COUNSEL: Anthony Colman Q.C. and Roger John Thomas for the plaintiff.

Kenneth Rokison Q.C., Victor Lyon and John Grainger for the defendants.

David Latham as amicus curiae.

 

SOLICITORS: Beaumont & Son; Ince & Co.; Treasury Solicitor.

 

JUDGE: Leggatt J.

 

DATES: 1984 March 12, 13, 14; April 18

 

 

Three issues arise: (1) Whether there has been any breach of the Act; (2) the effect of such a breach and (3) in answering (1) and (2) what effect should be given to Parker J.'s judgment. On analysis, the section directly attacks the carrying on of business. When one turns to the definition of carrying on a business in section 83 it is wrong to say that both the effecting and carrying on have to take place in Great Britain. That would create opportunities for evasion and would be wholly contrary to the way in which insurance protection for policy holders has developed over the years. Parliament was departing from a precise definition and was giving a general

 

[*996] Cur. adv. vult.

 

18 April. LEGGATT J. read the following judgment. On 31 October 1983 Parker J. gave judgment in Bedford Insurance Co. Ltd. v. Instituto de Resseguros do Brasil [1985] Q.B. 966. The effect of this decision was that where an insurer conducts insurance business in Great Britain without authorisation, contracts of insurance made in course of that business are illegal and void, with the probable result that the offending insurer may keep premiums paid by an innocent insured and yet not be liable to pay claims. In the present case both parties challenge the correctness of that decision.

 

The plaintiff, Mr. Stewart, is a representative member of Lloyd's Syndicate No. 173. That syndicate wished to reinsure on a facultative basis against a risk written by the syndicate as primary insurers. The risk was part of the syndicate's insurance of the International Federation of Airline Pilots Association against loss of licence resulting from accident or sickness. The purpose of the insurance was to compensate pilots for loss of salary for those reasons. The reinsurers were the defendants, whose registered office is at Seoul in South Korea, and another company called Haedong Fire & Marine Insurance Co. Ltd., which also is a foreign corporation. Each company entered into a contract of insurance with the syndicate by which it took a share amounting to 50 per cent. of 50 per cent. of 16.39 per cent. of 61 per cent. of the risk, or 21Ú2 per cent. By a subsequent variation the defendants agreed to take 100 per cent. of 16.39 per cent. of 61 per cent., or 10 per cent. from 1 April 1976. The reinsurance period was ultimately extended to 31 October 1978. That date was coincident with the termination of the primary cover afforded to the association by the syndicate. During the period of reinsurance cover losses under the primary cover resulted in claims amounting to U.S. $230,549.04, Canadian $22,765.67 and £85,948.26. The specially indorsed writ issued by the plaintiff on 1 November 1983 claimed these sums together with interest, which by then was considerable in relation to the principal sums. To this the defendants responded with a defence, which however consisted of nothing more than non-admissions. The principal sums now agreed (subject to liability) to be due to the plaintiff are U.S. $145,771.25, Canadian $15,091.52 and £63,351.19. On 10 February 1984 the plaintiff applied to Neill J. for summary judgment under R.S.C., Ord. 14. It was pointed out that the underlying transactions might be regarded as illegal following the decision of Parker J. in the Bedford case. Neill J. thereupon ordered a speedy trial and arranged with the Attorney-General for the appointment of an amicus curiae. I have in consequence been assisted by Mr. Latham in this capacity.

 

The defendants gave a binding authority to a Liechtenstein body corporate called Safeguard Registered Trust (“S.R.T.”) which was [*997] empowered to commit the defendants to contracts of insurance. S.R.T. also exercised power to appoint sub-agents to act in London. They were called World Underwriting Agencies Ltd. (“W.U.A.”). The company was not given power to commit the defendants to contracts of insurance but had to refer everything to S.R.T. Two facts are agreed: first, that neither the defendants nor S.R.T. nor W.U.A. had any authority from the Department of Trade at any material time to conduct in Great Britain any relevant class of insurance business, and secondly that the plaintiff, the syndicate and their representatives were at all material times unaware whether any authority had been given to the defendants or S.R.T. or W.U.A. by the Department of Trade or whether any of them needed such authority. The defendants were not carrying on insurance business here before 3 November 1966. If they were when they made their contracts with the plaintiff's syndicate, they needed such authority but did not have it.

 

The business which has given rise to the present action was carried on in this way. The original slip was presented to W.U.A. who accepted a proportion of the risk on behalf of the defendants on 25 March 1975 with a stamp reading “subject to confirmation by each company.” A photocopy of this slip was sent to S.R.T. in Zurich for a decision. The slip was then initialled by Dr. Luggen, who had authority to sign for and on behalf of the defendants, and was returned to W.U.A. On 2 April 1975 a letter was sent from W.U.A. to the brokers for the plaintiff's syndicate, stating that “The acceptance has been confirmed by our principals.” There were no material differences in the method of operation for the 1976 and 1977 renewals. After acceptance, all accounting and administration was dealt with in London. The percentage which was rejected of all slips presented to S.R.T. for acceptance was probably less than 5 per cent.

 

If the defendants by S.R.T. were carrying on in Great Britain contracts of insurance without required authorisation, then by force of the Bedford case the plaintiff could not recover under the reinsurance contract, notwithstanding that for nine years it has been assumed to be binding on the defendants. To the defendants' credit they do not seek to evade liability on this ground, but on the contrary, sharing the widespread consternation caused in the insurance market by the Bedford case, they, as well as the plaintiff, contend that the decision was wrong. Thus the question inescapably raised in this action is whether the Bedford case was rightly decided. If I concluded that it was, the matter could be tested in a higher court. If, on the other hand, I decided that it was wrong, there could be no appeal, since neither party wishes to uphold it. Although there can be no benefit in having conflicting decisions at first instance, I am nonetheless persuaded that if I were fully satisfied that the Bedford case was wrong it would be my duty to say so, regardless of the temerity of such a conclusion.

 

The amount of consternation and concern felt in consequence of the Bedford case in insurance and reinsurance markets in London and around the world was emphasised by an agreed report of Mr. Kiln. He is chairman of a company of underwriting agents at Lloyd's and for many years after the Second World War was an underwriter at Lloyd's [*998] specialising in leading international insurance business. Whilst no judge sitting in this court could fail to be aware of the concern felt in the market, there is in a case such as this little, if any, opportunity for allowing it to influence what is essentially a question of statutory construction.

 

The relevant insurance contracts were made during the currency of the Insurance Companies Act 1974. Although it has been replaced by the Insurance Companies Act 1981 the statutory provisions applicable continue to be the same in all essential respects. These Acts have been consolidated in the Insurance Companies Act 1982. Much of the Act of 1974 might be said to be material, but I shall refrain from citing in terms any but the most important sections. They are these:

 

“2(1) No person shall carry on in Great Britain insurance business of a class relevant for the purposes of this Part of this Act, other than industrial assurance business, except - (a) a body corporate which is authorised under section 3 below to carry on business of that class; …”

 

“1(1) The classes of insurance business relevant for the purposes of this Part of this Act are - (a) ordinary long-term insurance business; … (c) liability insurance business; (d) marine, aviation and transport insurance business; … (f) pecuniary loss insurance business; (g) personal accident insurance business; …”

 

“3(1) A body corporate … shall be authorised to carry out in Great Britain insurance business of a class relevant for the purposes of this Part of this Act if either - (a) it was carrying on in Great Britain insurance business of that class immediately before 3 November 1966 … or (b) it is authorised by the Secretary of State to carry on insurance business of that class.”

 

“11(1) A person who carries on business in contravention of this Part of this Act shall be guilty of an offence. … (3) A person guilty of an offence under this section shall be liable - (a) on conviction on indictment, to imprisonment for a term not exceeding two years or to a fine, or to both; …”

 

Section 83 defines each of the classes of insurance business identified by section 1(1), using the same formula in relation to each, namely, “In this Act [the relevant class of] '… insurance business' means the business of effecting and carrying out contracts of insurance …” The only exception to this is subsection (2) which begins: “(2) In this Act 'ordinary long-term insurance business' means business of any of the following kinds, namely …” There then follow three paragraphs, each of which begins “effecting and carrying out contracts of insurance …” It is accepted that the contracts of insurance in respect of which the plaintiff claims in this action fall within the scope of section 83.

 

The evident purpose of the Act of 1974 is to provide for regulation by the Department of Trade of insurers carrying on business in Great Britain in order to ensure that they are able to honour their commitments to their insured. Thus requirements for authorisation in the way of margin of solvency, paid up share capital and reinsurance arrangements are contained in sections 4, 5 and 6; and section 7 provides that there [*999] shall be no authorisation for a body under the control of unfit persons. Part II of the Act of 1974 begins with section 12(1) which provides that

 

“Subject to the provisions of this section, this Part of this Act applies to all insurance companies, whether established within or outside Great Britain, which carry on insurance business within Great Britain.”

 

Sections 13 to 22 prescribe what insurance companies must do about accounts, balance sheets and periodic statements. Sections 23 to 26 deal with assets and liabilities attributable to long term business. Section 26 in particular, is noteworthy in that having by subsection (1) forbidden an insurance company to enter into a transaction with connected persons, it goes on by subsection (8) to provide that the section

 

“shall not be construed as making any transaction unenforceable as between the parties thereto or as otherwise making unenforceable any rights or liabilities in respect of property.”

 

The primary purpose for which the Secretary of State is given powers under sections 28 to 37 of the Act of 1974 is to be found in section 28 which encapsulates the major purpose of the Act. Section 28 provides:

 

“(1) Any power conferred on the Secretary of State by sections 29 to 37 below shall be exercisable in relation to any insurance company to which this Part of this Act applies and shall be exercisable on any of the following grounds - (a) that the Secretary of State considers the exercise of the power to be desirable for protecting policy holders or potential policy holders of the company against the risk that the company may be unable to meet its liabilities or, in the case of long term business, to fulfil the reasonable expectations of policy holders or potential policy holders; … (d) that he is not satisfied that adequate arrangements are in force or will be made for the reinsurance of risks against which persons are insured by the company in the course of carrying on business, being risks of a class in the case of which he considers that such arrangements are required; …”

 

It is instructive to trace the evolution of control of insurance business. That began with the Life Assurance Companies Act 1870 (33 & 34 Vict. c.61), which required every company carrying on the business of life assurance to make a deposit of £20,000 with a daily penalty for noncompliance. For purposes of the Act the term “company” was defined as meaning “any person or persons, corporate or unincorporate … who issue or are liable under policies of assurance upon human life within the United Kingdom …” The Assurance Companies Act 1909 extended the system of deposit to fire, accident and employers' liability insurance business. These classes of business were defined by the use of the formula “the issue of, or the undertaking of liability under, policies of assurance …” There still was no express prohibition upon doing that business which was the subject matter of the Act. Section 42(1) of the Road Traffic Act 1930 added to the Act of 1909 reference to “motor vehicle insurance … that is to say, the business of effecting contracts of [*1000] insurance …” in connection with the use of motor vehicles. The Act still did not refer to the “carrying out” of such contracts of insurance. A similar provision was contained in section 20(1) of the Air Navigation Act 1936 which added “the business of effecting contracts of insurance” relating to aircraft. Both that Act and the Act of 1909 were amended by the Assurance Companies Act 1946 to include marine, aviation and transit insurance business, defining it as “the business of effecting and carrying out … contracts of insurance …” But there was still no prohibition against carrying on such business. A prohibition of that kind, if a particular condition was not fulfilled, was first introduced by the Insurance Companies Act 1958 which imposed penalties (including a daily penalty) for non-compliance. That Act continued to define various classes of insurance business by reference to the formula “the issue of, or the undertaking of liability under, policies of insurance.” (section 33(1)). It was in Part II of the Companies Act 1967 that insurance business generally was first defined as “the business of effecting and carrying out” relevant contracts of insurance.

 

On behalf of the plaintiff Mr. Colman first submits that the defendants were not carrying on any insurance business in Great Britain of any of the defined classes under the Act of 1974 and that the reinsurance contract in this case was not a contract made in the course of carrying out such business. The defendants, he says, were carrying on business outside Great Britain. There can be no doubt that the Act is concerned with the carrying on of business: the question is what that business consists of. Mr. Rokison for the defendants supports Mr. Colman's submission, arguing that in general terms and without reference to any definition in the Act of 1974 the defendants do not carry on business within the jurisdiction. He submits that before a company can be held to carry on business either generally or by reference to a particular type of business, where that business is carried on through an agent, it is necessary at least for the relevant effective decisions to be taken within the jurisdiction. According to him, there is no case in which a principal has been held to be carrying on business here on account of a contract having been made through an agent who had no authority to conclude it without reference to the principal. Against this it might appear surprising that if everything connected with the insurance contract was done in this country with the exception of the formal decision to accept the business offered, the proper conclusion was that no insurance business was being carried on here. The plaintiff's submission depends upon making good the proposition that no insurance business falls within the definition of classes of insurance business in section 83 of the Act of 1974 unless there is evidence of both effecting and carrying out contracts of insurance of the relevant description in Great Britain.

 

In the Bedford case [1985] Q.B. 966 Parker J. referred to section 11(4) of the Act of 1974 and said, at p. 982B-C:

 

“There is here a clear indication that the mere paying of claims, unless saved under the proviso, was intended to be prohibited whether or not the contracts of insurance under which the claims were made were themselves made in contravention of the Act so [*1001] long, of course, as the payments are made by a person carrying on insurance business in the United Kingdom.”

 

I am not myself persuaded that section 11(4) was intended to do more than deal with the run-off of insurance business transacted before the system of authorisation by the Secretary of State was introduced by the Act of 1967. But there can be no doubt that Parker J. regarded the word “and” in the phrase “the effecting and carrying out” as disjunctive in effect. The significance of section 11(4) for present purposes appears to be that where an insurance company carries on business only for the purpose of discharging liabilities it is still to be taken to carry on insurance business in default of a saving. If this were not so, an extraordinary result would have followed, when by the Act of 1967 the definition of most classes of insurance business was amended by the addition to the phrase “the business of effecting” of the words “and carrying out.” If the plaintiff were right, whereas before that date a body corporate carrying on the business of effecting contracts of insurance but not of carrying them out would have been subject to the control of the Act, it would not have been thereafter.

 

Whilst I see the force of the argument that a contract of insurance cannot be said to be made in Great Britain if the executive decision to accept the business offered is taken abroad, there are two reasons why I do not find it necessary to reach a conclusion about it. First, I hold that when the Act of 1974 states that each particular class of insurance business “means the business of effecting and carrying out” relevant contracts of insurance, the significance of “means” is “connotes.” No business falling within business of either of the kinds described can be transacted without contravention of the Act. This construction is supported by the language of section 11(4) of the Act of 1974 to which I have earlier referred. Though the point was not argued before me, I also derive some support for this conclusion from the language of section 84(3) which provides:

 

“For the purposes of this Act, a person shall not be taken to carry on motor vehicle insurance business by reason only of the fact that goods, merchandise or property upon which a contract of insurance is effected by him (being goods, merchandise or property on board of a vessel or aircraft or of a hovercraft to which this Act applies) consist of, or include, motor vehicles.”

 

This again appears to envisage that but for the subsection the mere fact that a contract of insurance was effected upon goods, which included motor vehicles, on board of a vessel, would or at least might be taken to entail carrying on motor vehicle insurance business. Yet if the plaintiff were right, the mere effecting of a contract of insurance without also carrying it out would in any event not be capable of constituting the carrying on of insurance business. The second reason why I need not decide whether the contracts of insurance in this case were made in Great Britain is that “effecting” a contract of insurance seems to me to involve more than merely making the contract. There may also be involved (as here) the offering of insurance services and the negotiation of the terms of the contract. Both occurred in Great Britain. I accept [*1002] Mr. Latham's submission that provided to any substantial extent the business of insurance, as described, was carried on in Great Britain, the Act of 1974 was applicable. Since most of the defendants' insurance business took place in Great Britain, including the issue of policies of insurance, the receipt of premiums and the payment out of claims, the business was within the scope of the Act; authorisation was required but not obtained; and the reinsurance contract was made in the course of carrying out such business.

 

I will only add that if the Commercial Court were to hold that by the expedient of declining from Zurich 5 per cent. of the slips offered for acceptance the defendants have avoided carrying on insurance business in Great Britain, the insurance market would be justified in concluding with Mr. Bumble that “if the law supposes that, the law is a ass, a idiot.”

 

The plaintiff's most impressive submission, also supported by the defendants, was that on the proper construction of the Act of 1974 the conduct at which the Act strikes and which is prohibited is the carrying on without authorisation of certain classes of business identified in the Act by reference to “the business of effecting and carrying out” certain specified contracts of insurance. It was contended that it would be unjustifiable to extend the prohibition against carrying on such a business so as to render individual contracts of insurance void and unenforceable merely because business in course of which the contracts were entered into was of a class prohibited by the Act. In short, the Act of 1974 contains neither an express prohibition of such contracts nor an implied one. If a person effects contracts of insurance of a particular class and carries them out, that will constitute evidence that he was carrying on an insurance business in contravention of the Act. Section 83 refers not merely to individual transactions but to “the business of effecting and carrying out contracts of insurance” of the relevant kind. Thus subsection (6)(e) relates to “the carrying on of the business of effecting and carrying out contracts of insurance” as constituting “the carrying on of insurance business.” It is suggested that when section 29(2) of the Act of 1974 provides that a requirement under that section may apply to contracts of insurance “whether or not the effecting of them falls within a class of insurance business which the company is for the time being authorised to carry on” may indicate that unauthorised contracts are not rendered illegal, since otherwise a power to require a company not to effect any contracts of insurance would be otiose. Similarly, it is hard to see why a person who invites another to enter into a contract of insurance with an insurance company which is not authorised, should be required to inform that other that it is not, if the effecting of the contract was per se illegal.

 

Mr. Colman submits that in the Act of 1974 there are strong indications that what is rendered illegal is insurance business of classes identified by reference to the conduct of effecting and carrying out particular contracts of insurance; and that the Act does not render illegal the making of individual contracts of insurance of particular classes merely because the insurer lacks authorisation for carrying on business of that particular class. The statute does indeed contain no [*1003] express prohibition on the making of contracts of insurance of an unauthorised class. It is therefore submitted that where it is the carrying on of such business which is rendered illegal, as distinct from the effecting of individual contracts of insurance, such contracts entered into in course of carrying on the unauthorised business should not be illegal and void unless the Act of 1974 itself contains expressly or by implication a provision to that effect.

 

Of the highest persuasive force in considering this question is the decision of the High Court of Australia, unfortunately not cited to Parker J., in Yango Pastoral Co. Pty. Ltd. v. First Chicago Australia Ltd. (1978) 139 C.L.R. 410. Since that case is directly in point it is necessary to examine it and in particular the judgment of Mason J. in some detail. First Chicago sued Yango on a covenant in a mortgage and sued other defendants as guarantors. Section 8 of the Banking Act 1959 prohibited a body corporate from carrying on any banking business without authority and imposed a daily penalty for contravention. The defence was that because the mortgage constituted unauthorised banking business the loan, the mortgage and the guarantee were illegal and void. Although First Chicago was held to have been carrying on at all material times an unauthorised banking business in contravention of the Banking Act the defence failed in all the Australian courts.

 

Mason J., with whom Aickin J. agreed, said, at p. 423:

 

“The principle that a contract the making of which is expressly or impliedly prohibited by statute is illegal and void is one of long standing but it has always been recognised that the principle is necessarily subject to any contrary intention manifested by the statute. It is perhaps more accurate to say that the question whether a contract prohibited by statute is void is, like the associated question whether the statute prohibits the contract, a question of statutory construction and that the principle to which I have referred does no more than enunciate the ordinary rule which will be applied when the statute itself is silent upon the question. Primarily, then, it is a matter of construing the statute and in construing the statute the court will have regard not only to its language, which may or may not touch upon the question, but also to the scope and purpose of the statute from which inferences may be drawn as to the legislative intention regarding the extent and the effect of the prohibition which the statute contains.”

 

In that case, as in this, the first question was whether the statute expressly prohibited the making of the relevant contract or contracts. The express prohibition here is against carrying on in Great Britain insurance business of a relevant class without authorisation. There is no direct reference to contracts of insurance. Such reference as there is is imported by the definition clauses. The argument is that because in relation to each class insurance business is defined as meaning “the business of effecting and carrying out contracts of insurance,” insurance business cannot be prohibited without ipso facto prohibiting the effecting and carrying out of those contracts of insurance which constitute it. As Mason J. said in the Yango case, at p. 423: [*1004]

 

“It is said that the express prohibition against the carrying on of any banking business is necessarily a prohibition against entry into the very transactions which constitute banking business …”

 

In the Bedford case [1985] Q.B. 966 Parker J. put it in this way, at PP. 981H - 982A:

 

“The express prohibition is upon the carrying on of insurance business of a relevant class, but, as I have already mentioned, the definition in the case of each class begins, 'the effecting and carrying out of contracts of insurance.' What therefore is prohibited is the carrying on of the business of effecting and performing contracts of insurance of various descriptions in the absence of an authorisation. It is thus both the contracts themselves and the performance of them at which the statute is directed.”

 

That Parker J. treated contracts of insurance as prohibited expressly, and not merely by way of implication, is evident from a reference in the Bedford case, at p. 984G: “here, albeit by way of the definition, there is a clear express prohibition of both contract and performance …” It does not, however, appear to me to follow that, merely because the conduct of insurance business is rendered an offence on the part of the insurer, contracts of insurance entered into in course of it are necessarily rendered unenforceable at the suit of the insured.

 

The real question therefore is whether any prohibition is to be collected by necessary inference from the Act of 1974, viewed as a whole. The classic cases of implied prohibition, which were cited in the Yango case, 139 C.L.R. 410, are Cope v. Rowlands (1836) 2 M. & W. 149 and Cornelius v. Phillips [1918] A.C. 199. In the first Parke B. made plain, at p. 157, that “The sole question is, whether the statute means to prohibit the contract?” The statute in that case rendered it an offence for an unauthorised person to act as a broker in the City of London. Parke B. put the question for decision more specifically when he said, at p. 158:

 

“the question for us now to determine is, whether the enactment of the statute … is meant merely to secure a revenue to the city, and for that purpose to render the person acting as a broker liable to a penalty if he does not pay it? or whether one of its objects be the protection of the public, and the prevention of improper persons acting as brokers? On the former supposition, the contract with a broker for his brokerage is not prohibited by the statute; on the latter it is: for it cannot be permitted to a person to recover a compensation for an act which the law interdicts him from doing.”

 

The court answered this question by saying that the relevant statute prohibited both the carrying on of the business and the making of the contracts.

 

In St. John Shipping Corporation v. Joseph Rank Ltd. [1957] 1 Q.B. 267 Devlin J., after citing Cope v. Rowlands, 2 M. & W. 149, said, at p. 285: [*1005]

 

“Now this language - and the same sort of language is used in all the cases - shows that the question always is whether the statute meant to prohibit the contract which is sued upon.”

 

He added:

 

“If in considering the effect of the statute the only inquiry that you have to make is whether an act is illegal, it cannot matter for whose benefit the statute was passed; the fact that the statute makes the act illegal is of itself enough. But if you are considering whether a contract not expressly prohibited by the Act is impliedly prohibited, such considerations are relevant in order to determine the scope of the statute.”

 

In Cornelius v. Phillips [1918] A.C. 199 the House of Lords was concerned with a provision prohibiting a money-lender from carrying on his money-lending business otherwise than at his registered address. By reference to the mischief aimed at, the House concluded that the money-lending contract was itself avoided. In that case there was no difficulty in determining that the contract was by necessary implication prohibited by statute because the lending of money by a money-lender ipso facto constitutes the business of money-lending. Referring to Cope v. Rowlands, 2 M. & W. 149 and Cornelius v. Phillips [1918] A.C. 199, Mason J. said in the Yango case, 139 C.L.R. 410, 425: “These cases do no more than demonstrate that the question whether a statute prohibits contracts is always a question of construction turning on the particular provisions, the scope and purpose of the statute.” So here it is arguable that the definition section of the Act of 1974 means that contracts of insurance are so closely tied to the prohibition against carrying on business that the contracts themselves are affected by the prohibition. But it is the purpose of the Act of 1974, as indicated by section 28, to protect the public in the form of actual and potential policy holders against the risk that insurers may be unable to meet liabilities which they have assumed under the relevant contracts of insurance.

 

That the object of the statute is relevant to the question whether contracts are by implication prohibited by it was stressed by Mason J. in the Yango case when he said, at p. 426:

 

“Where, as here, a statute imposes a penalty for contravention of an express prohibition against carrying on a business without a licence or an authority and the business is carried on by entry into contracts, the question is whether the statute intends merely to penalise the person who contravenes the prohibition or whether it intends to go further and prohibit contracts the making of which constitute the carrying on of the business. In deciding this question the court will take into account the scope and purpose of the statute and the consequences of the suggested implication with a view to ascertaining whether it would conduce to, or frustrate, the object of the statute.”

 

He cited the approach in In re Mahmoud and Ispahani [1921] 2 K.B. 716 of Scrutton and Atkin L.JJ. which was expressed thus by the latter at p. 731: [*1006]

 

“One may find that the statute imposes a penalty upon an individual, and yet does not prohibit the contract if it is made with a party who is innocent of the offence which is created by the statute.”

 

After observing that “It is not rational to suppose that the Parliament intended to inflict such dire consequences on innocent depositors” as to enable an unauthorised bank to keep their deposits, Mason J. in the Yango case concluded, 139 C.L.R. 410, 427:

 

“that the purpose of the Act is adequately served by the imposition of the very heavy penalty which is prescribed for a contravention of section 8 and that it does not prohibit and thereby invalidate contracts and transactions entered into in the course of carrying on banking business in breach of the section.”

 

In Archbolds (Freightage) Ltd. v. S. Spanglett Ltd. [1961] 1 Q.B. 374, 386 Pearce L.J. gave the illustration of the passenger in a taxi cab left stranded by the driver in some deserted spot who would be without remedy if the driver was unlicensed or uninsured and the contract was thereby avoided. He cited Lord Wright in Vita Food Products Inc. v. Unus Shipping Co. Ltd. [1939] A.C. 277, 293:

 

“Each case has to be considered on its merits. Nor must it be forgotten that the rule by which contracts not expressly forbidden by statute or declared to be void are in proper cases nullified for disobedience to a statute is a rule of public policy only, and public policy understood in a wider sense may at times be better served by refusing to nullify a bargain save on serious and sufficient grounds.”

 

Pearce L.J. added [1961] 1 Q.B. 374, 387: “If the court too readily implies that a contract is forbidden by statute, it takes it out of its own power (so far as that contract is concerned) to discriminate between guilt and innocence.”

 

In the same case Devlin L.J. said, at p. 390:

 

“The general considerations which arise on this question were examined at length in St. John Shipping Corporation v. Joseph Rank Ltd. [1957] 1 Q.B. 267, 285 and Pearce L.J. has set them out so clearly in his judgment in this case that I need add little to them. Fundamentally they are the same as those that arise on the construction of every statute; one must have regard to the language used and to the scope and purpose of the statute. I think that the purpose of this statute is sufficiently served by the penalties prescribed for the offender; the avoidance of the contract would cause grave inconvenience and injury to innocent members of the public without furthering the object of the statute. Moreover, the value of the relief given to the wrongdoer if he could escape what would otherwise have been his legal obligation might, as it would in this case, greatly outweigh the punishment that could be imposed upon him, and thus undo the penal effect of the statute.”

 

In St. John Shipping Corporation v. Joseph Rank Ltd. [1957] 1 Q.B. 267 Devlin J. had expressed his view that in default of a clear implication a court ought to be very slow to hold that a statute intends to interfere [*1007] with the rights and remedies given by the ordinary law of contract. He justified his comments as being a matter of special concern to any judge of the Commercial Court, adding, at p. 289:

 

“This court was instituted more than half a century ago so that it might solve the disputes of commercial men in a way which they understood and appreciated, and it is a particular misfortune for it if it has to deny that service to any except those who are clearly undeserving of it.”

 

Authority therefore requires the court in the absence of express prohibition to look at the policy of the Act and to take account of the commercial effect of construing it in a particular way. In Cornelius v. Phillips [1918] A.C. 199 the policy of the relevant Act obviously was to attack money-lending transactions for the protection of innocent borrowers. Whilst it might be argued that rendering contracts of insurance illegal would or might help the conduct of insurance business in the long term, the more immediate effect would be the wholly undesirable one of allowing offending insurers to keep premiums paid whilst releasing them from their obligations to pay claims. This would not be a sensible way of attempting to ensure that insurance business is carried on in an orderly way and subject to any necessary governmental supervision. If the Insurance Acts were construed as prohibiting by implication contracts of insurance entered into in course of their insurance business by unauthorised insurers, that result would have been achieved by the curiously indirect method of prohibiting the carrying on of insurance business whilst continuing to define the classes of insurance in the same way as almost all of them had been defined since the Road Traffic Act 1930 first used the phrase “the business of effecting contracts of insurance.” Despite the absence of any express prohibition of contracts of insurance, which would be the most natural way in which to strike them down, the prohibition of the carrying on of insurance business, if the argument were right, must be taken to have had the effect of rendering illegal the making of the relevant contracts of insurance. The carrying out of such contracts would have remained legal until the coming into force of the Companies Act 1967 when the relevant classes of insurance were defined by reference to the business not only of effecting but also of carrying out contracts of insurance. Indeed if the parties to the present action were right, the effect of the Act of 1967 would have been to reduce the scope of contracts of insurance rendered illegal by requiring the business in course of which they were made to be one not only of effecting but also of carrying out such contracts.

 

In commenting on the Yango case, 139 C.L.R. 410 Mr. Latham contended that since the Australian Banking Act provided a penalty for contravention and not a criminal offence it was therefore less likely to result in an act which is in general in contravention of the statutory prohibition being held to be illegal. Having regard to the language of the judges of the High Court of Australia in referring to the Banking Act 1959 and contravention of it, I cannot regard this as an available distinction. Next it was said that if the relief asked for is in effect relief [*1008] which requires the court to make an order such as would provide specific performance of a contract, the carrying out of which would have constituted a criminal offence either of itself or by reason of very few other factors, the court is being required to give effect to something prohibited by statute. This argument seems to me to beg the question. The court will not give effect to a contract of insurance rendered illegal by statute; but unless it is there is no reason why the court should not do so. It was also suggested that it might not help the insurance market if I were to come to a different conclusion from Parker J. and that in any event such a conclusion would be adverse to the public. I am quite clear that a different conclusion from Parker J. would help the insurance market and I do not consider that a conclusion which prevented an insurer from paying claims whilst keeping premiums received would be adverse to the public.

 

I regard as implausible the argument that the requirement to be authorised may be explained as being more likely to be adhered to by those in the insurance market if there were a commercial as well as a statutory penalty. I accept Mr. Latham's submission that, assuming that contracts of insurance are not prohibited, there would be no sufficient justification on grounds of public policy for depriving innocent insured of the benefit of their contracts of insurance. In my judgment, as a matter of commercial practicality contracts of insurance such as these should not, except of necessity, be rendered unenforceable by an innocent insured. Let us see then why Parker J. held them to be so in the Bedford case.

 

Those of Parker J.'s conclusions which are relevant to the issues here arising are set out in his judgment: see [1985] Q.B. 966. He concluded, at p. 982A, by reference to the definition of the relevant class of insurance business that it is “both the contracts themselves and the performance of them at which the statute is directed.” The essential difference between carrying on insurance business and effecting or carrying out contracts of insurance appears to me to be that whereas the business is carried on only by the insurer, the contracts are made between insurer and insured. The only conduct which is expressly prohibited by the Act of 1974 is the carrying on of insurance business. It does not follow from the fact that the insurer can perform contracts of insurance of the relevant class only if he is authorised to do so that he is absolved from the consequences of breach at the suit of the innocent insured. The fact that insurance business was carried on in contravention of the Act of 1974 does not necessarily render unenforceable any contract of insurance effected in course of that business. The Act of 1974 is not on its face directed either at the contracts themselves or performance of them.

 

When one turns to section 11 the offence created is one of carrying on insurance business in contravention of the statute. The purpose of subsection 4 is for the avoidance of doubt to exempt from penalty the running off of contracts entered into before the Act of 1967 came into force. In so far as it indicates that the mere paying of claims would have been prohibited but for the saving, it is consonant with my earlier [*1009] conclusion that the effecting and carrying out of contracts do not have to be regarded conjointly.

 

From section 84(2) Parker J. inferred that entering into a single contract of insurance without authorisation would be sufficient to constitute a contravention of the Act of 1974. I do not read section 84(2) as placing emphasis on single contracts. On the contrary, the phrase “a contract of insurance” is used in the subsection as though it referred to a form of contract. The use of the phrase “risks of a kind such that the business of effecting and carrying out contracts of insurance against them constitutes insurance business …” preserves the concept of insurance business comprising the business of effecting and carrying out contracts of insurance. What entering into a contract of insurance does is to provide some evidence that the insurer concerned is carrying on an insurance business. The only purpose of provisions such as section 84(2) is to clarify the effect of including incidental matters more commonly contained in contracts which an insurer effects in carrying on his usual class of business. Although the incidental conclusion in non-marine contracts of insurance of a marine risk is not to be taken to involve the insurer in carrying on marine business, it is not an inevitable consequence that but for the provision the insurer would in those circumstances have been held to carry on marine insurance business.

 

The essence of Parker J.'s decision was expressed at p. 982F-G:

 

“Although the prohibition is upon carrying on business in contravention of Part I of the Act, it appears to me clear that what is aimed at and what is prohibited is both the making and performance of any contract of insurance of a relevant class by way of business.”

 

I would rather say that what is aimed at and what is prohibited is the conduct of insurance business without authorisation. It is not the intention of the statute to leave a person uninsured who has entered into an apparently valid contract of insurance of a relevant class with an insurer who turns out, unbeknown to the person seeking insurance, to have effected it without authorisation and to be similarly without authorisation to carry it out. I agree with Parker J. that the parties to a contract within the prohibition are not treated alike, since it is the insurer carrying on business who commits the criminal offence, not the insured. Unless the performance of the contract is within the prohibition, there is no reason for assuming or concluding that the insured is intended to acquire no enforceable right under a contract. That would only be so if the contract was itself prohibited. But the fact that a person is prohibited from carrying on an insurance business does not mean that contracts which he makes in course of it are unenforceable.

 

Parker J. then cited section 11(4) of the Act of 1981, at p. 983A-B: “A direction under this section shall not prevent a company from effecting a contract of insurance in pursuance of a term of a subsisting contract of insurance.” This, he said, “is a clear indication that it is the contract itself which is prohibited.” It seems to me to indicate that the contract itself is not prohibited except by express direction. This would be a direction that a company authorised to carry on insurance business shall cease to be authorised to effect contracts of insurance. It may be [*1010] noted that following such a direction, if the submissions made in this case were right, an insurer against whom a direction had been made would no longer be authorised to carry out contracts of insurance.

 

Parker J. gained no assistance from express provisions of the Act of 1974 such as section 26(8). That provision prevents the section from being construed as making any transaction prohibited by that section unenforceable as between the parties notwithstanding that noncompliance with the section is a criminal offence. But the provision is at least consistent with a policy of not preventing the enforcement of a transaction even though by entering into it one party has committed an offence. The saving in section 26(8) was probably thought necessary because some of the proscribed transactions set out in the section are identified by reference to both parties to them. Such a saving is not necessary for the offences created by Part I of the Act of 1974 because those offences apply only to one party to the transactions, namely the insurer.

 

Finally, Parker J. gave as his reasons, at p. 983E why the innocent insured is not intended to acquire rights under a contract with an unauthorised person that

 

“the principal offence covers the performance of contracts and the discharge of liabilities as well as the effecting of the contracts.,and … that the offence created is plainly an absolute one.”

 

I have already explained why I do not agree with the first of these reasons; and the fact that the offence is absolute tells nothing of its scope.

 

My own conclusion is that the contracts made in the course of carrying on insurance business of an unauthorised class are enforceable, at any rate at the suit of the insured. I am fortified by the fact that this is the approach of the majority of jurisdictions in the United States. In People v. United National Life Insurance Co. (1967) 427 P. 2d 199 the Supreme Court of California so found, holding, at p. 214:

 

“The insurance industry is regulated primarily for the benefit of those who make use of the services the industry offers. Penalties are imposed on those members of the industry who violate the regulatory scheme …, but the Insurance Code places no penalties, or even duties, on insured persons. In fact, no practical method exists for a member of the protected class of insureds to ascertain whether his insurer has complied with the applicable regulations. We reject imposition of the minority rule that would allow an insurer who has issued policies and collected premiums in violation of the law to avoid obligations to the detriment of innocent members of the protected class.”

 

As Gibbs A.C.J. said in the Yango case, 139 C.L.R. 410, 417:

 

“Once it is held that neither the making nor the performance of the contract was unlawful, the fact that the contract was made and performed in the course of the conduct of an unlawful business provides no ground for denying relief to the respondent.”

 

In the Insurance Companies Acts the distinction is carefully made, and in the Act of 1974 deliberately maintained, between carrying on [*1011] Insurance business and making individual contracts of insurance. The Act of 1974 does not invalidate expressly each transaction made in course of carrying on insurance business without authorisation. Indeed it is important to recognise that it does not regulate rights and liabilities of insurer and insured inter se: it is principally designed to ensure the financial soundness of the insurers. The prohibition which it contains against carrying on insurance business without authorisation is an integral element in the statutory regulation of insurance business. That prohibition is exclusively directed to the protection of insured persons. To render individual contracts of insurance void would indeed be not merely inconsistent with the policy of the Act of 1974 but would be repugnant to it. Public policy requires the protection, rather than the prejudice, of insured persons, and at the very least should avoid an offending insurer being able to resist the payment of claims. Put negatively, I consider that the legislative purpose would be fulfilled without the courts regarding contracts of insurance such as these as void or unenforceable. Since the members of the plaintiff's syndicate were not subject to any direct statutory prohibition and did not themselves commit any criminal offence, they ought not to be held to have been deprived by the Act of 1974 of their contractual rights in circumstances where they did not know that effecting or carrying out the contracts would involve the defendants in committing criminal offences.

 

I respectfully adopt the conclusion of Devlin L.J. in Archbolds (Freightage) Ltd. v. S. Spanglett Ltd. [1961] 1 Q.B. 374, 390, where he said:

 

“I think that the purpose of this statute is sufficiently served by the penalties prescribed for the offender; the avoidance of the contract would cause grave inconvenience and injury to innocent members of the public without furthering the object of the statute.”

 

That applies here.

 

In my judgment the Act of 1974 meant to do no more than penalise the insurer who contravenes the prohibition against carrying on business in Great Britain without authorisation: it did not intend to go further and prohibit contracts of insurance, the effecting and carrying out of which constitute the carrying on of insurance business. In not following the Bedford case [1985] Q.B. 966 I am consoled by the reflection that, if my conclusion is right, Parker J. would also have reached it, had the Yango case, 139 C.L.R. 410 been cited to him.

 

I decline the invitation of the parties to hold that insurers who without authorisation enter into insurance contracts in course of carrying on prohibited insurance business have good rights of action against their reinsurers. It is not the function of the courts of first instance to attempt to edify or reassure by obiter dicta. So I will only say, “Cetera quis nescit?”

 

Judgment for the plaintiff in the sums agreed together with interest in the amounts agreed as being due to 19 September 1983 and thereafter [*1012] at the agreed daily rates of interest applicable to the respective currencies up to and including today.

 

Order accordingly.

 

Judgment for plaintiff with costs.