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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 >> Charman v New Cap Reinsurance Corporation Ltd  EWCA Civ 1372 (16 October 2003)
Cite as:  EWCA Civ 1372,  1 All ER (Comm) 114,  Lloyd's Rep IR 373
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COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
Mr Justice Morison
London, WC2A 2LL
B e f o r e :
LORD JUSTICE RIX
MR JUSTICE HOLMAN
| JOHN ROBERT CHARMAN
(suing on his own behalf and on behalf of all other members of Lloyd's Syndicates 488 and 2488)
|NEW CAP REINSURANCE CORPORATION LTD
Smith Bernal Wordwave Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Mr Nicholas Hamblen QC & Mr Richard Waller (instructed by Messrs Holman Fenwick & Willan) for the Respondent
Crown Copyright ©
Lord Justice Rix:
"The reinsurer reserves the right to increase the Annual Premium at any Anniversary Date during the Term on a pro rata basis, if prior to the Termination Date, there is a material change in the normal underwriting guidelines, classes of business, volume of business or proportion of business, as described in the submission and or any extraordinary claims developments. Material change to be deemed to be substantial and as mutually agreed."
"the clause was properly invoked for the 1999 year of account and the Syndicates [the reinsured] cannot be heard to say otherwise".
The slip contract
"PERIOD: Losses occurring during the period of 36 months at 1st January 1997.
"Underwriting Year" as used herein shall mean losses occurring during the period 12 months at 1st January 1997, 1998 or 1999."
"CANCELLATION: Cancellation hereon at any time to be mutually agreed. However, it is agreed that failure to pay the Annual Premium within 30 days of the due date shall be deemed Cancellation."
"Mr Devlin [NCR's underwriter] was concerned about a commitment to a three year contract and, for protection, he asked for a review clause enabling him to increase the premium in the event of "atypical" claims development. Mr Adrian Ryan on behalf of the Syndicates suggested the word "extraordinary" and this was inserted into the slip policy when it was scratched."
The background to trial
"We are in agreement to cancel the contract at Underwriting Year-end (1997) and would be in a position to offer terms on a new basis.
"If cancellation is not desired, then subject to the review clause, we would invoke our right to revise existing terms."
"we are imposing, as a precautionary measure, a general reservation of rights in relation to our participation".
"Please also note that this letter is sent subject to the full reservation of rights which [NCR] have imposed whilst their investigations into the placement and operation of your Whole Account Excess of Loss Treaty continue".
"We hereby put you on notice that GIO regard the claims development to date as extraordinary and therefore intend to exercise their right to increase the annual premium for 1998 and 1999."
"[NCR] had a right (by virtue of the Review clause pleaded at paragraph 4.9 of the Amended Points of Claim) to increase the Annual Premium at each anniversary date in the event of any extraordinary claims development. If the Claimant was not prepared to agree that increase then the Reinsurance Contract lapsed. The claims development in 1997 was extraordinary and no increase in premium was agreed. In the premises, the Reinsurance Contract lapsed as at 31st December 1997. If, which is denied, the Reinsurance Contract did not lapse as at 31st December 1997, the claims development in 1998 was extraordinary and no terms were agreed or would have been agreed for 1999. As a result, if, which is denied, the Reinsurance Contract did not lapse as at 31st December 1997 it lapsed as at 31st December 1998."
"[NCR] also had a right (by virtue of the NCAD provision and/or the Review clause…and/or the provisions of the Slip…) to cancel the Reinsurance Contract at the anniversary date if they required an increase in the Annual Premium (whether because of any extraordinary claims development or for any other reason) and the Claimant was not prepared to agree that increase or change its terms. The claims development in 1997 was extraordinary and in any event no terms were agreed. In the premises, the Reinsurance Contract was validly cancelled as at 31st December 1997."
"6. Whether the Mainframe Contract (if otherwise valid) terminated on 31 December 1997, by reason of…
6.3 The express terms of the Mainframe Contract (and, in particular, the term pleaded in Paragraph 9(5) of P/Defence 1), the alleged effect of which was that, in the event of an extraordinary claims development, NCR was entitled to increase the premium for the following year; the claims development for 1997 was allegedly extraordinary and, no terms having been agreed as to premium for the 1998 year, the Mainframe Contract terminated on 31 December 1997…"
"11. Extraordinary claims development. This involves consideration of the following matters:…
11.2.3 Whether there was extraordinary claims development for 1997 or 1998 [emphasis added];
11.2.4 If so, whether the failure to reach agreement as to an increased premium resulted in the termination of the Mainframe Contract."
Prior to that date, however, there had been no reference to ECD in 1998 in the GIO action either.
"2. [NCR] admits that it is not entitled to avoid the Policy (whether for misrepresentation, non-disclosure or on any other grounds).
"3. [NCR] admits that there is no unfulfilled condition precedent to the Policy and/or to [NCR's] liability thereunder.
"4. [NCR] admits that, as a matter of construction, the Policy was for a period of three years, subject only to the Cancellation clause and to the review clause contained in the General Conditions.
"5. [NCR] admits that the Policy was not terminated pursuant to the Cancellation clause (whether by notice of cancellation, mutual agreement or late payment of premium).
"6. For the avoidance of doubt, [NCR] maintains that there was extraordinary claims development prior to 31st December 1997 and/or prior to 31st December 1998 and that, as a result:
(a) because no increased premium was agreed, the Policy terminated as at 31st December 1997 and/or 31st December 1998; alternatively
(b) the [Syndicates] must give credit for the increased premium that would have been imposed in the absence of actual agreement between the parties and that the increased premium would have been in the sum of $101 million, alternatively $80 million, for 1998 and $131 million, alternatively $121.5 million for 1999."
"This Note is provided in order to address the question raised by the Court during final submissions, namely whether it is necessary in order to invoke the review clause to specify the additional premium required. It will do so by setting out NCR's case as to (a) whether NCR invoked the review clause and (b) the consequence (if any) of failing to specify the additional premium demanded."
"9. In summary, NCR made it clear that in the event that Charman did not agree to a mutual cancellation, then they would exercise their right to put forward new terms pursuant to the "review" clause (or ECD clause). Charman indicated that there was no right of review and rejected any proposal to revise or vary existing terms. This hardline [sic] from the Syndicates pre-empted any detailed consideration by NCR as to an appropriate increase or any subsequent negotiation with the Syndicates."
"14. Moreover, it is clear on the evidence that if an increased premium figure had been specified by NCR the Syndicates would not have accepted it or paid it. In those circumstances it is difficult to see how it can be open to the Syndicates to contend that the review clause cannot be relied upon because no premium figure was specified. In the light of the stance taken by the Syndicates it would have been futile for NCR to do so."
(I would comment that that passage reads as though it is making a case on waiver or estoppel against the Syndicates in respect of their conduct at the end of 1997.)
"26. The contract came to an end because once the review clause was validly invoked then (subject to questions of waiver) the original premium terms ceased to apply as from the first anniversary date. This meant that going forward the contract was incomplete in an essential respect ie the premium (and/or void for uncertainty) unless and until a new premium was settled or agreed upon.
"27. Alternatively, by wrongfully insisting that there had been no ECD and/or refusing to recognise NCR's right to invoke the review clause and/or maintaining that none of the terms of the contract could be varied the Syndicates repudiated the contract which repudiation was accepted by NCR's cancellation of the contract on 31 December 1997."
(As for the first answer given in para 26, this I suppose reflected a combination of the unpleaded case advanced in the note that the review clause had been invoked in respect of 1997 together with the pleaded case (see para 9.5 of the ultimate defence) to the effect that valid invocation of the review clause caused the contract to lapse at the relevant anniversary date, viz 31 December 1997. As for the second answer given in para 27, this was in truth an illegitimate attempt to raise anew a (different) case of repudiation. On either basis, the submission was bound to fail in the light of the judge's finding that there was no ECD in 1997.)
"28. If the Court rejects NCR's primary case and holds that the contract continued for 1998 and 1999 then it could only continue subject to NCR's right to specify the additional premium due. NCR has stipulated the increased premium it requires in paragraph 14A of their Defence (ie $101 million for 1998 and $131 million for 1999)."
(At this stage, the pleaded case of "giving credit" for what would have been the premiums, which is a question of fact, is transposed into the submission that NCR had a continuing "right to specify" an increased premium in May 2002.)
The draft judgment
"it is for the Reinsurer to invoke the clause in question (the right to increase is reserved to him) and, in the absence of agreement with the Syndicates, either to agree to the early termination of the policy or to determine a new premium which, if not paid by the Syndicates, would lead to a deemed Cancellation."
He made no finding that any increased premium had been nominated at any time, and simply ignored NCR's reliance on the figures pleaded in para 14A of the defence. He accepted that NCR "should have nominated a new premium".
"30. As a matter of fact, I conclude that although the words "extraordinary claims development" were missing from the communications what was said by the reinsurer was enough to invoke the operation of the clause, albeit that it was impracticable for it to operate in the light of the reinsurer's desire to treat the contract as at an end by reason of the NACD lettering. The review of the evidence at paragraph 16 shows that the underwriters thought the clause had been invoked, the brokers and the Syndicates thought so too. Had the contract continued in existence, the reinsurers should have nominated a new premium. But if the parties could not agree to the existence of the right to review, it would be unfair, uncommercial and wrong, I think, to say that the reinsurers would not have been able to insist on a review for the 1999 year, in the light of the extraordinary claims development which had come to light in 1998. The Syndicates cannot be heard to say that there was no extraordinary claims development and we would not have paid any more premium for that year and at the same time say that the reinsurers had failed properly to invoke the clause."
"(1) NCR expressly invoked the review clause at the end of 1997. At all times thereafter their position was that there had been extraordinary claims development and that they were entitled to a review. That stance was unjustified as at the end of 1997 but had become justified by the end of 1998. Further or alternatively, having invoked the clause at the end of 1997, it went without saying that NCR was invoking the clause at the end of 1998 when the claims development was even more severe. The Syndicates could never have been in any doubt that NCR, as an alternative case, was relying on its right to increase the premium at all material times.
(2) NCR, having invoked the clause, never went on to determine and nominate a premium for 1998 or 1999. This does not mean that the clause was not properly invoked. Even if it did, the Syndicates cannot be heard to argue that this meant that NCR had failed properly to invoke the clause in circumstances where the Syndicates' position was that there was no extraordinary claims development, was no right of review, and was no further premium payable. This made nominating a new premium futile and unnecessary (the law never compels someone to perform a useless formality).
(3) In any event, having invoked the clause for 1999, a new premium had to be agreed, but it never was and therefore the contract lapsed.
(4) Further or alternatively, the Court may also have had regard to the principle that in relation to damages claims it is always assumed that the defendant will perform the contract in the way most beneficial to himself and least beneficial to the claimant. In this case that means assuming that NCR would have invoked the review clause as they were entitled to do. If they had done so, the Syndicates would not have accepted their right to do so or paid any more premium (para. 30), and the contract would have lapsed."
The amended judgment
"31. For the avoidance of doubt, I consider that when NCR invoked the review clause in 1997, that was a continuing act; in other words they were invoking the clause then and for any subsequent year where the claims were no less. The stage of setting a new notional premium did not arise because the Syndicates did not accept that there was extraordinary claims development and because the Reinsurers were saying that the contract was dead. I am satisfied that there is no technical step required for the review clause to be invoked; normally a new premium would be set by the reinsurers. But it cannot sensibly be said that where the parties are in dispute it was a necessary condition that the reinsurers should go through the motions of setting a premium, when it had already been made clear that no increase in premium was acceptable. The review clause must be construed in such a way as to give it a degree of commercial reality. The suggestion that the clause was not invoked for the 1999 year because the Reinsurers did not stipulate a premium which was never going to be paid seems to me to deprive the clause of any commercial effect. In my view the clause was properly invoked for the 1999 year of account and the Syndicates cannot be heard to say otherwise."
The Syndicates' submissions on appeal
NCR's submissions on appeal
"The reasons for my conclusion can be stated in the form of numbered propositions…
"(2) The question is not how the landlord understood the notices. The construction of the notices must be approached objectively. The issue is how a reasonable recipient would have understood the notices. And in considering this question the notices must be construed taking into account the relevant objective contextual scene. The approach in Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen (trading as H. E. Hansen-Tangen)  1 W.L.R. 989, which deals with the construction of commercial contracts, is by analogy of assistance in respect of unilateral notices such as those under consideration in the present case. Relying on the reasoning in Lord Wilberforce's speech in the Reardon Smith case, at pp. 996D-997D, three propositions can be formulated. First, in respect of contracts and contractual notices the contextual scene is always relevant…Thirdly, the inquiry is objective: the question is what reasonable persons, circumstanced as the actual parties were, would have in mind…
"(4) There is no justification for placing notices under a break clause in leases in a unique category. Making due allowance for contextual differences, such notices belong to the class of unilateral notices served under contractual rights reserved, e.g. notices to quit, notices to determine licences and notices to complete: Delta Vale Properties Ltd. v. Mills  1 W.L.R. 445, 454E-G. To those examples may be added notices under charter parties, contracts of affreightment, and so forth. Even if such notices under contractual rights reserved contain errors they may be valid if they are "sufficiently clear and unambiguous to leave a reasonable recipient in no reasonable doubt as to how and when they are intended to operate:" the Delta case, at p. 454E-G, per Slade L.J. and adopted by Stocker and Bingham L.JJ.; see also Carradine Properties Ltd. v. Aslam  1 W.L.R. 442, 444. That test postulates that the reasonable recipient is left in no doubt that the right reserved is being exercised. It acknowledges the importance of such notices. The application of that test is principled and cannot cause any injustice to a recipient of the notice. I would gratefully adopt it." [emphasis added]
"On the evidence there is no mention in the contemporary documents about the claims development being extraordinary. On 15 December 1997, Mr Devlin reported on the losses but made no mention of the losses showing anything extraordinary. He gave some unconvincing evidence about why he thought that the claims were extraordinary, based upon a comparison between the output of the computer model he had used at GIO and the actual experience. He said that if the claims were greater than he [or the model] had anticipated then it was extraordinary, and he then added that the claims had to exceed those anticipated by a margin of about 5% - 7.5%. Frankly, during this part of Mr Devlin's evidence I was not convinced that he was doing other than making up a case on the spot whilst being questioned. The letter of 12 December was, at best, an oblique reference to the extraordinary claims development but, according to Mr Devlin, the reservation also encompassed other triggering events. Nor is there any contemporary material from the brokers in support of this part of the case."
"As a matter of fact, I conclude that although the words "extraordinary claims development" were missing from the communications what was said by the reinsurer was enough to invoke the operation of the clause…"
Mr Justice Holman:
Lord Justice Potter:
- The Claimant's appeal be allowed
- Paragraph 1 of the Order of the Honourable Mr Justice Morison herein dated 6 November 2002 (the order) be varied as follows: "The reinsurance cover provided by New Cap Re to the Syndicates pursuant to the policy (as defined in paragraph 3 of the Re-Re- Amended Points of Claim) subsisted in full force and effect for a term of three years from January 1997.
- Paragraph 2 of the Order be varied as follows: "New Cap Re is obliged to indemnify the syndicates, pursuant to and in accordance with the terms of the policy, in respect of losses occurring during the three-year periods from 1 January 1997"
- Paragraph 3 of the Order be varied as follows: "In the events which have happened, New Cap Re is not entitled to nominate a new, increased premium for the second or third years of the Policy term.
- Paragraph 4 of the Order be varied as follows; "there be judgment for the Syndicates against New Cap Re in respect of paid claims for the first and second years to the date hereof in the sum of US $12,716,654.68 being, US $1,014,617.93 in respect of the first year and US $11,702,036.75 in respect of the second year, together with simple interest thereon to the date hereof at the rate of 2% per annum over LIBOR.
- A new paragraph 6A be added to the Order to provide as follows; "The parties shall endeavour to agree the amount of paid claims (and interest thereon) in respect of the third year by 4.00pm on 14 November 2003. In default of agreement by that date, the Claimant shall have permission to apply to a Judge of the High Court of Justice, Queen's Bench Division (Commercial Court) for a determination of the amount of such paid claims and interest, and for judgment to be entered for the Claimant accordingly".
- The First Defendant do pay the Claimant's costs of this appeal to be subject to a detailed assessment (if not agreed)
(Order does not form part of approved judgment)