Mrs Justice Moulder :
- This is a claim for legal expenses brought by the claimants, Mr Woodford and Mr Hillman, under a Directors and Officers ("D&O") policy of insurance (the "Policy"). The Policyholder is Olympus Europa SE & Co. KG (the "Policyholder"). The Policy was underwritten by the first defendant, AIG Europe Limited ("AIG").
- The legal expenses sought relate to the defence of a claim brought against the claimants by KeyMed (Medical and Industrial Equipment) Limited ("OKM"), a company in the Olympus group for alleged breach of directors' duties (the "KeyMed claim"). The trial of the KeyMed claim is due to start in March 2018.
- AIG deny that the Policy applies to the KeyMed claim: in particular, AIG maintains, that the cover did not extend to breaches which were known about prior to 1 August 2015; alternatively that cover was lost because the Policyholder refused to provide information requested under the Policy.
- In the alternative Mr Hillman, the second claimant, brings a separate claim against OKM for a failure to maintain D&O insurance in accordance with the compromise agreement entered into with Mr Hillman on 22 November 2011.
- The background to this matter is that in 2011 Mr Woodford was CEO of Olympus Corporation Inc. ("Olympus"), having worked for the Olympus group for many years starting as a salesman moving to become a director of OKM and then CEO of Olympus. Mr Hillman held a number of roles with OKM based in the UK, becoming Group Managing Director in 2008, a position he held until a promotion in April 2011 to a role within Olympus and thereafter remaining a director of OKM until his employment terminated in November 2011.
- On 14 October 2011 Mr Woodford was dismissed following whistleblowing about the finances of the Olympus group. He subsequently settled his claim against Olympus for in the region of £10 million. Mr Hillman also left the Olympus group following the dismissal of Mr Woodford. He entered into a compromise agreement in November 2011.
- In 2007 a separate defined benefit scheme for executives (the "Executive Pension Scheme") was established at OKM. Mr Woodford and Mr Hillman were the trustees and beneficiaries of the Executive Pension Scheme. In May 2014 Mr Woodford proposed to transfer his pension out of the Executive Pension Scheme to a personal pension. The estimated transfer value was £64 million.
- The directors of OKM sought advice as to whether or not the transfer could be prevented and subsequently investigated the wider question as to whether or not the Executive Pension Scheme had been set up lawfully.
- It is OKM's case (as set out in its response dated 21 June 2017 to AIG's Part 18 request) that it was "on or after, but not before" 14 August 2015 that they first concluded that breaches of directors' duties had either probably occurred or that there was sufficient evidence of breaches to justify bringing civil proceedings.
- The claim form in the KeyMed claim was issued on 28 August 2015.
- The KeyMed claim was served on the claimants on 18 December 2015 and the claimants notified the claim to AIG on 23 March 2016.
- On 2 June 2016 AIG wrote confirming coverage under the Policy in respect of defence costs with respect to claims asserted by OKM against the claimants as former directors of OKM subject to certain conditions including to the effect that their right to deny coverage was reserved if circumstances should subsequently come to light that entitled them to deny coverage.
- On 21 July 2016 a meeting was held in Cologne between the claimants, AIG and their respective legal advisers. As a result of statements by Mr Woodford that the allegations had been in preparation since May 2014, AIG expressed the view that if Mr Kaufmann had known about breaches of duty prior to 1 August 2015 there would be no coverage under the Policy.
- On 13 October 2016 AIG wrote to the broker, AON, with a series of questions for Mr Kaufmann as to when he became aware of the alleged breaches.
- On 12 December 2016 the head of the Policyholder's legal department responded to the letter asserting privilege.
- On 23 January 2017 the lawyers for AIG challenged the reference to privilege and sought an answer to the questions.
- On 3 February 2017 lawyers for the Policyholder responded seeking an extension of time.
- By letter of 7 February 2017 AIG revoked cover relying on the Policyholder's "evasive reply" as an "indirect admission" that knowledge of the breaches of duty existed before 1 August 2015 and further that AIG was exempted from its obligation to provide cover due to the Policyholder's "deliberate breach" of its obligation to provide information pursuant to clause 5.2 of the General terms and conditions of the Policy.
- The Policy is in German and under German law. The Policy consists of a certificate of insurance, a number of special conditions and a set of general conditions.
- For the claimants I heard oral evidence from Mr Woodford and Mr Hillman.
- For AIG I heard evidence from Mr Goldschmidt and Mr Unglaub both employees of AIG, and from Mr Seitz and Dr Achtmann of the law firm Bach Langheid Dallmayr Rechtsanwälte ("BLD") who act for AIG.
- For OKM I heard evidence from Mr Williams, Mr Zangemeister and Mr Kaufmann. Mr Kaufmann was Executive Managing Director of the Policyholder at all material times. Mr Kaufmann reported to Mr Takeuchi who did not give evidence. The witness statement of Mr Wollenhaupt was admitted unchallenged.
- As the Policy is under German law, the court also has the benefit of reports produced by Professor Dr Brand instructed by the claimants, and Professor Dr Armbrüster instructed by AIG, dated 5 December 2017 and 6 December 2017 respectively as to issues of German law raised in the case. The experts also met and produced a joint memorandum dated 14 December 2017. Finally a supplemental report was produced by each of them in relation to the question of "detriment", each dated 7 February 2018.
- Professor Brand is the holder of the chair for tort law, insurance law and comparative law at the Faculty of Law and Economics of Mannheim University. Professor Armbrüster holds the chair for civil law, commercial and company law, private insurance law and private international law at the Free University of Berlin. From 2007-2013 he was also a judge at Kammergericht in Berlin. Both experts are therefore very well qualified to assist the court on the issues of German law which arise in this case. Where the evidence as to German law is agreed, the court has accepted the evidence as indicated in the judgment. Where the evidence is not agreed, it is for the court to decide between the conflicting testimony.
- The contractual relationships between insurer and the Policyholder are regulated in the VVG (Insurance contract code). However the regulations in this code that restrict the private autonomous freedom of design by the parties do not apply if the contract relates to a "large risk" which is the case here (paragraph 6 of Professor Armbrüster's report). This appears to be common ground (para 2a of the joint report).
- As the Policy is in German, the court has relied upon the translation provided by the parties and where extracts from the Policy are quoted in this judgment, the court is relying on the accuracy of such translation taking into account any evidence material to the construction of the relevant provisions.
- In relation to internal documents passing (principally) between Mr Kaufman, Mr Zangemeister and Mr Takeuchi from May 2014 to July 2015, OKM has asserted privilege and accordingly the court does not have before it these documents although a table of the documents for which privilege was claimed was produced.
- In preparing this judgment, the court has had the benefit of rereading counsels' written submissions; the fact that a particular submission has not been expressly addressed in the judgment does not mean that it has not been taken into account. The court has also had the benefit of reading the daily transcripts; again the fact that a particular piece of evidence has not been referred to does not mean that the court has not taken this into account in arriving at its conclusions.
Issues for the court
- On the case advanced at trial the following principal issues arise for determination by the court:
i) Did the Policyholder (or someone whose knowledge is attributable to the Policyholder as a matter of German Law) have knowledge of the alleged breaches of duty that form the subject matter of the KeyMed claim prior to 1 August 2015?
ii) Is AIG entitled to decline cover in respect of the claimants' claim by reference to clause 5.5 of the Policy?
iii) If AIG is not entitled to decline cover, to what sum are the claimants entitled by way of defence costs incurred to date?
iv) If AIG is entitled to deny cover, is OKM in breach of the compromise agreement with the second claimant?
- Additional issues are listed in the List of Issues. It was accepted by AIG in submissions that the claimants are Insured Persons under the Policy (Issue 1). To the extent that the remaining issues need to be dealt with in the light of the court's findings on the principal issues, they are addressed below.
Did the Policyholder (or someone whose knowledge is attributable to the Policyholder as a matter of German Law) have knowledge of the alleged breaches of duty that form the subject matter of the KeyMed claim prior to 1 August 2015?
- It is AIG's case that there is no cover for the claimants in this case because the Policyholder (or someone whose knowledge is attributable to the Policyholder as a matter of German Law) had knowledge of the behaviour which is the subject matter of the KeyMed claim prior to 1 August 2015 and that the alleged behaviour was considered by him to constitute a breach of their duties as directors and thus the claim was outside the scope of cover by reason of Special Condition 5 ("SC5") of the Policy.
- SC5 of the Policy provided as follows:
"With effect from 01/08/2015 - free of any breaches of duty known prior to 01/08/2015 for the extensions of cover - clauses 3 and 4 shall be deemed to be irrelevant, provided that no runoff cover has been obtained for [KeyMed] under policy 0033526230/STEPS ID 28983 in the UK." [emphasis added]
- Professor Armbrüster stated in his report that:
"For knowledge of such a breach of duty it is not sufficient that the conclusion that breaches of duty had occurred feels like a compelling conclusion for a reasonable person from the facts known to him…It is necessary that the person concerned has actually come to the conclusion, on the basis of the facts known to him, that duties have been breached. As this is about an inner fact, the question has to be assessed on the basis of the overall circumstances" (paragraph 59)
This is common ground between the experts.
- AIG have not sought to argue that either Mr Woodford or Mr Hillman had knowledge of the breach of duty prior to 1 August 2015. AIG's case is that the Policyholder had knowledge of the breaches of duty which appeared subsequently in the KeyMed claim on 28th August 2015 and considered these breaches to constitute wrongful behaviour before 1st August 2015. The claim form (as amended) in the KeyMed claim alleges, inter alia, that the claimants breached their duties as trustees of the Executive Pension Scheme and had acted in breach of their duties as directors of OKM in establishing the Executive Pension Scheme and in relation to the benefits conferred on members and the contributions paid by OKM.
- AIG submit that the knowledge of the following individuals is attributable to the Policyholder under German law: that is Mr Kaufmann, Mr Takeuchi, and Mr Williams. Counsel for the claimants submitted that Mr Williams was not relevant but counsel for OKM confirmed that Mr Williams was a director of the Policyholder at the material time. In closing submissions counsel for AIG accepted that Mr Zangemeister was managing director of OKM, and only from 19th September 2013. He does not appear to have had a position in Olympus Europa Management SE ("OEMSE"), the general partner in the Policyholder, or in the Policyholder itself. I therefore understood counsel for AIG to accept that the knowledge of Mr Zangemeister is not therefore attributable to the Policyholder.
- For the purposes of this judgment I shall proceed on the assumption that AIG are correct as a matter of German law as to the attribution of knowledge to the Policyholder and consider on the evidence what knowledge these three individuals had.
Burden of proof
- As to the burden of proof, German insurance law draws a distinction between primary risk description and secondary risk exclusion. The primary risk description is the "most general outline" of the insured risk. In indemnity insurance this means a description of the insured object, the causes of loss or damage that are covered, the insured location and the loss or damage covered (paragraph 31 of Professor Armbrüster's report). The secondary risk description serves to "remove from the scope of cover particular parts of the risk encompassed by the primary risk description" (paragraph 32 of Professor Armbrüster's report). The opinions in these paragraphs are common ground (paragraph 2b of the joint report). The distinction is of significance in relation to the burden of proof: a Policyholder must prove the facts that count for primary risk description. On the other hand the insurer has to prove the factual preconditions for a risk exclusion (paragraph 33 of Professor Armbrüster's report).
- In this case the issue is how the words "free of any breaches of duty known prior to 01/08/2015 for the extensions of cover" (the "free from" phrase) is to be understood. Professor Armbrüster accepts that the wording itself does not say anything about whether it is concerned with the primary risk description or a risk exclusion. Professor Armbrüster is of the view that it is to be regarded as an element of the primary risk description. Professor Armbrüster looks at the purpose of the clause: to prevent insurance against uncertain events being extended to "pre-planned conclusions" and he refers to section 2, paragraph 2, sentence 2 of the VVG that the insurer is not required to render payment if the Policyholder was aware that the event insured against had already occurred when he applied for the insurance. Professor Armbrüster also refers to the fact that the passage in question appears as an integral part of the cover in SC5. He notes the exclusion in the general conditions at clause 4.2 for known breaches of duty under the heading "Exclusions" but he concludes that the special conditions were agreed individually and are a separate set of contractual rules.
- Professor Brand in his report accepts that the structure of the contract may indicate the quality of the provision since exclusion clauses are often contained in separate clauses. However he opines that it is the "material content" of the clause and not its name or positioning which determines its nature as an exclusion clause (paragraph 82 and 83 of his report). He notes that the wording of SC5 is similar to the provision of the VVG at section 2 which allows for the commencement of insurance cover prior to the date on which the contract is concluded but that (by virtue of paragraph 2 sentence 2) retroactive insurance is unavailable, if a Policyholder knows when submitting his acceptance that an insured event has already occurred. Professor Brand opines that SC5 has a similar effect. As it is dealing with a D&O policy under the "claims made" principle, cover is afforded where the breach of duty may have happened before the conclusion of the contract but the claim is made after the conclusion of the contract. Professor Brand therefore opines that if an insurer wants to include a reservation akin to section 2 para 2 sentence 2 VVG into a D&O policy it would have to devise a clause which replaced the reference to an "insured event" with "breach of duty". Professor Brand is of the view that SC5 expresses the same concept and that section 2 paragraph 2 sentence 2 VVG is regarded as an exclusion clause by the German courts and commentators (paragraph 91 of his report). He further notes that clause 4.2 in the general conditions fulfils a similar role as SC5 under the heading "Exclusions".
- In the joint report (at paragraph 3c) the experts disagree as to whether or not the authorities relied on by Professor Brand support the qualification of section 2 para 2 sentence 2 VVG as an exclusion clause.
- It seems to me on the basis of the expert evidence that the positioning of the phrase free from in SC5 is not conclusive and the court must look to the substance of the provision. Similarly the fact that a similar provision appears in clause 4.2 of the general conditions under the heading "Exclusions" is not determinative given that the special conditions are separate from and override the general conditions (paragraph 15 of Professor Armbrüster's report, acknowledged as common ground at para 2b of the joint report). The analogy with section 2 para 2 sentence 2 of the VVG appears to be accepted as a valid comparison by both experts but the experts disagree on the authorities as to whether or not that particular provision would itself be regarded as an exclusion clause.
- In cross-examination Professor Armbrüster gave the example of a policy protecting the Policyholder against a fire: where the insurance company says, "This will not cover the situation where the fire is caused by a bad electric wiring", that, he said, was a risk exclusion. The risk of fire is covered and there is an exclusion for one aspect, for one possibility, of the manifestation of that risk. In contrast, when the insurance company says, "I will provide cover for a home against fire, as from fires that occur after 15th March 2018," that's not a risk exclusion. That is a limitation of the scope of the policy.
- Applying this by analogy, in my view considering the function of the phrase "free from…" in SC 5, it does not "remove from the scope of cover particular parts of the risk" but amounts to a restriction on the insurance cover in the same way as the example of the fire or the waiting time between conclusion of the contract and the start of the insurance (para 36 and 37 of Professor Armbrüster's report). I therefore proceed on the basis that AIG are correct as a matter of German law that the phrase "free from" is an element of the primary risk description.
- Accordingly the burden of proof lies on the claimants to show that the Policyholder did not have knowledge although I note paragraph 42 of Professor Armbrüster's report describes it as a 3 stage test, not, as counsel for AIG submitted, that the Claimants "have to do all the work". Professor Armbrüster said that the three stages are as follows:
i) stage I: the primary onus to present evidence is carried by the Policyholder
ii) stage II: because knowledge is an inner circumstance, the insurer has a secondary onus to present evidence. He is responsible for presenting facts from which a conclusion of knowledge could arise
iii) stage III: it is then for the Policyholder to refute these facts.
- Counsel for the claimants submitted in summary that:
i) Mr Kaufmann's evidence was clear that he had not concluded that there was a breach until the advisers reported back on 14 August 2015.
ii) In relation to Mr Williams, counsel submitted that Mr Williams accepted that Mr Woodford's behaviour had fallen below corporate governance standards but based on his investigations and advice, his consistent conclusion was that the behaviour was not unlawful.
iii) Counsel accepted that any breach of duty is "alleged" until proven or admitted but submitted that for the relevant individuals to "know" of a breach of duty for the purposes of SC5, the individual has to conclude that a breach of duty has been committed.
- AIG's submissions in summary were as follows:
i) Counsel for AIG accepted in closing submissions that the evidence to the court of Messrs Kaufman and Zangemeister was that they were not intent on pursuing Mr Woodford but wanted to put the matter behind them; however Counsel for AIG relied in particular on the evidence of Mr Woodford that Mr Takeuchi was looking for "dirt" and on Mr Williams' evidence as being "closer to what was really going on inside Olympus in 2014 and 2015". AIG relied on the evidence of the draft press release first created by Mr Williams in December 2011. The draft included the statement:
"There was widespread outrage within Olympus at revelations that the ousted former CEO Michael Woodford had manipulated the company pension for his own personal financial gain."
Counsel submitted that the evidence in the draft press release in terms of there being a manipulation of the pension scheme to the detriment of the company and for the benefit of Mr Woodford and Mr Hillman, was not only strong when it was drafted originally in 2011, but Mr Williams kept on coming back to it. Counsel submitted that the press release was not just for Mr Williams to vent his frustration but Mr Williams confirmed in his cross-examination that it represented his own view about the behaviour as he understood it.
ii) Counsel for AIG submitted that although there are very few documents to go on because so much is said to be covered by privilege, where we do have communications between Messrs Kaufmann, Zangemeister, Takeuchi and Williams, the language is entirely consistent. They use language, to describe what Woodford and Hillman did, of "unethical", "wrong", "selfish", "outrageous". In particular, Mr Takeuchi did not seem to be concerned with the question of whether there was a breach of fiduciary duty: in an email of 26 May 2014 he wanted to know who to sue. He had already made up his mind that there was a breach of fiduciary duty.
iii) Accepting the limited details of the documents before the court as a result of the claim of privilege, counsel for AIG submitted that it appeared to be likely that the investigation came to an end in around July 2015 when a document entitled "Summary of conclusions" was produced, and the only reason why nothing happened until the end of August was because of the reason that Mr Woodford gave, which is that Olympus is quite a "sclerotic organisation" which is quite difficult to get moving very quickly.
- Counsel for OKM submitted in summary that:
i) the evidence of Mr Williams was clear that Mr Williams had very little involvement after 2011, in 2014 he was not really that involved but he did not change his view;
ii) The contemporaneous correspondence refers to a conclusion that the actions of the claimants were not unlawful;
iii) To reject the evidence of Messrs Williams Kaufmann and Zangemeister the court would be finding the evidence of these 3 individuals untruthful on the basis of an inference that Olympus had knowledge of wrongoing prior to 1 August 2015 but for some reason which is unclear OKM delayed bringing proceedings until the end of August 2015.
Evidence of Mr Kaufmann
- In cross-examination Mr Kaufmann was taken through the chronology from immediately after Mr Woodford was sacked in October 2011 to notification of the transfer out of the Executive Pension Scheme in May 2014, and then the investigation following the transfer out, in 2014 and 2015.
- Mr Kaufmann was asked about an email he sent on 17 November 2011 to Olympus Japan in which he stated:
"we just discovered that Michael and Paul have an exclusive pension fund and they are the only trustees which means they personally and not the company decide about the utilisation of the fund… I am still in the process of understanding the details and will keep you informed. But it seems to be extraordinary."
Counsel for AIG put it to Mr Kaufmann that his view as expressed in this email was that the scheme was "extraordinary", Mr Kaufmann rejected this insisting that the reference to "extraordinary" was to the pension amount of £1 million per year (which Mr Woodford would receive) and not to the structure.
- Mr Kaufmann was asked in cross examination about an email he sent on 18 November 2011 in which he asked Mr Takeuchi to take the lead in investigating the details of the pension scheme. His evidence was that he was asking for the investigation because of the combination of the structure of the pension scheme (with the same individuals being both trustees and beneficiaries) and that the pension amount of £1 million per year appeared "extraordinary", that is so very high, to him. Mr Kaufman said that he was fulfilling his obligations to make Tokyo aware of this.
- Mr Kaufmann did accept that he had written in an email that it was "unethical" and his evidence was that he meant contrary to good corporate governance.
- In May 2014 Mr Kaufmann learnt of the proposed transfer out of the pension scheme and wrote to Mr Williams:
"do you know if we ever made a legal check… if the model and the amount for MCW is legally compliant? I could imagine that such an unreasonable amount could be regarded as a breach of trust...
I also believe that we …have a legal responsibility and exposure as directors to make sure that any potential payout is legally confirmed and justified …" [Emphasis added]
Mr Kaufmann's evidence in cross examination was:
"At this stage we did not have any precise evidence or information. So this statement from our side is just derived from the fact I just mentioned. The two most senior directors of the company were – established their own scheme where they were trustees and beneficiaries, and as a result, question mark as a result, at least at the end of the day this resulted into a pension entitlement in the magnitude of 64 million, and I felt as a director of the company we at least have to take into consideration to investigate if this was not a breach of trust or if this was incompliant or unlawful or whatsoever…"
- Counsel for AIG put it to him that the size of the pension as revealed in May 2014 represented a breach of core duties of a director, because Mr Woodford and Mr Hillman had put their own interests in conflict with OKM. However Mr Kaufmann's evidence was that in May 2014 he did not understand the mechanism of the scheme and the approval processes:
"So all I knew is that we have -- my thought was as a director we have an obligation -- before we approve a payout or transfer of $64 million we have the obligation to scrutinise this. That's all at this stage."
- Mr Kaufmann rejected the suggestion that he, Mr Takeuchi and Mr Zangemeister were all of one mind at that point.
- After the transfer had taken place the investigations continued. Mr Kaufmann's evidence was that:
"at the end of the day we came to the conclusion that we had legal advice that there was nothing we could do against the transfer, but in our role as directors of the company we did not feel that we yet had sufficient information to decide that we stop the investigations and that was the discussion we had in July  I believe."
- Mr Kaufmann was then asked when legal proceedings against the claimants became a real possibility. His evidence was that in November 2014
" we found one puzzle piece which made us thought that there was a likelihood that this would come to a litigation, yes, but the puzzle piece itself was not sufficient to take that decision at that stage, but it was a hint, but this is under legal privilege, so I cannot give you more details about that."
- Mr Kaufmann was referred to his witness statement at paragraph 21 where he stated:
"By the end of December 2014, on advice (over which privilege is not waived), I could not conclude that there had been breaches of duty by Mr Woodford and Mr Hillman."
Counsel for AIG asked Mr Kaufmann in cross examination for his "personal view" at that time to which he responded:
"Again it was not sufficient to base on this now the case. There was a puzzle piece, but the surrounding puzzle pieces were still missing, and if I may outline this, and this was coincidence, we then found -- we then found I think it was Mr Hillman's laptop, and then end of December 2014 we took the decision that we would engage IT specialists and they tried to restore as many documents and information as possible."
- Mr Kaufmann said that the time between January and July 2015 was a quiet time as the IT specialists and the lawyers were working on the restoration of the data and the documents that resulted. Again counsel for AIG sought to establish Mr Kaufmann's "personal view":
"So what I want to know is were there in your own mind in the early part of 2015, in June and July 2015, were there clear breaches of duty on the part of Mr Hillman and Woodford that you thought, "Yes, they did do something wrong with this pension scheme"?"
Mr Kaufmann repeated that this was a quiet period and he did not recall any meetings in June or July but only two meetings in August.
Evidence of Mr Williams
- In the case of Mr Williams, his evidence was that when Mr Woodford was first dismissed, his initial investigation was in relation to the use of any surplus in the pension scheme as he was concerned that he had approved a recent payment of £3.8 million into the scheme a couple of months before. Then he sought to discover further information about the background to the scheme being set up. His evidence was that his conclusion in 2011 was:
"The conclusion of the investigation that I did was I had a number of people telling me that what they did was not unlawful."
- The evidence of Mr Williams in relation to the draft press release was that the draft was written in 2011 and only slightly changed in 2014 and 2015. He shared it only with a couple of people who did not include any of the key individuals in this case. Mr Williams' evidence in cross examination was that he wrote it at the end of the investigation out of his frustration:
"with the fact that the conclusions were that nothing that Michael or Paul had done was unlawful."
Secondly that if things happened in the future it could be used as a draft to be presented to the communications department in Tokyo.
- In cross examination it was put to Mr Williams:
"So by saying here that the company pension scheme had been manipulated for his own personal gain and to the detriment of the company, you are saying, aren't you, that in your view at least he had committed a breach of his duties as a director of the company?"
Mr Williams response was:
"No, I am not saying that."
- Counsel for AIG sought to demonstrate a distinction between the personal view of Mr Williams and the legal advice which he received but in my view despite being asked several times, Mr Williams rejected such a distinction.
"Q. … but what you thought at the time, Mr Williams, what you thought personally at the time, was what's set out in your press release. That is what you believed?
A. What I believed at the time was -- to reiterate – that they had not done anything unlawful."
Thus I reject the submission of counsel for AIG that Mr Williams confirmed in his cross-examination that the draft press release represented his own view about the behaviour as he understood it.
- In his witness statement (paragraphs 17 and 18), under the heading, "Investigation into the Executive Scheme in 2014," Mr Williams said that:
"Other than being asked on occasions to provide information during the course of the investigations being conducted by leading advisers ... I was not involved in the ensuing investigations. As far as I was aware, this was managed by Mr Kaufmann and Mr Constantin Zangemeister. I was not party to the advice they received… I was not kept updated with their progress. I had not concluded that Mr Woodford and Mr Hillman had breached their duties."
- Mr Williams was taken in cross examination to the email exchange with Mr Kaufmann in 2014 where he referred to engaging a "bulldog type lawyer" to advise. Mr Williams accepted this would be to get another view on the advice but still maintained that he had no knowledge that the behaviour was unlawful. The following email exchange which is a contemporaneous document supports that evidence: Mr Kaufmann wrote:
"I could imagine that such an unreasonable amount could be also regarded as breach of trust. Are you aware of any kind memorandum from a specialised law firm?"
Mr Williams replied:
"no but I have met with [Mr Zangemeister]… today and asked for us to i) see if there is any line we can take legally, (although I think not)….
As previously highlighted, the fact that the trustees have the power, and it is not illegal that the trustees equal the beneficiaries… then as long as the transfer value stands up to scrutiny.… there is nothing we can do. DB pension schemes reflect the final salary of the individual members – his does that the reason the value is so high reflects his remuneration when he was i/c of OEH. " [Emphasis added]
- In June 2015 Mr Williams returned to the draft press release and amended it for a third time prompted he said by becoming aware of investigations being carried out into the size of the pension pot accumulated by Mr Woodford. In answers in cross examination he denied that he was aware of the possibility of legal proceedings at that point saying that he was aware of an investigation but as stated in his witness statement, he was not involved.
- In re-examination Mr Williams confirmed that when he referred in the draft press release to the "hypocrisy" of Mr Woodford lecturing on corporate governance he was not of the view that any such failure amounted to an unlawful act.
Evidence of Mr Zangemeister
- Mr Zangemeister moved to OKM in April 2014. His evidence in cross-examination was that, having been notified of the proposed transfer out of the pension fund in May 2014 he led the investigation into the transfer and was responsible for coordinating the advisers.
- Mr Zangemeister was asked about the email exchange in June 2014 with Mr Takeuchi where he stated that the transfer was "wrong" and "selfish". His evidence was that he concluded that the transfer was legitimate although he was expressing in effect his frustration that such a large amount was being transferred out at a time when he was seeking to implement change and introduce efficiencies. This accords with the contemporaneous email which stated:
"all appears to be selfish – and when looking at the financial consequences unethical too.
But from my point of view it is not only the Executive Scheme itself, which is contributing to this unreasonable Transfer Value. A key driver to this high Transfer Value also is based in the contracts and remuneration agreements which have been closed with MCW when he was appointed EMD in Europe.…
Look at the result, all of this seems wrong.
However from a legal perspective the directors of the company apparently had the power to do so, since neither law nor the articles of the company prevented them from being trustees and company representatives at the same time." [Emphasis added]
This exchange is clearly focused on the reason for the high transfer value but also states that at that time there was believed to be nothing unlawful.
- It was put to him in cross examination that he personally was of the view that this pension scheme had been set up in such a way to benefit Mr Woodford and Mr Hillman to an "outrageous degree". However Mr Zangemeister rejected that saying that he had a very limited understanding of the scheme at that point and was fully dependent on external advice and the advice he received was that the transfer could not be challenged.
- Mr Zangemeister's evidence was that after the transfer had taken place, he then sought confirmation from his advisers that the directors had done the necessary investigations and as this confirmation was not forthcoming he had to carry out further investigations. His evidence was that he mainly shared information with Mr Kaufmann and that he sent frequent updates to Mr Takeuchi.
- Asked in cross examination about whether allegations of breaches of duty were already in existence in June/July 2015 Mr Zangemeister replied:
"Based on my internal investigation no, because my internal investigation was paused, more or less, between November and beginning or middle of August, because the investigation was about establishing and putting together the different documents. So I didn't --nothing progressed really during that time to my mind."
Role of Mr Takeuchi
- Mr Takeuchi did not give evidence. Mr Woodford in cross examination, was asked about people at Olympus who had "loathing and contempt" for him. His evidence was this would include Mr Takeuchi who he described as the number two in the Olympus hierarchy. His view was that following the whistleblowing, the first thing that Olympus would do was to "dig dirt" on him. Mr Woodford recalled having dinner with a former colleague in August 2012 at which he was told that Olympus had commissioned a law firm to look into everything in the early part of 2012 but he was also told by the colleague that they had found no illegality in relation to the pension scheme. Mr Woodford also said that he was told that Mr Takeuchi was the driving force behind the allegations and that Olympus were "after him".
- Mr Williams' evidence did not support the submission for AIG that litigation was being driven by Mr Takeuchi or Mr Kaufmann. When asked whether it was his impression that the two people who were driving the legal proceedings against Mr Woodford were Mr Takeuchi in Japan and Mr Kaufmann in Europe, Mr Williams responded that his understanding was that the investigation was primarily done by Mr Zangemeister and he wasn't aware of a drive from Mr Kaufmann or Mr Takeuchi. This is consistent with the evidence given by Mr Zangemeister referred to above, that he led the investigation.
- Mr Kaufmann's evidence on this point in relation to Mr Takeuchi was that in 2011 he felt that they were busy with so many other things that he could not see any indication that they were now starting a huge investigation or something like that to find dirt or anything else on Mr Woodford. When pressed as to whether there was a campaign for revenge in Tokyo Mr Kaufmann responded:
"My statement is that I was neither involved nor informed that there was such an investigation. What happened in Tokyo, I do not know."
- Mr Kaufmann did ask Mr Takeuchi to "take the lead" in investigating the details of the pension scheme in November 2011 but his evidence in cross examination was that he did not receive the result of any such investigation. At that point the correspondence merely indicates an investigation being started.
- As to the further investigations from July 2014, Mr Kaufmann's evidence was that before seeking authorisation for further investigations from Mr Takeuchi, he had internal discussions with Mr Zangemeister. Mr Kaufmann said in cross examination:
"So it is not that Mr Takeuchi was the driving force. We were discussing this as directors of the company, what would be the appropriate way forward, and then we took this decision, and Mr Takeuchi in his role as the senior director in Tokyo gave us the formal approval to do so, because we would have not been we didn't have the authority to take such a decision on our own discretion."
- The test for knowledge as expressed by Professor Armbrüster is that:
"It is necessary that the person concerned has actually come to the conclusion, on the basis of the facts known to him, that duties have been breached. "
- It is therefore necessary to decide in relation to each of Mr Kaufmann, Mr Williams and Mr Takeuchi whether the claimants have shown on the evidence that none of these individuals came to the conclusion prior to 1 August 2015 that duties had been breached and the question has to be assessed on the basis of the overall circumstances. There are two elements to knowledge:
i) positive knowledge of the relevant conduct and
ii) a conclusion that the conduct was wrongful.
In cross examination counsel for AIG put it to Professor Brand that the test was knowledge of the behaviour and "belief" in the allegation. Professor Brand rejected that:
"That's not what Professor Armbrüster and I have agreed upon. They must know it is wrongful and they need to know it by themselves or because they have received legal counsel which says it is wrongful."
- Counsel for AIG put it to Professor Brand in cross examination that it would be possible for someone to conclude that it was wrongful even though there was legal advice to the contrary. Professor Brand doubted that this would be the case unless the relevant person had for example set out reasons why he disagreed with the legal advice.
- As set out above Mr Kaufmann accepted that he viewed the amount of the pension as "extraordinary" and the structure as "unethical" meaning contrary to good governance, further that he felt he had a duty to scrutinise and investigate but he expressly rejected the suggestion that he came to the view in May 2014 or at the end of December 2014 that duties had been breached. This is supported by the contemporaneous documentation. In May 2014, as referred to above, Mr Kaufmann asked Mr Williams whether they had checked whether the model and amount was legally compliant and the response from Mr Williams was:
"we did not do this as, on current information, there is nothing wrong with the model legally. The amount of the pension reflects the amount he was paid. The amount he was paid was over market rate but [Olympus] signed off on it and I am sure MCW will have got third [party] reports to show it was OK, so we have nowhere to go."
- AIG sought to draw an inference as to knowledge from the fact that litigation privilege was claimed from 5th November 2014 for documents on the basis that they were created in reasonable contemplation of legal proceedings against the claimants for breach of directors' duties in relation to the Executive Pension Scheme and/or the transfer value. However Mr Kaufmann's evidence as referred to above, was that although in November 2014 evidence was uncovered (he referred to the "puzzle piece"), it was not sufficient to take a decision at that stage. Mr Zangemeister's evidence in cross examination was that although they had received more information by this time, it had thrown up inconsistencies in the documentation and this was why they decided to carry on with the investigations.
- AIG relies upon the email entitled "Summary of conclusions" sent by Mr Kaufmann in July 2015 but this is a privileged document and the evidence of Mr Kaufmann was that he could not recall its contents. Mr Kaufmann insisted however that no decision was taken until August. His evidence in cross examination was:
"I remember a discussion we had on 14th August where we had a telephone conference and where we then, after evaluating the arguments, looking at the evidence, at the facts, took a decision that we would make a proposal to the OT board that we should issue proceedings against Mr Woodford and Mr Hillman. That's my recollection. I don't have a recollection about the events in July."
Mr Zangemeister's evidence in cross examination when asked about this document was that it could have been one of the updates but confirmed that this was a quiet time as the work was being carried out by the IT specialists and the lawyers. He expressly rejected the suggestion that he had come to a conclusion in July 2015, saying that he was waiting for a summary or a memo from his advisers and this didn't arrive until mid August.
- There is no apparent motive for Olympus to have delayed proceedings and the submission for AIG that the investigation was concluded in July but it took from July until the end of August because Olympus as an organisation moved slowly was in my view pure speculation by counsel and contrary to the evidence of Mr Kaufmann. Mr Woodford's evidence on this point was that Olympus would have been investigating for an extended period of time leading up to a decision being made in Tokyo and his view was that Olympus had been investigating since May 2015. Mr Woodford acknowledged however in cross examination that he had no knowledge of what Olympus knew. Mr Kaufmann's evidence was that it was not until 14 August 2015, after advice on 12 and 14 August 2015, that Mr Zangemeister and he concluded that there were sufficient circumstances to justify the conclusion that (i) there had been breaches of duty by Mr Woodford and Mr Hillman and (ii) there was sufficient evidence to justify initiating legal proceedings (paragraph 23 of his witness statement). Mr Kaufmann's evidence was that following this, he travelled to Tokyo and discussed it with the Tokyo board at a meeting on 20 August 2015. He said he had no authority to decide to issue a claim against Mr Woodford and Mr Hillman, that was a matter for the Tokyo board. However he had not been in a position to approach the Tokyo board for a decision before 14 August 2015 because he did not have the knowledge required to justify legal proceedings. On 28 August 2015, he was instructed by the Tokyo board to issue a claim form against both Mr Woodford and Mr Hillman (paragraph 24 of his witness statement).
- Mr Woodford's evidence was that Mr Kaufmann had feelings of loathing towards him. This was not borne out by Mr Kaufmann's evidence. In my view Mr Kaufmann came across as an honest witness having to answer questions about his own role which were difficult for him in the circumstances but which he did not seek to evade and appeared to answer frankly. Whether or not he had feelings of animosity towards Mr Woodford, Mr Kaufmann's evidence was not shown to be unreliable or implausible. I find on the evidence that Mr Kaufmann did not come to the conclusion prior to 1 August 2015, on the basis of the facts known to him, that duties had been breached.
- As to Mr Williams, his language in the draft press release was that he felt Mr Woodford had manipulated the pension scheme for personal gain. However he did not share the draft in 2011 beyond Mr Rowe, the finance director, and one of the PAs and it remained merely a draft, password protected and stored on his computer. This evidence tends to support in my view Mr Williams' evidence that he wrote the draft out of frustration and whatever his personal feelings about Mr Woodford's actions, he had not concluded in 2011 that the actions of the claimants were unlawful. Had he concluded that the actions were unlawful, given his strong personal feelings, it is very likely in my view that Mr Williams would have shared it with Mr Takeuchi, Mr Kaufmann or Mr Zangemeister.
- In an email of 8 May 2014 to Mr Takeuchi, Mr Williams notified him of the proposed transfer out from the pension scheme stating:
"the company is powerless to stop MCW transferring out in this way"
Although he said in that email that the principle of the trustees being the beneficiaries was "extremely unpalatable", it is a contemporaneous document which confirms that at that time, Mr Williams' view was that the transfer out of the pension scheme was not unlawful.
- Mr Williams' evidence that he was not involved in the subsequent investigations is supported by the evidence of Mr Kaufmann that in May 2014 Mr Kaufmann discussed matters with Mr Zangemeister and then sought authority for further investigations from Mr Takeuchi.
- As to the position in June 2015, Mr Williams denied that he was aware of the possibility of legal proceedings at this point and this evidence is supported by the evidence of Mr Kaufmann and Mr Zangemeister that at this time the investigations were being carried out by the IT specialists and the lawyers.
- I find on the evidence that Mr Williams did not come to the conclusion prior to 1 August 2015, on the basis of the facts known to him, that duties had been breached.
- As to the knowledge of Mr Takeuchi there was no direct evidence to support Mr Woodford's belief of a campaign against Mr Woodford by Mr Takeuchi. Mr Williams rejected the suggestion that Mr Takeuchi was driving the investigation. However the issue is not whether the evidence shows Mr Takeuchi was looking for grounds to sue Mr Woodford but whether he had knowledge of breaches of duty prior to 1 August 2015.
- In an email on 26 May 2014 Mr Takeuchi wrote to Mr Kaufmann:
"One thing I should like to know is if we should sue the [board of director] member who signed the pension contract and approved it for their lack of fiduciary duty."
Mr Kaufmann responded that he would investigate and establish contact with UK lawyers for this purpose. Mr Kaufmann's evidence in cross examination was that they did not have precise evidence at that point and the evidence of this email exchange does not establish that Mr Takeuchi had knowledge at this point that the behaviour was wrongful, rather that he was raising it as a matter to be investigated as is evident from the phrase "if we should sue".
- This accords with the contemporaneous email exchange between Mr Zangemeister and Mr Takeuchi in June 2014 in which Mr Zangemeister stated:
"all appears to be selfish – and when looking at the financial consequences unethical too.
But from my point of view it is not only the Executive Scheme itself, which is contributing to this unreasonable Transfer Value. A key driver to this high Transfer Value also is based on the contracts and remuneration agreements which have been closed with MCW when he was appointed EMD in Europe.…
Looking at the result, all of this seems wrong.
However from a legal perspective the directors of the company apparently had the power to do so, since neither law nor the articles of the company prevented them from being trustees and company representatives at the same time." [Emphasis added]
This exchange is focused on the reason for the high transfer value but also states that at that time there was believed to be nothing unlawful.
- Mr Kaufmann sought approval from Mr Takeuchi in July 2014 to continue the investigations but there is no evidence that Mr Takeuchi had any greater knowledge at that point. Rather the evidence of Mr Zangemeister paints a picture of Mr Zangemeister leading the investigation from May 2014, sharing his findings with Mr Kaufmann and giving updates to Mr Takeuchi. According to Mr Kaufmann's evidence, Mr Takeuchi was required to give his approval to investigations continuing and Mr Zangemeister records in his witness statement (paragraph 24) that he was so instructed by Mr Takeuchi on 31 July 2014.
- The evidence suggests that Mr Takeuchi was not carrying out an independent investigation in 2014 and would have been getting his information from the reports from Mr Zangemeister and Mr Kaufmann. Mr Zangemeister rejected the suggestion that Mr Takeuchi was the driving force at this point. He said that they all wanted to complete the gaps in their information. The evidence of Mr Kaufmann was that there was insufficient evidence at the end of 2014 and that the meetings to assess the evidence only took place in August 2015, after the IT specialists and lawyers had concluded their work. Mr Zangemeister gave a similar account in his evidence to the court. There was no suggestion that these two witnesses had colluded to present their evidence and I accept their evidence.
- Assessing the question on the basis of the overall circumstances, I find that Mr Takeuchi did not come to the conclusion prior to 1 August 2015 that duties had been breached.
- As stated above, my understanding is that counsel for AIG accepted that Mr Zangemeister's knowledge was not attributable to the Policyholder. However, if it had been necessary for me to decide the point, my conclusion would have been that on the evidence Mr Zangemeister did not come to the conclusion that the conduct was wrongful prior to 1 August 2015; in particular the evidence of the email exchange in June 2014 referred to above and the evidence of both Mr Zangemeister and Mr Kaufmann independently concerning the events from July 2014 until August 2015.
- For completeness I note that Professor Armbrüster offered his opinion on the documentary evidence including witness statements in relation to this issue and sought to draw conclusions (para 87 of his report). However he did not have the benefit of the oral testimony and I do not see any need in this judgment to address his specific reasoning which is formed on part only of the evidence which is before the court.
- Accordingly I find on the evidence that there was no knowledge of the alleged breaches of duty that form the subject matter of the KeyMed claim prior to 1 August 2015 by the insured persons or the Policyholder or any persons whose knowledge is attributable to the Policyholder.
- In the light of my findings on the evidence it is not necessary for me to consider the issues raised at paragraphs 3b – e of the List of Issues including whether SC5 is void or unenforceable as a matter of German law and the effect of the confirmation of cover letter of 2 June 2016 (set out at paragraphs 4 – 7 of the List of Issues.)
Is AIG entitled to decline cover in respect of the claimants' claim by reference to clause 5.5 of the Policy?
- The general conditions (GC5.2) of the Policy contain an express clause requiring the Policyholder to provide information on request for "clarifying the damages, determining the duty to pay or for examining and preparing recourse claims".
- The consequences of a breach of duty set out in clause 5.5 are that if the breach is "deliberate" (as a matter of German law) the insurer is free from any liability to indemnify. The insurer remains liable however under clause 5.5 if the Policyholder proves that the breach was not causative for the establishment or extent of the insurer's liability.
- Counsel for AIG acknowledged in closing submissions that he was no longer pursuing an argument that the breach was "arglistig" (malicious) in this case.
- On 13 October 2016, AIG sent five questions to Mr Kaufmann and the Policyholder including, whether the alleged breaches of duty were known to Mr Kaufmann before 1 August 2015.
- On 12 December 2016 the head of the legal department at the Policyholder, Mr Haak, informed AIG that the questions were not going to be answered on the grounds of legal professional privilege. Mr Haak wrote:
"…as legal proceedings are currently underway in the High Court in London it would be inappropriate at this stage for Mr Kaufmann, or indeed anyone else involved in the proceedings, to respond to any questions you have raised of this nature.
Further the questions you have raised could prejudice the protection given by [legal professional privilege] and we have been advised… that no response to the specific questions should be provided
"KeyMed's position is fully set out in the particulars of claim and its reply and defence to counterclaim…"
- BLD acting for AIG wrote on 23 January 2017 to Mr Haak and set a deadline of 6 February 2017 for a response. The letter stated:
"…Mr Goldschmidt, with the email known to you dated 13th October 2016, had addressed questions to the Policyholder and Mr Kaufmann in his capacity as managing director of the Policyholder in order to clarify the above mentioned facts [knowledge of the breaches of duty prior to 1st August.] These questions, have however, until today not been answered by either the Policyholder or Mr Kaufmann. In your e-mail of 12th December 2016, you merely repeat the position of KeyMed in respect of the statute of limitations in the KeyMed proceedings and generally refer to the alleged legal professional privilege of your company and Mr Kaufmann.
However, the pre-conditions for legal professional privilege according to English law are not met in the present case…
We therefore renew our request to [the Policyholder], as well as to Mr Kaufmann, to now please answer the questions set out in the e-mail dated 13th October 2016 by 6th February 2017." [emphasis added]
- The letter contained a warning that failure to provide the requested information might lead to the right to an indemnity which might otherwise have arisen to fall away. The warning was in bold text in the following terms:
"Deliberately false or untrue declarations or incomplete or delayed disclosures of information may lead to the complete loss of the insurance benefit ...unless this information does not become causal for the determination of the insured event nor for the determination or extent of our duty to indemnify. The last mentioned limitation does not apply if the false or untrue declarations are made by you maliciously."
- On 3 February 2017 there was a response from Fieldfisher, the lawyers for the Policyholder, asking for an extension to the deadline to 6th March. The letter read in material part:
"As the lawyers instructed on the claims against the insured persons, our client… has passed us your letter of 23rd January to its Head of the Legal Department of EMEA, Mr Heiko Haak.
Before we are in a position to advise our client and to respond to the points raised in your letter, it is necessary for us to investigate and review all the communications that have passed between our respective clients. It will also be necessary for us to review the terms of the policy and special conditions referred to in your letter and to discuss the same with specialist German legal counsel. This work will take more time than would normally be the case as all the communications and the policy are written in German.
In the circumstances we will not be in a position to meet the deadline set out in your letter of 6th February 2017. We anticipate being in a position to respond to your letter by no later than 6th March 2017 and would therefore be grateful if you would please confirm that this is acceptable to you.
In the meantime please could you let us have a full copy of the policy and special conditions so that we can be sure the versions we have are the correct versions." [emphasis added]
- On 7 February 2017 AIG's lawyers responded to Fieldfisher:
"We are happy to send you the relevant policy as well as the relevant terms and conditions for the [Policy] in the course of the next days.
For us it is neither for legal nor factual reasons comprehensible why your client and Mr Kaufmann have until now not been able to answer AIG's questions in the email of 13 October 2016… At the latest, the Policyholder has been obliged to provide information since 13 October 2016 …Having to wait further until 6th March 2017 for the answers to the questions posed to the Policyholder and Mr Kaufmann is therefore completely unacceptable.
Since as at today the Policyholder and Mr Kaufmann have not fulfilled their obligations to provide information without in our opinion there being any factual or legal reason for this, we assume that they are deliberately refusing to provide the information requested and will now draw the necessary legal consequences from this."
- On the same date AIG's lawyers wrote to the claimants stating that:
"…We consider the repeated evasive reply of the Policyholder as an indirect admission that knowledge of the breaches of duty alleged against your clients had existed even before 1st August 2015, otherwise the Policyholder's evasiveness would be unnecessary.
Due to this factual basis, we have once again assessed the coverage situation together with our client.. As a result we unfortunately have to inform your clients that there is in fact no insurance coverage due to the provision in clause 5 of the special conditions with regard to the claims against your clients made by [OKM] in England.
Furthermore….we have come to the conclusion… that…the Policyholder is obliged to provide information to AIG under clause 5.2 of the general terms……Consequently AIG is also exempted from its obligations to provide cover due to the Policyholder's deliberate breach of its obligation to provide information pursuant to clause 5.2 read together with clause 5.5 of the General Terms and Conditions." [emphasis added]
- AIG's case is therefore that the Policyholder's refusal to answer questions was deliberate and a breach of clause 5.2, the obligation to provide information.
- It is the claimants' case that AIG cannot rely on anything prior to the letter of 23 January 2017 as prior to the letter of that date, they had not given the warning required under section 28.4 of the VVG. AIG's position is that, notwithstanding the inclusion of the warning set out above in the letter of 23 January 2017 from its lawyers, under the Policy they were not required to give such a warning.
- The claimants' case is that even if they are wrong on that, the breach was not causative as Mr Kaufmann supplied the answers to the questions in his witness statement and it would not have made any difference if the answers had been provided earlier as the claim has been maintained even after the answers were provided. Further AIG suffered no financial detriment.
- Professor Armbrüster sets out his opinion on this issue at paragraphs 94 – 115 of his report. It is clear from his report that clause 5.2 creates an obligation on the Policyholder to provide information needed to verify the occurrence of the insured event or the scope of the insurer's duty to render a benefit and that corresponds with the statutory requirement. The obligation to provide information is to compensate for gaps in knowledge between the insurer and the Policyholder and to compensate for the asymmetry of information.
- For the claimants it was submitted that AIG cannot rely on anything prior to the letter of 23 January 2017 as prior to the letter of that date, they had not given the warning required under section 28 paragraph 4 of the VVG. Professor Armbrüster's evidence was that this warning was not required. His reasoning was that clause 5.5(2) reproduces in broad part the exact wording of section 28 paragraph 2 VVG. Given that the clause is modelled on section 28 his interpretation is that 28.4 was intentionally not incorporated and therefore waived by implication. Professor Brand disagreed for the reasons set out in his report. I proceed on the assumption that Professor Armbrüster is correct as in my view for the reasons set out below it is not necessary for me to determine this point of German law in order to resolve the issue in relation to clause 5.5.
- At paragraph 96 of his report Professor Armbrüster states that the Policyholder in the email of 12 December 2016 and the letter dated 3 February 2017 has not provided full answers to the questions and expresses the view that the failure to do so constituted a clear breach of the duty to provide information. I note that Professor Armbrüster appears to be expressing a view on the factual situation which is not binding on the court. Professor Armbrüster stated that in his opinion the scope of the duty to provide information cannot be restricted by citing privilege under a law other than the law of the contract; however he also stated that if the Policyholder sought legal advice and the advice was that it was not necessary to reply, the Policyholder may normally rely upon this (paragraph 102). Professor Armbrüster stated that the situation would be different if the legal adviser "does not guarantee" that he is in a position to give competent answers and he suggested that it can be presumed here. Rather it would seem to be highly unlikely that a major corporation such as Olympus with a legal department would take legal advice from an external legal adviser who had not given the matter appropriate consideration and there is no evidence to support such a presumption as Professor Armbrüster advances. Even if Professor Armbrüster is correct that the Policyholder cannot rely on a claim to privilege under English law and refuse to provide the information, Professor Armbrüster does not opine that the refusal in the email of 12 December 2016 of itself was sufficient to amount to an intentional breach of clause 5.2. Rather he considers the chain of correspondence including the assertion of privilege in the email of 12th December and the subsequent letter of 23 January. From his report therefore it seems to me that the question of whether or not the Policyholder has deliberately breached the duty to provide information has to be looked at in the light of the chain of correspondence.
- This is consistent with the view expressed by Professor Brand (at paragraph 171 of his report) where he stated that, whilst the Policyholder has to respond to the request of the insurer within a reasonable time, delays can be justified with the result that they do not amount to a breach of the Policyholder's obligation where it is unreasonable to demand information or the information is difficult to obtain, for example foreign law questions. He further notes that what amounts to delay is not defined in the statute and there is little scholarly work or jurisprudence on the issue.
- In my view, having regard to the evidence of German law, the response of Mr Haak did not of itself amount to a deliberate breach at that point; he states that it would be inappropriate "at this stage" for Mr Kaufmann to respond to the questions. He relies on legal professional privilege and he also refers AIG to OKM's position as set out in the particulars of claim and reply and defence to counterclaim. In particular Mr Haak deals with OKM's case on the date of knowledge by reference to specific paragraphs of the reply and defence to counterclaim.
- Although not determinative as a legal matter, Mr Haak's response does not appear to have been regarded by AIG's lawyers at that point, as a deliberate breach of the obligation to provide information, given the correspondence which then followed between AIG and the Policyholder's representatives. AIG's lawyers in its letter of 23 January challenged the assertion of privilege but did not at that point assert a deliberate breach of clause 5.2. In relation to the response from the Policyholder's legal advisers on 3 February 2017, in my view there was no express or implicit refusal to provide information; rather a statement that they anticipated being in a position to respond. Despite this, AIG did not indicate whether or not an extension would be granted but merely proceeded to issue the letter to the claimants asserting that there had been a refusal and coverage was accordingly denied.
- The evidence was that there was no particular deadline under German law in order to respond to a request and although the original request was made in October 2016, the letter of 23 January 2017 made no particular complaint about timing and Mr Seitz in his evidence acknowledged that the deadline of 6 February had no particular significance. In circumstances where the lawyers were seeking to gather the relevant documentation, translate documents from German and advise their clients on the appropriate response, the request for an extension to March does not suggest that the delay from renewal of the request on 23 January to 6 March would have been for an unreasonable amount of time in the circumstances.
- In my view in all the circumstances, on the evidence there was no deliberate refusal to provide information nor was there an unreasonable delay amounting to a breach of clause 5.2.
- If I am wrong on that, then I have to consider whether or not the breach had a causal effect on the ascertainment or scope of the insurer's obligation to pay (paragraph 112 of Professor Armbrüster's report). The issue is whether the insurer has sustained a financial loss due to the breach of the obligation (paragraph 113 of Professor Armbrüster's report). The Policyholder bears the burden of proof of absence of causality. The insurer bears the burden of substantiation concerning the question of what concrete measures he would have taken in the case of punctual fulfilment of the obligation. Causality and burden of proof is common ground between the experts (paragraph 2i of the joint report)
- Professor Armbrüster's evidence in cross examination as to what constitutes "detriment" for these purposes in summary was as follows: the Federal Court has held that even if the insurer has denied cover, there may be detriment; there may be cases where the lack of information has misled the insurer to refuse cover. The detriment need not occur at the moment when the preliminary decision of the insurer was taken, but it must be caused by that misled assessment.
- Professor Armbrüster referred to two authorities in his supplemental report, one (at paragraph 3) where the Federal Supreme Court:
"… considered it sufficient for a disadvantage …when the Policyholder renders incorrect information about the existence of several policies covering the same risk, as this was not without consequences for the insurer but prevented the insurer at least temporarily from examining the case, even though the insurer finally paid." [emphasis added]
In another case decided by the Federal Supreme Court, where a Policyholder claimed compensation for a lost golden watch, but did not have the receipt and he faked the receipt, that was seen as a detriment in assessing the claim, even though it may have been accurate. Professor Armbrüster's evidence was that the courts are very "obsessed" with preventing people from cheating here or misrepresenting.
- In cross examination Professor Armbrüster said that the denial of cover itself was not a detriment, but it may very well cause detriment.
- In his second witness statement Mr Goldschmidt set out the detriment that he said AIG suffered as a result of the failure to provide information. Mr Goldschmidt's evidence was that the detriment suffered by AIG as a result of the failure of Mr Kaufmann and the Policyholder to answer the questions sent in October 2016 was that AIG would have been able to consider the answers before making a final decision about coverage. If the answers had satisfied AIG that they did not have knowledge of the breach of duty, AIG would have been likely to have provided defence cover and saved the expense of the litigation. Alternatively if the answers had tended to indicate that the Policyholder did have knowledge, AIG could have used the information to convince the claimants that there was no insurance cover. If proceedings had been issued in any event, the defence could have been limited to the issue of knowledge without the need to argue points such as a breach of obligation to provide information. Mr Goldschmidt was asked in cross-examination whether AIG would still have declined cover under SC5 if answers had been received along the lines of the statements made by Mr Kaufmann in paragraphs 19 – 24 of his witness statement but he failed to give a clear answer.
- Counsel for AIG in closing submissions accepted that the court would have to decide whether this was sufficient to amount to detriment for the purposes of the clause and referred to Professor Armbrüster's view that procedural detriment could be sufficient.
- The answers to the questions were provided in the witness statement of Mr Kaufmann in November 2017 to the effect that the Policyholder did not have knowledge prior to 1 August 2015. Nevertheless AIG has maintained its defence of this litigation on the basis that it was entitled to refuse cover as the Policyholder did have knowledge of the alleged breaches prior to 1 August 2015. AIG have not therefore established that the decision would have been different and thus that they suffered a detriment as a result of the failure of Mr Kaufmann and the Policyholder to answer the questions raised in October 2016.
- The alternative detriment advanced, that AIG would have concentrated on the issue of knowledge in the litigation and not advanced other points such as breach of obligation to provide information, does appear to be circular (as submitted by counsel for the claimants). The detriment which AIG say they suffered as a result of the failure to provide answers is the cost of raising this issue in litigation. Professor Armbrüster accepted in cross examination that the denial of cover itself is not a detriment as a matter of German law. In my view AIG has not established this alternative "detriment" which it allegedly suffered.
- Accordingly even had I concluded that the Policyholder had breached its obligation to provide information under clause 5.2, I find on the evidence that no detriment has been suffered by AIG.
Remedies and quantum
- The claimants have confirmed that they have incurred costs to 31 December 2017 of £2,318,053 and £1,773,223 respectively. The claimants seek an order for payment of those sums plus interest at the German law statutory rate of 4.12% per annum 14 days after the expiry of demand. The principles which apply to entitlement to interest on the defence costs and the period and rate of interest, as a matter of German law, are set out at paragraphs 184 – 193 of Professor Brand's report and are common ground (paragraph 2j of the joint report).
- The relevant sections of the Policy are as follows:
Clause 1.1 of the General terms and conditions provides:
Subject Matter of the Insurance
The Insurer provides worldwide Insurance Cover in the event that a claim for compensation of financial damages is brought against an Insured Person as a result of a breach of duty committed in his/her capacity in accordance with clause 1.2 …
Breach of duty
A breach of duty within the meaning of these terms is any act committed or alleged to have been committed or omission contrary to duty by an Insured Person which could result in financial damages…
Clause 3 is headed "Scope of the Insurance".
"3.1 Defence and Indemnification
The Insurance Cover covers both the defence of claims in an out-of-court as well as the indemnification from justified claims including the analysis of liability…
3.2 Conduct of Proceedings/Choice of Lawyer
… The Insured Person shall be at liberty to choose a lawyer, subject to the right of the Insurer to raise an objection. An objection may only be raised against the choice of lawyer if there are justified reasons. The Insurer shall bear the costs incurred in accordance with the scale of fees in the German Lawyers Remuneration Act… or equivalent foreign schedules of fees and, costs incurred in addition to this in accordance with fee agreements, provided these are reasonable with regard to the complexity and significance of the case." [Emphasis added]
- AIG submitted that usually a contractual indemnity is reflected in an order for costs to be the subject of a detailed assessment: Morgan J in Renewable Power & Light Ltd v McCarthy Tetrault & Others  EWHC 3848 at paragraph 40. AIG further submitted that the assessment of costs should be on the standard basis not the indemnity basis as the Policy does not use the language of an indemnity. Further the reference in clause 3.2 to complexity and significance "evokes the requirement of proportionality".
How should the costs be assessed?
- Counsel for AIG submitted that usually a contractual indemnity is reflected in an order for costs to be the subject of detailed assessment and relied on the authority of Renewable Power. In that case the claimant served notice to discontinue its claim and the defendant sought an order for its legal costs in the proceedings in defending the claim and presenting a counterclaim. The court held that the defendant had a contractual agreement which covered such costs and Morgan J took the view that "the most convenient course" in that case was to make a declaration of the entitlement of the defendant to an indemnity and then to direct a detailed assessment of costs on the indemnity basis. Morgan J stated that this procedural course was "supported by" the approach in Gomba Holdings UK Ltd v Minories Finance Ltd (No 2)  CH 171.
- In Gomba Holdings the Court of Appeal was concerned with the powers of a mortgagee to claim the costs incurred by it in enforcing a mortgage and how a contractual entitlement in the mortgage was to be construed where the court made an order for taxation of costs. In those circumstances it was accepted by counsel and the Court of Appeal that the quantification of litigation costs must be by means of a taxation carried out by a taxing master and the Court of Appeal also held that both litigation costs and items of costs which did not fall into the category of litigation costs could be referred to the taxing master.
- It seems to me that the present situation is very different from that before the Court of Appeal in Gomba Holdings. In the present case the claimants are not seeking to recover their costs in these proceedings against the other party pursuant to a contractual entitlement; rather the claimants are claiming under an insurance policy which indemnifies the insured against losses suffered arising out of their role as directors and officers of a relevant company including legal costs. It is in the nature of an insurance policy that it is a contract to indemnify the insured for costs arising out of the insured event and the Policy in clause 3.1 refers to an "indemnification". It is within the scope of the indemnity provided under the Policy, that an insured person can claim for the costs of lawyers retained to defend claims brought against it, subject to the qualification (where there is no scale of fees) of reasonableness. It seems to me therefore that this situation is to be distinguished from the situation considered by the Court of Appeal in Gomba Holdings and by Morgan J in Renewable Power where in legal proceedings between two parties, a party seeks to recover the costs of litigation from the other party. In that situation the court has a discretion as to the award of costs and taxation is the usual method of establishing those costs, even though there may be a contractual entitlement in addition to the court's discretion. In the present situation the losses for which an indemnity is sought under the Policy comprise legal costs but they are not costs incurred in the current proceedings before this court. It seems to me that it is for this court to determine the validity of the claim under the Policy and for this court to determine the quantum of that claim. In order to determine quantum, the court does not refer the issue of quantum to a taxing master but has to determine the quantum of liability under the Policy as it would determine any other issue of quantum (not comprising legal costs) by reference to the evidence before it. There is thus no scope for importing rules which would apply on detailed assessment to the determination of quantum under the Policy.
On what basis are the costs to be assessed?
- Counsel for AIG submitted that the Policy did not use the language of indemnity in clause 3.2 and that the costs should be assessed on the standard basis not indemnity costs reflecting the contractual provision. But in my view clause 3.2 has to be read in the context of the insurance policy as a whole including clauses 1.1 and 3.1 set out above, which make it clear that the Policy indemnifies the insured against losses incurred in relation to claims for breach of duty.
- I do not accept AIG's submission that the references in clause 3.2 to judging reasonableness "with regard to the complexity and significance of the case" "evokes the requirement of proportionality, which would only be consistent with standard basis costs." There is no justification for such a link from a German law contract of insurance to the Civil Procedure Rules. The test of proportionality in the CPR has regard to a number of factors and is not limited to complexity and significance; to import the rules of standard basis assessment would in my view to be impose a different test from the express language used in the contract which cannot be justified.
Are the costs of the case reasonable with regard to the complexity and significance?
- The costs incurred by the claimants to 31 December 2017 are £2,318,053 and £1,773,223 respectively. The complexity and significance of the matter for which costs are being incurred is that the claimants are defending a three-week Chancery action in the High Court where the amount at stake is some £50 million. In addition to the financial value of the claim, the significance of the claim is that it has reputational significance for both claimants who are accused of a number of breaches of duty in their role as directors. The financial impact of defending the claim is demonstrated by the fact that Mr Woodford has had to withdraw sums from his pension in order to fund the litigation in the absence of insurance cover, which cannot of course be paid back into the pension. Mr Hillman has exhausted his savings in defending the proceedings and is now having to borrow money from Mr Woodford. The complexity arises in that the alleged breaches of duty arise in the context of a specialist area of law, namely pensions. It is against that background of complexity and significance that the reasonableness of the costs falls to be determined.
- Counsel for AIG submitted that reasonableness is not judged from the perspective of the receiving party because whilst it may be reasonable for that party to spare no expense, reasonableness is to be judged objectively: Kazakhstan Kagazy v Zhunus  EWHC 404 (Comm) at 13. However in my view that authority is not relevant to the approach in this case. Leggatt J in Kazakhstan Kagazy was dealing with the approach to costs under the Civil Procedure Rules and applying the different test of whether costs were reasonably and proportionately incurred.
- Mr Woodford states in his witness statement (paragraph 55) his belief that the legal costs incurred to date are reasonable. He refers to the serious allegations which have been made against Mr Hillman and himself by OKM and the fact they are seeking an "extraordinary amount of money". Mr Hillman states in his witness statement (paragraph 68) his belief that the costs incurred to date have been reasonable when
"considering the amount of the KeyMed Claim, the fact that it concerns several complicated issues of pension scheme management and the extremely serious nature of the allegations which have been made."
- In his first witness statement Mr Goldschmidt made various statements concerning the costs incurred by the claimants describing them as "huge" and "unjustifiable" (paragraph 14), "enormous and (in our view) incomprehensible" (paragraph 29) and that "no insurer on earth would be prepared to pay costs that magnitude for 13 pages of work product" (paragraph 22). Mr Goldschmidt went so far as to assert that Simmons & Simmons along with Mr Woodford was trying to "churn the case for costs" (paragraph 22) and although he appeared to disavow the use of the term "churn" in cross-examination, he nevertheless stated that this remained his view. Mr Goldschmidt further asserted in cross-examination in effect that information on the costs had been deliberately withheld to try and influence AIG's coverage decision.
- The evidence of Mr Goldschmidt as to the scale of the costs has to be examined in the light of Mr Goldschmidt's experience. He accepted that this case, so far as defence costs are concerned, is a relatively large case for him and that he had not come across a claim like the KeyMed claim in which a claim for defence costs was made and which involved a three-week trial in the High Court although his evidence was that he did deal with cases with an exposure of 50 million that have been dealt with in England.
- In my view Mr Goldschmidt's limited experience did not justify either his views on the scale of the costs or the very serious accusations of "churning" on the part of Mr Goldschmidt, and (properly in my view) counsel for AIG expressly did not seek to pursue these accusations in closing submissions.
- Mr Goldschmidt's evidence was that he found it difficult to understand why 15 to 19 lawyers had been working on the case but this was in the context of Germany and his assertion that it was "not normal" in England did not appear to be borne out by any substantive evidence.
- Mr Woodford has been paying the costs through withdrawals from his pension which, given the tax implications, is an expensive method of funding the litigation. Further he has lent money to Mr Hillman to enable Mr Hillman to fund his defence. There seems to be no logical or rational support for the assertion by Mr Goldschmidt that Mr Woodford would have sought to increase his costs artificially in order to present an inflated claim to AIG.
- Mr Seitz in his witness statement (paragraph 19) suggested that there was a possible "financial conflict of interest" arising out of Mr Woodford being a non-executive director on the advisory board of Simmons. In cross-examination Mr Seitz was asked whether this meant that he was of the view that Mr Woodford had allowed the legal costs to become excessive because he was a non-executive director. Mr Seitz chose not to make such an allegation in his oral evidence stating that he could not "recall" whether he made the allegation and that what he thought today was not "really relevant".
- Mr Woodford acknowledged in his witness statement that he was a non-executive director of Simmons but Mr Woodford's evidence was that he derived no additional benefit from the amounts invoiced to him by Simmons (paragraph 56 of his witness statement). I have no reason to doubt that evidence and in my view it is highly unlikely that any financial benefit accruing to Mr Woodford as a non-executive director would result in Mr Woodford seeking to pay inflated amounts to the law firm in circumstances where he had no certainty that he would be able to recover the defence costs under the Policy. Rather the evidence is that Mr Woodford benefited from a significant reduction in the hourly rate of the lawyers working at Simmons as a result of being a non-executive director. Accordingly on the evidence I reject the assertion that Mr Woodford sought to increase his costs artificially or that there was any "financial conflict of interest" arising out of Mr Woodford being a non-executive director of Simmons.
- AIG raised particular objection to the hourly rates charged by the law firm which AIG plead are "unreasonably high" (paragraph 42.1 of the Amended Defence). The hourly rates for Simmons and Simmons were initially £565 grade A, £430 grade B, £325 grade C and £145 grade D then discounted to £508, £389 £275 and £133 from October 2016. The evidence before the court is that this represents a 30% discount on Simmons' standard rates due to the fact that Mr Woodford is a non-executive director of Simmons and Simmons.
- I do not accept the submission on the part of AIG that the starting point is the Guideline hourly rates in the Guide to the summary assessment of costs. As stated above this is not an assessment of costs pursuant to the CPR. Further the guidelines are widely recognised as out of date. Finally, even if the guidelines were relevant, there is express recognition in the Policy that costs may be recovered in excess of schedule rates. In my view the rates approved by Morgan J in Group Seven Limited v Nasir  EWHC 620 CH (an authority relied upon by AIG) are of no assistance. In that case Morgan J was carrying out a cost budgeting exercise where the rules provide that the court is considering whether the budgeted costs fall within the range of reasonable and proportionate costs and Morgan J took account of the guidance as to assessing proportionality given in CPR 44.3 and 44.4. Having considered the guidance on proportionality in the rules, Morgan J reached his conclusion on the appropriate hourly rates in that case. His conclusions on the factual position before him and by reference to the Civil Procedure Rules provide no assistance to the question of whether the hourly rates claimed under the Policy are reasonable.
- In my view, given the complexity and significance of this matter as discussed above, it is reasonable for the claimants to use a City firm and the discounted rates cannot be said to be unreasonable.
- AIG also plead that there has been "excessive billing" by a total of 19 fee earners (paragraph 42.2 of the Amended Defence) and an "unreasonable lack of delegation" to junior staff for routine work but no particulars are pleaded. AIG submitted that too many fee earners have been involved and that work had been duplicated. In order to substantiate this submission AIG produced a schedule as part of their closing submissions, extracting line items of work from invoices which AIG submitted show duplication at grade A level, nonchargeable matters and a failure to delegate. Neither Mr Woodford nor Mr Hillman were asked in cross examination about any of these matters nor is there any other evidence which addresses the detailed allegations made in submissions. As matters (so far as the detailed allegations are concerned) were not raised prior to closing submissions and were not put to the claimants' witnesses or to the lawyers themselves and thus the claimants have not had an opportunity to answer the points made, I am not satisfied the court should infer from the description in the invoices which provide no detailed explanation of the work carried out, duplication by fee earners or a failure to delegate or that non-chargeable matters have been charged.
- In relation to counsel, AIG pleaded "unreasonable use" of two QCs and a (senior) junior (para 42.4 of the Amended Defence). The evidence is that Mr Salzedo QC and Mr Midwinter QC (until recently junior counsel) have primarily been engaged on the matter with a pension specialist brought in to assist. This was initially Mr Evans QC who was then replaced by Mr Newman QC when Mr Evans ceased to practice. AIG submitted that the matter could have been done with two counsel, one of whom was a pension specialist. I am satisfied that the approach adopted by the claimants in engaging commercial counsel to handle the matter with input from a pension specialist, was reasonable in the circumstances.
- In my view the claimants are entitled to an indemnity for the costs incurred in defending the claim for breach of duty. On the evidence I find that the costs claimed have been incurred and for the reasons discussed above, I find that the costs are reasonable with regard to the complexity and significance of the case.
If AIG is entitled to deny cover, is OKM in breach of the compromise agreement with the second claimant?
- In the light of my findings above, the contingent claim of the second claimant against OKM (issue 10 of the List of Issues) does not fall to be determined and I do not propose to deal with it in this judgment.