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||Neutral Citation Number:  EWHC 1181 (Ch)
||Case No: HC03C02089
IN THE HIGH COURT OF JUSTICE
||Royal Courts of Justice
Strand, London, WC2A 2LL
||25th May 2004
B e f o r e :
|| THE QUALIFYING INSURERS SUBSCRIBING TO THE ARP
||CAPITA LONDON MARKET SERVICES LIMITED
||- and -
||ROSS & CO
||THE LAW SOCIETY
||Pt. 20 Defendant
Mr. Fergus Randolph and Mr. James Purchas (instructed by Messrs Berwin Leighton Paisner) for the claimants
Mr. Graham Ross (In Person) for the First Defendant
Mr. Stephen Morris QC (instructed by Messrs Norton Rose) for the Part 20 Defendant
Hearing dates : 11th to 13th May 2004
HTML VERSION OF JUDGMENT
Crown Copyright ©
The Vice-Chancellor :
- The Solicitors Indemnity Insurance Rules 2000 made by the second defendant ("the Law Society") under s.37 Solicitors Act 1974 came into force on 1st September 2000. They set up a scheme whereunder solicitors were to obtain on the open market professional indemnity insurance satisfying certain minimum conditions. The scheme provided, amongst other things, for the constitution of the Assigned Risks Pool ("ARP") to provide professional indemnity insurance for those solicitors who failed to obtain open market indemnity insurance for themselves. The ARP risks are underwritten by the first claimants and managed by the second claimant. Those rules were replaced, with one material amendment, by the Solicitors Indemnity Rules 2001 ("the Rules") in respect of the indemnity year commencing on 1st September 2001.
- The first defendant, Mr Ross, is a solicitor. He ceased to practise on 31st August 2002. He obtained the requisite open market professional indemnity insurance for the indemnity year 1st September 2000 to 31st August 2001 at a premium of £16,865. Mr Ross failed to obtain such insurance for the following year with the consequence that the necessary professional indemnity insurance was provided by the ARP. On 19th February 2002 Mr Ross was notified by the second claimant that the premium for such ARP insurance was £56,847.73.
- Mr Ross failed to pay that premium and these proceedings for its recovery were commenced against him on 4th November 2002. By his defence dated 16th December 2002 Mr Ross claimed that the scheme relating to the ARP and the conduct of the claimants in operating it infringed ss.2 and 18 Competition Act 1998. On 6th October 2003 the Law Society was joined as the second defendant at its request and pleadings were directed as though a Part 20 issue had been raised between Mr Ross and the Law Society. Such pleadings having been served and an attempt at mediation having failed, applications were issued by the Law Society on 2nd February 2004 and the claimants on 19th February 2004 seeking orders that the defence of Mr Ross be either struck out under CPR Rule 3.4(2)(a) or summarily dismissed under CPR Rule 24.2. Those are the applications now before me.
The Solicitors' Indemnity Insurance Scheme
- A solicitor may not practise as such unless he holds a practising certificate. He will not get a practising certificate unless he complies with the indemnity rules for the time being in force or is exempt, Solicitors Act 1974 ss. 1(c) and 10(1)(e). The indemnity rules are those made under s.37. S.37(1) provides that the Council of the Law Society with the concurrence of the Master of the Rolls may make rules concerning indemnity against loss arising from claims in respect of civil liability incurred by a solicitor or his employee. Such rules may (s.37(2)) constitute schemes in one of three basic forms, the establishment and maintenance of a fund by the Law Society, the issue to and maintenance by the Law Society of insurance with authorised insurers and the issue to and maintenance by individual solicitors of insurance with authorised insurers. From 1987 to 2000 the scheme for professional indemnity insurance followed the first alternative. The scheme adopted in 2000 ("the Scheme") is of the third type.
- The Scheme has four basic components:
(1) The imposition of an obligation on individual solicitors to obtain professional indemnity insurance from qualifying insurers which satisfies the minimum conditions specified in the Rules. These requirements are contained in Part 2 of and Appendix 1 to the Rules.
(2) The constitution and regulation of the Solicitors Professional Indemnity Ltd ("SPIL") by the Law Society and St Paul International Insurance Co Ltd ("SPIICL") and its holding company to provide professional indemnity insurance which satisfies the minimum conditions on open market terms to those segments of the profession which because of some common feature, notably size or practice, find it hard to obtain such cover. This component is dealt with in a shareholders agreement dated 25th April 2000 and made between the Law Society, SPIICL, its holding company and SPIL ("the MGA Agreement").
(3) The constitution and operation of the ARP as provided for in Part 3 of the Rules and an agreement dated 4th August 2000 and made between the Law Society and the second claimant ("the ARP Agreement").
(4) The recognition of certain authorised insurers as qualifying insurers, the minimum conditions to be satisfied in relation to indemnity insurance issued to solicitors and the terms on which they underwrite the risks in the ARP. This is dealt with in the standard form agreement between the Law Society and the Qualifying Insurer ("the QI Agreement") to which 28 authorised insurers subscribed for the indemnity year 2001/02.
- In relation to the first component, namely the minimum conditions to be satisfied by insurance cover issued by a qualifying insurer to a solicitor, I should note three particular features. First, the solicitor is insured on a "claims made" basis, that is to say that the insurance only covers a liability for which a claim (or notification of circumstances likely to give rise to claim) is made during the period of insurance. (Rules Appendix 1 para 1.1) Second, the cover must include run off cover for the ensuing six years. (Rules Appendix 1 para 5.) Third, the material amendment introduced in 2001 was to restrict the extent to which the cover provided by a qualifying insurer outside the ARP may be back-dated. This was effected by clause 4 of the QI Agreement which provides that the qualifying insurer may not issue a policy with an inception date more than 30 days prior to the date on which the contract of insurance was made. In the version in use in 2000 there was no such restriction.
- With regard to the MGA Agreement I need to note only one additional feature. The purpose was to ensure that insurance cover on the minimum terms was available to all segments of the profession. But that was not to inhibit the ability of SPIICL to refuse cover to individual solicitors because of the specific risk involved.
- It is necessary to describe the ARP in more detail. It is dealt with in Part 3 of the Rules. A solicitor who has not obtained qualifying insurance for himself is under an obligation to apply to enter the ARP before the indemnity year commences (Rule 8). By making such an application the solicitor agrees to pay the premium assessed in the light of his gross fee income in accordance with the method set out in Appendix 2 to the Rules and to submit to investigation, monitoring and special measures (Rule 10). The solicitor must complete an application for admission to the ARP (Rule 11). On entry he will be issued with a policy (Rule 17). Rule 19 provides that a solicitor may leave the ARP at any time on satisfying the manager that he has obtained qualifying insurance outside the ARP at least until the expiry of the current indemnity period. On leaving the ARP the solicitor is entitled to a return of premium calculated in accordance with the scale set out in Appendix 2 to the Rules. I shall refer to that scale later.
- Part 4, consisting of rules 27 to 34, deals with solicitors in default. They are defined in rule 3.1 as those who do not have qualifying insurance outside the ARP and who failed to apply for cover within the ARP before the commencement of the relevant indemnity year. Such a solicitor is automatically covered by the qualifying insurers to the same extent as if he had been in the ARP (rule 27). The Law Society is entitled, on behalf of the qualifying insurers, to recover from the solicitor any amount paid out under such insurance (rule 28). During the period of default a solicitor is entitled to be admitted to the ARP but both he and a solicitor who might, but did not, so apply is liable for the default premium. The default premium is equal to the premium paid by a solicitor who applies for admission in the ordinary way plus 20% (rules 29 and 33).
- On 15th February 2000 the Law Society submitted to the European Commission a Form A/B seeking negative clearance or an individual exemption for the Scheme. It set out the nature and terms of the Scheme in considerable detail. By a letter dated 10th March 2000 the European Commission expressed the view that
"the notified arrangements do not appear appreciably to restrict competition within the meaning of Article 81(1). Furthermore, even if the notified arrangements did restrict competition to an appreciable degree they would in any event fulfil the conditions for exemption pursuant to Article 81(3).
Given these conclusions it has not been necessary to form a view as to whether the Law Society is an undertaking for these purposes or whether the notified arrangements are likely to affect trade between member states to an appreciable degree."
- As I have already indicated, in the year 2000/01 Mr Ross obtained professional indemnity insurance which complied with the minimum standards set out in the Rules for that year. The insurer was Chubb Insurance Co of Europe SA ("Chubb"). It quoted a premium of £16,865, and thereby undercut SPIICL. The latter had quoted a premium of £44,163 but later reduced it to £40,188. Both Chubb and SPIICL were and are qualifying insurers and there is no reason to think that the difference between them was due to anything other than market forces. The period of that insurance expired on 31st August 2001. On 23rd August 2001 the second claimant as the Manager of ARP informed Mr Ross that if he did not obtain insurance from a qualifying insurer then he would be automatically insured by ARP as a firm in default but would be liable to pay a premium 20% higher than the ordinary ARP premium.
- On 3rd September 2001 Mr Riccardi, a solicitor employed by Mr Ross, wrote to his brokers, Marsh, indicating that Mr Ross would cease to practice on 30th September 2001 and asking them to obtain professional indemnity insurance sufficient to satisfy the minimum terms and conditions for the month of September. On 26th September Marsh responded that for six years run off cover, which would be required if Mr Ross ceased to practice, the premium would be 250% of the previous year's premium, namely £44,272. Mr Ross did not accept this offer.
- On 22nd January 2002 Mr Ross completed a proposal form for insurance with a qualifying insurer outside ARP. This was submitted by Mr Riccardi to Marsh on 24th January 2002 and by Marsh to Chubb. Chubb declined to quote because of the time that had elapsed since the expiry of the previous year's insurance which, Chubb considered, indicated an unprofessional attitude. Marsh approached ten other qualifying insurers. None was interested. As Marsh explained later
"most insurers are not interested in firms with less than 4 - 5 solicitors. Also as previously advised insurers did not like the split of your activities (personal injury work) and the size of the practice and some were not writing new business for existing practices during the course of the year.
The only market that we are aware of that is currently writing sole practitioners is Zurich Professional, but the market is continually changing so other markets may come in for a brief period and withdraw again."
There is no evidence that Zurich or any other market was approached by Marsh on behalf of Mr Ross.
- On 7th February 2002 Mr Ross submitted an application for entry to the ARP for the period from 1st September 2001 to 31st August 2002. He declared his gross fee income for the previous year to have been £180,469. In accordance with the scale set out in Appendix 2 to the rules the premium was 180,469 x 25% = £45,117.25 + 20% (£9023.45) = £54,140.70. With the addition of insurance premium tax at 5% the total premium, as advised to Mr Ross on 19th February 2002, was £56,847.73. This is the amount claimed in these proceedings. The size of the premium came as a shock to Mr Ross. He sought and was granted the ability to pay by monthly instalments but he never paid even one of them.
- On 14th February 2002 Marsh replied to Mr Riccardi reporting on the status of the application of Mr Ross for professional indemnity insurance from a qualifying insurer. They wrote:
"We have approached five markets to date including Chubb your previous insurer. All markets have declined to provide a quotation. The reasons include:
- Many insurers are refusing to accept new solicitor business because of the hardened insurance market.
- The practice is involved in a high percentage of Personal Injury Work which is considered a high risk area.
- The practice is reducing its income considerably therefore insurers have minimum fee limits in order to cover their costs.
As we have exhausted all available markets, we have passed your application to our London based broking team who have access to additional markets via Lloyds Syndicates. I will let you know as soon as I hear from them."
On 18th February Marsh wrote to Mr Riccardi again confirming that their London broking team had been unable to obtain any quotation despite approaching a further six markets because most of them would only deal with firms of 4 – 5 solicitors or more.
In November 2003 Mr Ross wrote to SPIICL asking why it would not provide cover for him outside the ARP. Eventually Mr Ross elicited a response to the effect that though SPIICL would listen to particular issues why the firm was in the ARP it would not provide terms for firms in the ARP "unless exceptional circumstances exist". Mr Ross also wrote to the European Commission setting out at some length his contentions why the constitution and operation of the ARP constituted infringements of Articles 81 and 82. On 15th March 2004 the European Commission replied dealing with the various points raised by Mr Ross and concluding that
"Neither your past letters during 2003 nor the e-mail of 19th February 2004 provide evidence of an appreciable restriction of competition affecting trade between member states that the Commission should investigate."
The Competition Act 1998
The provisions of the Competition Act 1998 on which Mr Ross relies are ss. 2 and 18, referred to in the Act as the Chapter I and Chapter II prohibitions. They approximate to Articles 81 and 82 of the EC Treaty with the substitution of "trade within the United Kingdom" for "trade between Member States". So far as relevant s.2 is in the following terms
2. - (1) Subject to section 3, agreements between undertakings, decisions by associations of undertakings or concerted practices which-
(a) may affect trade within the United Kingdom, and
(b) have as their object or effect the prevention, restriction or distortion of competition within the United Kingdom,
are prohibited unless they are exempt in accordance with the provisions of this Part.
(2) Subsection (1) applies, in particular, to agreements, decisions or practices which-
(a) directly or indirectly fix purchase or selling prices or any other trading conditions;
(b) limit or control production, markets, technical development or investment;
(c) share markets or sources of supply;
(d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
S.18, so far as relevant, provides
(e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.
(1) Subject to section 19, any conduct on the part of one or more undertakings which amounts to the abuse of a dominant position in a market is prohibited if it may affect trade within the United Kingdom.
(2) Conduct may, in particular, constitute such abuse if it consists in –
(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;
(b) limiting production, markets, or technical development to the prejudice of consumers;
(c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
(d) making the conclusion of contracts subject to acceptance by the other parties of supplemental obligations which, by their nature or according to commercial usage, have no connection with the subject of the contracts.
(3) In this section –
"dominant position" means a dominant position within the United Kingdom; and
By s.60 I am enjoined to deal with this matter in a manner which is consistent with the treatment of corresponding questions arising in Community Law in relation to competition within the Community. I must also have regard to any relevant decision or statement of the Commission.
"the United Kingdom means the United Kingdom or any part of it."
The Law Society and the claimants rely on the provisions of Schedule 3 para 5 which provide
"(1) The Chapter I prohibition does not apply to an agreement to the extent to which it is made in order to comply with a legal requirement.
(2) The Chapter II prohibition does not apply to conduct to the extent to which it is engaged in in order to comply with a legal requirement.
(3) In this paragraph "legal requirement" means a requirement –
(a) imposed by or under any enactment in force in the United Kingdom;
Mr Ross has filed a defence to the particulars of claim and a response to the Law Society's statement of case. With regard at least to the former he accepts that if this case proceeds it will be necessary to reformulate it. Nevertheless in order to deal with these applications it is necessary to ascertain what his defence is. The available materials are the pleadings, his skeleton argument prepared for the purpose of these applications and his oral argument at the hearing.
[(b) and (c)]
The particulars of claim refer in paragraphs 1 and 2 to the Rules, the qualifying insurers agreements and the ARP Manager Agreement. The Rules dealing with the ARP and the second claimant are set out in paragraphs 4 to 7. Paragraphs 8 to 11 aver the failure of Mr Ross to obtain qualifying insurance outside ARP, his proposal for ARP insurance and its issue and the demand for payment of the premium. In paragraph 12 the claimants allege that "wrongfully and in breach of its obligation to do so" Mr Ross has not paid the premium or any part of it.
In his defence to the claim Mr Ross described the purpose of ARP as being to provide default insurance for solicitors who cannot or fail to obtain insurance outside the ARP. He contends that it was understood by the Law Society that applications for cover would not be refused by qualifying insurers on grounds of lateness. He maintains that he is a good risk and that none of the qualifying insurers refused to cover him on grounds of risk. He points out that the grounds for refusal given and summarised in paragraphs 13 to 16 above do not relate to individual risk.
In paragraphs 9 and 10 Mr Ross avers that the two agreements referred to in paragraph 22 above, the Rules and the conduct of the parties to them breach the Chapter I prohibition. He gives 9 particulars of breach. In summary they are as follows:
(1) The agreements and Rules fix the cost of professional indemnity insurance provided by the qualifying insurers;
(2) The cost of the ARP insurance is not based on risk but is a fixed percentage of gross fees;
(3) The default premium for ARP insurance, namely that referred to in (2) together with a 20% uplift, is imposed, not negotiated, and is excessive;
(4) The agreements and Rules denied to Mr Ross the opportunity to obtain insurance in a competitive market;
(5) As all qualifying insurers participate in the ARP there is a sharing of a market or source of supply;
(6) By requiring solicitors insured in the ARP to pay excessive premiums dissimilar conditions are being applied thereby subjecting solicitors so insured to a competitive disadvantage;
(7) The requirement that solicitors insured in the ARP should permit their offices to be inspected is a supplementary obligation which has no connection with the insurance contract;
(8) It is extremely hard for solicitors insured in the ARP to practice in a reasonably profitable manner;
(9) Contrary to the understanding of the Law Society and of the Master of the Rolls at the time the Rules were promulgated default cover in the ARP is not confined to solicitors with a poor claims record and the claimants have taken advantage of their monopoly to impose default cover on solicitors with a good claims record.
In paragraph 13 Mr Ross contends that if the Rules and Agreement do not infringe the Chapter I prohibition then the conduct of the claimants amounts to an abuse of a dominant position contrary to the Chapter II prohibition. Mr Ross gives five particulars of breach. They may be summarised as follows:
(1) The failure of qualifying insurers to offer insurance outside the ARP forces a solicitor into the ARP;
(2) The ARP premium is significantly higher than the premium charged for comparable insurance outside the ARP;
(3) The ARP premium is excessive and prejudices the ability of a solicitor required to pay it to practise at a profit;
(4) The qualifying insurers share the higher ARP premium and thereby have a commercial incentive to the detriment of the relevant solicitors to force solicitors into the ARP, particularly by default;
(5) The incentive and higher premium for ARP cover obtains because of the dominant position in the market enjoyed by qualifying insurers under the Rules and Agreements.
Mr Ross admits the proposals made by him as alleged in the particulars of claim and the enjoyment by him of ARP cover both before and after their acceptance. But he alleges in paragraphs 15 and 18 that such proposals and any resulting agreement were made under duress and without full and willing consent. In oral argument Mr Ross made it clear that he did not allege duress or lack of consent as defences separate from his allegations of infringement of the Chapter I and Chapter II prohibitions. Accordingly these paragraphs add nothing.
The Law Society responded in detail to the defence of Mr Ross to the particulars of claim in its statement of case dated 20th October 2003. Mr Ross's response to it is dated 12th November. Most of it is a repetition of the allegations made in his defence and does not require any further mention. In paragraph 39(a) of their statement of case the Law Society pointed out that Mr Ross did not allege in his defence any breach of the Chapter II prohibition by the Law Society. This is denied by Mr Ross in his response. He relies on his defence, particulars given under it and three further allegations none of which refer to the Law Society. Neither in his written nor his oral argument did Mr Ross make any allegation that the Law Society had infringed the Chapter II prohibition.
Mr Ross's written argument followed the general lines of his defence. But his oral argument, having heard the submissions of counsel for the Law Society and the claimants, significantly altered the emphasis. He encapsulated his submissions into three propositions, namely
(1) the premiums charged for professional indemnity insurance of a solicitor in the ARP are excessive,
(2) the ability of a solicitor to leave the ARP and thereby avoid or reduce his liability for the excessive premium is obstructed by the way the ARP is operated rather than by the terms of the Scheme itself, and
(3) the restriction on backdating professional indemnity insurance introduced into the Rules in 2001 (para 6 above) restricts the extent to which a solicitor in the ARP may reduce his liability for an ARP premium.
The third proposition is new. It is not to be found in either the defence or response of Mr Ross, nor in his written argument. It was not suggested that it was not open to Mr Ross to raise it in argument and I propose to deal with it in due course.
The Chapter I Prohibition
Both the Law Society and the claimants submit that Mr Ross's defence under this head is bound to fail. Accordingly it should either be struck out or summarily dismissed. The contentions of one or both of them may be summarised as follows:
(a) In promulgating the Rules and operating the Scheme the Law Society is not an "undertaking";
(b) The Scheme does not have as either its object or its effect the restriction, prevention or distortion of competition within the United Kingdom;
(c) The Scheme is exempt pursuant to Schedule 3 para 5 because the Rules are either an enactment or were promulgated in order to comply with an enactment, namely s.37 Solicitors Act 1974.
The issues summarised in sub-paragraphs (a) and (c) are of general importance in relation to the construction and operation of the Competition Act 1998. I am conscious that Mr Ross appeared in person and I have not had the benefit of argument from OFT on these points. Accordingly I propose to deal with the issue summarised in sub-paragraph (b) first and I will deal with issues (a) and (c) only if the need arises.
Whether or not there is a restriction, prevention or distortion of competition, and therefore whether that is the object or effect of the relevant agreements, decisions or concerted practices, must be considered in relation to the relevant market. As counsel for the Law Society submitted the issue is whether competition as a whole in the entire relevant market is restricted, prevented or distorted to an appreciable extent, not how it impacts on an individual solicitor or his ability to carry on in practice. In this case there was no dispute that the relevant markets, at their narrowest, are the provision of professional indemnity insurance to solicitors and the provision of legal services by solicitors. Nor is it suggested by Mr Ross either that solicitors should be allowed to practice without having professional indemnity insurance or that the Scheme as a whole is anti-competitive.
The complaints of Mr Ross relate to the terms and operation of the ARP, but he accepts, rightly, that the ARP is not a separate market. If, as I consider to be self-evident, the Scheme without the ARP is pro-competitive it is hard to see how the inclusion of the ARP can give rise to an infringement of the Chapter I prohibition. Mr Ross relies on three alleged features of the ARP, namely
(1) the incentive to force solicitors into the ARP,
(2) the excessive level of premium for insurance when within ARP, and
(3) the impediments to leaving the ARP faced by solicitors who are insured in it.
These are alleged to be both inherent in the scheme, and therefore its object, and the result of its operation, and therefore its effect.
The incentive to force solicitors into the ARP is said to arise from the fact that professional indemnity insurance within the ARP is covered by all qualifying insurers on a pro rata basis. Schedule 2 to the QI Agreement provides for the establishment and operation of the ARP. Paragraph 3 provides that each qualifying insurer participates on the basis of the proportion his relevant premium income bears to the aggregate of the relevant premium income of all qualifying insurers. This ratio determines the extent of liability in respect of claims on ARP policies and the extent of entitlement to share in the premium payable thereunder, see paras 5 and 6.
Mr Ross contends that because the ARP premium is higher than that paid for professional indemnity insurance outside the ARP it is for the benefit of qualifying insurers to refuse such insurance outside the ARP in order to participate in the higher premium paid for equivalent insurance within it. I do not accept this contention for it assumes without justification that all qualifying insurers will refuse cover outside the ARP if one of them does. There is nothing in the Scheme to that effect, nor is there any allegation or evidence of any collusion between qualifying insurers outside the Scheme. The simple fact is that if the individual risk/premium ratio is commercially acceptable to an individual qualifying insurer he will accept that business. He cannot be sure that if he refuses all other qualifying insurers will refuse too. Unless all qualifying insurers refuse the risk will not be insured in the ARP.
Mr Ross bases his argument that the premium for insurance within the ARP is excessive on two linked propositions, first the premium is assessed by reference to gross fees and second, in the case of a solicitor in default, there is a 20% uplift. Appendix 2 to the Rules do so provide. In the case of Mr Ross, with gross fees of less than £500,000, the premium is 25% of the gross fees, see Part 1. The additional default charge of 20% is imposed by Part 2. As shown in paragraph 14 above this gave rise in the case of Mr Ross to an ARP premium of £45,117.25 and a default charge of £9,023.45. He contends that the aggregate premium of £54,140.70 is excessive.
In my view these contentions are misconceived. As Mr Darby, the Head of the Professional Indemnity Section of the Law Society, explained in paragraph 31 of his witness statement made on 2nd February 2004 the ARP premiums and the default charge are not intended to be open market premiums but to cover the cost of providing the default insurance for those solicitors who, for one reason or another, fail to obtain professional indemnity insurance for themselves outside the ARP. The figures produced by Mr Darby, which Mr Ross does not seek to challenge, show that the ARP premiums and default charge do not cover the claims incurred.
Assuming that the ARP premiums and default charge are higher than the premiums for professional indemnity insurance outside the ARP Mr Ross's contention that they are so high as to prevent solicitors within the ARP continuing in practice is not borne out by the unchallenged figures produced by Mr Darby. And even if the level of ARP premium and default charge had that tendency the remedy of those solicitors would be to obtain cover outside the ARP for themselves either from individual qualifying insurers or from the MGA. To that extent also the ARP is pro-competitive as encouraging solicitors to obtain professional indemnity insurance for themselves outside the ARP.
Mr Ross's third submission is based primarily on the change to the Scheme introduced in 2001 whereby the ability of a qualifying insurer to back date cover arranged outside the ARP was limited to 30 days, see paragraph 6 above. In order to consider this objection it is convenient to consider first the position under the Rules in force in 2000.
By virtue of Appendix 2 to the Rules a solicitor who enters the ARP in any indemnity period, and thereby becomes liable for the ARP premium is entitled to a rebate on the ARP premium if he subsequently arranges qualifying insurance outside the ARP. The percentage of the ARP premium to be returned depends on when the cancellation of the ARP cover takes effect, not the length of the period in the past for which cover outside the ARP has been obtained. It ranges from 80% in respect of cancellation in the first month to 15% in the ninth month and nothing thereafter. Under the rules in force in 2000 a qualifying insurer was allowed at any time in the indemnity period to grant cover to a solicitor from the beginning of that period. Thus, for example, a solicitor covered in the ARP for the indemnity period commencing on 1st September might obtain qualifying insurance outside the ARP on 1st February for the period commencing on the previous 1st September. In that event he could cancel the ARP cover with effect from 2nd February and claim a rebate on his ARP premium of 30%.
The change introduced in 2001 prevented a qualifying insurer from providing cover outside the ARP for a period of more than 30 days before its inception. Thus in the example given the qualifying insurance effected outside the ARP on 1st February could only cover the period commencing the previous 1st January rather than, as in the previous year, 1st September.
The reason for the change was explained by Mr Darby in paragraph 50 of his witness statement dated 2nd February 2004 in the following terms
"During the first year of the new system in 2000-2001, firms in the ARP were permitted to obtain cover at any point during the indemnity period back-dated to the beginning of the indemnity period. This led to a number of policies being issued by qualifying insurers in the final few months of the indemnity year to firms in the ARP that had not received any claims against them during the course of that year. As such, these firms represented a relatively good risk for the qualifying insurers and by the operation of the rules at the time, these firms were able to obtain open market cover from the beginning of the year and receive a rebate of their ARP premium. Therefore to prevent this practice from the start of the indemnity year in 2001, the Rules were changed to limit the period of back-dating insurance cover to 30 days. This change was publicised in the Law Society Gazette on 26th July 2001."
Mr Ross contends that the effect of the change was to prevent or impede solicitors leaving the ARP by arranging cover outside it during the course of the year. I do not accept his contention. The ability of a solicitor to obtain prospective professional indemnity insurance outside the ARP in the course of the indemnity period is unaffected by the change in the Rules. Similarly the rebate on the ARP premium and default charge allowed by Appendix 2 to the Rules remained unaltered. All the change did was to limit the extent to which a solicitor might obtain retrospective cover outside the ARP in the course of an indemnity period. But such cover is in respect of claims made (or circumstances notified). If there are none then no risk is being assumed by allowing such retrospective cover. If there are then no qualifying insurer is likely to provide after the event cover outside the ARP. Thus the effect of retrospective cover is only to show that the solicitor carried the requisite cover at all times during the indemnity period. It follows that the limitation to a past period of 30 days has no practical effect on the recoverability of the rebate or the ability of a solicitor insured within the ARP to obtain cover outside it.
Counsel for the Law Society drew my attention to the terms of clause 4.3 of the terms of the ARP policy. It provides that
"This contract cannot be cancelled other than if (and with effect from the date upon which) –
(b) replacement insurance complying with the Minimum Terms and Conditions commences. Cancellation will not affect the rights and obligations of the Insurer and the Insured accrued under this contract prior to the date of cancellation."
He submitted that if in the indemnity year 2000 the new insurance outside ARP was concluded on, say, 1st February but with effect from the previous 1st September then the ARP could be cancelled on 2nd February with effect from the previous 1st September also. The suggested consequence was to entitle the solicitor to a rebate of the ARP premium as if it had been cancelled on 1st September, not 2nd February. No doubt this was the view of the Law Society, as shown by the evidence of Mr Darby quoted in paragraph 40 above, but I do not think it is correct. The amount of the rebate depended on the month in which the cancellation of the ARP policy was effective. In the example I have given that could not have been September if the insurance outside the ARP was not concluded until the following February. I see nothing in Clause 4.3 to suggest otherwise. Replacement insurance could not commence and Clause 4.3 precluded the cancellation of the ARP insurance until the insurance contract outside the ARP had been concluded.
In any event there is no evidence that the result of the rule change was to prevent solicitors within the ARP getting out of it. The figures produced by Mr Darby, which Mr Ross does not challenge, show that in the indemnity period 2001/02 of the 125 firms within the ARP 69 obtained qualifying insurance outside it and thereby left it. They were entitled to the rebate provided for in Appendix 2 to the Rules and in some cases obtained a waiver. Only 11 of the firms which remained in the ARP failed to pay the ARP premium in the year 2001/02. There is no evidence at all to suggest that the reason any of those 11 failed to pay was because qualifying insurers were no longer able to backdate cover outside the ARP.
It follows that I do not consider that Mr Ross has any, let alone a real, prospect of establishing any of the three features, referred to in paragraph 31 above, on which he relies. This conclusion largely disposes of all the particulars of breach to which I have referred in paragraph 24 above, but for completeness I add the following comments:
(1) – (3) The only costs which can be said to be fixed by the Rules are the premiums for cover within the ARP. But the ARP is part of a scheme which is, as a whole, pro-competitive. It is not a separate market. The premiums for ARP cover may exceed open market rates for some solicitors, but given the purpose of the ARP they are not excessive.
(4) The Scheme did not deny to Mr Ross, or any other solicitor, the opportunity to obtain insurance in a competitive market. He obtained such insurance in the previous year and there is no reason to suppose that if he had applied for it promptly he could not have obtained it for the indemnity year 2001/02.
(5) It is true that all qualifying insurers participate in ARP but the ARP is not a separate market but part of a scheme which, as a whole, is pro-competitive.
(6) It is likewise true that premiums payable for insurance within the ARP are assessed differently from those payable for insurance outside it but no solicitor who can obtain open market insurance outside the ARP is forced into it.
(7) This is true but the requirement is not anti-competitive.
(8) There is no evidence to support this assertion.
(9) The prior understanding of the Law Society and/or the Master of the Rolls cannot make anti-competitive a scheme which, as a whole, is pro-competitive. There is no evidence to support the assertion that default cover in the ARP has been "imposed" on solicitors with a good claims record.
Accordingly I conclude that there is no real prospect of Mr Ross establishing that the Scheme has as either its object or its effect the restriction, prevention or distortion of competition within the United Kingdom. It follows that his defence to the claim based on an infringement of the Chapter I prohibition has no real prospect of success. As my conclusion accords with the views of the European Commission expressed in its letters to the Law Society and Mr Ross respectively dated 10th March 2000 and 15th March 2004 referred to in paragraphs 10 and 16 above it is not necessary for me to consider the various criticisms advanced by Mr. Ross at the hearing.
The Chapter II Prohibition
As I have already observed, this defence is advanced by Mr Ross as a defence to the claimants claim for payment of the premium not to the statement of case put forward by the Law Society. Accordingly only the claimants are concerned with it. They contend that
(a) they are not dominant on any relevant market, but if they were
(b) they did not abuse any such position, but if they did
(c) such abuse did not have any appreciable effect on trade or competition, and in any event
(d) they were engaged in such conduct in order to comply with a requirement imposed by or under an enactment in force in the United Kingdom and are thereby exempt by Schedule 3 para 5 Competition Act 1998.
I have set out in paragraph 25 above the particulars on which Mr Ross relies. In his oral argument he relied on the three features to which I have referred in paragraph 31 above as being fundamental to his case in respect of the Chapter II Prohibition also. For the reasons given in paragraphs 32 to 45 above I have rejected the contentions of Mr Ross in relation to each of them. It follows that I likewise reject the particulars relied on by Mr Ross summarised in paragraph 25(1), (3) and (4) above. I should, however, deal further with the assertions made in paragraph 25(2) and (5).
The contention of Mr Ross is that ARP premiums are always significantly higher than premiums charged outside the ARP for comparable insurance. But this is not self-evident, nor is it supported by such evidence as there is. The ARP premiums are calculated as a percentage of gross fees with, in the case of default, a 20% surcharge. But in the absence of any evidence as to how qualifying insurers calculate premiums for insurance outside the ARP it cannot be said that the latter will always be less; they may or may not be.
That this is so is apparent from the evidence as to the quotations received by Mr Ross. For the year 2000/01 he was quoted a premium of £44,163, later reduced to £40,188, by SPIICL, see para 11 above. The quotation obtained by Marsh for run off cover and one month in the year 2001/02 was 250% of the previous year's premium, namely £44,272, see para 13 above. These figures must be compared with the basic ARP premium demanded of Mr Ross for the year 2001/02 of £45,117.25, see para 14 above. In the year 2000/01 Mr Ross benefited from the open market in obtaining cover from Chubb for only £16,865. Had he applied promptly to Chubb for insurance for another full year he might have obtained similar terms, but he did not. The indication that he intended to cease practice triggered the requirement for run-off cover with a consequential increase in premium by a factor of 2.5. In all these cases Mr Ross had applied for cover. There is no evidence at all that the open market loading for a solicitor in default would have been less than 20%.
But even assuming that the premium for ARP insurance is always higher than for equivalent cover outside the ARP is this the consequence of a dominant position in the market being enjoyed by qualifying insurers? This, in effect, is the first defence advanced by the claimants.
It is apparent from the terms of s.18 that one or more undertakings may enjoy a dominant position in the relevant market. Equally it is clear from the discussion in leading textbooks, such as Bellamy & Child, European Community Law of Competition 5th Ed. paras 9-060-9-064 and Whish, Competition Law 5th Ed. pp.518-526 that two or more separate undertakings may enjoy a collective dominance capable of being abused. The same passages demonstrate that the nature of the factors connecting the undertakings for that purpose are not yet clearly marked out.
Nevertheless I do not see how the claimants could enjoy a collective dominance in the relevant market which could be abused. Each of the 28 qualifying insurers is a competitor in the market for professional indemnity insurance for solicitors. The connection between them is that each has entered into a QI Agreement with the Law Society. The purpose of that agreement as proclaimed in recital C
"is to set out the terms and conditions on which the insurer may provide professional indemnity insurance to [solicitors] as required by the Rules and in particular the terms on which it may issue policies, shall participate in the ARP, shall comply with the claims handling guidelines and related matters."
Within the market, so defined, each qualifying insurer competes with each other. The only element in which there is no such competition is the ARP. But the ARP is not a separate market; rather it is part of a scheme which, overall, is pro-competitive. Even if Mr Ross were to establish that the premiums for cover within the ARP were always higher than premiums charged for equivalent insurance outside it I see no prospect of him establishing that the charge for premiums for insurance within the ARP arises from a dominant position enjoyed collectively by all the qualifying insurers, let alone from an abuse of it having any appreciable effect on trade or until the insurance contract had been concluded competition within the market as a whole.
In these circumstances I do not consider that Mr Ross has any real prospect of establishing a breach of the Chapter II prohibition on each of the first three grounds advanced by the claimants. As in the case of the Chapter I prohibition, it is not necessary for me to deal with the criticisms advanced by Mr Ross in relation to the comfort letter sent by the European Commission to the Law Society or the response to his complaint to the Commission. Similarly the defence under Schedule 3 para 5 of the Competition Act 1998 on which the claimants rely does not arise.
As I have already pointed out, Mr Ross advances no defence to the claim other than infringement of the Chapter I and Chapter II prohibitions. Though in his written argument he suggested that the claimants had delayed unduly in making their application he did not suggest that if he was wrong in relation to those defences that there was any compelling reason, whether arising from the alleged delay or otherwise, why the claim should be disposed of at a trial. Whilst it might be permissible to strike out the defence under CPR Rule 3.4(2)(b) as an abuse of the court's process, in my view, the more appropriate remedy is to dismiss it under CPR Rule 24.2. The consequence is that there is no defence to the claim for payment of £56,847.73 with interest as claimed and I will give judgment for those sums.
For all these reasons I will
(1) dismiss the defence of the first defendant under CPR Rule 24.2, and
(2) give judgment in favour of the claimants against the first defendant in the sum of £56,847.73 with interest.
I will hear further argument on any issue arising out of this judgment.
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