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England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd  EWCA Civ 1047 (3 July 2001)
Cite as:  Lloyd's Rep IR 667,  EWCA Civ 1047,  CLC 1103,  2 All ER (Comm) 299
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COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEEN'S BENCH
DIVISION (LONGMORE J.)
Strand, London, WC2A 2LL
Tuesday 3rd July 2001
B e f o r e :
LORD JUSTICE LATHAM
SIR CHRISTOPHER STAUGHTON
| GAN INSURANCE CO. LTD.
|- and -
|TAI PING INSURANCE CO. LTD.
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
David Railton QC & John Lockey (instructed by Messrs Stephenson Harwood Solicitors for the Tai Ping)
Crown Copyright ©
LORD JUSTICE MANCE:
"CONDITIONS: Full Reinsurance Clause NMA 416
Claims Coop Clause (Wording T.B.AGD)
Cancellation Clause as original plus 30 days.
All amendments, additions, deletions or endorsements hereto to be agreed by the Leading Reinsurance Underwriter only, such agreement to be binding on all other Underwriters subscribing hereto.
In the slip, the second condition had originally read "Claims Control Clause (Wording T.B. AGD)", but the word "Control" was altered to "Co-operation" at Gan's request.
"REINSURANCE WARRANTY CLAUSE (FULL R/I. CLAUSE No. 1)
(Approved by Lloyd's Underwriters' Non-Marine Association)
Being a Reinsurance of and warranted same gross rate, terms and conditions as and to follow the settlements of the ..........................................................................Company and that said Company retains during the currency of this Policy at least.......................................on the identical subject matter and risk and in identically the same proportion on each separate part thereof, but in the event of the retained line being less than as above, Underwriters' lines to be proportionately reduced."
Gan required and on 21st March 1996 initialled the following Claims Co-operation Clause:
"CLAIMS CO-OPERATION CLAUSE
Notwithstanding anything contained in the Reinsurance Agreement and/or Policy wording to the contrary, it is a condition precedent to any liability under this Policy that:-
a) The Reinsured shall, upon knowledge of any circumstances which may give rise to a claim against them, advise the Reinsurers immediately and in any event not later than 30 days;
b) The Reinsured shall co-operate with Reinsurers and/or their Appointed Representatives subscribing to this Policy in the investigation and assessment of any loss and/or circumstances giving rise to a loss;
c) No settlement and/or compromise shall be made and liability admitted without the prior approval of Reinsurers.
All other terms and conditions of this Policy remain unchanged.
SCOR (UK) Clause 012 4/83"
The Issues Appealed
"(ii) Whether, as a matter of construction, compliance by Tai Ping with the provisions of the claims co-operation clause was a condition precedent to liability on the part of Gan.
(iii) Whether, as a matter of construction, breach of subparagraph (c) of the claims co-operation clause is only established by showing that Tai Ping both settled and/or compromised Winbond's claim and admitted liability.
(iv) Whether there are to be implied into the slip policy the following terms: (a) that reinsurers may not withhold approval of a settlement unless there are reasonable grounds for withholding approval; (b) that reinsurers will respond with reasonable promptness to a request for approval of a settlement.
(v) Whether, as a matter of construction of the slip policy, Tai Ping, even if shown to have been in breach of the claims co- operation clause, is entitled to recover under the slip policy, if and to the extent that it is able to show that it was in fact and in law liable to Winbond in Taiwan, and under Taiwanese law for at least its proportion of the settlement figures of Taiwanese $2.65 million."
(iv) (a) Yes
(b) Longmore J. did not think it useful to answer this issue, "because, if a request goes unanswered, it will be tantamount to a refusal".
Issue (iii) Claims Co-operation Clause, sub-clause (c): one or two subjects?
"(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
(2) The background was famously referred to by Lord Wilberforce as the "matrix of fact", but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should be reasonably available to the parties and to the exception mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of a document is what the parties using those words against the relevant background would reasonably have been understood to mean.
(5) The 'rule' that words should be given their 'natural and ordinary meaning' reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Naviera S.A. v. Salen Rederierna A.B.  A.C. 191, 201:
"if detailed semantic and syntactical analysis of words in a commercial document is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense".
"no reason to depart from the fundamental rule of construction of contractual documents that the intention of the parties must be ascertained from the language that they have used interpreted in the light of the relevant factual situation in which the contract was made. But the poorer the quality of the drafting, the less willing the court should be to be driven by semantic niceties to attribute to the parties an improbable and unbusinesslike intention, if the language used, whatever it may lack in precision, is reasonably capable of an interpretation which attributes to the parties an intention to make provision for contingencies inherent in the work contracted for on a sensible and businesslike basis."
"It is a condition precedent to liability under this Insurance that all claims be notified immediately to the Underwriters subscribing to this Policy and the Reassured hereby undertake in arriving at the settlement of any claim, that they will co-operate with the reassured Underwriters and that no settlement will be made without the approval of the Underwriters subscribing to this Policy".
Issue (ii) - condition precedent?
Issue (v) condition precedent to what?
Issue (iv)(a) must reinsurers have reasonable grounds for withholding approval?
(1) The judgment below and the general issue
"Suppose Tai Ping were in truth liable to Winbond. Is it supposed to be the party's [sic] intention that Gan need not pay? Suppose all the reinsurers of the remaining 98% other than Gan insist that as part of Tai Ping's promised cooperation in the earlier part of the clause, Tai Ping should take advantage of what appears to be a reasonable offer of settlement. Is it to be supposed that the 2% reinsurer can insist on the claim not being settled, however capriciously he withholds his approval? Mr. Wynter [counsel for Gan] had no answer to these problems. His undaunted submission was that, however arbitrary, however capricious, however unreasonable Gan were, they were entitled to decline to approve any settlement, and if a settlement were made without their approval, they had no liability."
"The insurers have therefore to decide what to do in the circumstances. In effect, they have got to prove a liability under the policy with the assured, in respect of which the reinsurers have agreed to indemnify them. They can attempt to prove this, without going to the expense of defending the claim by the assured in legal proceedings; or they may feel it more prudent to defend the claim, on the basis that they may defeat it or, if they do not, they will be in a better position to establish their claim against reinsurers. They well be in a very difficult position."
(2) The need to establish liability to the original insured
(3) The suggested implication
"In the present circumstances:
(A) The proposed settlement was reasonable and businesslike and was supported by other reinsurers of the Defendant.
(B) The Claimant had the opportunity to respond to the proposed levels of settlement in the defendant's letters of 16 and 24 July 1997 and chose not to respond.
(C) The Claimant had in fact no reason to refuse approval of the settlement at NT $2.65 billion.
(D) In the premises, it was not necessary for the Defendant to obtain the prior approval of the Claimant, and/or the Claimant was in breach of one or both of the implied terms pleaded in sub-paragraph (4) above and cannot now rely on their own breach of the slip policy to defeat the Defendant's claim."
(4) The law and the previous authorities
"The question therefore is, Was the admission of negligence one which in the circumstances the insurers were entitled under the policy to require the assured to make? In my opinion clearly not. The right given to the insurers is to have control of proceedings in which they and the assured have a common interest - the assured because he is the defendant and the insurers because they are contractually bound to indemnify him. Each is interested in seeing that any judgment to be recovered against the assured shall be for as small a sum as possible. It is the assured upon whom the burden of the judgment will fall if the insurers are insolvent. The effect of the provisions in question is, I think, to give to the insurers the right to decide upon the proper tactics to pursue in the conduct of the action, provided that they do so in what they bona fide consider to be the common interest of themselves and their assured. But the insurers are in my opinion clearly not entitled to allow their judgment as to the best tactics to pursue to be influenced by the desire to obtain for themselves some advantage altogether outside the litigation in question with which the assured has no concern. This is what was done in the present case. I do not wish to use hard words, but I should have thought that a moment's consideration would have shown that the course adopted was as unjustified in point of law as it is assuredly repellent to the sense of business decency. I am not surprised that the jury should have wished to express their emphatic disapproval."
"Under condition 2 the society were given, in consideration of their indemnity, an absolute right to control their assured's defence; but the scope of this right was, in my view, subject to certain implied boundaries and limitations. It was not one which they would be entitled to exercise arbitrarily. They were bound to exercise a real discretion upon each question as it arose in the conduct of the defence, making each decision after due consideration of the circumstances of the particular case; not, of course, consulting the wishes of the assured as if he were an uninsured person, but taking their decisions with their minds on the facts of the particular allegations made against him, whilst not forgetting their own rights arising from the bargain expressed in the policy - namely, that in return for his indemnity their assured allowed them freedom to deal with the pecuniary risk to which they were exposed as economically for themselves as they could without bringing into the account extraneous considerations wholly foreign to the subject-matter of the insurance between him and them. It is easy to see, even within a field of discretion so defined, that a great sense of moral grievance might still be caused to an assured, as, indeed, the learned judge felt. Let me suppose the case either of a private chauffeur, or a lorry driver engaged continually in commercial transport on the roads, in either case a man of unblemished road reputation. The insurance company settles the case without consulting the employer. His driver knows he was guilty of no negligence, and the employer knows it, too. The driver feels that his good reputation has been sacrificed. Very hard cases happen in this way sometimes. It is, however, not necessary for this appeal to express any opinion on the difficult question of whether on such facts the assured would have legal ground for complaint, for the facts of the present case do not leave room for doubt; they fall wholly outside the field of discretion entrusted to the society by condition 2."
"I think that the second condition in the policy, which provides that "The Society shall have "absolute conduct and control of all or any proceedings against "the assured" is subject to an implied term that the solicitor who is selected by the society shall act reasonably in the interests both of the assured and the society. As the assured is the litigant, the solicitor is his solicitor on the record and owes him the duty of a solicitor to his client.
This means that the solicitor, nominated by the society, is the solicitor for the assured, who is his client. But he is also appointed by the society to protect its interests. If in regard to any question of tactics in conducting the litigation the solicitor has reason to discern a conflict, or possible conflict, of interest between the society and the assured, it is the duty of the solicitor to inform the assured of the matter. If the assured then insists on a course that the society disapproves, it can refuse to conduct or control the proceedings any longer, and leave the assured to do so at his own cost, and at the risk, if the society are right in their view, of not being able to recover that cost under his policy. If people act reasonably, it is obvious that the business method contemplated by the policy can be carried out with perfect smoothness."
"In these proceedings there has been no argument upon the question whether in the circumstances the refusal of the insurer to give its consent in writing to the insured making any admission, offer, promise or payment in connection with any claim lacks bona fides or is unreasonable and, if so, whether the insurer is under an obligation to consent. These are important questions of law depending upon findings of fact which have not been made and which require full consideration after argument. In my opinion, the declaration sought does not raise these questions and upon them I express no opinion."
"35. In these circumstances it is not irrelevant to note some features peculiar to insurance against risks of third party liability and in relation to which condition 2(a) is of special significance. Policies insuring against such risks and which combine an upper limit of indemnity with a prohibition upon settlement of claims by the insured without the insured's concurrence, as does the present policy, are very likely to give rise to conflicts of interest as between insurer and insured whenever a claim is made against the insured in excess of that upper limit of indemnity. The insured will be anxious to settle the claim at a figure within that limit; the insurer, however, will gain little from a settlement close to the limit and may prefer to have the case fought out rather than have it settled on such terms. An immediate conflict of interests then arises.
36. Where settlement for less than the upper limit of indemnity appears unattainable and the third party's case is a strong one the insurer's immediate financial interests would be better served if he could successfully resist the insured's claim to indemnity instead of accepting liability to indemnify and conducting an inauspicious defence. Condition 2(a), as interpreted in the present declaration, may afford to an insurer a means of attaining this result; if the insured is anxious to settle and the insurer, while refusing to take over the conduct of the defence, withholds its consent to a settlement, a breach of the condition against settlement without consent may be procured and subsequent liability to indemnify may be avoided. An insured's anxiety to settle will, of course, be acute if his entitlement to indemnity is in doubt and will in any event be substantial if the likely amount of any judgment against him far exceeds the limit of his entitlement to indemnity under the policy.
37. . The terms of the declaration would permit it [the insurer] to refuse consent to any proposed settlement, while warning the assured that to settle would constitute a breach of condition.
50. However it is important that the making of this second declaration should not be thought to confer arbitrary power of refusal of consent upon the insurer. On the contrary I regard the power of the insurer as so hedged around with safeguards for the legitimate interests of the insured as to result in a situation in which the insured may be little worse off as a result of the declaration than it would have been had it been held that it might settle claims without the insurer's consent.
51. Where conflicts of interest arise as between an insured and an insurer, as they frequently will where an indemnity against liability to third parties is limited to a maximum amount, the insurer must exercise its powers under the policy with due regard for the interest of the insured. Perhaps because of the rather different way in which the granting of cover for third party automobile claims has developed in the United States as compared with the United Kingdom or Australia, there appear to be very few instances in the latter jurisdictions in which the courts have had to consider this aspect of liability insurance. One is, however, provided by Groom v. Crocker  1 K.B. 194. .
55. The nature of the proceedings before Helsham J., concerned as they were only with a point of construction and not involving any investigation of the merits of the particular settlement which the insured was anxious should be effected with infant plaintiffs, makes it quite inappropriate on this appeal to seek to judge the insurer's refusal of consent to settlement. It would I think be improper for the insurer to refuse its consent to an otherwise proper and reasonable settlement if it did so not because there were reasonable prospects of a defence to claims succeeding but rather because, remote as those prospects might appear, they seemed to it preferable to a settlement involving it in payment up to the full amount of its limit of liability. To refuse consent in such a case, thereby exposing the insured to the probability of a judgment against it for an amount much in excess of the limit of liability, would be substantially to disregard the proper interests of the insured. On the other hand the insurer might quite properly refuse consent to a settlement which was attractive to the insured not because of an objective evaluation of the prospects of a successful defence but rather because it would avoid the adverse publicity of a trial or would enable the insured to share in, and require its insurer to share in, a liability which properly should be wholly borne by its parent company, the supplier of the allegedly harmful drug.
56. No doubt the limit of liability to indemnify and its relationship to the amount likely to be awarded against an insured will be an important factor in considering the propriety of any refusal of consent to a settlement. The insurer necessarily ceases to have any interest in that part of an award in excess of the limit of liability but the insured is vitally interested in that excess. .
57. The second declaration produces, I have said, a result little less favourable to the assured than would a declaration that the consent of the insurer to any settlement was unnecessary; in the latter event the insured would nevertheless be required to have regard to the proper interests of the insurer and could not claim indemnity under the policy in respect of amounts payable under a settlement which did not reflect, by its terms, a reasonable evaluation of the prospects of a successful defence to a third party's claim. ."
"Here Scor not merely withheld approval; they withheld co-operation also, except to a detrimentally limited extent. By withholding both approval and co-operation, Scor forced ICA into a settlement by adjudication, which cost much more than settlement by accepting ATC's claim; yet Scor now contend that the language of one of these two clauses entitles them to withhold payment of what their refusal to approve or to co-operate has compelled ICA to pay.
I do not feel driven by the claims co-operation clause to attribute to the parties who contracted to be bound by it any such unjust and improbable intention. By their conduct rather than by any implied approval or request, Scor took themselves and ICA's resulting settlement by adjudication outside the scope of the claims co-operation clause, as the Judge was willing to hold alternatively, and so brought or kept that forced settlement within those settlements which Scor had contracted to follow."
"(a) A contract may not on its true construction give a party any contractual right on the fulfillment of conditions, but may only provide one or other of the following:
(i) A right to have discretion exercised in their favour in which event in order to provide something enforceable, the Court construes the contract as imposing an obligation to act reasonably (see The Product Star  1 Ll.R. 397); "
Later, at p.567 he also identified
" . a class of case in which rights having been granted by the contract, and there then is granted to one contracting party a discretion which will enable that party to reduce his own liability; The Vainqueur Jose,  1 Ll.R. 557 is an example of such case. Once again in this area, as in the cases where the only contractual liability is to exercise a discretion, the Court imposes an obligation on the contracting party to exercise that discretion reasonably."
(5) Analysis of present reinsurance
LORD JUSTICE LATHAM:
Sir Christopher Staughton:
Issue (iii) "And liability admitted".
"The fact that a particular construction leads to a very unreasonable result must be a relevant consideration.The more unreasonable the result the more unlikely it is that the parties can have intended it, and if theydo intend it the more necessary it is that they shall make that intention abundantly clear."
So far as I am aware that sentiment has not been criticised or reversed.
Issue (ii) Condition precedent?
Issue (v) - Condition precedent to what?
Issue (iv)(a) must reinsurers have reasonable grounds for withholding approval?
"Whether there are to be implied into the slip policy the following terms: (a) that reinsurers may not withhold approval of a settlement unless there are reasonable grounds for withholding approval "
"These are important questions of law depending upon findings of fact which have not been made and which require full consideration after argument."
"I regard the power of the insurer as so hedged around with safeguards for the legitimate interests of the insured as to result in a situation in which the insured may be little worse off as a result of the declaration than it would have been had it been held that it might settle claims without the insurer's consent."
That does , if I may say so, seem to me to envisage a remarkable implied term.