arrangement based on the "Producer Allocation Formula". Similarly, claims against and between subscribing insurers were replaced by their undertakings to make payments in accordance with the agreement. To that extent, litigation between subscribers and the exercise of subrogation rights became unnecessary, with substantial savings in legal costs and with less exposure, in certain cases and certain jurisdictions, to the risk of what were regarded as excessive awards in favour of sufferers, whether as punitive damages or otherwise.

During 1985 to 1988, therefore, the Syndicate made payments to the Wellington Facility rather than to its insureds, as and when sums became due from it under the terms of the Wellington Agreement. These were all, or mostly, payments of sums attributed to a producer insured by it, and to some extent they were in respect of claims by individual sufferers for which the producer would have been liable in any event. In some, maybe most, such cases the amount was less than it would have been if the insured producer had borne its full share of liability for the particular claim, because the proportion due from it under the Wellington Agreement was smaller than its exposure would otherwise have been, even after taking contribution proceedings into account. But it also follows that some of the payments made by the Syndicate, like other subscribing insurers, were in respect of claims for which its insured producers were not and never could have been held liable to the individual sufferer. In those cases, the Syndicate was liable under the Wellington Agreement to pay its due proportion of claims made against other producers who were not insured by it, but for which its insured producer became liable pro rata under the agreement.

It is important to note that the distinction between claims for which a subscribing producer and therefore a subscribing insurer would have been liable in any event, and those which could never have been established against them, was never clear cut. This is because the pooling arrangement between producers made it unnecessary to pursue contribution proceedings, or similar, between them, and the extent to which other subscribing producers would or might have been held liable for them was never investigated or proved. One object of the Wellington Agreement was to make it unnecessary to do so.

When the Syndicate was contemplating entering into the Wellington Agreement, in August, 1984, brokers acting on its behalf made known to the reinsurers that, in the words of another syndicate similarly placed, it was not prepared to assent to the proposed scheme without advising the reinsurers --

. . . and obtaining their confirmation that this will in no way prejudice our position with them.

The relevant findings of fact are in par 10 of the Reasons. The receivers were aware of the terms of the proposed scheme, meaning the draft Wellington Agreement. They replied:

Confirm that assent to the proposed scheme will not prejudice their [meaning "the insurers"] position but will not in any way diminish their responsibility in running off the account and maintaining and providing accurate information.

This note was reported to the insurers, including the Syndicate, by their brokers in what were effectively identical terms. Facts found in par 13 of the Reasons show that the Syndicate then signed the Wellington Agreement believing that "we had Mr Outhwaite behind us" and that the reinsurers considered the Syndicate's commitment to it "the right thing to do".

It is not now contended that these exchanges resulted in any variation of the reinsurance contract. The Syndicate did contend before the arbitrator that the contract was varied so that all liabilities under the Wellington Agreement were contractually reinsured, but this contention was rejected for the Reasons given in par 12. Put briefly, none of the formalities which would have been expected if a contractual variation was intended, were complied with.

Certain arguments are, however, based on promissory estoppel, said to operate against the reinsurers as a result of the terms in which they gave their assent to the Syndicate signing the Wellington Agreement. One such contention was accepted by the arbitrator. This is not appealed against by the reinsurer, and I should refer to it now. If nothing had been said, the reinsurers might have been able to argue that no payment made to the Wellington Facility was within the contract of reinsurance, because it was made in respect of the Syndicate's liability under the Wellington Agreement, rather than under any underlying contract of insurance. This became the reinsurers' primary case at the arbitration hearing (see par 29(1)) but they were estopped from relying upon it for the reasons given in par 19. Again briefly, the Syndicate would be "conspicuously prejudiced" if such a plea was to succeed --

. . . at least in relation to outlays satisfactorily identifiable as being of the type described [-- meaning --] sums for which the Syndicate's insured producers would have been held liable in damages, and for which the Syndicate would in consequence have been liable to indemnify its insured, even in the absence of the Wellington Agreement (par 19).

This apart, the distinction between payments to insured producers in respect of claims by sufferers for which those producers would have been held liable in any event, and other payments to them in respect of claims against non-insured producers for which the insured producer would not have been exposed to any liability, apart from the Wellington Agreement, underlined the issues which have been argued on this appeal. Reinsurers contend, and the arbitrator declared (award, par 2), that payments made under the Wellington Agreement are not reinsured save to the extent that they could properly have been made in discharge of liabilities or in settlement of claims made under the underlying insurance policies, ie, liability policies written in or before 1974.

The Syndicate has leave to appeal on two grounds, giving rise to the "loss settlement issue" and "the estoppel issue". The former depends on the construction of the reinsurance contract. The Syndicate says that all (as opposed to some) payments made by it under the Wellington Agreement are properly included in the "ultimate net loss" under art 3 of the reinsurance contract. The estoppel issue does not arise if this construction is correct.

Paragraphs 2 and 3 of the reinsurers' counter-notice are relevant to the construction issue:

The reinsurance contract

The preamble has been quoted above. Article 1 provides:

Article 1

This Agreement is only to pay in excess of an ultimate net loss to the Reinsured of US$7,500,000 in the aggregate and the liability of the Reinsurers for the amount in excess thereof shall be unlimited.

For the purposes of this Agreement the words "loss" or "losses" as used herein shall be understood as collective expressions to mean as applicable: losses, loss expenses, refunds, salvages, recoveries, additional premiums, return premiums, reinstatement premiums, reinsurance premiums and other monetary transactions of a similar nature which are within the scope of this Agreement.

Article 3 defines "ultimate net loss" as:

. . . The sum actually paid by the Reinsured in settlement of loss or losses and shall include all legal costs and professional fees . . .

Articles 6 and 7, although they are in common form, should be quoted in full:

Article 6

Article 7

The construction issue

The arbitrator's conclusions, which the Syndicate challenges, are set out on pars 15-17 of his Reasons, where the nature of the Wellington Agreement is considered ("a complex bargain" which was "eventually a blueprint for facilitating the settlement of future asbestos claims", and "a balanced compromise"; "it was a reasonable, businesslike and bona fide arrangement for the subscribing insurers and producers to conclude in the interests of fixing acceptable principles for settling future asbestos-related claims inter se"), and in paras 23-27, where he draws a clear distinction between payments made by the Syndicate "representing the reasonably agreed or adjudged settlement value of its liability in respect of actual claims on it previously made by its own assureds under insurances subscribed by it in or before 1974" (par 27) and, on the other hand --

. . . payments made by the Syndicate without any basis of legal liability to the recipients other than the rules of that complex arrangement . . .

The latter, he concluded, are outside the scope of the contract of reinsurance (par 27).

The reasoning behind this conclusion forms the subject-matter of the reinsurers' counter-notice, namely, the meaning and effect of arts 6 and 7 of the reinsurance contract. Put briefly, reinsurers accept that art 7 is the equivalent of a "follow the settlement" provision, meaning that any compromise by the Syndicate is "unconditionally binding" (the words of art 7) upon them. Nevertheless, they submit, they are entitled to refuse liability in respect of any claims settled by the Syndicate which were not as a matter of law within the risks covered by the policies issued by the Syndicate to its assureds. The Syndicate replies that, when claims have been compromised in a reasonable and businesslike manner, as required by art 7, then reinsurers cannot re-open the question whether the Syndicate was liable to its insured as a matter of law, any more than it could reopen any compromise on issues of fact.

I am prepared to hold, in favour of the Syndicate, that a reasonable "compromise" within art 7 may well cover disputed issues of law as well as of fact. But I confess to having difficulty in understanding why that leads to the conclusion, for which I understood the Syndicate to contend, that reinsurers are therefore liable in respect of any payment which the Syndicate chooses to make in respect of claims by its insureds. Admittedly, the requirement that any settlement or compromise shall be bona fide, reasonable and businesslike (as the Wellington Agreement is found to have been) gives a large measure of protection to reinsurers, because it may be expected that no such payment will be made in respect of claims which the Syndicate does not believe that it would, or might, be held legally liable to pay. But there can be circumstances in which an original insurer will act prudently in making payments which it could not be held legally liable to pay, and so the question may arise whether such payments can be recovered under the "follow the settlement" provisions of a reinsurance contract. Even in those cases, the Syndicate contends, where the terms of the reinsurance and of the original insurance are the same, the reinsurers are bound to follow the Syndicate's agreement to settle the original claim.

The leading English authority is the Court of Appeal's judgment in The Insurance Co of Africa v Scor (UK) Reinsurance Co Ltd, [1985] 1 Lloyd's Rep 312. The passage most often cited comes from the judgment of Lord Justice Robert Goff (as he then was) at p 330:

In my judgment, the effect of a clause binding reinsurers to follow settlements of the insurers, is that the reinsurers agree to indemnify insurers in the event that they settle a claim by their assured, ie when they dispute, or bind themselves to dispose of a claim, whether by reason of admission or compromise, provided that the claim so recognised by them falls within the risks covered by the policy of reinsurance as a matter of law, and provided also that in settling the claim the insurers have acted honestly . . .

This suggests that the reinsurer is always entitled to contend that the original claim was not as a matter of law within the risks covered by the contract of reinsurance, and his right to do so is supported by many recent United States authorities which are relied upon by the reinsurers, notably Michigan Millers Mutual Insurance Co v North American Reinsurance Corporation, (1990 Court of Appeals of Michigan) where the plaintiff insurer contributed towards a settlement even though the insured's claim against it was below the excess figure, and the reinsurer was held not liable.

The principle stated in Scor's case is unexceptional, but its application gives rise to difficulty where the terms of the reinsurance contract are the same as those of the underlying insurance contract, and the reinsurer has agreed to follow the settlements of the original insurer/reinsured. This difficulty was recognized by the Court of Appeal in Hong Kong in Insurance Co of the State of Pennsylvania v Grand Union Insurance Co, [1990] 1 Lloyd's Rep 208. In the leading judgment, Hunter JA said this:

Two points, I think, have to be noticed about these two provisos. The first, I have no doubt, was very carefully worded and deliberately limited to the policy of reinsurance. Mr Collins argues that where, as is usual, the policy of reinsurance refers to the terms of the original insurance, the reinsurer can look through to those terms and complain, as was sought to be done here, of breaches of condition in the underlying policy. I reject that. If Lord Justice Goff meant that, he would in Mr Justice Mortimer's words "be nullifying the conclusion that he had already reached".

I am satisfied that he meant no such thing. He was well aware that many settlements include compromises on liability and quantum and that to permit reinsurers to go back to an alleged strict construction of the policy would destroy the value of the clause. If there is any question as to the sufficiency or propriety of the settlement it arises under the second proviso.

The next question I have to decide is whether the reinsurer is precluded from raising any issue as to the scope of "the risks covered by the contract of reinsurance" (Lord Justice Robert Goff's words) when the original insurer/reinsurer has properly compromised all such issues as might arise. Mr Colman, QC submits that he is so precluded, provided that a claim was "asserted" under the original insurance which was reinsured. When that was the original claim, then a proper compromise of it is binding on the reinsurer, for otherwise the "follow the settlement" provision would have no effect, as regards questions of law, where the same risk is insured and reinsured. Moreover, the submission recognizes that the original claim must be "of the same kind" as that which was originally insured, a phrase which has its origin in the earlier English authorities which preceded Scor's case and which are said now to be of historic interest only.

In my judgment, the reinsurer is always entitled to raise issues as to the scope of the reinsurance contract, and where the risks are co-extensive with those of the underlying insurance he is not precluded from raising such issues, even when there is a "follow the settlement" term of the reinsurance contract. Ultimately, this is the only sure protection which the reinsurer has against being called upon to indemnify the reinsured against payments which were not legally due from him to the original insured, however reasonable and businesslike the payments may have been. But this is subject to one proviso which I have already assumed in the Syndicate's favour, and which is supported by the judgment of Hunter JA in the Grand Union case, quoted above. The reinsurer may well be bound to follow the insurer's settlement of a claim which arguably, as a matter of law, is within the scope of the original insurance, regardless of whether the Court might hold, if the issue was fully argued before it, that as a matter of law the claim would have failed.

My difficulty, to which I referred earlier, is that the present is not such a case, subject to one possible exception to which I shall refer below. The arbitrator distinguished between two kinds of payments made by the Syndicate under the Wellington Agreement: those which are in respect of claims for which the insured producer would have been liable in any event, and others for which no such liability would have existed without the agreement, the claims being asserted against non-insured producers only. The disputed payments were in respect of non-insured claims, which by definition were not within the scope of the reinsurance contract. They did not become insured, and therefore reinsured, claims merely because the Syndicate agreed to treat them as if they were.

For these reasons, I hold that payments made in respect of claims asserted against non-insured producers are not wihin the scope of the reinsurance contract, and the arbitrator was correct in holding that they are excluded from the calculation of "ultimate net loss" under art 7. The possible exception to which I have referred exists when a claim in fact asserted against non-insured producers could have been asserted against an insured producer also, in contribution proceedings or otherwise, although it was not asserted because the Wellington Agreement made it unnecessary for the sufferer or for any insured producer to do so. I would be prepared to hold that payments made by the Syndicate in respect of such claims could, as a matter of English law, be recovered from reinsurers under the provisions of art 7. But it appears from the terms of the declaration in par 2(b) of the interim award that this is not a live issue. That declaration allows for bona fide settlement of claims made in reliance on "facts and matters (not excluding applicable foreign law)", and it seems that all the relevant policies of insurance were governed by US law, here treated as a question of fact. Whether the terms of the declaration are sufficient to cover all possible contribution or third party claims against insured producers, which depend upon the way in which the claims by sufferers were processed by the Wellington Facility, it is not for me to say.

Even though, as I have held, the Syndicate can only recover in respect of payments made in settlement of claims made by insured producers representing amounts paid by those producers which they were liable to pay, or arguably liable to pay, even in the absence of the Wellington Agreement, the question arises whether the Syndicate nevertheless can claim that all the payments made by it to the Wellington Facility were, properly regarded, payments made in respect of such claims. The Syndicate agreed to make such payments, regardless of their ultimate destination, because the total or aggregate amount was lower, or was estimated to be no greater, than its total exposure to insured/reinsured claims, hence the reasonable and businesslike nature of the agreement. The saving of legal costs in contribution and third party proceedings was likely to be substantial, and this too means that the total amounts paid are much less than the Syndicate's and therefore the Reinsurers total liability would have been, if the agreement had not been entered into.

This leads to the "plums and duff" factor referred to in par 27 of the Reasons. If the reinsurers are correct, not only is the Syndicate's total claim against them smaller than it would have been, but their liability is further limited to what the Syndicate pays in respect of insured claims, regardless of the contributions made by other insurers or producers under the agreement towards those claims, and regardless of the fact that such contributions were made only in consideration of the Syndicate's matching undertaking to contribute to what were, for it, uninsured claims. Reinsurers in fact are receiving the benefits of but not contributing towards the costs of the Wellington Agreement so far as the Syndicate is concerned. There is no objection in law, in my judgment, to a settlement or compromise agreement within art 7 of the reinsurance contract which includes terms whereby the original insurer/reinsurer agrees to pay a third party other than the original insured, provided that the payment operates to discharge his liability under the insurance to the original insured. Nor do I see why the fact that the third party is himself the insured of another insurer, as where reciprocal arrangements are made involving other insureds and other insurers, should prevent the same rule from applying. So the question arises whether payments made by the Syndicate to the Wellington Facility in respect of claims against its insured and non-insured were payments of this kind.

The arbitrator considered the position in detail in pars 23-26 of his Reasons. He was concerned that individual payments could not "sensibly" be regarded as contributions towards a total sum which in the aggregate would constitute a settlement of all claims insured by the particular subscribing insurer, whether past claims already settled (so providing the basis for the "Producer allocation formula") or existing claims or future claims which, so far as they might involve different claimants, were hypothetical only. He concluded:

No such payment could sensibly be viewed as a payment made towards settlement of other and earlier settled claims, or as any reasonable measure of the settlement value . . .

So far as future claims are concerned, again I cannot see any objection in law to the original insurer discharging future as well as existing liabilities towards a group of claimants, including even identified future claimants, provided that there is a sufficient identification of a group to which they belong or will belong, and provided also that suitable agency arrangements are made. Even so, any insurer proposing to enter into such arrangements would be well advised to obtain his reinsurers' consent before doing so, and thereby obtain a variation of the reinsurance contract.

But in my judgment, even on these assumptions, payments made to the Wellington Facility cannot properly be regarded as payments made "in settlement of loss or losses" for which the Syndicate was or might become liable under the policies of insurance which it reinsured. Therefore, they do not fall within the definition of "ultimate net loss" in art 3. Nor were any agency arrangements made, so far as future claimants might be concerned, even if, which is not found, such future claimants could be identified by reference to a group to which they would belong. Without further findings of this sort, the arbitrator's conclusions on this part of the case are clear. A payment in respect of claims made against a non-insured producer "is not paid to, or to the order of, the second subscribing (insured) Producer" (par 26). Therefore, even viewing the agreement "as a whole not piecemeal" (par 21), there were payments of two kinds: those in respect of insured claims, and those which were not. In my view, once the distinction is made, the arbitrator's conclusion with regard to the latter is correct.

If and to the extent that the Wellington Agreement included a second pooling agreement between insurers, as Lord Wilberforce found, then in my judgment any such payments made by the Syndicate were, by a fortiori reasoning, not within the reinsurance contract.

I should add that Mr Eder, QC for the reinsurers stressed the limited powers of the Court when an arbitrator's award on a question of law is under appeal, referring to The Nema [1981] 2 Lloyd's Rep 239 at pp 242, col 1; p 253, col 1; p 254, col 2; [1982] AC 724 at pp 734F and 752-753; The Ymnos, [1982] 2 Lloyd's Rep 574 at pp 584 and 589; and State Trading Corporation of India v M Golodetz Ltd, [1989] 2 Lloyd's Rep 277 at p 284. The terms of art 11 of the reinsurance contract, the "honourable engagement" provision, under which Mr MacCrindle, QC was appointed, are also relevant here. Even if I had reached the conclusion, which I have not, that another meaning of the treaty should be preferred, I should have been reluctant to hold that the award is wrong and that the appeal on this issue should be allowed.

Estoppel

The relevant facts are found in pars 10 and 13 of the Reasons and have already been referred to in this judgment. Essentially, reinsurers' representative confirmed that "assent to the proposed scheme would not prejudice the Syndicate's position". In reliance upon this assurance the Syndicate entered into the Wellington Agreement and, throughout the relevant period, all claims made against it and against its producers were handled by the Wellington Facility.

Three estoppels were alleged, as set out in par 29 of the Reasons. The Syndicate succeeded on the first, and there is no appeal against the arbitrator's finding. This was, as set out in pars 19 and 30 of the Reasons, that --

. . . the Respondent is at least precluded from running his primary case (to treat all Wellington Agreement payments as being automatically outside the cover would prejudice the claimant).

I add one comment, because it is relevant to the issues raised by the other estoppel pleas, which the arbitrator rejected and on which I have to rule. The first estoppel is variation under another name. Even if all the payments under the Wellington Agreement are, as a matter of law, outside the scope of the reinsurance, the reinsurers nevertheless are estopped from asserting that they are, ie, from denying that they are within it. The estoppel therefore permits a claim to succeed which otherwise would have no foundation in law. It succeeds as a claim under the reinsurance contract only because reinsurers cannot deny that it is. This gives rise to the sword/shield argument regarding the nature of an estoppel, which reinsurers raise against the two other heads of estoppel which the Syndicate claimed. It may be said that by accepting the arbitrator's decision on the first estoppel, reinsurers acknowledge that a successful plea of estoppel can effectively create a sword, as well as a shield, meaning a cause of action which would not otherwise exist, as opposed to a valid defence against one which does. But they make no such concession, and the shield/sword issue therefore arises on this appeal.

The second alleged estoppel is that:

. . . the Respondent is also at least precluded from requiring the Claimant to prove which Wellington Agreement payments represent payments which would have been made in any event in order to discharge liabilities to insured producers under their policies of insurance [see pars 29(2) and 28 of the Reasons].

This was rejected by the arbitrator on the ground that the argument is circular. The Syndicate cannot show that it has been prejudiced without identifying those claims which would have succeeded in any event (Reasons, par 32).

This analysis, in my judgment, is unanswerably correct. The Syndicate's difficulty arises from the fact that the alleged estoppel relates to the burden of proof under the reinsurance contract. I doubt whether the person who made the representation or the person to whom it was made had the rules of evidence, or even the strict legal position, in mind when the representation was made and acted upon. Payment under the Wellington Facility either would, or would not, be reinsured. But suppose that the representation, which was in writing, has an "objective" construction, so that it means, "will not be prejudiced in regard to the proof of the claim". This still applied only to valid claims, unless the estoppel (or variation) goes even further, which it does not, meaning that all claims will be accepted as reinsured. And it remains necessary to prove which payments were in respect of valid, or arguably valid, claims. Unless those claims are identified, it is impossible to say that there was prejudice, regardless of the amount.

The third estoppel is set out at par 29(3) of the Reasons:

Submission (3)

The Respondent is not only precluded from treating all Wellington Agreement payments as prima facie unreinsured, but is also precluded from challenging the inclusion of [such] payments in the ultimate net loss figure except insofar as he can show (at any given time) that the total amount [claimed by the Syndicate] is greater than the total amount [the Syndicate] would by then have paid [in any event] . . .

The arbitrator rejected this contention in par 33:

Submission (3)

The wording [of the reinsurers' letter] was somewhat delphic. In my judgment it was certainly not sufficiently precise and unequivocal to have brought about the elaborate extended estoppel of the nature here submitted. This suggested estoppel essentially combines two elements: first, the burden of proof which, it is suggested, is transferred to reinsurers, and second, the calculation of total or aggregate payments for the purpose of establishing whether the "ultimate net loss" for which reinsurers are liable has been increased or reduced by reason of Syndicate's participation in the working of the Wellington Agreement.

For the reasons already given, I do not find attractive the idea of any estoppel based upon shifting the burden of proof in legal proceedings for recovery of sums claimed under the reinsurance contract. Even if the representation is construed objectively, it has no specific reference to that factor, nor in my judgment was "prejudice" intended to be construed by reference to possible financial consequences of shifting the burden of proof.

This leaves the "total" claims figure for separate consideration and I will relate to it the reinsurers' four objections to the estoppel pleas. These are all subject to their main submission that the arbitrator's conclusions on these issues, whether they be regarded as fact or mixed fact and law, should not be disturbed on appeal under the Arbitration Act, 1979, unless they are such that no properly directed tribunal could properly have reached. The four objections are these: (1) there was no "clear and unequivocal" representation having the meaning relied upon, as required by Woodhouse AC Israel Cocoa Ltd v Nigerian Produce Marketing Co Ltd, [1972] 1 Lloyd's Rep 439; [1972] AC 741; (2) there is no finding of reliance, beyond the general findings in par 13 ("We had Mr Outhwaite behind us"), and none to the effect that the representation was understood in the (wider) sense for which the Syndicate now contends; (3) in the circumstances, there is no such "inequity" as to make an estoppel necessary; (4) in any event, the Syndicate cannot use any estoppel as a sword, rather than a shield, which is what they are attempting to do; Combe v Combe [1951] 2 KB 215.

Although reference was made to the Texan Bank case (Amalgamated Investment & Property Co Ltd v Texan Commerce International Bank Ltd, [1982] 1 Lloyd's Rep 27; [1982] QB 84) in the context of the sword/shield argument, that case was an example of estoppel by convention, and Mr Colman, QC made it clear that a promissory estoppel is relied upon in the present case. Indeed, there was no relevant course of dealing out of which an estoppel by convention could arise.

The first question, therefore, is what was the representation? On the arbitrator's findings it was in writing, and its terms were that the Syndicate's position vis-a-vis the reinsurers would not be prejudiced. A limited meaning (claims for payment made under the Wellington Agreement will not be rejected on that ground alone) formed the basis for the first estoppel, which the arbitrator upheld. Beyond this, the reinsurer contended, any further meaning was not "clear and unequivocal", and therefore it could not found any estoppel.

The Syndicate responded that the words of the representation were clear ("will not be prejudiced") and that their scope has to be decided by reference to the facts which have occurred; if there is prejudice to the Syndicate (or would be, if reinsurance cover is denied), then that involves a breach of the representation, or promise, which was made.

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