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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Great North Eastern Railway Ltd v Avon Insurance Plc [2001] EWCA Civ 780 (24 May 2001)
Cite as: [2001] Lloyd's Rep IR 793, [2001] EWCA Civ 780, [2001] 2 All ER (Comm) 526, [2001] Lloyds Rep IR 793, [2001] 2 Lloyd's Rep 649, [2001] 2 LLR 649

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Neutral Citation Number: [2001] EWCA Civ 780
Case No: 2000 2904 A3

(His Honour Judge Dean QC)

Royal Courts of Justice
Strand, London, WC2A 2LL
Thursday 24th May 2001

B e f o r e :



- and -



(Transcript of the Handed Down Judgment of
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)


(for the Appellant)
(for the Respondent)



Crown Copyright ©



  1. The question in this case is whether Great North Eastern Railway Ltd ("GNER") was insured against business interruption losses arising from a derailment incident at Sandy on 16 June 1998 on the terms of what has been called the Fenchurch wording agreed in 1996 or (as GNER argue) the terms of what has been called a Request for Property Insurance Quotation prepared in 1998 by Fenchurch's successor as GNER's broker, Jardine Insurance Services Ltd ("Jardine"). Both forms of wording excluded liability for damage or consequential loss caused by or consisting of faulty or defective workmanship but the wording prepared by Jardine added the all important words "on the part of GNER or any employees other than drivers or guards". For the purpose of the preliminary issues ordered to be tried in this case, it is agreed that the derailment was caused by faulty manufacture of one of the wheels on the engine unit and that that was faulty workmanship on the part of one or more non-GNER employees; it was thus within the Fenchurch exception but not the Jardine exception. His Honour Judge Dean QC has held that the insurance was on the terms of the Fenchurch wording. GNER now appeals from that decision.
  2. Facts

  3. Following privatisation of the railway system, GNER placed material damage and business interruption cover with Avon Insurance Plc ("Avon") for the period 29th March 1996 - 31st March 1997 through their brokers Fenchurch Insurance Brokers Ltd ("Fenchurch"). I gratefully adopt the judge's account of the underwriting history with references to the chronological correspondence bundle.
  4. On 2nd April 1996 Mr Florence, Avon's underwriter who was involved with all the material placement negotiations for all three periods, initialled a slip presented to him by Mr Knowles of Fenchurch on behalf of GNER, pp. 12-13. This afforded cover for
  5. "All Risks of Physical Loss or Damage howsoever arising including breakdown . . . . .

    Period 29th March 1996 to 31st March 1997 both dates inclusive

    Section 2 - Business Interruption

    Loss of Gross Revenue and increased cost of working following interruption to the business as a result of loss or damage to any part of the UK rail network and associated property, including but not limited to roads, bridges, tunnels, signalling or overhead transmission lines whether owned by the Insured or not."

  6. The slip provided for the broker to provide the form, ie, the policy wording.
  7. At the request of Mr Florence Fenchurch agreed to arrange reinsurance for the breakdown risk at a premium of 40,000 so that Avon merely fronted for this element of the cover.
  8. Fenchurch prepared and sent to Avon for signature policy wording; Avon signed this on 30th August 1996 and returned the signed wording to Fenchurch on 2nd September 1996, pp. 38, 39 and pp. 41-91. The Schedule described the insured events as "All Risks" with no reference to breakdown cover as such, p. 47. The consequential loss provision was 295,800,000. The exclusions extended to:
  9. "Damage or Consequential Loss caused by:-

    a) i) faulty or defective design, materials or workmanship, inherent vice, latent defect, gradual deterioration, wear and tear or frost," p. 52

    The policy also excluded by exclusion 5 a) damage to "railway locomotives and rolling stock", p. 54. This was a mistake on the part of Fenchurch in drawing up the wording because it had always been intended to cover these items and it was later agreed that the policy should be amended to delete this exception from inception. From time to time this caused some misunderstanding as to whether the cover included locomotives and rolling stock but nothing turns on this so far as the present claim is concerned; indeed two claims for damage to locomotives were made and settled during the first year of cover in 1996. These claims did not involve any consideration of the exclusion clause.

  10. In his witness statement of 10th February 2000, Mr Knowles stated that he did not approve the signed wording because it did not include breakdown cover as required by the slip. However, he never raised this with Avon and never sought to have the wording amended while Fenchurch were still acting as brokers to GNER. It is right to say that Avon have never sought to contend that breakdown was not covered, subject only to the effect of what I will call the faulty workmanship exclusion. Their case is that the all risks cover is apt to cover breakdown of locomotives once these were deleted from the exception in Clause 5(a) of the policy wording.
  11. On 17th February 1997 GNER appointed Jardines as their brokers and they immediately contacted Mr Florence about provision of cover for 1997/98. Negotiations were conducted by Mr Mountain on behalf of Jardines. On 14th February 1997 at a meeting with Mr Florence Mr Mountain was handed a copy of the Fenchurch slip and wording, p. 107.
  12. Mr Mountain sought market quotations from other insurers as well as Avon upon a number of different bases as regards deductibles and also sought alternative quotations with or without breakdown cover. Mr Mountain prepared a presentation document in this connection, p. 97-102. This document mentioned "Jardine Policy Wording". The evidence failed to identify any such wording prepared by Jardines. The document contained no reference to any form of faulty workmanship exclusion. After canvassing other insurers Mr Mountain recommended renewal with Avon inclusive of breakdown cover, p. 105. Thereafter, Mr Mountain left the final renewal negotiations to Mr Aylett of Jardines. Mr Aylett concluded these negotiations at a meeting with Mr Florence on about 29th April 1997, pp. 110-113. There was no discussion of the faulty workmanship exclusion and it was expressly agreed that the existing wording, ie the Fenchurch wording, should remain but that Jardines could come back to Avon if they wanted alterations, p. 112. They never did so unless the events of October 1997 or February 1998 considered below can be so construed.
  13. On 23rd July 1997 Avon issued a schedule to Jardines for the 1997/98 period of cover. This schedule made no reference to the policy wording and no wording was signed for this period. The premium was paid on 23rd July 1997 although Jardines miscalculated the amount which resulted in an under payment which had to be accounted for on the renewal for 1998/99.
  14. On 6th October 1997 Mr Aylett faxed Mr Florence referring to an attached document described as a "draft property register sheet" for his attention and requesting that the attached pages be checked and amended as necessary, pp. 126-134. He also raised eight specific lettered questions relating to details of the cover, none of which referred to the faulty workmanship exclusion. The attached document ran to nine pages and was headed "Summary of Cover" and referred to the period of insurance as "12 months from 31st March 1997", ie the existing period of cover. The whole tenor of the document suggests an existing cover, e.g. in referring to "What is insured", p. 126. In his oral evidence Mr Aylett made it very clear that he did indeed regard this document as an attempt to summarise the cover as it existed at the time in October 1997. In one respect at least this was inaccurate because at page 9 of the document, (p. 133) the "Principal exclusions applying to the whole package" were described in these terms:
  15. "No cover is provided for damage or consequential loss caused by or consisting of:

    inherent vice, latent defect, gradual deterioration, wear and tear, frost, change in water table level, its own faulty or defective design or materials

    faulty or defective workmanship, operational error or omission, on the part of Great Eastern Railways or any employees other than drivers and guards."

    GNER relied on this document as an intimation to Avon that Jardines were proposing a change in the underlying policy terms particularly as to the faulty workmanship exclusion.

  16. Mr Florence delegated the task of dealing with the eight specific inquiries, lettered (a) to (h) in Mr Aylett's fax, to Mr Lord, a clerk in the underwriting department of Avon. Mr Lord did so by reference to the Fenchurch policy wording annotating the fax with his answers to Mr Aylett's specific inquiries, p. 135. On 4th November 1997 Mr Lord spoke to Mr Aylett on the telephone and followed this up with a memorandum which he sent to him on the same date, p. 138. This document referred to the telephone conversation and commenced with the observation, "I understand that the wording for 1997 is to be the same as for 1996 and will try to reply to your fax of 6th October 1997 accordingly, using the Fenchurch wording for 1996". This he proceeded to do, making express reference to the appropriate pages and clauses of the Fenchurch wording. Mr Aylett responded by a fax on 9th December 1997 saying that he felt that the wording still had "some areas where the wording need amendment" but did not refer to the faulty workmanship exclusion, although he did mention the exclusion of railway locomotives and rolling stock, p. 141-142. It is abundantly clear from this exchange that Mr Aylett had the Fenchurch wording available and further that he did not dispute its applicability to the 1997/98 policy year.
  17. In February 1998 Mr Aylett set about negotiating the placement of cover for 1998/99. He prepared a document entitled "Request for property insurance quotations" as a market presentation to be submitted to potential insurers including Avon, pp. 155-165. Mr Aylett said that this was based upon the draft property register he had sent to Avon in the previous October and included the standard Jardine policy terms for cover of this sort. This is not correct as Jardine did not have such standard terms. The terms and in particular the faulty workmanship exclusion were in fact inspired by those provided by other insurers offering mechanical breakdown cover. Quotations were sought for all risks cover including breakdown in respect of material damage and business interruption, p. 159. At p. 164 the "principal exclusions" were described in these terms;
  18. "No cover is provided for damage or consequential loss caused by or consisting of:

    faulty or defective workmanship, operational error or omission, on the part of GNER or any employees other than drivers and guards."

    This presentation was given by Mr Aylett to his colleague Mr Johnson on about 10th February 1998 with a request that he deliver it to Mr Florence at his office. There was no covering letter or memorandum explaining the purpose or content of the presentation. The Claimants contend that its purpose was obvious viz. that it was an offer or at least an invitation to treat on the terms of the document. When Mr Johnson attended at the Avon office Mr Florence was not available so he gave it to Mr Godfrey to give to Mr Florence. Mr Godfrey either gave it to Mr Florence or left it on his desk. It had clearly reached Mr Florence at some time between 10th and 20th February upon which date Mr Aylett attended a meeting with Mr Florence in the latter's office to negotiate renewal of the cover.

  19. There was a conflict of evidence at trial as to what took place at the meeting on the 20th February. Mr Aylett said that Mr Florence had read and was familiar with the terms of the presentation, that he referred to it at the meeting and that he made reference to information concerning deductibles and insured values which appear in Mr Florence's notes of the meeting, at page 166, which were only available from the presentation. Mr Aylett said that he could not remember if he drew the terms of the faulty workmanship clause to Mr Florence's attention.
  20. Mr Florence accepted that he had the presentation available to him both before and at the meeting but said that he had not read it at any time and that he made no reference to it at the meeting, all information concerning the calculation of premium in his note on page 166 being given to him orally by Mr Aylett at the meeting. He denied that there had been any discussion of any topic other than commercial matters relevant to the calculation of premium as appears from his note. He said that there was no mention of the faulty workmanship clause by either of them. Avon's case is that this clause was never mentioned, let alone discussed, at any time before the claim was made and that Avon rejected it (if offered) in reliance on the form of the clause in the Fenchurch wording.
  21. The findings of the judge in relation to this meeting were that Mr Aylett did not draw the terms of the faulty workmanship clause to the attention of Mr Florence. He also held that Mr Florence did not read the presentation before the meeting and, although he did have it with him, no reference was made to it at the meeting either by him or by Mr Aylett.
  22. Following the meeting of the 20th February there were further negotiations by exchange of faxes between Mr Aylett and Mr Florence, principally concerned with the basis of deductibles; there was no mention of any term or condition relevant to legal liability or exceptions, see pp. 167-168. On 5th March 1998 Mr Aylett faxed his proposals on the business interruption excess and suggested a renewal premium of 140,000 and payment of the under-paid 14,000 of premium in respect of 1997/98, p. 169. Mr Florence wrote his agreement to this proposal in manuscript on Mr Aylett's fax and re-faxed it back to Mr Aylett on the 6th March, p. 170. Avon contend that at that point an agreement was concluded on the only matters outstanding and the risk was accepted for 1998/99 upon the basis of the matters which had been the subject of express negotiation and upon the basis of the Fenchurch wording which had applied throughout the two previous periods of cover, together with a subsequent agreement about aggregates.
  23. The calculation of the unpaid premium for 1997/98 was incorrect and this was subsequently corrected by Mr Aylett, p. 172.
  24. There was further correspondence in April 1998 between Mr Aylett and Mr Lord, who had played no part in the renewal negotiations, on the points which Mr Aylett had originally raised in December 1997. These were dealt with by Mr Lord by explicit reference to the Fenchurch wording, pp. 173, 74. No new policy wording had been signed when the casualty occurred on 16th June 1998.
  25. Submissions

  26. Mr Julian Flaux QC in his skeleton argument had a number of attacks on the learned judge's judgment but by the time of his oral argument he had reduced them to two main submissions
  27. (1) the insurance contract for the year March 1998 - April 1999 was to be found in the following documents

    (i) the request for a quotation sent to Avon in February 1998 which Mr Florence brought with him to the meeting of 20 February 1998 even if he had not read it before the meeting;

    (ii) the notes made by Mr Florence at the meeting about suggested premiums (including 40,000 for breakdown) and excesses;

    (iii) Mr Aylett's fax of 23rd February 1998 requesting a quotation which incorporated an excess based on a monetary limit rather than a limit based on time;

    (iv) Mr Florence's response offering a choice;

    (v) Mr Aylett's fax of 5 March 1998 confirming "renewal of the policy" on the basis of two separate monetary excesses at a renewal premium of 140,000 together with 14,000, part of the previous year's unpaid premium

    (vi) Mr Florence's signed agreement to that fax;

    (vii) the acceptance by Mr Florence of 6th March that the excesses each be subject to a 500,000 aggregate.

    Mr Flaux categorised the contract as being made partly in writing and partly by conduct inasmuch as the request for a quotation was sent to and received by Avon in February 1998.

    (2) The exception relied on by Avon rendered any cover for breakdown of GNER's engines illusory; since it was always the intention of the parties that breakdown be covered and a separate part of the premium was, in fact, charged for breakdown cover (see (ii) above), the exception could never have been intended to apply to engine breakdown at all and must be treated as repugnant to breakdown cover.

  28. Mr Jeremy Stuart-Smith QC submitted:-
  29. (1) that the contract was a written contract to be found in the fax of 5 March 1998 in which Mr Aylett offered to confirm "renewal of the policy" subject to agreement on 3 matters and Mr Florence's countersignature on the fax agreeing those 3 matters; the policy renewal could only be the previous year's insurance contract which was in the Fenchurch wording.

    (2) that the exception clause in the Fenchurch wording had to be applied in accordance with its terms which were not, in any event, inconsistent with the provision of breakdown cover, let alone the main purpose of the contract.

    The terms of the contract

  30. In my judgment, the contract of insurance for the year 1998-1999, even though made somewhat informally, has to be regarded as a contract in writing and falls to be interpreted as such a contract. No one suggests that it is partly an oral contract. Nor is it possible to argue that it is a contract made partly in writing and partly by conduct. Although there was no policy document produced for the 1998 year, it would be most unusual if any insurance contract of the complexity of that in the present case could be otherwise than a contract in writing initialled or signed by the underwriter. As it happens the critical document signed by Mr Florence for the insurers is also signed by Mr Aylett of Jardine since Mr Florence's way of indicating his assent was to sign and return the fax initially sent by Mr Aylett on 5th March 1988. I, therefore, agree with Mr Stuart-Smith that any search for the terms of the contract of insurance must start with the fax of 5th March 1998.
  31. That fax confirmed "renewal of the policy". According to Mr Stuart-Smith that can only be the wording agreed the previous year. Mr Flaux submits that it can only refer to the request for a quotation submitted previously to Avon, even if not read by Mr Florence. He says that the question whether agreement has been reached on any particular term depends on an objective assessment not on what the parties may have thought that they agreed. Any objective and properly informed observer would conclude that the insurance contract was to be renewed on the terms of the document that asked for a quotation in response to which, it must be assumed, the insurers did frame their quotation so that it became the basis of the contract.
  32. In spite of the attractive way Mr Flaux put his submission I cannot accept it. First, I agree with Mr Stuart-Smith that an offer to "renew" a "policy" must be an offer to renew on the previous year's terms which, despite some argument to the contrary in Mr Flaux's skeleton, must on any view be the Fenchurch wording.
  33. Secondly, although it is true that the request for a quotation was sent to Avon some time before the meeting of 20 February 1998, it is a striking fact found by the judge that no reference at all was made to it at that meeting. The judge rejected Mr Aylett's evidence that it had been discussed. He also recorded Mr Aylett's evidence (which he did accept, confirmed as it was by Mr Florence) that if a broker were asking an insurer to renew cover which that insurer had given for the immediately previous year he (Mr Aylett) would regard it as incumbent on the broker to draw to the attention of the underwriter any specific change he was seeking and to obtain an acknowledgment from the underwriter that he was willing to accept those changes on renewal. That evidence was also confirmed by Mr Johnson, an experienced Jardine broker. The judge referred to "this method of doing business" and concluded that, since it was not adopted by Mr Aylett, there could be no agreement on either the terms of the quotation in general or the Jardine exception in particular. He also relied on the undoubted fact that when, after the accident, Mr Aylett's colleagues in Jardine's claims department asked Mr Aylett to provide them with the terms of cover, Mr Aylett provided the Fenchurch wording with the wider exclusion only emphasising that the wording should have included breakdown cover - which it did, in any event, since the cover was all risks cover.
  34. Mr Flaux attacked the judge's emphasis on both these matters, submitting that the judge should not have relied on a "method of doing business", when (a) no custom or practice of the market to that effect had been pleaded or argued and (b) the presence of any particular term had to be objectively determined; nor should he have relied on subsequent events in order to determine the terms of contract. Mr Flaux's attack on the judge is misplaced in both respects.
  35. In the first place, the judge did not rely on the evidence of "the method of business" as a custom or practice; he used it as a yardstick to test Mr Aylett's evidence that there had been discussion of and implicit agreement to the terms of the request for a quotation. Mr Aylett's own evidence was that there was such discussion; the judge held that there was not, but only negotiation "in respect of commercial and monetary terms"; the fact that no acknowledgement had been procured from Mr Florence, that he accepted relevant changes to the previous wording, merely supported the fact that no discussion had occurred. If, of course, any such discussion had occurred, the question would then have arisen whether any agreement (implicit or explicit) on new terms had been reached; if it had been, that could then have been relevant to the terms on which renewal was made. But the starting point for such an argument was never reached according to the judge. That conclusion was, in my judgment, correct.
  36. Nor is it correct to say that the judge was misled into deciding what had to be an objective inquiry by subjective standards. He was using Mr Aylett's evidence as to his method of doing business in order to determine the objective question whether anything which was said or done at the meeting of 20 February would indicate to an objective observer that agreement was reached on terms which differed from the previous wording. In the light of that evidence the judge concluded that there was indeed nothing said or done to that effect. The judge did say that it was appropriate to have regard to the commercial background and "any common understanding of the negotiating parties as to the way the business in question is usually done in the context of the particular transaction". He relied for this on the speech of Lord Wilberforce in Reardon Smith Line Ltd v. Yngvar Hansen-Tangen, The Diana Prosperity [1976] 1 W.L.R. 989 particularly the passage where Lord Wilberforce said (at 997C) that what the court had to do was
  37. "to place itself in thought in the same factual matrix as that in which the parties were".

    That case arose (and those remarks were made) in the context of a dispute as to the construction of terms which (it was agreed) were contained in the relevant contract. But it seems to me (as it did to the judge) that the same approach is appropriate in considering the question whether a suggested term was or was not expressly incorporated into a contract.

  38. Secondly, the judge was correct to find it very telling that, when Mr Aylett was asked by his colleagues to obtain the terms of the contract, he sent them the Fenchurch terms. If the question is whether a term was incorporated into a contract, the subsequent conduct of the parties may be very relevant to the inquiry whether such a term was or was not agreed. Mr Flaux's submissions to the contrary were, with respect, a misapplication of the principle that the subsequent conduct of the parties cannot be relied on as an aid to the construction of the contract, see Miller v. Whitworth Estates [1970] A.C. 583, 603D-E per Lord Reid, 615A per Lord Wilberforce. No such principle exists in relation to the question whether an alleged term of a contract was, in fact, agreed.
  39. The judge's finding that no discussion took place of the terms of the request for a quotation is, thus, fatal to the submission that the phrase "renewal of the policy" must in the circumstances of the case be a reference to that request; the appellant's first argument, therefore, fails.
  40. Repugnancy

  41. Mr Flaux relied on Tor Line A.B. v. Alltrans Group of Canada, The TFL Prosperity [1984] 1 W.L.R. 48 in support of his argument that the exception clause in its wider (Fenchurch) form was so extensive as to deprive GNER of any cover for breakdown, when it was agreed that breakdown cover was to be provided. This was a brave submission for two reasons. First the insurance cover was not solely against breakdown. It was All Risks cover. It is, no doubt, fair to say in the light of the underwriting history that there was specific agreement that breakdown cover was to be included and it was also the fact that a particular part of the global premium was premium in relation to breakdown. This latter fact was not, however, apparent on the face of the documentation and it is not, in my judgment, permissible to look between the lines of the written contract to extract a part of the cover and then to argue that a particular exception will deprive that part of the cover of any effective meaning. The repugnancy doctrine (even at its most extreme) only entitles a court to disregard an exception clause if the contract as a whole would otherwise be virtually reduced to a declaration of intent, see per Lord Roskill [1984] 1 W.L.R. at 58-59. To the extent that Mr Flaux wished to rely on the original slip with its express provision "including breakdown" as opposed to the inclusive "All Risks" Fenchurch wording, such exercise was, as the Judge held, impermissible in the light of Youell v. Bland Welch [1992] 2 Lloyd's Rep 127, 133.
  42. Secondly, even if it were possible to isolate cover for breakdown in some way, it does not seem to me impossible to give the contract with the exception clause a sensible meaning. The wider form of clause excludes liability for faulty or defective design, materials or workmanship. As Chadwick LJ pointed out in the course of argument, there is no exclusion of liability for breakdown caused by operational error or omission (e.g. a failure to use the correct lubricant or the correct quantity of lubricant). In this respect the clause is, in fact, less wide than the otherwise narrower (Jardine) form of the clause, which does apply to "operational error or omission on the part of GNER or any employees other than drivers or guards". The judge accepted the view of GNER's underwriting expert, Mr Colin Grace, that there were no standard terms for breakdown insurance and that an exception clause as wide as that in the Fenchurch wording was wholly inappropriate for breakdown cover. That of itself cannot get the appellants home as against the underwriters. The judge also said that Mr Stuart-Smith's examples of situations not excluded by the Fenchurch wording did not impress Mr Grace and owed more to counsel's fertile imagination than to the practicalities of breakdown insurance save insofar as they related to external perils which would normally be covered under different forms of policy.
  43. For my own part, I would not regard Chadwick LJ's example as far-fetched; it does, moreover, seem to me that external perils (such as malicious damage by third parties) are covered by the Fenchurch wording; in respect of the Material Damage cover, they are included by virtue of being excluded by the word "Damage" in exception 4 and then being written in again by use of the words "Malicious Damage"; in respect of Business Interruption Cover they are included by virtue of the cover being All Risks cover. I would not, therefore, be as dismissive of Mr Stuart-Smith's submissions on this aspect of the case as the Judge was inclined to be.
  44. More importantly, however, it is, to my mind, impossible to say that the parties cannot have intended there to be no exception applicable to breakdown cover which is what Mr Flaux' argument comes down to. If (which did not happen) they had specifically addressed their minds to the question they might have agreed there should be no exception; it is at least equally likely that they might have agreed some other exclusion even if it might well have been a narrower one. To delete the exclusion altogether in relation to breakdown insurance would be to re-make for the parties a contract they did not make for themselves.
  45. Thus this second argument must also fail, the appeal as a whole must be dismissed and the answers to the preliminary issues given by the judge will be upheld.

  47. I agree.

  49. I also agree.
  50. ORDER: Appeal dismissed with costs; leave to appeal to House of Lords refused.
    (Order does not form part of approved Judgment)

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