Mrs Justice Gloster, DBE:
Introductory overview of the action
- The Claimant in this case, HLB Kidsons, formerly known as Kidsons Impey ("Kidsons"), was a firm of chartered accountants. Kidsons was a mid-size, national accountancy practice. In 2002 it merged with another such practice, Baker Tilly, the effective date being 1 April 2002. The merged entity took the name Baker Tilly.
- The 1st to 5th Defendants are Lloyd's underwriters and insurance companies, whom I shall refer to as "Underwriters". Underwriters provided Kidsons with professional indemnity insurance cover, on a claims made basis, under a policy incepting on 1 May 2001 for a period of 12 months and terminating on 30 April 2002 ("the Policy"). The Policy Document was actually issued on 29 April 2002, the penultimate date of the period of insurance. There are in fact three policies, namely Lloyd's policy 621PK 1D 00101 subscribed to by the First Defendants, an IUA policy subscribed to by the Second and Third Defendants and incorporating the terms of the Lloyd's policy and a Company's Collective Policy subscribed to by the Fourth and Fifth Defendants, also incorporating the terms of the Lloyd's policy, but nothing turns on any distinction between the three policies. 70% of the risk was placed with Lloyd's syndicates, the balance with the companies. Although I refer to the 1st to 5th Defendants collectively as Underwriters, they are several, not joint, insurers.
- From 1 May 2002 Kidsons became insured under Baker Tilly's then current policy, which was renewed later that year with effect from 1 December 2002. So the claim is made in relation to the firm's last independent insurance period,
- Kidsons sues Underwriters in this action for a declaration that Underwriters are bound to indemnify Kidsons in respect of claims made against Kidsons by clients in relation to the activities of Solutions at Fiscal Innovation Limited ("S@FI"), a company formerly owned and managed by Kidsons, which marketed tax avoidance schemes. Kidsons has received claims from third parties, and may receive further such claims, in connection with tax avoidance work and advice given by S@FI and/or Kidsons.
- None of these claims was first made against Kidsons during the period of the Policy, but Kidsons contends that it is entitled (subject to excess provisions) to be indemnified in respect of the claims by reason of having notified the circumstances giving rise to each of the claims in accordance with General Condition 4 ("GC4") of the Policy. This provides:
"The Assured shall give to the Underwriters notice in writing as soon as practicable of any circumstance of which they shall become aware during the period specified in the Schedule which may give rise to a loss or claim against them. Such notice having been given any loss or claim to which that circumstance has given rise which is subsequently made after the expiration of the period specified in the Schedule shall be deemed for the purpose of this Insurance to have been made during the subsistence hereof."
- Kidsons relies principally upon two letters sent during the currency of the Policy as constituting valid and effective notice of the circumstances giving rise to the claims made in respect of S@FI. The first is dated 31 August 2001 ("the 31 August 2001 letter"). The second is dated 28 March 2002 ("the 28 March 2002 letter"). There are other intervening documents upon which Kidsons also relies: in particular, a letter dated 5 October 2001 and a claims file and bordereau prepared by the 7th Defendant, Miller Services Limited (formerly Miller Professional Risks Limited) ("Millers"), which referred to, or précised, the information in the 31 August 2001 and/or 28 March 2002 letters). Kidsons also alleges that a Report, called the Tax Faculty Report, which was sent to Underwriters in October 2003, constituted notice under the Policy, notwithstanding that the Policy had expired 18 months previously. However, it is only if the Court accepts Kidsons' submission that the only temporal requirement for the giving of a valid notification is that there be first awareness of the circumstance in the policy period (and that, in the absence of prejudice, a notification will not fail if it is not given "as soon as practicable") that Kidsons will be entitled to rely upon the Tax Faculty Report. However, Kidsons accepts that it can only rely upon those circumstances of which it first became aware in the policy period, and that any new circumstance referred to in the Tax Faculty Report must be disregarded.
- Underwriters dispute that these documents (whether read separately or together) purported to constitute, or constituted, valid and effective notices under GC4. In particular, they contend that, in view of the delay from the date of Kidsons' awareness of the relevant circumstances in late August 2001, until the dates of the purported notifications to Underwriters, such notices were not served as soon as reasonably practicable. In the alternative, Underwriters say that, if these documents were valid notifications under GC4, they were (at most) notification of procedural difficulties (and even then only affecting the implementation of Discounted Option Schemes, one of many products marketed by S@FI), which is not a circumstance that has, in fact, given rise to any claims. Finally, Underwriters contend that, even if that is wrong and there was indeed valid notification of procedural difficulties affecting implementation of schemes other than Discounted Option Schemes, that too is not a circumstance which has given rise to any significant claims and/or loss. Underwriters deny that, on the true construction of the Policy, there is any entitlement to rely upon the Tax Faculty Report submitted to Underwriters in October 2003 as notification under the Policy. Underwriters submit that, if Kidsons were indeed aware of the matters canvassed in the Tax Faculty Report during the period of the Policy (which is a prerequisite for GC4 to apply), then October 2003 was far too late for valid notice under GC4, which requires notice to be given "as soon as practicable" as 18 months after expiry was not, on any view, as soon as practicable.
- The claims made against Kidsons in respect of S@FI in fact cover a variety of S@FI tax schemes and allege almost exclusively that Kidsons were negligent in (i) advising their clients in relation to the schemes, (ii) making false representations about the schemes, and (iii) failing to give their clients adequate warning of the risks, if not the likelihood, of the schemes being challenged and rejected by the Inland Revenue because of their inherent defects. The claims have arisen because of Kidsons' allegedly poor advice and because, on analysis, the schemes have been found to be fundamentally flawed in their design and conception, and hence ineffective to avoid tax. The clients who entered into them now say that they would never have done so, had they been competently advised. It is Underwriters' contention that these circumstances are a long way from the "procedural" criticisms, or "procedural difficulties affecting implementation", which are alluded to in Kidsons' letters.
- Thus it can be seen that the contest is about notification. Kidsons contends that, if and to the extent that Underwriters' arguments prevail, then one or both of the 6th and 7th Defendants will be liable. The 6th Defendant is CMS Cameron McKenna ("Camerons"), Kidsons' former solicitors, with whom Kidsons had a claims handling agreement during the period of the Policy. The 7th Defendant is Miller Services Limited (formerly Miller Professional Risks Limited) ("Millers"), Kidsons' former insurance brokers. They are sued on the grounds that they were negligent if the notice of circumstances that was given does not encompass the claims made in respect of S@FI. The claims against Camerons and Millers have been stood over pending the outcome of this trial.
- Underwriters suggest that, if there was no valid notification of any circumstance relating to S@FI, or, alternatively, only notification of a limited circumstance, then claims not covered by the Policy will be covered by the insurers of Baker Tilly's 2002/2003 policy, or indeed subsequent years' policies by whom Kidsons was insured. However, underwriters in respect of subsequent year policies are not parties to this action, and it was common ground that I should proceed on the basis that there was no certainty that policies in respect of any subsequent year would respond or accept liability.
The issues
- The main issues which I have to decide are:
i) whether the communications relied upon by Kidsons as notice of circumstances under GC4 constituted valid and effective notification of any (and if so, what) circumstance relating to S@FI; and
ii) whether the claims which have arisen in respect of S@FI fall within the scope of any such circumstance as may have been so notified.
- However these main issues can be broken down into various sub- issues, which can be briefly summarised as follows:
i) on the true construction of GC4, what requirements have to be satisfied for a notice to be a valid and effective notice for the purposes of that condition;
ii) as a matter of fact, of what circumstance or circumstances was or were Kidsons aware during the Policy period;
iii) at the Policy's inception on 1 May 2001 and at all material times thereafter, was Camerons Underwriters' agents for purposes of receiving notifications under the Policy;
iv) does the particular communication, properly construed, satisfy the requirements of GC4;
v) if so, what, if any, circumstances does the particular communication notify; and
vi) whether the claims which have arisen in respect of S@FI fall within the scope of any such circumstance as may have been so notified.
In relation to the last issue, the parties have agreed various categories of sample claims, which, depending on my determination in relation to the substantive issue of notification, may or may not be covered under the Policy. Whether it is appropriate for me to determine this last issue is something which I address at the end of this judgment.
The relevant provisions of the Policy
- Before turning to the various contentions of the parties as to the requirements imposed by GC4, it is appropriate to set out certain of the relevant provisions of the Policy, upon which the parties relied during the course of their arguments:
"SECTION 1 – INSURING CLAUSES
Now we the Underwriters to the extent and in the manner hereinafter provided hereby agrees
1. To indemnify the Assured against any claim or claims first made against the Assured during the period of insurance as shown in the Schedule in respect of any Civil Liability whatsoever or whensoever arising (including liability for claimant's costs) incurred in connection with the conduct of any Professional Business carried on by or on behalf of the Assured.
2. To indemnify the Assured for any loss which during the period specified in the Schedule they shall first discover they have sustained by reason of any dishonest or fraudulent acts or omissions of any former or present partner director or employee of the Firm(s) or any sub-contractor or alternate subject always to Special Condition 2 hereof."
"SPECIAL CONDITIONS TO SECTION 1
1.a) Underwriters shall in addition indemnify the Assured in respect of all costs and expenses incurred with their written consent in the defence or settlement of any claim made against the Assured which falls to be dealt with under this Insurance provided that if a payment in excess of the amount of the indemnity available under this Insurance has to be made to dispose of any claim or claims against the Assured Underwriters' liability for such costs and expenses shall be such proportion thereof as the amount of indemnity available under this Insurance bears to the amount required to dispose of such claim or claims.
…
3. The Assured shall as a condition precedent to their right to indemnity fully comply with and observe the terms, conditions, exclusions, limitations and provisions contained in the Policy generally, and shall give Insurers immediate notice, as soon as they become aware, of any circumstances which may lead to a claim or complaint made against them, reported to the authority responsible for their regulation under the Financial Services Act."
"SECTION III
LEGAL DEFENCE CLAUSE
Underwriters agree to pay all costs charges and expenses (which are not otherwise covered by this Insurance) of legal representation of the Assured at any proceedings before any duly constituted court or tribunal of enquiry or otherwise having the like power to compel attendance of witnesses at which the Assured in the opinion of the Underwriters should be represented by reason of any conduct which might give rise to or has given rise to claim under this Insurance or by reason of any prejudice which might be occasioned to the Assured's professional or business reputation.
Provided always that:
a) This indemnity will only apply to circumstances notified to the Underwriters during the period of insurance and
b) The Underwriters shall not be liable to pay any penalty fine or award of costs made against the Assured and
c) that no costs charges and expenses of any kind other than those incurred with the written consent of the Underwriters (such consent no to be unreasonably withheld), shall be payable hereunder and
d) The Underwriters shall be entitled if they so desire to nominate a Solicitor and if appropriate a Barrister to represent the Assured and
e) The Assured shall bear 10% of any amount in total payable under this section or £500 whichever is the higher in respect of each and every claim."
"DEFINITIONS
…
2. 'THE ASSURED"
a) Those partners named in the Proposal Form dated as shown in the Schedule and any other person who may at any time during the period of this Insurance become a Partner in the Firm(s).
b) Any former partner of the Firm(s) and any former partner acting as a consultant to the Firm(s).
c) Those persons named as consultants in the Proposal Form dated as shown in the Schedule and any other person who may at any time during the period of Insurance become a consultant.
d) Any person who is or has been under a contract of service with the Firm(s) and any person whom the partners wish to be regarded as being under a contract of service provided all fees earned by such persons inure to the benefit of the Assured.
e) The estates and/or legal representatives of any of the persons noted under (a) (b) or (d) hereof in the event of death incapacity insolvency or bankruptcy.
f) Any Company/Limited Liability Company named in Item 1 of the Schedule.
g) Any person who has been named as a sub-contractor in the proposal form dated as shown in the Schedule and/or any other person who has been named and accepted as a sub-contractor under any preceding insurance but indemnity under Section 1 Insuring Clauses shall only apply in respect of Professional Business carried out for and on behalf of the Firm(s).
h) Any person who has been declared to and accepted by the Institute of Chartered Accountants (in England and Wales/of Scotland/in Ireland) as an 'alternate' in accordance with any arrangement for the continuity of the practice in order to comply with the Investment Business Regulations issued by the Institute of Chartered Accountants (in England and Wales/of Scotland/in Ireland).
3. 'FIRM(S)'
a) Wherever the word 'Firm(s)' appears herein the same shall be deemed to read the Firm(s) or Company(ies) named in the Schedule and/or the predecessors in business of the said Firm(s).
b) The above definition of 'FIRM(S)' is extended in accordance with Endorsement 5 attaching hereon."
"GENERAL INSTITUTE CONDITIONS
The Underwriters will not exercise their right to avoid this Insurance where it is alleged that there have been untrue statements or non-disclosure or misrepresentation of facts in the Proposal Form or in any other information which may have been supplied provided always that the Assured shall establish to Underwriters' satisfaction that such alleged untrue statements or non-disclosure or misrepresentation of facts was free of any fraudulent conduct or intent to deceive. However,
a) In any case where the Assured should have notified under any preceding insurance a loss or a claim made against them or circumstances which could give rise to a loss by or a claim against them and the indemnity or cover available hereunder is greater or wider in scope tha[n] the indemnity to which the Assured would have been entitled under such preceding insurance (whether with other Insurers or not) then the Underwriters shall only be liable to indemnify the Assured in respect of that loss or claim to the extent of the indemnity which would have been afforded by such preceding insurance.
b) Where the Assured's breach of or non-compliance with any conditions of this Insurance has resulted in prejudice to the handling or settlement of any loss or claim the indemnity afforded by this Insurance in respect of such loss or claim (including costs and expenses) shall be reduced to such sums as in the Underwriters' opinion would have been payable by them in the absence of such prejudice."
"GENERAL EXCLUSIONS
This Insurance shall not indemnify the Assured against any claim or for any loss
…
4) Arising out of any claim or circumstance that has been notified under any other policy or certificate of insurance attaching prior to the inception of this Insurance.
5) In respect of dishonest or fraudulent acts or omissions committed by any person after the discovery by the Assured of reasonable cause for suspicion of fraud or dishonesty on the part of that person.
6) In connection with any investment business activities arising out of any advice given or services performed which have not been authorised where such authorisation shall have been required under any statutory regulation by an appropriate statutory authority."
"GENERAL CONDITIONS
1. The liability of the Underwriters under this Insurance shall not exceed the limits of indemnity specified in item 4 of the Schedule for any claim or loss or losses
a) Arising out of one occurrence
OR
b) Consequent upon or attributable wholly or substantially to the same original cause or source.
2. The Assured shall not admit liability for or settle any claim or incur any costs and expenses in connection therewith without the written consent of the Underwriters who shall be entitled at their own expense at any time to take over and conduct in the name of the Assured or the Firm(s) as the case may be the defence of the settlement of any such claim and to receive at all times the full co-operation of the Assured for this purpose. Nevertheless, neither the Assured nor the Underwriters shall be required to contest any legal proceedings unless a Queen's Counsel (to be mutually agreed upon by the Assured and the Underwriters) shall advise that such proceedings should be contested.
3. The Assured shall as a condition precedent to their right to be indemnified under this Insurance give to the Underwriters notice in writing as soon as practicable
a) Of any claim made against them or any of them
b) Of the receipt of notice from any party of an intention to make a claim against them
c) Of any loss suffered by them or any of them
d) Of the discovery of reasonable cause for suspicion of dishonesty or fraud on the part of any former or present partner consultant sub-contractor director or employee of the Firm(s) whether giving rise to a loss or claim under this Insurance or not.
4. The Assured shall give to the Underwriters notice in writing as soon as practicable of any circumstance of which they shall become aware during the period specified in the Schedule which may give rise to a loss or claim against them. Such notice having been given any loss or claim to which that circumstances has given rise which is subsequently made after the expiration of the period specified in the Schedule shall be deemed for the purpose of this Insurance to have been made during the subsistence hereof. [This is GC4 which I have already quoted above, but it is worth repeating it in the context of the other general conditions.]
5. The nominated solicitors for the purpose of handling claims or circumstances that fall to be dealt with under this Policy, other than claims under Endorsement 13., shall be as more fully described in the Claims Handling Agreement (General Condition No. 12).
In the event of a conflict of interest or otherwise Insurers retain the right to appoint alternative Solicitors to enable any such claims or circumstances to be handled.
6. Any claim first notified to the Assured prior to the expiry date of this policy will be deemed to fall to be dealt with under this policy provided it is properly notified to Underwriters within 15 calendar days of the expiry day.
…
11. In any dispute in connection with the terms conditions exclusions or limitation of this Insurance it is specifically understood and agreed that the terms conditions exclusions and limitations of the Approved Wording contained in the Prospectus for Approved Insurers to the Institute of Charters Accountants (in England and Wales/of Scotland/in Ireland) shall take precedence over any terms conditions exclusions or limitations contained herein which are less favourable to the Assured."
- It is also appropriate to set out the relevant provisions of the Minimum Approved Wording (commonly known as "the Minimum Terms") stipulated by the Institute of Chartered Accountants of England and Wales ("ICAEW"). For many years ICAEW had required its members (which included most, if not all, of the partners of Kidsons) to be insured against professional indemnity risks upon terms which were no less favourable than those contained in the ICAEW's Minimum Terms, and to be insured with approved ("participating") insurers. Whilst a principal purpose of this requirement was to ensure that there was adequate protection for the public the Minimum Terms represented the beneficial results of the ICAEW's bargaining with those insurers who were to become participating insurers. Consequently the Kidsons policy contained the mandatory term at GC11 which I have already set out.
- For present purposes the relevant provisions of the Minimum Terms are as follows:
"B.7 Where the Insured's breach of or non-compliance with any Condition of this Certificate has resulted in prejudice to the Insurers:
(a) in the handling or settlement of any claim against the Insured,
(b) in the amount of any loss sustained by the Insured,
(c) in the obtaining of reimbursement from any dishonest or fraudulent person as referred to in Condition B.11,
The indemnity afforded hereunder (including liability for claimants costs) shall be reduced to such sum as in the Insurers' reasonable opinion would have been payable by them in the absence of such prejudice.
…
B.9 The Insured shall as a condition precedent to their right to be indemnified hereunder give to the Insurers notice in writing as soon as practicable:
(a) Of any claim made against them or any of them.
(b) Of the receipt of notice from any party of an intention to make a claim against them.
(c) Of any loss suffered by them or any of them.
(d) Of the discovery of reasonable cause for suspicion of dishonesty or fraud on the part of any former or present partner, director, employee, consultant, sub-contractor or alternate of the Firm(s) whether giving rise to loss or claim hereunder or not.
B.10 If the Insured shall become aware during the period of insurance of any circumstance which may give rise to a loss or claim the Insured shall give notice in writing to the Insurers as soon as possible. Such notice having been given:
(a) any claim which may subsequently be made against the Insured arising out of that circumstance shall be deemed to have first been made against the Insured during the Period of Insurance;
(b) any loss which the Insured may subsequently discover they have sustained, being a loss arising out of that circumstance, shall be deemed to have been first discovered by the Insured during the Period of Insurance."
"SECTION D – EXCLUSIONS
This Certificate shall not indemnify the Insured for any claim or for any loss:
…
D.5 Arising out of any circumstances or occurrence which has been notified under any other policy or certificate of insurance attaching prior to the inception of this Certificate."
Issue (i): On the true construction of GC4 what requirements have to be satisfied for a notice to be a valid and effective notice for the purposes of that condition?
The approach to the construction of the Policy
- The correct general approach to the construction of the Policy was, not surprisingly, to a large extent common ground between the parties. The Policy is a commercial contract and, like any commercial contract, must be construed in its appropriate factual matrix; see e.g. Investors' Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 at 912-3, per Lord Hoffmann. This includes, in this case, the practice in the London Market of writing professional indemnity insurance on a "claims made" basis as opposed to an occurrence occurring basis.
- This practice is well-known: see e.g. Friends Provident Life and Pensions v Sirius [2005] 1 Lloyd's Rep IR 135 at 142, per Moore-Bick J. It developed in the mid-1980s in response to the problems encountered by the insurance industry in dealing with long tail losses or liabilities under occurrence based policies. Because insurers under such policies covered events occurring during the policy period, they often found themselves obliged to respond to losses or liabilities arising years – often decades – after the expiry of the relevant policy period as a result of events that had not been known or appreciated at the time. Asbestos related claims are, perhaps, the paradigm example. The concept of occurrence occurring policies inevitably makes any attempt at evaluating long-tail liabilities extremely uncertain, if not impossible, and can prevent an insurer from effectively being able ever to close a policy year.
- By contrast, from the insurer's perspective, claims made policies
i) enable the insurer to know by the end of the claims made period, or very soon thereafter, what claims have been made against the assured during the policy period and what circumstances have become first known to the assured during the period of the policy that might mature into claims against him;
ii) enable the insurer upon or very shortly after the expiry of the policy period to evaluate reported claims and circumstances for the purposes of making appropriate provision or reserves for his ultimate liabilities;
iii) enable the insurer thus to avoid the undesirable uncertainty of long-tail future claims arising out of occurrences which are in many instances unreported.
- The expert evidence to such effect was unchallenged and, indeed, was referred to by Moore-Bick J in Friends Provident (supra) at paragraph 13:
"This [i.e. writing policies on a claims made basis] has an advantage for underwriters in that they are less exposed to unforeseen losses arising long after the period of cover has expired".
- On the other hand, the assured benefits under a claims made policy:
i) from coverage for claims made during the policy period;
ii) from coverage for claims made after the policy period arising from circumstances first known during the policy period; and
iii) from the insurer being able to estimate his liabilities more accurately and thereby to set fair premiums for the succeeding policy year.
- It is integral to the structure of claims made policies being successively renewed from year to year, that provision is made for claims arising after the expiry of any one policy period out of circumstances of which the assured has first become aware during that period. Unless provision is made to treat such claims as having been made during that policy period, the concept of claims made policies applying in successive policy years would create an unexpected and inappropriate gap in coverage. This is because of the obligation upon an assured to make disclosure to renewing insurers on the succeeding year and the possibility that, upon disclosure to renewing insurers of such circumstances of which the assured was aware at the end of the earlier policy year, renewing insurers might exclude any claims arising out of them, or only be prepared to accept liability at a premium that was commercially unacceptable to the assured. This would leave the assured with no cover in respect of such claims either under the earlier policy year during which he first became aware of the relevant circumstances or under the later year during which the claim might ultimately be made arising out of those circumstances. This analysis finds confirmation, for example, in the reasoning of Rix J in J Rothschild Assurance Plc v Collyear [1999] 1 Lloyds Rep IR 6 at paragraph 22, and of Moore-Bick J in Friends Provident at paragraph 13 and paragraphs 38-39.
- The authorities concerning such clauses recognise that the purpose of a notification clause such as GC4 is twofold. First, it is intended to enable insurers to investigate potential claims at the earliest possible opportunity, before the trail of evidence goes cold, and to take, or require the assured to take, such steps as insurers think appropriate to minimise liability under the policy; see e.g. Pioneer Concrete (U.K.) Ltd v National Employers Mutual General Insurance Association Ltd [1985] 1 Lloyd's Rep 274 at 278, per Bingham J; Rothschild Assurance at 22, per Rix J; Friends Provident at paragraph 20, per Moore-Bick J; McAlpine v BAI [1998] 2 Lloyd's Rep 694 at 698, per Colman J; Clarke, The Law of Insurance Contracts, paragraph 17-4D4.
- Secondly, the clause enables the assured to obtain an extension of cover in respect of a claim made after expiry of the Policy (and which would otherwise fall outside the scope of the Insuring Clause), provided the claim arises out of a circumstance of which the assured became aware during the period of the Policy and in respect of which he gave notice in accordance with the clause. GC4 protects the assured from the difficulty that would otherwise arise under a claims made policy in the event of his becoming aware during the policy period of circumstances which he recognises might give rise to a claim but which did not result in a claim being made prior to expiry of the policy. Again, the authorities recognise that, since the assured would be bound to disclose the existence of such circumstances when seeking insurance for the following year, he might find it difficult to obtain cover in respect of that potential loss at a commercially acceptable premium, if at all. GC4 enables the assured, in such a situation, to obtain an extension of the existing insurance to cover the loss, if and when a claim materialises; see e.g. Rothschild Assurance at 22, per Rix J; Friends Provident at paragraph 13, per Moore-Bick J; Tioxide Europe Ltd v CGU International Insurance Plc [2005] Lloyd's Rep IR 114 at paragraph 56, per Langley J. If the assured notifies in accordance with the clause, insurers are bound to provide him with cover in respect of a claim arising from the circumstances notified, even though the claim is made after expiry of the policy period. Thus the clause acts as a "trigger for the extension of cover"; see Friends Provident Life and Pensions v Sirius [2006] 1 Lloyd's Rep IR 45 at paragraph 11, per Mance LJ.
- It was common ground that, whether or not a communication took effect as a valid notice, was a question that had to be determined by reference to the provisions of the agreement between the parties which gave the relevant party the right – or obligation -to serve a notice. That principle was identified in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1999] A.C. 749 per Lord Clyde at p.780H:
"My Lords, the question in this appeal is whether the two letters dated 24 June 1994 and sent by the appellant tenant to the respondent landlord qualify as effective notices to determine the leases to which each letter respectively referred. Their validity as notices has to be tested against the terms of the power under which they were served.";
and per Lord Goff at p.755H-756B:
"The principle is therefore clear. The agreement between the parties provides what notice has to be given to be effective to achieve the relevant result. The question in each case is: does the notice which was given, properly construed, comply with the agreed specification?"
The requirements of GC4
- It was common ground that, by its first sentence, GC4 imposes an obligation on the assured,
i) to give a "notice";
ii) to "the Underwriters";
iii) "in writing";
iv) "as soon as practicable";
v) "of any circumstance";
vi) "of which they shall become aware";
vii) "during the period specified in the Schedule";
viii) "which may give rise to a loss or claim against them".
- There was no dispute that, for the requirements to be satisfied, the assured had to have an "awareness" of the relevant notified circumstances during the period of the Policy. As between the parties, the principal issue of construction relating to this clause was what were the consequences of a notice "of any circumstance" being given which was later than "as soon as practicable". In other words, was satisfaction of the requirement that the assured should give notice in writing "as soon as practicable" (of any circumstance of which they shall become aware during the period specified in the Schedule which may give rise to a loss or claim against them) a necessary criterion for the extension of cover under the second sentence of GC4?
- A secondary issue of construction also arose: namely, in the case of Kidsons, whose awareness counts as awareness "of the Assured" for the purposes of giving notice under GC4 and who was the relevant person to give notice of circumstances?
- Kidsons' contention in relation to the first issue, which was generally supported by Camerons and Millers, was to the effect that, even in circumstances where the notice under GC4 was given admittedly later than "as soon as practicable", nonetheless the Policy responded. Their contention was that circumstances could nonetheless be properly notified pursuant to GC4 even though the notice was not given as soon as practicable. I summarise the submissions of Mr. Nicholas Davidson QC on behalf of Kidsons, Mr. Michael Harvey QC on behalf of Camerons and Mr. Roger Stewart QC on behalf of Millers in support of this contention as follows:
Distinction between the wording of GC3 and GC4
i) There was a marked distinction between the wording of GC3 and GC4. GC3 expressly provided that it was a condition precedent to the assured's right to be indemnified under the Policy that it would give to Underwriters notice in writing as soon as practicable. In contrast, GC4 contained no such condition precedent. GC3 is expressly made a condition precedent, with the apparent result that, if the assured does not comply with it, the assured will not be entitled to indemnity (unless, as to which see below, General Institute Condition, section b applies). The fact that GC4's first 14 words follow the opening words of GC3, except for the omission of the words "as a condition precedent to their right to be indemnified", is both striking and highly significant. The omission and change of wording shows the intent to produce a different result, that is, that failure to comply with the stipulation as to time is not to disqualify the assured from indemnity. Support for this proposition is to be found in the judgment of Moore-Bick J in Friends Provident at paragraph 42; and, on appeal, at paragraph 28 of the judgment of Mance LJ. If consecutive clauses of an insurance policy describe both as conditions and the first, but not the second, as a condition precedent, the inference that the second is not a condition precedent is overwhelming.
General Institute Conditions, section b
ii) The policy wording provides expressly for what is to happen in the case of breach of or non-compliance with a condition. The significance of provision of a specific remedy is that the argument that non-compliance with the provisions of GC4 means that the extension of cover is not available simply does not run. Thus the General Institute Conditions, section b ("GIC(b)") provides a remedy to the Insurer who has suffered prejudice. It is a remedy favourable to Underwriters in that the reduction is determined by Underwriters, not independently. There being a remedy for a breach or non-compliance causing prejudice, there is no reason to provide a remedy for a breach or non-compliance not causing prejudice. It is illogical to give the insurer a more favourable remedy for a breach or non-compliance which has not caused prejudice than for one which has. An argument which produces a disproportionate result is usually unsound. The fact that GC3 expressly provided that it was a condition precedent to the assured's right to be indemnified under the Policy that it would give to the Underwriters notice in writing as soon as practicable, and is therefore difficult to reconcile with this argument as to the effect of GIC(b), is neither here nor there. Either the words "condition precedent" in GC3 are not to be given their usual force, and GIC(b) limits Underwriters' remedy for breach of the timing requirement of GC3 to compensation for prejudice, or, in GIC(b), the words "any conditions of the Insurance" have to be read as "any conditions of this Insurance other than a condition precedent". Either way, GIC(b) provides the exhaustive remedy for breach of or non-compliance with GC4.
The effect of GC 11 and the Minimum Terms
iii) The effect of GC 11 (which affords precedence to the Minimum Terms, and provides that "In any dispute in connection with the terms, conditions ... of this Insurance" "the terms conditions exclusions and limitations of the Approved Wording ... shall take precedence over any terms conditions exclusions or limitations contained herein which are less favourable to the Assured") is that, even if GC4 is to be construed in accordance with Underwriters' submissions, B.10 trumps GC4. Kidsons, Camerons and Millers submit that, on the proper construction of B.10, the giving of a notice that is served later than reasonably practicable does not prevent the extension of cover.
Effect of GC6
iv) GC6 operates as an addendum to GC3 sub-paragraph a). GC6 shows that the question whether something has been "properly notified" is nothing to do with the timing of the notice. The premise of GC6 is precisely that a claim has been properly notified even though it has not been made "as soon as practicable" (a claim notified as soon as practicable does not need the benefit of GC6). GC4 should be read on a consistent basis, namely that a notice is proper if in proper form, regardless of its timing.
Public policy considerations require the policy to be construed in favour of Kidsons
v) Policies of this kind are issued in the form in which they are for public policy reasons: a professional body requires its members in private practice to maintain insurance; it lays down the (detailed) minimum requirements for that insurance; those insurers who wish to participate in the market for those professionals must provide terms which at least meet the minimum requirements. Such requirements typically include anti-avoidance provisions. Such policies and their contents reflect the context and objective which is that the insurance is primarily for the protection of the public: see, in the context of the statutory background for solicitors, Swain v The Law Society [1983] 1 A.C. 598, where Lord Brightman, with whom all members of the House agreed, said at p.618:
"My Lords, the insurance scheme is statutory. It flows from section 37 and the rules made thereunder, of which the form of master policy and the form of insurance certificate are an integral part. In exercising its power under section 37 The Law Society is performing a public duty, a duty which is designed to benefit, not only solicitor-principals and their staff, but also solicitors' clients. The scheme is not only for the protection of the premium paying solicitor against the financial consequences of his own mistakes, the mistakes of his partners and the mistakes of his staff, but also, and far more importantly, to secure that the solicitor is financially able to compensate his client. Indeed, I think it is clear that the principal purpose of section 37 was to confer on The Law Society the power to safeguard the lay public and not professional practitioners, since the latter can look after themselves. This is underlined by the position of section 37, which is one of a group of three sections, the other two of which are plainly enacted in the interests of the lay public. So, there is no doubt at all in my mind that the power given to The Law Society by section 37 is a power to be exercised not only in the interests of the solicitors' profession but also, and more importantly, in the interests of those members of the public who resort to solicitors for legal advice." [Emphasis added.]
Thus, it was submitted, although one of the objects of the policy was to provide Kidsons with claims made cover, a far more important objective was to secure that Kidsons would be financially able to compensate its clients. That is why professional bodies require professionals to insure even where statute does not require them to do so. Where the policy is in a form known to insureds and insurers to be designed to protect the lay public from the consequences of error or omission by the professional, the Court should be disinclined to adopt debatable interpretations which would enlarge the number of occasions on which some default by the insured should leave a claim without insurance cover. The market participants designing this type of policy have addressed the questions when defaults by the insured should enable the insurers to be free of liability, and have restricted them. Even if the point here were a borderline one, then the decision should favour the lay public's interest.
Composite policy point in relation to the first issue of construction
vi) In relation to the first issue of construction, it was submitted that, given the fact that the Policy is a composite policy, there would be harsh consequences for individual assureds (who would have no control over the notification process) if GC4 were to operate on the basis that the consequence of failing to notify as soon as practicable were that there would be no indemnity. It was submitted, for example, that there was no way, for example, that estates of deceased partners, could protect themselves against carelessness by others over notification of the discovery of circumstances which may give rise to a claim.
Composite policy point in relation to the second issue of construction
- In relation to the second issue of construction (namely, in the case of Kidsons, whose awareness counted as awareness "of the Assured" for the purposes of giving notice under GC4 and who was the relevant person to give notice of circumstances), a separate composite policy point was taken by Mr. Harvey and adopted by Mr. Davidson. This submission was to the effect that each assured has a separate contract of insurance, and that reference to the assured means the particular assured. Consequently, in GC3 and GC4 it is the particular assured's knowledge or first awareness which is relevant, and it is only his non-compliance with conditions which will deprive him of cover. Similarly, it is only his non-disclosure or misrepresentation which (save to the extent ameliorated by the innocent non-disclosure clause – GIC (a)) will vitiate his cover).
Conclusion as to the proper construction of GC4
- I start by looking at the natural meaning of the words in GC4, without reference to other provisions of the Policy, or the other considerations which counsel for Kidsons, Camerons and Millers prayed in aid. It seems to me to be perfectly clear that, upon a simple and natural reading of the relevant words, an extension of cover in relation to claims made after the expiry of the Policy period is only provided where "Such notice" has indeed been given of relevant circumstances "as soon as practicable".
- I find nothing surprising in the concept that there should be a contractual requirement that notice of circumstances is given in a timely fashion. In the context of claims made policies, the making of claims against the assured, or the assured's first awareness of circumstances, is rarely, if ever, determinative of the existence of cover. It is commonplace for the existence of cover to be dependent upon the provision of notice by the assured to insurers in accordance with the policy terms. This applies as much to claims as it does to circumstances: see for example, Rothschild Assurance at 22; Friends Provident at paragraphs 13, 17, 20, 25 and 27. The commercial imperative is that notice to insurers should be given promptly: see per Moore-Bick J in Friends Provident at paragraphs 20, 25, 27 and 38. The reasons are obvious: the insurer needs to know about any claim or relevant circumstance as soon as possible in order to be given the opportunity, in the case of a claim, to minimise the risk of a finding of ultimate liability against the assured and to take over the defence; and, in the case of any circumstance, to minimise the risk of a claim ultimately materializing or, in the event that any claim should ultimately materialize, the risk of liability falling on the assured. Moreover, the insurer needs the commercial certainty of finality of exposure; it enables him to calculate his reserves with more certainty and avoids, or at least ameliorates, the difficulties of estimating his contingent liabilities for long-tail claims. This enables him to calculate premiums with more precision, with consequent advantages to assureds. It is in the interest of neither party to the insurance contract that notification concerning claims and circumstances should be delayed until the end of the policy period, or even later, for perhaps an indeterminate period of time. The expert evidence before me demonstrated clearly that, so far as insurers are concerned, they do not appreciate "laundry lists" of claims and circumstances being presented to them shortly before expiry and consider it to be crucial that information is received about circumstances as soon as possible. Moreover, so far as assureds are concerned, delayed notification limits their ability to rectify any defects in any notices purportedly given to the insurer or any deficiencies in any information required to be presented to the insurer. The Policy, the Institute Clauses and the Minimum Terms all recognise the importance of timely notice. This is affirmed, in the context of claims, in GC3 and clause B9 of the Minimum Terms; and, in the context of circumstances, in GC4 and clause B10 of the Minimum Terms.
- The first sentence of GC4 imposes an obligation in clear and certain terms upon the assured. Thereafter, GIC(b), Insuring Clause Section I, and GC3 provide for what is to occur if notice is given under the Policy and a claim arising from those circumstances is made during the Policy period. If the notice is given as soon as practicable, and a claim is made during the policy period, then subject to fulfilment of the condition precedent in GC3 (a) by the giving of notice of the claim as soon as practicable and not later than 15 days after the expiry of the Policy period, the claim is covered. If the notice of circumstances is not given as soon as practicable but it leads to a claim being made during the Policy period, this does not disentitle the assured from recovery. The condition precedent in GC3 still has to be fulfilled but, if it is, GIC(b) applies and the assured is vulnerable to a reduction of the amount of indemnity payable under the Policy.
- The second sentence of GC4 provides for what is a valuable extension of cover in relation to claims made after the expiration of the Policy period but arising out of circumstances of which the assured becomes aware within the Policy period. In combination with the first sentence, it does so in clear grammatical terms. It is obvious that the notice referred to in the second sentence is indeed such notice as is identified in the first sentence. The word "notice" in the second sentence is qualified by the adjective "such", which, in context, must carry its dictionary meaning "of the character, quality or extent previously indicated". But the critical feature is that it is only if the stated contingency – i.e. "such notice having been given" - occurs, that the extension is triggered.
- What is the character and quality of such notice? I conclude that it is one that
i) is given in writing (i.e. oral notice does not qualify);
ii) was given as soon as practicable (i.e. notice that was not so given does not qualify);
iii) is of a circumstance of which the assured shall have become aware during the Policy period (i.e. notice that is not of such a circumstance does not qualify);
iv) is of a circumstance which may give rise to a loss or claim against the assured (i.e. notice that is not of such a circumstance does not qualify).
- I agree with the submission of Mr. Gavin Kealey QC, on behalf of Underwriters, that one cannot dissect and remove some of the characteristics and qualities of the defined notice in order to suit one's case. The notice that triggers the extended cover by virtue of the second sentence of GC4 has to be such notice as was defined in the first sentence. On a reasonable and natural reading of the sentence, one identifies "such notice having been given" with all, not just a selection or even only one, of the attributes explicitly required to be possessed by such a notice in the first sentence of GC4. In my judgment, the arguments of Kidsons, Camerons and Millers to the contrary are wrong and illogical and lack commonsense. It would have been exactly the same if the second sentence had begun: "If such notice has been given …". Nor would a different result be reached even if the clause were to be read as if the words "as soon as practicable" came immediately after the verb "give" It would still be an inherent quality of the giving of notice under GC4 that it should be as soon as practicable and in writing. "Such notice having been given" would, in that example, be the notice given as required in the first sentence: i.e. as soon as practicable and in writing. There is, in any event, no warrant for transposing words in the clause. As GC4 is drafted, the words "as soon as practicable" follow the phrase "in writing", thereby indicating that they are just as much a part of the definition of the notice required in order to trigger cover as are the words "in writing". If, as all parties accept, the requirement of writing is an indispensable criterion for a notice under GC4, so too, in my judgment, is the criterion that notice must be given as soon as practicable.
- Nor, in my judgment, is this preliminary conclusion displaced by a consideration of GC4 in the wider context of the policy as a whole.
i) Distinction between GC3 and GC4
- When I turn to consider GC4 in the wider context of the policy as a whole, I find nothing in any of the other provisions of the Policy that undermines my preliminary conclusion based upon the wording of GC4. There is, of course, a distinction between the wording of GC3 and GC4, since GC3 expressly provides that it is a condition precedent to the assured's right to be indemnified under the Policy that it would give to the Underwriters notice in writing as soon as practicable, and GC4 contains no such wording. However, I do not find the arguments of Kidsons, and those of Camerons and Millers, as to the so-called importance of the distinction in the language, persuasive. They seek to diminish the significance in the context of claims made professional indemnity policies of notice provisions which have the effect of extending the scope of cover to post policy period claims. They do so by suggesting that GC4 is not a condition precedent to liability and that it is merely an "ancillary" provision of the type considered by Moore-Bick J in Friends Provident, at paragraph 42.
- In my judgment this approach mischaracterises the rationale and effect of GC4 in relation to the triggering of extended cover. GC4 cannot be characterised as merely an "ancillary" provision of the type considered by Moore-Bick J in Friends Provident. GC4 is not a condition precedent which has to be complied with in order to obtain cover under the standard, existing insuring clauses of the Policy. Under the Policy, as Section 1 of the Insuring Clause tells us, Underwriters agree
"1. To indemnify the Assured against any claim or claims first made against the Assured during the period of insurance as shown in the Schedule in respect of any Civil Liability whatsoever or whensoever arising (including liability for claimant's costs) incurred in connection with the conduct of any Professional Business carried on by or on behalf of the Assured." [My emphasis.]
- On the contrary, GC4 is a provision that entitles the assured, upon, but only upon, the happening of a certain stipulated event, to obtain an extension of cover which otherwise does not and would not exist under Section 1 of the Insuring Clause. A breach of GC4, in relation to a post policy period claim, does not deprive the assured of a right which otherwise would accrue to him under the terms of coverage in the policy. He has no contractual right to be indemnified in respect of post policy period claims, unless the stipulated contingency (viz. "Such notice having been given") has occurred, since, absent the giving of the relevant notice, they are risks that are simply not covered under the insurance contract. In one sense, the happening of the contingent event can be described as the satisfaction of a condition precedent, since, unless the pre-condition is satisfied, no liability is imposed upon Underwriters, and, in order for it to be satisfied, the assured has to do something, namely give the requisite notice. But in my judgment all this is patently obvious from the structure of the second sentence of GC4; it would be linguistically superfluous additionally to spell out that it was a condition precedent to Underwriters' liability for post policy period claims that the requisite notice had been given.
- Moreover, Mr. Davidson's analysis of the clause considered by Moore-Bick J in Friends Provident is, in my view, wrong. In Friends Provident, the clause equivalent to GC4 was General Condition 2 of the primary layer policy. This was clearly a condition precedent and it was accepted that it operated as such: see paragraphs 20, 25 and 41. The other clause which was described by Mance LJ in the Court of Appeal as "an ancillary provision" (at paragraph 32 of his judgment) was the notice provision in the excess layer policy, namely clause 5. This was not a condition precedent, was not expressed to be a trigger for coverage under the excess layer policy and performed a significantly different function from the notice clause in the primary layer policy. As Moore-Bick J explained at paragraph 20:
"clause 5 … reflects the different position and interests of the excess layer underwriters who will not be affected unless the loss ultimately exceeds the indemnity available under the primary layer policy. The insured is not required to notify them until it becomes apparent that that may happen. Moreover, unlike General Condition 2, clause 5 does not make compliance with its terms a condition precedent to the insured's right to recover under the policy."
- In my view, there is no analogy between clause 5 in the Friends Provident excess layer policy and GC4. GC4 has to be construed according to its own terms in its own context. If there is any relevant analogy, it is with General Condition 2 of the primary layer policy, compliance with which was a necessary pre-condition to the assured's right to recover not only under the primary layer policy but also the excess layer policy, which incorporated the same terms and conditions of the primary policy: see Friends Provident at paragraphs 27-30.
- This approach and analysis is amply supported by authority, not only English, but also Australian and United States: see e.g. John Connell Holdings v Mercantile Mutual Holdings [1999] 10 QCA 429 1, Queensland Court of Appeal, at paragraphs 9, 16, 20 in the judgment of the Chief Justice, and paragraphs 40 and 42 in the judgment of McPherson JA; the former said the following at paragraph 20:
"This contention overlooks the role of clause 4 in the contracts. To be entitled to damages for breach of the contracts of insurance, the appellants must show that they were entitled to indemnity under the policies. Condition 4 (unlike condition 3) is not a condition precedent to an entitlement to indemnity in respect of a claim otherwise within the insurance clause. Clause 4 extends the scope of cover. If no notice is given under clause 4, a claim made outside the policy year – as here – is simply not covered. Conasoc has no entitlement to indemnity because it gave no notice under clause 4 which, if given, would have extended the scope of the limited cover otherwise available. As to JCH, the claim ultimately pursued against it, as the judge found and as I agree, did not arise out of the 'occurrence' notified in June 1980. In either case, therefore, the repudiation of the contracts is without present significance."
- The same approach is equally applicable in the instant case. See also City of Harrisburg v International Surplus Lines Company Limited (1984) 596 F Supp 954 Federal District Court of Pennsylvania, at 10 (followed by the 8th Circuit Court of Appeals in FDIC v St Paul Fire and Marine (1993) 993 F 2d 155, at 158); Federal Deposit Insurance Corporation v Barham (1993) 993 F 2d 600, US 5th Circuit Court of Appeals, at 9. Although the relevant notice was being given in a different context (termination of a lease), support for this approach is also found in Mannai Ltd v Eagle Star (supra) at 776, per Lord Hoffmann, where he states that "if the clause had said that the notice had to be on blue paper, it would have been no good serving a notice on pink paper, however clear it might have been that the tenant wanted to terminate the lease; and also at 781 per Lord Clyde; 755 per Lord Goff (dissenting on other points); 762 per Lord Jauncey (dissenting on other points).
- A further, and recent, illustration of this approach is to be found in Rennie v Westbury Homes [2007] EWHC 164 (Ch). This involved a clause in an option agreement to the following effect:
"At any time during the last year of the Option Period (meaning the period of 10 years referred to in clause 1.1.9) the intending Purchaser may by notice in writing served upon the intending Vendor require such period to be extended by 5 years and upon service of such notice … this Agreement shall be construed as if the Option Period was 15 Years".
- In construing this clause, Henderson J said (at paragraph 21) that the clause contained:
"two indispensable conditions which the notice did have to satisfy. First, it had to be in writing; and secondly, it had to be served upon [the intending Vendor] or his solicitors during the last year of the Option Period. Failure to comply with either of those conditions would have been fatal, because the notice would not have been a notice of the type stipulated by clause 9.1".
- Likewise in the present case, the failure by an assured under the Policy to give notice in writing "as soon as practicable" means that the notice, once given, would not be a notice "of the type stipulated" by GC4, i.e. "such notice".
- Given the purpose and function of claims-made policies, as I have described them above, there are clear and obvious commercial reasons why a notice of circumstances not given in writing as soon as practicable should not be a qualifying notice under GC4. As I have already said, the insurer needs to have knowledge that after a certain date he will no longer be liable under the policy; this will enable him to fix his reserves for future liabilities with more accuracy and compute future premiums with more certainty. The consequence of this is that his exposure will be reduced, and policy cost to the assured will be reduced. The insurer will also have to make appropriate arrangements for investigating and handling any existing circumstances and future claims. It seems to me that the huge additional protection afforded to an assured in respect of claims potentially made long after the policy has expired, provided that the assured has given notice of "circumstances", amply justifies the reciprocal, correlative obligation of the assured to notify "circumstances" strictly within the time period described in the policy.
- Other reasons why the dependency of extended coverage upon proper notice being given as soon as practicable is commercially sensible include the following.
i) If notice is not required to be given as soon as practicable, there is always the danger that insurers would be engulfed immediately before the end of the policy period with "laundry lists" of circumstances containing the barest detail in list form of sometimes hundreds and thousands of cases in respect of which the assured fears that he might sometime in the future be confronted by a claim. However, if notice is required to be given of each and every circumstance as soon as practicable, the assured is bound to give consideration to each circumstance and notify it if he genuinely thinks it might give rise to a claim, neither exaggerating the circumstance nor diminishing it - so that underwriters and insurers can in a sensible and structured environment be given the opportunity to examine and investigate each one – validating whether it really is a circumstance and, if it is, taking all necessary steps to protect their position.
ii) If it were right that an assured could with effective impunity give notice of circumstances long after the expiration of the policy period in respect of circumstances of which he became aware during the subsistence of the policy period, that would, in reality, have the commercial effect of converting the policy from a claims made policy into an occurrence occurring policy. According to the arguments of Kidsons, Camerons and Millers, it would be enough that a circumstance had occurred during the policy period or before, of which the assured first became aware during the policy period, for the cover to have to respond to any claim arising therefrom - provided only that notice of such circumstance was given before the claim was finally made. The insurers could be left completely in the dark about that circumstance until long after the event and long after the assured himself was aware of it: just as in occurrence based policies, which notoriously left insurers at risk for an unknown number of claims arising from an unknown number of occurrences that might be made many years after the expiry of the policy.
- The dependency of cover for post policy period claims upon notice of circumstances as soon as practicable during or immediately following the policy period is typical in this field of insurance: see Friends Provident (supra). There is nothing inherently repugnant about a notice provision operating in this manner. Nor does Underwriters' construction leave the assured in a commercially unacceptable position, for the reasons given above.
- There was much debate before me whether GC4 should be characterised as an option - in the sense of conferring a choice on the insured as to whether to notify, so as to obtain the extension – or rather as an obligation. Mr. Kealey QC, on behalf of Underwriters, submitted the former; Mr. Nicholas Davidson QC for Kidsons, Mr. Michael Harvey QC for Camerons, and Mr. Roger Stewart QC for Millers, submitted the latter. It was argued, on the one hand, that the right conferred by GC4 to obtain an extension of cover was similar to an option and that, accordingly, as with the exercise of a contractual option, it was necessary to have a strict approach as to whether the communications actually sent satisfied the notice requirements of GC4. On the other hand, it was argued that a more lenient approach to that question could be adopted if the notice had to be sent as a matter of obligation. In my judgment, no real assistance was afforded by this debate. I have to interpret the particular provisions of GC4, in their context; semantic debate as to the extent to which an analogy could be drawn between an option, by way of example, for the purchase of shares or real property, and a provision in an insurance policy providing extension of cover, was not, in the event, helpful to the analysis.
ii) General Institute Condition, section b
- Under this limb of their argument, Kidsons, Camerons and Millers submit that early notification in GC3 is not a condition precedent at all. The basis of this argument is the existence of GIC(b). Relying on this provision, Kidsons and the other parties contend that this clause operates to oblige Underwriters to afford cover to claims arising out of late-notified circumstances, albeit subject to a right of set-off for such loss as in Underwriters' view has been caused by the lateness of the assured's notification. They first submit that the words "condition precedent" in GC3 are not to be given their usual force, and GIC(b) limits Underwriters' remedy for breach of the timing requirement of GC3 to compensation for prejudice. This, they contend, supports their argument as to the lack of conditionality of the second sentence of GC4: i.e. if notice of a claim as soon as practicable is not a condition of cover under GC3, there is no reason why the extension of the scope of cover under GC4 should be conditional upon notice of circumstances given as soon as practicable. Alternatively they submit that, even if service of a timely notice is a condition precedent under GC3, and GIC(b) does not operate to limit Underwriters' remedy for breach to compensation, that is because of the words "condition precedent" found in GC3, but which are not present in GC4; on this alternate construction, they submit that the words "any conditions of the Insurance" in GIC(b) have to be read as "any conditions of this Insurance other than a condition precedent". But in GC4, where no such words as "condition precedent" appear, they submit GIC(b) provides an express – and exhaustive - remedy for breach of, or non-compliance with, GC4. They point out that GIC(b) is a remedy favourable to Underwriters in that the reduction is determined by Underwriters, not independently; that in circumstances where a remedy is provided for a breach or non-compliance causing prejudice, there is no reason to provide a remedy for a breach or non-compliance not causing prejudice; that it is illogical to give the insurer a more favourable remedy for a breach or non-compliance which has not caused prejudice than for one which has; and that an argument which produces a disproportionate result is usually unsound; and they rely, to support this last proposition, by way of analogy, in the context of a statutory construction issue in relation to insurance, upon statements in The "Star Sea" [2001] UKHL1 [2003] 1 AC 469 [2001] Lloyd's Rep. 389, paragraph 72 (pp.503 /406) per Lord Hobhouse, with whom Lords Steyn, Hoffmann and Scott (at p.415 paragraph 120) agreed.
- I do not accept these arguments, which in my judgment do not reflect the reality of the clear wording of GC4. Even if it were the case (which in my judgment it is not) that the effect of GIC(b) was that the words "condition precedent" in GC3 were not to be given their usual force, and Underwriters' remedy for breach of the timing requirement in GC3 were limited to compensation for prejudice, the terms of GC4 make it clear that the extension of the scope of cover to include post-policy period claims is conditional upon notice as soon as practicable of underlying circumstances. GIC(b) deals with the reduction of cover which exists, rather than the creation of cover which does not otherwise exist. The second sentence of GC4, in combination with the first sentence, provides the assured with a facility to acquire cover, which does not otherwise exist, in respect of post-policy period claims and to have them treated as though they had been made during the Policy period in accordance with Insuring Clause I. The effect of a failure to give notice in writing as soon as practicable of a circumstance is that any claim arising out of the circumstance is not covered by the Policy and GIC(b) does not have the effect of extending cover to that claim. This is clear from the words of GIC(b), which provide only for the prejudice set-off mechanism to apply to any loss or claim in respect of which "indemnity [is] afforded by this Insurance". Where the criteria for the giving of notice under GC4 have not been complied with, any subsequent claim would not be one in respect of which indemnity was afforded by the insurance and GIC(b) would not come into play. As Mr. Kealey submitted, GIC(b) does not, either by its terms or by any implication, modify the fundamental basis set out in GC4 upon which the extension of the definition and scope of cover under the Policy depends.
- Although, given my view as expressed in the previous paragraph, it is not strictly necessary for me to decide whether GIC(b) does apply to the conditions precedent to be found in GC3 to limit Underwriters' remedies thereunder for breach, I conclude that GIC(b) does not apply to the conditions precedent to be found in GC3 and that the effect of a failure by the assured under GC3 to give notice in writing as soon as practicable of a claim is that there is no coverage in respect of that claim. Indeed, Mr. Davidson accepted as much in his oral opening submissions, although he subsequently changed his approach on this point. The function of GIC(b) is to provide a regime for those cases where the assured has breached or failed to comply with any of the conditions of the insurance with the result that there has been prejudice in the handling or settlement of any covered loss or claim. In those circumstances, the indemnity afforded by the Policy in respect of such covered loss or claim is reduced to such sum as in insurers' opinion would have been payable in the absence of such prejudice. So long as Underwriters have exercised good faith in the reaching of their opinion, their decision cannot be re-opened.
- But full effect has to be given to the wording of GC3; namely, that if there is failure to comply with the condition precedent set out in that clause, there is no indemnity under the Policy. The words "as a condition precedent to [the Assured's] right to be indemnified under this insurance" cannot in my judgment be interpreted in any other way. Again, I see nothing illogical about this. The same result is contemplated by clause B9 of the Minimum Terms which is in identical terms to GC3. It is, therefore, clear that whatever public policy may underlie the Minimum Terms, that policy does not preclude insurers stipulating in their contracts of insurance that cover will not obtain where the assured fails to give prompt notice of claims made or losses discovered. The ICAEW's guidance to its members on professional indemnity insurance expressly contemplates that an assured's failure to comply with insurers' notice requirements will have this effect: see paragraph 6.5 of the ICAEW's Regulations and Guidance. Moreover, GIC(b) is mirrored in Special Condition B7. If B9 were not intended to operate as a condition precedent in the light of B7, it is somewhat surprising that the words of condition precedent are used in B9 and were not omitted. This conclusion in relation to the relationship between GIC(b) and GC3 supports Underwriters' submissions in relation to GC4. As Mr. Kealey submitted, if the consequence of a failure to comply with the condition precedent in GC3 is that no indemnity is provided to the assured, a fortiori it is the consequence of failing to comply with the pre-conditions for obtaining an extension of cover under GC4.
- A check against the commercial reality of the situation also persuades me that my conclusion in relation to the relationship of GIC(b) with GC4 is the correct one. If the combined effect of the two clauses was that Underwriters simply had a cross-claim for damages against the assured or a set-off for the assured's failure to give timely notification, that would mean that the assured would have obtained valuable extensions of cover on a virtually open-ended basis. On this basis, Underwriters would be obliged to extend cover to claims arising out of circumstances of which they had no prior knowledge and which were first notified to them many years after expiry of the policy. This would undermine the commercial rationale for claims made policies and effectively transform the Policy into something akin to an occurrence policy, contrary to the underlying and fundamental basis on which it was written.
- In this context I should refer to an argument advanced by Mr. Harvey QC on behalf of Camerons to the effect that GIC(b) does indeed apply to, inter alia, conditions expressed to be conditions precedent. Having relied upon the fact that GIC(b) is expressly stated to apply to the assured's breach of or non-compliance "with any conditions of this Insurance", and that there was no distinction drawn between conditions which are innominate terms and those which are said to be conditions precedent, he went on to suggest that one of the purposes of GIC(b) was to restore, contractually, the position which many in the market had believed existed before the decision of Bingham J in Pioneer Concrete (supra) – namely a requirement upon insurers to show that they had suffered prejudice before they could take advantage of a breach. He submitted that, before Pioneer Concrete, there was uncertainty whether insurers who wished to rely upon a breach of a condition precedent had to show that they had suffered prejudice. This, he submitted, stemmed from the observations of Lord Denning in Barratt Bros (Taxis) v Davies [1966] 2 Lloyd's Rep 1 at 5:
"Apart from these two points, I would put the matter more broadly. This Condition 1 was inserted in the policy so as to afford a protection to the insurers so that they should know in good time about the accident and any proceedings consequent on it. If they obtain all the material knowledge from another source so that they are not prejudiced at all by the failure of the insured himself to tell them, then they cannot rely on the condition to defeat the claim".
The doubt, submitted Mr. Harvey, continued until Bingham J clarified the position in Pioneer Concrete, as the latter summarised at pages 279 – 281 of his judgment; see also paragraph 4.117 of Insurance Disputes (2nd edition) where, in the context of condition precedent clauses, it is stated:
"Courts will interpret such clauses carefully since breach clearly has a drastic effect on the rights of the insured, although the insurer's right to deny liability is not dependent upon it suffering prejudice. This was unclear until the decision in Pioneer Concrete …."
Thus, suggested Mr. Harvey, the point of GIC(b) was to make it clear that there was no entitlement to rely upon the condition precedent in GC3 to avoid liability.
- Despite the persuasive terms in which the submission was presented by Mr. Harvey, I found it unconvincing. The "broad" approach adopted by Lord Denning (as an alternative ground for his decision in Barratt) had not received judicial support in later cases. The applicable provision of the Minimum Terms is dated 2000 (some 14 years after Pioneer Concrete). It was, I was told, first introduced in 1991 some 5 years after Pioneer Concrete. There was no expert or market evidence to suggest that the function of GIC(b) was to circumvent the clear effect of conditions precedent, as stated by Bingham J in Pioneer Concrete. The point about B9 and GC3 is straightforward: it is that the assured's right to be indemnified is conditional upon (among other things) notice in writing as soon as practicable. If that condition is not fulfilled, no indemnity is afforded under the policy to the claim. GIC(b) does not alter this. It is concerned, and concerned only, with losses or claims in respect of which indemnity is "afforded by this Insurance". Mr. Harvey's construction in effect requires GIC(b) to be read as if the words referring to "the indemnity afforded by this Insurance in respect of such a loss or claim" referred instead to "the indemnity afforded by this Insurance in respect of such a loss or claim, or the indemnity which would, but for the Assured's breach or non-compliance, have been afforded by this Insurance". This involves a substantial rewriting of the clause. Those words are in fact present in the very last line of GIC(a); but the draftsman did not choose to use them in GIC(b).
- Indeed, as Mr. Kealey submitted, at least to a certain extent, Underwriters' construction of GC4 is supported by GIC(a). Thus GIC(a) provides an anti-avoidance regime in case of innocent and negligent, i.e. non-fraudulent, non-disclosures, misrepresentations and breaches of warranty. In the absence of fraud, Underwriters agree not to avoid. GIC(a) covers the situation where a claim is made or a loss is discovered during the Policy year arising out of a circumstance that should have been notified – but implicitly had not been notified validly or at all – under a prior year's policy. In that event, assuming an absence of fraud, the claim attracts an indemnity under the existing Policy but it is confined to the scope and extent of coverage that had been provided under the prior year's policy. In effect, the existing Policy provides an indemnity but confines it to that which would have been provided by the previous year's cover as though notification had been made to insurers on that previous year's cover. This provision complements General Exclusion 4: which excludes from coverage any claim or loss arising out of any claim or circumstance which has been notified under any prior years' insurance. It is implicit in that exclusion that the notification under a prior year's policy should have been effective as a notification. The function of GIC(a) would be undermined if, long after the expiry of a prior year's policy, an assured could give valid notice of circumstances to that prior year's insurers of circumstances of which the assured had been aware during its subsistence. One of the functions of GIC(a) is to cover the obvious case where, because the assured has not given notice of circumstances under a prior year's policy in order to trigger coverage under that policy when he should have done, he has no cover under that prior year's policy in respect of claims that ultimately arise out of that non-notified circumstance. It is thus implicit in GIC(a) that the assured's failure to give notice of circumstances under that antecedent policy prevents the assured from acquiring an extension of cover in respect of claims arising after the expiration of that policy from those circumstances. If it were otherwise, the assured could simply give late notice of circumstances under an antecedent (and possibly long-expired) policy when faced with the prospect of claims arising out of circumstances of which he had been aware during its subsistence. GIC(a) is a standard provision in the accountancy professional indemnity insurance market (as Special Condition B6 of the Minimum Terms shows). GIC(a) demonstrates that, consistent with the claims made basis on which these policies are written, the intention is to prevent an assured notifying claims or circumstances to the policy once it has expired and any grace period encompassed by the words "as soon as practicable" in GC4 has elapsed. After that, it is too late for the assured to give notice to prior year insurers.
- Mr. Harvey sought to suggest that Underwriters' contention would have uncommercial results which cannot have been intended. He postulated the example where an insured became aware of the circumstance in the first month of the policy, but did not notify until the seventh month. On Underwriters' construction, assuming that the notice was not given as soon as practicable, (a) the deeming provision would not have been "triggered" and (b) there would be no opportunity for the insured to correct the matter. At expiry the insured might be unable to obtain cover for future claims arising out of that circumstance. Thus a claim made in the following year could be without cover. He further submitted that Underwriters' construction would have an additional uncommercial result, in that any subsequent insurer (when considering the application of an exclusion equivalent to General Exclusion 4 or Exclusion D.5 of the Minimum Wording) would have to consider whether the notification had been made promptly, and not merely whether the subsequent claim arose out of the circumstance notified.
- In my judgment, these so-called commercial concerns are more apparent than real, since the expert evidence showed that the requirement to provide notice as soon as practicable is acknowledged in the market place to admit of a reasonable latitude and that frequently (although not in the present case) the policy requires notice of any circumstance to be given within the policy period; and, as was said in Fraser v B. N. Furman (Productions) Ltd, Miller Smith & Partners (A Firm) Third Party [1963] All ER 57 per Diplock LJ at 60 H-I), "'as soon as practicable' is as between assured and insurer having regard to the commercial purpose of the contract". Thus, in practice it would be rare, I suspect, for notice of circumstances given within the policy period to be rejected on the grounds that it had not complied with the requirement to provide notice as soon as practicable, although, of course, that is one of the points that is being taken here.
- In any event, such concerns are overridden by the clear and practical reasons which I have already set out, as to why the extension of cover in respect of claims arising outside the policy period should indeed be dependent upon notification being given as soon as practicable, or otherwise in a manner that is compliant with the time requirements of the policy. On any basis, such concerns as articulated by Mr. Harvey cannot displace the clear purpose and effect of GC4.
- Various other arguments were run by Camerons in this and related contexts, which I should mention briefly. First Camerons relied upon the discussion in Rothschild Assurance about the inter-relationship (and inconsistency) in that case between a Special Condition and an exclusion. But in the present case there is no inconsistency between Minimum Wording B7 and B9: the former does not relate to conditions precedent having the effect that an indemnity is never afforded under the policy in the first instance. More importantly, there is no tension between GIC(b) and the second sentence of GC4: the former is concerned with a reduction in the amount of the indemnity afforded by the insurance; the latter is concerned with an extension of the scope of the cover provided by the insurance. GIC(b) is simply inapplicable to the operation of the second sentence of GC4. It can only be if and after the scope of cover under GC4 is extended that GIC(b) can have any subsequent application. GIC(b) cannot affect whether or not the scope of the cover is extended.
- Camerons also relied upon the case of BNP Mortgages v Page and Wells and Sun Alliance (Anthony Butcher QC sitting as a deputy Official Referee, 16 September 1994). The case concerned a claim by valuers (Page and Wells) for indemnity by their professional indemnity insurers (Sun Alliance) in respect of a claim by BNP Mortgages which Page and Wells contended arose out of circumstances which they had notified. The deeming clause (Condition 1, set out on page 5 of the judgment) read;
"The Insured shall give written notice to the company (regardless of the Insured's contribution) as soon as possible after becoming aware of circumstances which might reasonably be expected to produce a claim irrespective of the Insured's views as to the validity of the claim or on receiving information of a claim for which there may be liability under this Insurance. Any claim arising from such circumstances shall be deemed to have been made in the period of insurance in which such notice has been given".
A clause entitled Special Benefit 2 (see page 6 of the judgment) provided:
"The Company shall not avoid any claim on the grounds of the breach of Conditions 1, 2 or 3 of this insurance subject to proviso C) in Special Benefit 1 but where the Insured has prejudiced the handling or settlement of any claim the amount payable in respect of such a claim (including costs and expenses) shall be reduced to such sum as in the Company's opinion would have been payable in the absence of such prejudice."
Mr. Harvey relied upon the fact that, although it was a requirement of the first sentence of the deeming clause that the notice be given "as soon as possible", Mr. Butcher QC concluded that this was not a requirement for the operation of the deeming provision. He said at p.27,
"It might have been, but was not, argued by Mr. Bartlett that Page and Wells were, all other considerations apart, disqualified by breach of their duty under Condition 1 to give notice "as soon as possible after becoming aware". Had the point been taken, it would not, in my view, have been of any assistance. The worst consequence of their tardiness in giving notice under Condition 1 – it must, of course, be given during the period of insurance – would, I consider, be a possible application of the penalty prescribed in Special Benefit 2."[My emphasis.]
- However, on the particular wording of the policy concerned, Mr. Butcher had held that the policy provided that it was "indispensable" that the assured had to give notice of circumstances during the period of insurance, if he was to secure an extension of cover in respect of claims made after the period of insurance: see pages 27 and 30. Thus the extension of insurance to cover post-policy period claims was indeed conditional on notice within the policy period, which was not a condition that could be disregarded by reference to Special Benefit 2. However, in other respects, the case was a completely different case from the instant case and the clause in question was expressed in completely different terms from GC4. Given that the judge had held that the notice of circumstances had to be given within the policy period in order for the assured to obtain the extension of cover at all, and the wholly different structure of the clause in question, it is not perhaps surprising that the judge expressed the view (obiter and without argument) that any failure to give notice of circumstances within a reasonable time (provided that such notice had indeed been given within the policy period) would not have had the effect of preventing the extension of cover. Accordingly, I derive no assistance from this authority.
iii) The effect of GC11 and the Minimum Terms
- I turn next to address Kidsons', Camerons' and Millers' submission that, even if GC4 is to be construed in accordance with Underwriters' submissions, by virtue of GC11, B.10 trumps GC4. They submit that there is a material difference between the wording of GC4 and B.10, and that, on the proper construction of B.10, the giving of a notice that is served later than reasonably practicable does not prevent the extension of cover; they rely, in particular, upon the fact that, in B.10 in the Minimum Terms, the words "as soon as possible" are placed away from the words "notice in writing", which they submit means that the expression "as soon as possible" is not "attached to" notice in writing; they point to the distinction between the use of the words "as soon as possible" in B.10, as compared with the words "as soon as practicable" in GC4, which they submit make it more unlikely that the ICAEW and Approved Insurers intended the consequences that there would be no extension of cover, simply because the Insured had not notified "as soon as possible".
- Notwithstanding the detailed semantic submissions which I received on the point, I cannot accept that, as a matter of construction of B.10, the words "Such notice" in the phrase "Such notice having been given" are only referring to a notice which satisfies the requirements of (a) being in writing and (b) being of any circumstance of which the Insured has become aware during the period of insurance. An essential characteristic of any notice given, is that it is one that has been given "as soon as possible"; a reasonable person reading the clause in context would not conclude that "Such notice" had indeed been "given" in compliance with the second sentence, if it had not been given "as soon as possible". The technical grammatical argument that the phrase "as soon as possible" is an adverb phrase which only modifies the verb "shall give", and does not qualify the noun "notice" so as to be one of the constituent elements "of the character, quality or extent previously indicated" comprised in the word "Such" is as unattractive and artificial in the context of B.10 as it was in the context of GC4. The fact that, in the Minimum Terms, the words "as soon as possible" are to be found at the end of the clause, away from the "notice in writing", as compared with their juxtaposition to those words in GC4 does nothing to improve the argument. Accordingly I reject this argument based on the Minimum Terms.
iv) Effect of GC6
- I also reject Mr. Davidson's argument based on GC6, namely that GC6 operates as an addendum to GC3; that the premise of GC6 is precisely that a claim has been properly notified even though it has not been made "as soon as practicable"; and that GC4 should be read on a consistent basis, namely that a notice is proper if in proper form, regardless of its timing. In my judgment GC6 cannot be relied upon to support Kidsons' proposition that "the question whether something has been "properly notified" is nothing to do with the timing of the notice." The premise of GC6 is not, as he suggests, that a claim has been properly notified even though it has not been made "as soon as practicable". All that GC6 is doing is providing a grace period of 15 days, in relation to the notification of claims, for obvious practical reasons. The expert evidence to which I have already referred shows that the commercial context in which this provision has to be construed is (a) that usually a professional indemnity policy will require the assured to notify underwriters within the policy period of claims and circumstances that may give rise to claims; and (b) that "As soon as practicable" is understood as having a certain degree of latitude which can extend into weeks and even months. But the fundamental concept of a claims-made policy, as I have previously described, is that underwriters are looking for a definite cut-off date at the end of the policy period, at which time the condition of the policy and the scope of accrued or potentially accruing exposures under it are capable of being identified if not ascertained. Thus, as Mr. Kealey submitted, the function of GC6 is that, whatever latitude might be afforded to the requirement to notify a claim as soon as practicable, that latitude terminates upon the expiry of 15 days after the end of the policy period. GC6 does not modify the condition precedent in GC3. When it refers to "properly notified", it means notified in accordance with the stipulated requirements of notification including writing and time. It does not mean, for example, that an assured could learn about a claim on day 1 after inception and notify it validly on the 15th day after the policy has expired, notwithstanding that, on any objective basis, "as soon as practicable" was within 30 days of inception. It is addressing the practical problem of where a claim is made in the last days or weeks of a policy period and, by providing a cut-off date of 15 days, rules out any debate as to whether a later date than 15 days could nonetheless be justified as "as soon as practicable". Moreover, on any basis GC6 is not directed at the notification of circumstances pursuant to GC4. I cannot see that it supports Kidsons' construction of GC4.
v) Composite policy point in relation to the first point of construction
- Mr. Davidson submitted that another pointer in favour of Kidsons' construction of GC4 was the fact that, given the fact that the Policy is a composite policy, there would be harsh consequences for individual assureds (who would have no control over the notification process) if GC4 were to operate on the basis that the consequence of failing to notify as soon as practicable was that there would be no indemnity. Again, I do not find this argument persuasive in the context of a professional indemnity policy relating, for example, to a firm of accountants or other professionals. In such a case, the partnership itself, and therefore the non-involved partners individually, will not have acquired the necessary "awareness" on any basis, until such time as the individual person, or persons, involved in, or aware of, the relevant "circumstance" has informed the partnership secretary, or managing partner, or other designated person who, under the provisions regulating the partnership, is authorised to receive such information and communicate with insurers on behalf of the firm. In such circumstances (depending, of course, upon the particular provisions of the policy in question) time will only start to run against the non-involved partners, as it were, as and when that designated person (and therefore the partnership), becomes "aware" of the relevant circumstance, albeit that time may well have started to run against the "involved" partner at an earlier date. The responsibility must be upon all partners in a firm to ensure that adequate notification procedures are in place, once the firm, i.e. the body of partners, is made aware of the relevant circumstance. I do not see that any sort of "hardship" along the lines contended for by Mr. Davidson in reality arises, or that, even if theoretically it could, it supports Kidsons' construction of GC4.
(vi) Public Policy
- In the course of all the above arguments, reliance was placed by Kidsons, Camerons and Millers on the "public policy" considerations underlying the Institute's Minimum Wording. However, although clearly there are public policy considerations in the context of professional indemnity insurance, which is why, no doubt, professional bodies require their members to be adequately insured so as to be in a position to compensate their clients, there is nothing in the relevant factual matrix in this case to suggest that the Policy should be construed in such a way that it always provides cover, irrespective of the terms of the Policy, in order to protect members of the public who may be injured by the assured's wrongdoing. I mention a few of the relevant factors. First, the available literature in the evidence before me did not suggest that the Institute Minimum Wording was designed, or intended, to have the effect for which the other parties contend. On the contrary, the Regulations and Guidance on Professional Indemnity Insurance issued by the ICAEW expressly draw the attention of members to the fact that failure to comply with underwriters' notification requirements "could seriously prejudice the firm's right and entitlement to indemnity under the policy" (see paragraph 6.5). Second, the ICAEW's requirement that all practising members should obtain qualifying insurance on terms at least as favourable as the Minimum Wording appears to be designed as much to protect the profession as to protect members of the public dealing with the profession. Third, no evidence was called to support the public policy arguments relied upon. Fourth, the public policy that underlies liability insurance for accountants, is, in principle, no different from the policy underlying other forms of professional indemnity insurance. No example was shown to me of professional indemnity policies in other fields being construed in such a way as to prevent insurers from relying upon similar terms upon which extended cover was contingent. Fifth, in the case of accountants, such public policy as may underlie the requirement for them to be insured on suitable terms is satisfied by, and reflected in, the Minimum Wording, with which insurers have agreed to conform. Accordingly, "public policy" does not, in my judgment, afford any grounds for softening the requirements with which an assured has to comply in order to obtain an extension of cover under the Policy.
vii) Other points in relation to the criteria for compliance with GC4
- Other issues arose during the course of argument in relation to other criteria for compliance with GC4. My conclusions in relation to these points are as follows.
- First, it is clear that, when GC4 refers to a "circumstance of which the assured shall become aware during the period specified in the Schedule", it is referring
i) in the context of a circumstance, to a fact, event, happening or state of affairs;
ii) in the context of awareness, to the assured being aware for the first time of the relevant circumstance; and
iii) in the context of the Schedule, to the period of the Policy (namely, in this case, the 12 months from 1 May 2001 to 30 April 2002).
- Underwriters accepted that the fact that a document was not intended by an assured to constitute notice under GC4, did not preclude it from qualifying in fact as such a notice. This is clear from the decision of Henderson J in Rennie supra. In that case the judge rejected a submission made by the recipient of the document alleged to be a notice that the court should not construe as a notice a letter which was never meant by those who sent it to be a notice under the relevant contractual provision. Henderson J held that an objective approach was required and that the subjective intentions and understandings of the party sending the notice were irrelevant; see paragraph 38. Underwriters accepted that the same reasoning applies in the present case. However they submitted that, whilst intention to notify is not a relevant criterion for the validity of a document purporting (on an objective basis) to be a notice under GC4, and is not relevant to the proper interpretation of a purported notice, Kidsons' state of mind was nevertheless relevant, and important, in this case. Mr. Kealey submitted that, first, Kidsons' state of mind determines the extent to which it was aware, and hence capable of notifying, circumstances which might give rise to a loss or claim under GC4. Secondly, and potentially by contrast, he submitted that Kidsons' state of mind at the times when the letters of 31 August 2001 and 28 March 2002 were sent to Underwriters informs the Court why those letters came to be written in such significantly confined and circumscribed terms. I agree that, whilst Kidsons' intention as to what it was intending to notify, is not relevant to the objective interpretation of a purported notice from the perspective of the reasonable recipient, Kidsons' state of mind is nevertheless relevant to determine the extent to which it was aware, and hence capable of notifying, circumstances which might give rise to a loss or claim under GC4. I also accept that such evidence informs the Court why the 31 August 2001 and 28 March 2002 letters came to be written in what I regard as the coy and restricted terms in which they were written. Moreover, and more generally, the evidence relating to what Kidsons intended to notify to Underwriters necessarily informs the Court in relation to the underlying merits of the case, which even in a case of construction it cannot disregard.
- Secondly, when GC4 refers to a "circumstance … which may give rise to a loss or claim against" the assured, it requires that the circumstance should be one which, objectively evaluated, creates a reasonable and appreciable possibility that it will give rise to a loss or claim against the assured. It is necessary to emphasize, however, that a circumstance may give rise to a loss or claim when there is a possibility or perceived possibility that, at some stage in the future, it will do so. There need not be a certainty that it will do so; there need not be a probability or likelihood that it will do so. All that need exist is a state of affairs from which the prospects of a claim (whether good or bad) or loss emerging in the future are "real" as opposed to false, fanciful or imaginary. And that is what has to be notified.
- Thirdly, in my judgment, when GC4 refers to "the assured giv[ing] to the Underwriters notice in writing … of any circumstance which may give rise to a loss or claim against them", that requires that the written communication by the assured to Underwriters should be sufficiently clear and unambiguous that it leaves the reasonable recipient in no reasonable doubt that the assured is by the communication purporting to give notice of a circumstance under GC4 for the purposes of triggering coverage under the Policy. This was effectively – or at least almost - common ground between the parties, although they formulated the test in somewhat different terms and, in the case of Kidsons, Camerons and Millers, suggested that Underwriters had formulated the test too strictly by reference to "no reasonable doubt".
- However, the relevant authorities clearly demonstrate that the issue indeed is whether the notice is
"sufficiently clear and unambiguous to leave a reasonable recipient in no reasonable doubt as to how and when [it is] intended to operate":
see Delta Vale Properties v Mills [1990] 1 WLR 445 at 454G, per Slade LJ. This passage was cited with approval in Mannai at 767G -768G, per Lord Steyn who said as follows:
"(2) The question is not how the landlord understood the notices. The issue is how a reasonable recipient would have understood the notices. And in considering this question the notices must be construed taking into account the relevant objective contextual scene …. ... the inquiry is objective: the question is what reasonable persons, circumstanced as the actual parties were, would have had in mind. It follows that one cannot ignore that a reasonable recipient would have had in the forefront of his mind the terms of the leases….Given that the reasonable recipient must be credited with knowledge of the critical date and the terms of clause 7(13) the question is simply how the reasonable recipient would have understood such a notice.
3) It is important not to lose sight of the purpose of a notice under the break clause. It serves one purpose only: to inform the landlord that the tenant has decided to determine the lease in accordance with the right reserved. That purpose must be relevant to the construction and validity of the notice. Prima facie one would expect that if a notice unambiguously conveys a decision to determine a court may nowadays ignore immaterial errors which would not have misled a reasonable recipient.
4) There is no justification for placing notices under a break clause in leases in a unique category. Making due allowance for contextual differences, such notices belong to the general class of unilateral notices served under contractual rights reserved, e.g. notices to quit, notices to determine licences and notices to complete: Delta Vale Properties Ltd. v. Mills [1990] 1 W.L.R. 445, 454E-G. To those examples may be added notices under charter parties, contracts of affreightment, and so forth. Even if such notices under contractual rights reserved contain errors they may be valid if they are 'sufficiently clear and unambiguous to leave a reasonable recipient in no reasonable doubt as to how and when they are intended to operate': the Delta case, at p. 454E-G, per Slade L.J. … That test postulates that the reasonable recipient is left in no doubt that the right reserved is being exercised. It acknowledges the importance of such notices. The application of that test is principled and cannot cause any injustice to a recipient of the notice. I would gratefully adopt it."
I also refer to page 782, per Lord Clyde; and per Lord Hoffmann at 776. Bingham LJ expressed this test in substantially the same terms in Delta Vale Properties at 457E-F:
"a notice will be invalid and ineffective unless it gives the precise notice which the contract requires and leaves the recipient in no reasonable doubt as to the effect of the notice".
I refer also to Rennie (supra) at paragraph 26, per Henderson J, citing the test formulated by Sir Nicolas Browne-Wilkinson V-C in Nunes v Davies Laing & Dick (1985) 51 P&CR 310 at 314, that, in a landlord and tenant context, the notice "should be in terms which are sufficiently clear to bring home to the ordinary landlord that the tenant is purporting to exercise his right". To similar effect is the statement of Arden LJ in Barclays Bank v Bee [2001] EWCA Civ 1126, [2002] 1 WLR 332 (following Mannai) at paragraph 45:
"The function of a notice is to make a statement on which another party can act. It is of great importance that it is reasonably clear to a reasonable person in the position of the recipient. He should not have to take legal advice or start proceedings to find if the notice is valid or not".
- At the end of day, it is in my view largely a question of interpretation and analysis of the document setting out the notification, in the context of the facts known to the assured, as to what precise circumstance or set of circumstances has in fact been notified to insurers. I am not therefore convinced that semantic cavilling over the precise formulation of the test assists the ultimate resolution of the problem. There may well be uncertainty at the time of notification as to what the precise problems or potential problems are; there well may be, whether known, or unknown, to the assured a "hornets' nest" which may give rise to numerous types of claims of presently unknown quantum and character at the date of the notification. Whilst in principle there is no reason why such a state of affairs should not be notified as a circumstance if the assured is aware of it, in each case the extent and ambit of the notification and the claims that are covered by such notification will depend on the particular facts and terms of the notification.
- Fourthly, it is also obvious (in the light of my conclusion on the construction issue) that, when GC4 refers to the giving of "notice in writing as soon as practicable", it requires the written notice to have been given by or on behalf of the assured as soon as reasonably possible after he has become aware (i.e. for the first time during the period of the Policy) of the relevant circumstance. Thus if, at the time when the assured purports to give notice in writing or at any other later relevant time, he is not aware of a relevant circumstance, then the notice is ineffective. Again, in this context also, Kidsons' state of mind is relevant.
- Fifthly, I also accept Mr. Kealey's submissions that, when GC4 refers, in the context of notice having been given, to "any loss or claim to which th[e notified] circumstance has given rise", it requires that the loss or claim should be sufficiently causally related to the fact, event, happening or condition which comprises the notified circumstance, that it can be fairly said to have arisen out of it.
- Sixthly, I also accept that when GC4 refers to the giving of notice "to the Underwriters", it requires notice to be given to each Underwriter, or its duly authorised agent, absent any Market Agreement or other agreement between the parties limiting the requirement to make notification to each Underwriter, or its duly appointed agent.
Composite policy point in relation to the second issue of construction
- Mr. Harvey raised a sophisticated point in relation to the second issue of construction, namely that each insured has a separate contract of insurance, and that reference to the "Assured" means the particular Assured. Consequently, in GC3 and GC4 it is the particular Assured's knowledge or first awareness which is relevant, and it is only his non-compliance with conditions which will deprive him of cover. Similarly, it is only his non-disclosure or misrepresentation which (save to the extent ameliorated by the innocent non-disclosure clause – GIC (a)) will vitiate his cover. Late notice of a circumstance known only to certain individuals does not affect the entitlement of other individuals, also covered by the Policy, who had themselves not failed to give notice as soon as practicable, to recover an indemnity in respect of claims arising out of the circumstance so notified. Thus Mr. Harvey stressed the composite nature of the Policy and argued that the awareness of any individual partner cannot be imputed to any other partner. He supported this argument by reference to many well-known authorities dealing with attribution or imputation of knowledge.
- For the reasons which follow, I do not accept Mr. Harvey's submissions on this point.
- There was no dispute that the Policy was a composite policy and that there are a number of separate different persons included within the concept of "the Assured". However, the consequences of any determination upon what has been referred to as the composite policy point have very limited significance to the facts of the case as pleaded or proved. First of all, Underwriters do not rely upon any relevant awareness of anyone within Kidsons prior to a meeting of the Kidsons' National Executive Committee ("NEC") on 29 August 2001 and a S@FI board meeting on 30 August 2001. Underwriters' case is that the awareness concerning S@FI acquired by the NEC and/or S@FI board and/or by Mr. Patten, the Partnership Secretary, as a result of the meetings on those dates counted, for the purposes of GC4, as awareness on the part of Kidsons. So, realistically, the argument applies, if at all, only to a situation where one or more assured partners might be able to say (i) that they first became aware of circumstances relating to S@FI after 31 August 2001 but prior to expiry of the Policy (as any relevant awareness had to be acquired by that date); (ii) that any such notification as was made by Millers to the following Lloyd's and Company insurers between April 2002 and July 2002 was made "as soon as practicable" after they became aware of the relevant circumstances; and (iii) that they therefore can claim the benefit of an extension of cover under GC4 even though other assured partners cannot by reason of having become aware of the S@FI matter in August 2001. The argument thus does not apply to: (a) all assured partners who became aware of the S@FI matter during August 2001; or (b) notification of the Tax Faculty Report in October 2003. In the light of my decision under Issue (i), namely that an extension of cover in relation to claims made after the expiry of the Policy period is only provided where "Such notice" has indeed been given of relevant circumstances "as soon as practicable", no reliance, in my judgment, can be placed by Kidsons upon the provision to Underwriters in 2003 of the Tax Faculty Report. On any basis this was far too late to qualify as coming within a "as soon as practicable" timeframe. It was 18 months after the end of the Policy period; even if one assumes in Kidsons' favour that one only has to start measuring the period of delay from that date, it was far too late to be compliant. Even if it had been alleged (which it was not) that there was an assured who first became aware of matters relating to S@FI in, for example, in March 2002, he cannot be in any realistically better position (so far as delay in notification of the Tax Faculty Report is concerned) than assureds who knew about the S@FI matter in August 2001.
- Secondly, as paragraph 1 of the Particulars of Claim makes clear, the claim is brought only by Kidsons, meaning the partners of the firm known as HLB Kidsons at the relevant time. There is thus no claim against Underwriters brought by S@FI, or any other corporate entity associated with Kidsons and no claim by any employee of Kidsons. The rights and obligations of other assureds, not parties to these proceedings, are not in issue in this case.
- Thirdly, on the pleadings, Kidsons has clearly presented its case on the basis that it, namely the Kidsons' partnership, in the sense of all Kidsons' partners at the relevant time, is entitled to a declaration that it (again meaning all Kidsons' partners) is entitled to indemnity from Underwriters in respect of all claims arising out of S@FI activities; see paragraph 32(i) of the Particulars of Claim. Consistent with this, Kidsons' case has throughout been put on the basis that by 31 August 2001, Kidsons (again meaning all Kidsons' partners) became aware of circumstances relating to S@FI. The point is expressly stated in paragraph 15(ii) of Kidsons' Reply:
"On 31 August 2001 Kidsons notified Underwriters as soon as practicable of circumstances of which it had become aware which might give rise to a loss or claim against it."
- I agree with Mr. Kealey, that if Kidsons had been intending to allege that only some of its partners were aware on 31 August 2001 of circumstances which might give rise to a loss or claim in relation to S@FI, the declarations sought in the Particulars of Claim would have been formulated differently and Kidsons would have given disclosure, and no doubt adduced appropriate evidence, on the state of awareness of partners other than the NEC and S@FI Board. Mr. Davidson sought to address this point by referring to the fact that Kidsons, by amendment to its particulars of claim, had adopted paragraph 26F of Camerons' defence (where the point had been raised); by seeking to amend the form of declarations sought, so as to carve out the possibility that there might be partners who had acquired the relevant "awareness" at a later date; and by arguing that the burden of proof was on Underwriters to plead and prove that a specific partner had knowledge at a particular (early) date so as to make the notice not "as soon as practicable".
- I cannot accept these submissions. In my judgment, it is now too late for Kidsons to resile from the position which it effectively adopted in its statements of case or to alter the form of the declarations they seek so as to take account of Camerons' argument. Nor can I accept that any evidential gap is to be resolved in Kidsons' favour. Apart from the fact that these are matters which were entirely in Kidsons' power and control to prove, the onus is on Kidsons to plead and prove its entitlement to an indemnity, that it had first awareness of the relevant circumstance during the period of the policy, and that it gave notice "as soon as practicable". The case which it has pleaded is at paragraph 15(ii) of its Reply, from which it has not resiled. It is not open to it to do so now.
- However, in deference to Mr. Harvey's arguments, and those of other counsel on the point, and in case this matter goes further, I should state my conclusion that, in any event, I do not accept Mr. Harvey's argument that knowledge, or awareness, on the part of either the Partnership Secretary, Mr. Patten, or the relevant managing organ of the Kidsons' partnership (i.e. the NEC), cannot be imputed to all the relevant partners in Kidsons.
- So far as awareness through Mr. Patten was concerned, the evidence showed that he was given full responsibility and authority to deal with professional indemnity insurance matters on behalf of all assureds under the Policy. This is clear from clause 28 of the Partnership Deed and internal memoranda and was confirmed by Mr. Patten in his evidence. As Mr. Kealey submitted, the breadth of Mr. Patten's responsibility and authority could not have been wider. It extended to: (1) receiving notice of circumstances and claims from partners, employees and other assureds under the Policy; (2) giving notice of such circumstances and claims to Kidsons' brokers, for onward transmission to insurers; and (3) acting as an intermediary between Kidsons and brokers in relation to all matters concerning professional indemnity insurance. In carrying out these functions, Mr. Patten was acting (and authorised to act) for and on behalf of each assured under the Policy. When he received notice of circumstances or claims from a partner, he received it not only as agent on behalf of that partner, but also on behalf of each and every other partner of the firm. Equally, when he gave notice to insurers (via brokers) of a circumstance or claim of which he had become aware (by reason of having been notified of the same by an individual partner), he gave notice to insurers on behalf of all assureds, not only on behalf of the partner who had notified the circumstance or claim to him.
- In these circumstances, Mr. Patten's knowledge as Partnership Secretary is to be attributed to all Kidsons' partners. This follows from application of basic principles of agency law; see Article 95(1) of Bowstead; Meridian Global v. Securities Commission [1995] 2 AC 500; and per Hoffmann LJ in El Ajou v Dollar Land Holdings & Another [1994] 2 All ER 685. Although the principle did not in the event arise on the facts of that case, as Hoffmann LJ made clear at page 703c-e, where this type of agency exists: "communication to the agent is communication to the principal". Mr. Harvey sought to distinguish El Ajou on the ground that this type of agency was "narrow"; but even if that were so, on the evidence before me it was clear that there was the necessary factual foundation to conclude that Mr. Patten was indeed an agent to receive communications concerning professional indemnity insurance on behalf of the Kidsons partners, within this principle. Mr. Harvey also submitted in his written submissions that Mr. Patten's knowledge could not be imputed to all partners because he had no duty to inform individual partners of what he learned about insurance matters. But that point, even if factually correct, is irrelevant, because it is Mr. Patten's authority to receive communications concerning the partnership's insurance affairs on behalf of the partnership that carries with it the imputation of knowledge stated by Hoffmann LJ. It is not critical whether or not the Partnership Deed required Mr. Patten to circularise each partner with what he was told about claims and circumstances. Moreover, factually the point is not correct, because clause 28.3 of the Partnership Deed required Mr. Patten to report upon the insurance matters notified to him to the NEC through the National Managing Partner. He was therefore under a duty to inform his principals, the partners of Kidsons, albeit through their delegated agent for that purpose, namely the National Managing Partner.
- I also accept Underwriters' submission that the awareness of the NEC as to relevant circumstances can be regarded as the awareness of each individual partner. The NEC was the principal managing organ of the Kidsons partnership, with full power in relation to management of the firm, which clearly included management of the firm's professional indemnity insurance; see Clause 3.1 of the Partnership Deed. Clause 28.3 authorised the NEC to receive reports from Mr. Patten (via the National Managing Partner) on insurance matters. Section 16 of the Partnership Act 1890 also is in point. This provides that:
"Notice to any partner who habitually acts in the partnership business of any matter relating to partnership affairs operates as notice to the firm, except in the case of fraud on the firm committed by or with the consent of that partner."
- The members of the NEC were all partners who habitually acted in the business of the Kidsons' partnership. Notice to them of professional indemnity matters was, by virtue of section 16, notice to the firm, i.e. notice to each and every partner of the firm. Mr. Harvey argued against this conclusion by relying on the decision of the New South Wales Supreme Court (Clarke J) in Northumberland v Alexander [1984] 2 ACLC 363. In my view, this case, and the passage from it relied upon by Mr. Harvey, are not in point. The issue in Northumberland was whether the knowledge of one partner (Purcell) concerning the affairs of a client dealt with by that partner could be attributed to another partner (King) so as to establish that King was negligent in not making further enquiries about that client's affairs. Unsurprisingly, the argument was rejected, but for present purposes it is important to note that what Clarke J was rejecting in the passage relied upon by Mr. Harvey (at page 387) was that the totality of one partner's knowledge should be attributed to every other partner. He was not suggesting that, in relation to matters concerning the partnership's affairs, as opposed to the affairs of a client, the knowledge of one partner was not be attributed to another partner by virtue of section 16. The distinction between notice of matters concerning the partnership's affairs and notice concerning the affairs of a client emerges from the passage cited in Northumberland at page 386-7 from Lord Stott's judgment in Campbell v McCreath [1987] 1 All ER 114:
"A partner being the agent of his firm, it follows that notice to him on matters connected with the partnership affairs must be notice to the firm, his principal. But it does not follow that the same applies in matters connected not with the partnership affairs but with the affairs of a client of the partnership."
This case concerns notice of matters falling with the first of Lord Stott's categories, not the second. Northumberland does not establish that notice to one partner of such matters does not constitute notice to all partners of those matters. On the contrary, it implies that it does.
- Mr. Harvey also relied upon three authorities to support his argument that the principles of agency attribution and section 16 did not apply to this case. These were: New Hampshire Insurance Co and Others v MGN Ltd and Others [1997] LRLR 24, Arab Bank v Zurich Bank [1999] 1 Lloyd's Rep.262; and Fisher v Guardian Insurance Co. of Canada [1995] 123 DLR (4th) 336. However, in my judgment, all of these cases are distinguishable and do not assist Camerons' contentions. Each of them depended upon construction and effect of different terms in different insurance policies. None concerned a clause such as GC4 (except, in a subsidiary sense, Fisher.) All of the cases involved an attempt by insurers to attribute the dishonest knowledge of one assured to other assureds so as to avoid the policy altogether. There is no parallel between that situation and this case, which is concerned only with the question of the proper operation of GC4 in circumstances not involving dishonesty on the part of any assured.
- The issue in New Hampshire v MGN was whether, having regard to the terms of the policy in that case, breach by one assured of its duty of good faith entitled insurers to avoid the policy as against all other assureds, even if they were innocent of the first assured's wrongdoing. Potter J (whose judgment was upheld on appeal) held that on its proper construction the policy was a composite one, with the effect that non-disclosure by one assured did not, in itself, constitute non-disclosure by other assureds; see in relation to Issue G at 42-3, per Potter J, and at 57-8, per Staughton LJ. I do not accept Mr. Harvey's submission that the principle to be derived from this case is that in composite policies breach of or non-compliance with any policy term by one assured will not affect other assureds. The decision was confined to the question of non-disclosure and it is clear from page 42 that the MGN policy expressly provided to the contrary in the case of notice of loss, for which knowledge possessed by any assured was expressly stated to constitute knowledge possessed by every insured. This emphasises the importance of construing each policy by reference to its particular provisions. Moreover, as Potter J stressed at page 43, he only decided that non-disclosure by one assured would not "in itself" constitute non-disclosure by others and left it open as to whether in the context of the Maxwell group, non-disclosure by an officer of one assured might constitute non-disclosure by another assured if the relevant officer was also authorised to act on behalf of, or carry out functions for, other assureds. Plainly, therefore, Potter J was not saying that agency and attribution principles had no role to play in composite policies. Staughton LJ agreed that Potter J's observations on this matter should stand (at 58). Thus I cannot accept Mr. Harvey's submission that New Hampshire v MGN establishes the broad proposition that "breach or non-compliance by one insured does not, of itself, constitute breach or non-compliance by another insured". Whether or not such breach or non-compliance has this effect depends, in each case, upon construction of the policy terms.
- Zurich also concerned non-disclosure and fraud in the making of a policy. The essential question was whether the dishonest knowledge of the managing director (Mr. Browne) of the assured company, John D Wood Commercial Ltd ("JDW"), was to be attributed to JDW. The policy in question covered not only JDW but also each of its current and former directors and partners. Rix J decided that Mr. Browne's knowledge was not to be attributed to JDW on three inter-related but separate grounds – construction, the conceptual nature of a composite policy and attribution. His reasoning on each of these grounds depended fundamentally on the dishonest nature of the knowledge which insurers were seeking to impute to JDW. Thus, on the question of construction, Rix J decided that the policy was "specifically designed" to provide cover to other assureds who were not complicit in the dishonesty of one assured; at page 272 he stated:
"In the present case, however, the policy goes much further than is normally done … in emphasising that the dishonesty of one insured will not be held against another insured who is not complicit".
- By contrast, in the present case, the policy cannot be said to have been "specifically designed" to allow one partner to deny the lateness of a notice given under GC4 on the grounds that he personally learned of the notified circumstance later than other partners. In relation to the composite nature of the policy, Rix J relied upon the MGN case as showing that in principle in a composite policy, the breach of the duty of good faith by one assured was not automatically to be laid against another assured; see pages 277-8. Rix J regarded this as supporting his construction of the policy. Again, there is no parallel with this case. No question arises here of breach of the assured's duty of good faith. In relation to attribution, Rix J decided that, having regard to the policy's terms, it would not be appropriate to apply ordinary rules of vicarious liability and agency and explained at 278 that this was because:
"any rule of attribution applicable has to be consistent with the policy's clear guidance that it is intended to provide cover to other innocent insureds even in circumstances where a director of the primary insured has been dishonest".
But in the present case the particular policy terms are not inconsistent with the application of the relevant rule of attribution in relation to notification of circumstances and there is no question of any dishonest knowledge being attributed. Importantly, however, Rix J did not decide that rules of attribution, including the rules of agency, had no part to play in the operation of a composite policy. On the contrary, he accepted that knowledge was to be attributed to JDW on the basis of the company's primary rule of attribution (at 278-9), although that did not assist insurers on the facts of the case, since JDW's Board as a whole did not have dishonest knowledge. Thus in my judgment Zurich cannot be regarded as an authority for the blanket exclusion from all composite policies of all agency rules of attribution.
- Fisher, a case decided by the British Columbia Court of Appeal, was another case involving fraudulent non-disclosure on inception of the policy and the question whether the fraud of one of the partners of a three-partner firm who concealed his previous dishonest dealings when taking out the policy on behalf of the firm entitled insurers to avoid the policy as against the other two innocent partners, notwithstanding an express waiver clause in the policy. It is clearly distinguishable on its facts and by reference to the terms of the relevant policy; neither the decision nor the reasoning in my view assist Mr. Harvey's argument.
- In my judgment there is no reason not to apply the normal rules of attribution in the context of this Policy. Indeed, as Mr. Kealey submitted, there are sound commercial reasons for doing so. It is difficult to see how the Policy could be operated on any other basis, since each and every partner would otherwise be required to give notice before they could obtain the benefit of any extension of cover under GC4. On Camerons' argument, individual partners could not claim the benefit of notices given by Mr. Patten, even though he was the agent delegated by the firm with responsibility for communicating with insurers, except insofar as they had actual awareness of the matters notified by Mr. Patten to insurers. This is clearly not the way in which the Policy was intended to operate. The position is obviously different where a partner is acting in fraud of the other partners in the firm. In those circumstances, the knowledge of the dishonest partner will not be imputed to other partners, as the cases relied upon by Camerons and to which I have referred above show. This, however, is by way of exception to application of the normal rules of attribution: see Zurich Insurance at pages 278-83, per Rix J.
Issue (ii): as a matter of fact, of what circumstance or circumstances was or were Kidsons aware during the Policy Period
- Kidsons' case is that it became aware during the Policy period of deep-seated, wide-ranging fundamental issues and concerns in relation to the entirety of S@FI's activities, both as to the effectiveness of the tax-avoidance schemes marketed by S@FI and as to the implementation of such schemes. Kidsons contends that it conveyed these concerns to Underwriters. Underwriters' case, on the other hand, is that, by the time it gave notice to the Leading and second Leading Underwriter in the Lloyd's market on 17 and 18 October 2001, the only circumstances of which it was by then "aware" which might give rise to a loss or claim were in respect of procedures followed in certain cases relating to Discounted Option Schemes (which was one of the schemes marketed by S@FI). Whilst the question of what Kidsons conveyed to Underwriters is essentially an issue of construction of the documents provided to Underwriters, the question of Kidsons' awareness is one fact. In this context, there was considerable debate before me as to whether, on the evidence, Kidsons' "awareness" of circumstances which might give rise to a loss or claim against it was limited to awareness of circumstances which might give rise to a loss or claim in relation to Discounted Option Schemes or extended to concerns about possible claims in relation to all schemes marketed by S@FI. There was also debate as to whether awareness could cease to be such if, by the time that notice was given, the level of concern had reduced to such an extent that there was no real appreciation or belief on the part of Kidsons that claims would be made in relation to such other schemes. Related to these arguments were questions as to the extent to which concerns expressed by a Mr. Iain Torrance, a tax manager employed in Kidsons' Edinburgh office, in relation to wide-ranging matters arising in relation to schemes marketed by S@FI could be regarded as "awareness" on the part of Kidsons of such matters, in circumstances where the partners clearly did not regard all his concerns as well-founded.
- Mr. Kealey submitted that awareness, for the purposes of GC4, was tantamount to knowledge, and that that required Kidsons to have a genuine belief, at the actual time of notification, that there was a real possibility that claims would be made in relation to such wide-ranging matters. In the absence of such belief at the time of notification, Mr. Kealey submitted that there was no relevant "awareness" for the purposes of GC4.
- I do not accept that submission. At the end of the day, what is critical is what circumstance or circumstances was or were in fact notified to Underwriters, irrespective that the circumstances of which Kidsons was actually aware may have been more extensive than those notified. All that is required under GC4 is awareness of "any circumstance of which they shall become aware during the period specified in the Schedule which may give rise to a loss or claim against them". In my judgment, an assured can envisage the possibility that a known circumstance or circumstances may give rise to a loss or claim against him, and thus have the requisite "awareness" for the purposes of GC4, without having, as Mr. Kealey requires, "a genuine belief at the actual time of notification that there was a real possibility that claims would be made in relation to such wide-ranging matters". In the circumstances of this case, and indeed most cases, it would be a difficult, if not impossible, exercise to attempt to identify with precise particularity those circumstances of which Kidsons were technically "aware" in Mr. Kealey's sense, by reference to the scale of the strength, or otherwise, of the partners' belief, or, indeed, individual partners' respective beliefs, in the likelihood that claims would arise out of all or any of such circumstances. It would be even more impractical to have to ascertain whether the strength of such belief had waxed or waned over the period of time from date of first awareness to date of notification. I do not consider that the wording of GC4 requires such an inquiry. The submission involves the introduction of an unwarranted subjective condition into the subordinate clause "which may give rise to a loss or claim against them". There is no basis for the implication of a term that the assured himself has "genuinely to believe" at the time of notification, that the circumstances of which he has become aware (and which objectively satisfy the condition that they may give rise to a loss or claim against him), are of such a character that there was a real possibility that claims would be made in relation to such wide-ranging matters. It is enough, in my judgement, that objectively the criterion of possibility is satisfied; this will avoid the laundry list type of problems to which Mr. Kealey referred in the course of his submissions.
- My analysis of the evidence, as set out below, leads me to the conclusion that, Mr. Torrance did indeed raise wide-ranging concerns about the whole S@FI operation generally, and about all its products being doomed to failure, not only due to the inherent lack of validity of the relevant tax schemes, but also because of defects in their implementation. His concerns addressed not merely a scheme known as the Discounted Option Scheme ("Discounted Option Schemes"), but also the whole range of schemes marketed and implemented by S@FI. He also raised the possible consequence of claims by dissatisfied clients, and investigations into the firm by the Inland Revenue. Those wider concerns, relating to schemes other than Discounted Option Schemes, although brought to the attention of the S@FI Board and the NEC were, in the event, during the Policy Period, regarded by Kidsons as largely ill-founded, exaggerated and unsubstantiated, albeit that they were subjected to only fairly cursory discussion and attention. Nor was there any evidence of any real concern that claims would be made by clients arising out of matters identified by Mr. Torrance. Thus if, contrary to my conclusion, Mr. Kealey's submissions as to what was required for an assured to be "aware" were correct, and it were relevant to examine the strength of Kidsons' "belief", I would have concluded that Kidsons did not have "a genuine belief at the actual time of notification that there was a real possibility that claims would be made in relation to such wide-ranging matters". The only exception was in relation to concerns over the implementation of the Discounted Option Schemes, where Kidsons did take the view that such concerns might indeed be well founded. The level of concern held by relevant Kidsons' partners about S@FI's activities and products, both in relation to Discounted Option Schemes and the wider range of products, and their perception of risk that claims might arise therefrom, varied over time and, indeed, from partner to partner.
- Accordingly, I conclude that Kidsons was "aware" for the purposes of GC4, during the Policy Period, and at the time of notification, of the wide ranging circumstances relating to the conduct of S@FI's activities adverted to by Mr. Torrance in his various communications and the possibility that, if his concerns were well-founded, claims might arise as a result. However, the reality of the position was that, at the time Kidsons wrote the 31 August 2001 letter, and the 28 March 2002 letter, and at the time that those letters came to be presented to Underwriters, the firm as such did not believe that such wider concerns were well founded, or would in practice give rise to claims. The only discrete area where the firm had real concerns that claims might arise was in relation to Discounted Option Schemes. Again, I emphasise that, in my judgment, the level of Kidsons' concern as to whether such wider claims might be made, or its assessment of the risk that they would be made, does not affect the question of awareness or the question of what circumstances were in fact notified, in relation to which Kidsons' actual intention is irrelevant.
Factual Summary
- It is necessary for the purposes of explaining why I have reached my conclusion in relation to the issue of awareness, and for the determination of subsequent issues, to set out a factual summary of certain of the events leading up to the alleged notifications to Underwriters and of the state of Kidsons' investigations into the conduct of S@FI's business and its products during the Policy Period and thereafter. In this section I deliberately do not summarise the facts relating to Kidsons' communications with Underwriters, Millers and Camerons which are alleged to amount to the relevant notifications. These are summarised in the following section of this judgment.
- S@FI was set up in early 1999 as a wholly-owned subsidiary of Kidsons with a view to carrying on the fiscal engineering activity formerly carried out by the Kidsons partnership. The object of setting up a separate limited company was inter alia to provide a more focused business approach and create a separate profit centre within the firm. Although a company, S@FI operated as a division of Kidsons and was manned entirely by Kidsons partners and staff. It was however run by its own Board of Directors, which was accountable to the NEC. It maintained separate books and records and had its own remuneration and bonus arrangements. S@FI's directors included the following Kidsons' partners: Peter Douglas (S@FI's Chairman), Peter Sills, Frank Harris and Mike Hull. Mr. Garner-Jones became a director on 28 December 2001, although he attended S@FI Board meetings from July 2001.
- S@FI sold a range of tax planning and avoidance schemes. In 2001, there were about 40 products in S@FI's portfolio. These were not designed by S@FI, but were sourced from other providers. S@FI was very successful and its annual turnover grew from £1 million in the year ended 30 April 1998 to £5.7 million in the year ended 30 April 2001. It was a profitable part of the firm's business and perceived within Kidsons as being "one of the firm's major success stories". By late 2001 it was the fourth largest office in Kidsons and was aiming to be the second largest, with a turnover of £10 million, within three years.
- But the rapid success of S@FI's business revealed weaknesses in its operating systems. These were addressed in a three-year business plan, "Vision Into Reality", formulated by S@FI and adopted by its Board on 15 May 2001. Mandatory risk measures were put in place, including the establishment of an Operations Board to sign off all new products. It was recognised from the outset that the schemes that S@FI sold were at the leading edge of the tax avoidance market. The schemes were designed to exploit actual or perceived loopholes in tax legislation and were inherently controversial. Mr. Gwilliam, a partner in the Edinburgh office and Mr. Torrance's line manager, was in favour of selling such products even though he acknowledged that they were "reputedly of 'high risk' and it was known in advance that they would attract the interest of the Inland Revenue". It was accepted that the likelihood of Inland Revenue scrutiny into the products sold by S@FI was an inherent risk of the business. The question was not whether, but when, the Inland Revenue would challenge the viability of these products. As the subsequent Tax Faculty Report stated, such schemes were "predominantly artificial tax avoidance schemes" and "were therefore potentially provocative as regards the Inland Revenue and likely to be routinely challenged in terms of their technical efficacy". Warnings to the same effect were given in the Introduction to the S@FI Manual: "Tax avoidance is regarded by the Courts, where it exists, as a pretence and is to be challenged".
- It was therefore no surprise that a number of S@FI products came under attack from the Revenue during 2000 and 2001. This included Capital Loss Schemes, which were under enquiry from as early as May 2000. The Inland Revenue made it clear that they did not like these schemes and were trying to deny the losses claimed by S@FI clients who had entered into them. Employee Benefit Trusts ("EBT") were under serious scrutiny by early 2001. There was by that stage an ongoing debate with the Inland Revenue, involving not only Kidsons but the accounting profession as a whole, as to whether accounting guidelines UITF13 and FRS5 precluded a sponsoring company claiming relief for contributions made to an EBT in the year they were made or only when the monies were actually paid out by the trust.
- None of this, however, was cause for any particular concern within Kidsons. It was an expected part of S@FI's business. These and other difficulties which surfaced in relation to S@FI's products prior to May 2001, such as the administration problems encountered with Capital Redemption Contracts ("CRCs") (which were put on hold in November 2000 because of administrative difficulties experienced with the annuity policy providers) were not considered by anyone within Kidsons, including those responsible for S@FI's business, to be matters which required notification to insurers as circumstances which might give rise to a loss or claim against Kidsons for the purposes of renewal of the Policy with effect from 1 May.
- It was clear from Mr. Gwilliam's evidence that neither he nor Mr. Torrance believed prior to the Summer of 2001 that there were circumstances requiring notification under Kidsons' professional indemnity policy despite the issues which had arisen, and had been debated within Kidsons, about the viability of certain S@FI products. In particular, Mr. Torrance, in emails and otherwise, had periodically raised concerns in fairly resonant tones about CRCs, Discounted Option Schemes, EBTs and SHEPS. But, according to Mr. Gwilliam, this was "simply Iain being characteristically sceptical". As Mr. Kealey submitted, the logic of Kidsons', and Mr. Gwilliam's, position was clear. Kidsons did not guarantee that the schemes would work. The situation, however, was different where the implementation (i.e. execution and administration) of a scheme was criticised. The correct implementation of schemes was a matter for which Kidsons was indeed responsible and could, if carried out incorrectly, have given rise to the risk of a claim against the firm. Thus, for example, S@FI's Risk Management & Quality Control Paper emphasised the crucial importance of ensuring that the correct procedures were followed in implementing the schemes in the following terms:
"Implementation
This area is crucial and is one over which we have the greatest control. If we implement the right product, in the right circumstances in the right way we minimise our risk. To achieve this however we need to adopt rigorous implementation standards and procedures".
"Implementation … is the area that has the greatest potential to generate risk. Most strategies that fail do so because of poor implementation. We need to ensure that all products are implemented correctly and in appropriate circumstances."
The importance of correct implementation was stressed in other contemporaneous documentation.
- The distinction between the design and viability (sometimes referred to as "technical efficacy") of the schemes (that is to say whether they worked as effective avoidance schemes), on the one hand, and their implementation on the other, was well-recognised within Kidsons. The design of each of the schemes incorporated a number of steps which, if carried out, were intended to have a particular tax effect. Implementation was the carrying out of those steps. The distinction was readily apparent from the scheme briefing documents in the contemporary S@FI Manual as well as from the evidence before me. Implementation included any necessary "follow-up work", such as filing returns. This was necessary to ensure that nothing happened to prejudice the intended tax effect once the scheme was in place. In Kidsons' terminology, these were "procedural or administrative" matters. A particular danger of failing to implement a scheme correctly was that the Inland Revenue might construe such conduct as amounting to criminal tax evasion, as the IRB warned in its Draft Report, at paragraphs 6.1 to 6.3:
"6.1 … the scheme must be implemented correctly, with due attention to detail, taking account of all variations, allied to constant monitoring of the arrangement with particular emphasis on post-implementation reviews. Critical areas include the identification of trigger points in the scheme giving rise to statutory notices to the Revenue authorities, including formal returns and notification of potential liabilities. Failure to implement correctly could render the scheme open to anti-avoidance case law and legislation and in extreme cases to charges of criminality.
…
6.3. For example, if there was evidence that proper returns or disclosures were not being made when they should have been, or at all then an adverse view of this could be taken by the Inland Revenue. That adverse view could be that it had been intended that the proper returns or disclosures were never to be made."
- Mr. Torrance was not called to give evidence at the trial. He had a degree in law from Durham University and was obviously highly articulate. According to Mr. Gwilliam, who knew him well, he could be a volatile character, was prone to occasional emotional outbursts and did not always demonstrate good inter-personal skills. His emails showed that he held strong opinions and was not afraid to express them. Again, according to Mr. Gwilliam, he had a tendency to see things in black or white, had "a sense of righteousness" and would "'blow up' but would then calm down again"; he regarded himself as, and was indeed, highly principled, and saw it as his duty to correct things he perceived to be wrong. The documents suggest that he could be prone to exaggeration. Mr. Gwilliam himself was disposed to disregard emails from him criticising the viability of S@FI schemes, on the ground that they "were simply Iain being characteristically sceptical" about the quality of counsel's opinions. Mr. Torrance's personality has to borne in mind when considering the impact of his comments upon Kidsons' senior management during and after August 2001. Having read the relevant contemporaneous documentation, and heard various Kidsons partners give their evidence, I conclude that it is highly unlikely that such partners would have taken to heart every comment and concern expressed by Mr. Torrance or regarded all the concerns expressed by him as well-founded.
- Mr. Torrance had a specific concern about the implementation of Discounted Option Schemes. This strategy was designed to enable discretionary bonuses to be paid free of all income tax and National Insurance. According to the S@FI Manual it was intended to work as follows:
i) A sponsoring company made a contribution to an employee benefit trust ("EBT"), with offshore trustees.
ii) A trustees of the EBT used the contribution to subscribe for shares in an Isle of Man ("IOM") company. Two shares in the company were issued and allotted to the trustees of the EBT, at a large premium.
iii) The trustees of the EBT granted an option to the employee intended to benefit from the scheme, or (more commonly) the trustees of a family trust of which the employee and/or members of his family were beneficiaries, over an additional number of shares authorised by the IOM company, say 1,000 extra shares. The consequence of the option (assuming it to be genuine) was that it diluted the value of the two issued shares then held by the trustees of the EBT.
iv) The trustees of the EBT transferred the two shares to the employee, or the trustees of his family trust, at the request of the remuneration committee of the sponsoring company. At the time they were transferred to the employee or his family trustees, the shares were assumed to be virtually worthless because of the existence of the option.
v) In the future, the holder of the option (either the employee or his family trustees) could allow the option to lapse, at which point in time the value in the IOM company would effectively flow back into the two issued shares held by the employee or his family trustees.
vi) In the interim, the IOM company could make tax efficient benefits available to the employee, usually in the form of loans.
- Mr. Torrance became concerned about the returns that should be filed in connection with these schemes. A later Kidsons' report showed that there were (at least) two sets of returns involved. First, returns were required to be made by the taxpayer, who was the intended beneficiary of the scheme. He was required to account, in his individual self-assessment return, for the benefit he received in the form of the two, assumedly worthless, shares in the IOM company. Being the beneficiary of the scheme, the taxpayer was a client of Kidsons, who was consequently responsible for making the requisite return on his behalf. Secondly, returns might be required to be made by the IOM company, if it were resident in the UK for tax purposes. In this event, its income (including interest on loans made to the taxpayer) would be chargeable to tax in the UK and the company would be obliged to file a return in accordance with UK tax rules. The obligation to file this return lay upon the administrators of the IOM company (usually a company called AIB Worthy Trust Limited ("Worthy Trust")), although Kidsons was involved in liaising with Worthy Trust and would have been exposed to criticism if the correct returns were not made. In addition, if the taxpayer had received loans from the IOM company, further returns might be required to be made, depending upon the tax status of the IOM company. If the company was not resident in the UK, and the interest payable on the loans was short interest, no further return was likely to be needed. If, however, the company was non-resident and the interest paid on the loan was not short interest, the taxpayer would be chargeable to tax on the interest paid on the loan and would be obliged to deduct this at source and include it in his individual self-assessment return.
- In April 2000 Mr. Torrance raised concerns about the residency of IOM companies involved in the Discounted Option Schemes scheme implemented by S@FI. The tax implications of the residency of those companies were significant, and affected what returns had to be made to the Inland Revenue and by whom, and what disclosures had to be made to the Inland Revenue in them. Mr. Torrance felt that, if the correct procedures in relation to such returns were not ascertained and then followed, the Inland Revenue might have some serious criticisms. As a result of Mr. Torrance's concerns, Mr. Gwilliam agreed to obtain advice from English Leading tax counsel on the appropriate returns required for Discounted Option Schemes. Tax counsel advised on 27 June 2000. He identified the procedures to be followed in relation to the making of returns, in relation to disclosure and in relation to the conduct by the IOM companies involved in the Discounted Option Schemes. He did not, however, resolve the question of whether the IOM companies were resident in the UK or not. He thought that there was very little chance of establishing that they were centrally managed and controlled abroad if all that the directors had done was to accede to a request for a loan from the proprietor, but he seemed content for the UK taxpayer to make returns on the assumption that the companies were resident abroad, provided that this was made clear to the Inland Revenue.
- Although Mr. Torrance was at this stage also questioning the actual viability of the Discounted Option Scheme, on the ground that the discounting mechanism (involving the use of the option to dilute the value of the shares) would be disputed by the Inland Revenue, he was prepared to put this question to one side, even though he regarded it as "fairly fundamental", provided the appropriate returns were made. His priority was the procedural question concerning the making of appropriate returns and disclosure to the Inland Revenue.
- In July 2000, and subsequently January 2001, Mr. Torrance revisited the question of returns in respect of Discounted Option Schemes, reiterating his concern about any failure to make a return being seen by the Inland Revenue as tax evasion. The documents suggest that by the summer of 2001 Mr. Torrance's concerns had again focussed on Discounted Option Schemes. Thus, in May 2001, he became agitated when it appeared to him that others in S@FI were not making returns to the Inland Revenue in relation to Discounted Option Schemes on the basis previously advised by leading counsel in June 2000. Mr. Torrance was particularly anxious that the failure to do so could amount to concealment and fraud and could lead to criminal prosecution. By 1 August 2001, Mr. Torrance had become thoroughly upset at the situation. Thereafter, his state of mind became progressively more agitated. His principal anxiety throughout August 2001 continued to be the making of proper returns and disclosure to the Inland Revenue in relation to Discounted Option Schemes, because of impending deadlines for the making of such returns and disclosures in respect of specific Schemes; because of the possibly very serious consequences to himself and others if such was not done or was done late; and because of the apparent failings of others within S@FI to take his views and anxieties seriously. Those concerns increased in the period 8 to 10 August 2001, by which time, according to Mr. Gwilliam, Mr. Torrance had become "almost uncontrollable in his emotions".
- On 15 August 2001 the matter was raised at Kidsons' National Executive Council ("NEC"). The minutes record:
"EGG briefly intimated that he had been confronted by Ian Torrance, a tax manager from Edinburgh office, who was expressing misgivings over certain S@FI products. It was agreed that he, FHH and DG would give a full report to the NEC at the next meeting on 29 August."
- On 20 August 2001, Scottish leading counsel, Mr. Colin Tyre QC gave advice in consultation which broadly supported Mr. Torrance's views on the residency of Isle of Man companies involved in the two Discounted Option Schemes submitted to him, and on the returns and disclosures to be made to the Inland Revenue as a result. He also commented on the risk of challenge by the Inland Revenue in relation to the validity and genuineness of the option. Bolstered by Mr. Tyre's advice, Mr. Torrance sent a batch of further emails to NEC and S@FI board members between 22 and 30 August 2001. As before, they concerned the question of returns and disclosure to the Inland Revenue and Kidsons' exposure to criminal proceedings if they failed to make the returns and disclosure required: Mr. Torrance was urging both blanket disclosure in respect of Discounted Option Schemes and also an independent review into their implementation.
- It was at this juncture that Mr. Torrance, having, as Mr. Gwilliam put it, obtained an audience of the firm's senior management, made allegations about flaws in other products (SHEPs, CRCs, and Conditional Share Award schemes) and specific aspects of S@FI's methodology, in particular its use of "generic" counsel's opinions. In expanding the scope of his observations beyond Discounted Option Schemes, he used fairly colourful language. The following memoranda which he sent on 23 and 24 August will suffice as examples. In the first, dated 23 August, he wrote:
"… Harris and Hull [have] agreed with the chairman of S@FI that an independent review should be carried out of all S@FI products. That is good news and bad news … The Revenue will expect that pending a review of the merits of the DOS steps will have been taken to ensure that the marketing of these schemes has been suspended. I suggest that this makes commercial sense anyway … They would expect that the implementation of other schemes implemented under the auspices of S@FI would be subject to review also … You will have to consider whether other strategies imported by S@FI on a similar basis to the DOS should continue to be implemented pending the findings of that review. Most are implemented in accordance with the same recipe for disaster as I have outlined was followed in relation to the DOS. You must draw your own conclusions".
In the second and third, dated 24 August, he wrote:
"DOS, SHEP Selling, the CRC Scheme and the Conditional Share Award scheme … all represent unacceptable tax avoidance …I have never before seen tax avoidance of this nature or on such a scale. It represents an assault on the Treasury which I believe may well be unprecedented."
"It is impossible to quantify the exposure attributable to the S@FI operations. Please see my other memo of today's date in relation to the scale of the problem as I perceive it to be."
Thus he recommended that the implementation of other schemes executed under the auspices of S@FI should also be subject to review, because in his view this was something that the Inland Revenue would expect. He suggested that CRCs and SHEPS should be dealt with first.
- On 23 August 2001, Mr. Greatorex sent letters to members of the NEC, some of whom had been on holiday, informing them that "a major matter" had "blown up with regard to S@FI" and that one of the senior tax staff in the Glasgow office (i.e. Mr. Torrance) had been "questioning both the effectiveness and the implementation of some of the schemes" and had been sufficiently concerned to seek Counsel's opinion. Upon receipt of one of these letters, Mr. Garner-Jones telephoned Mr. Harris, Mr. Greatorex and Mr. Sills to find out what had been going on. He learned from them that one of the schemes on which Mr. Torrance had commented was SHEPS. These were of particular concern to Mr. Garner-Jones because he had a personal interest in these schemes, having personally funded the purchase of life policies which had been on-sold to Kidsons' clients for the purposes of the schemes. There was a concern about whether this involvement constituted trading in breach of the Financial Services Act 1986, on which counsel's opinion had been obtained. Mr. Garner-Jones was as a result particularly interested in Mr. Torrance's concerns and anxieties about his involvement in SHEPS. Mr. Garner-Jones had two lengthy telephone calls with Mr. Torrance on 24 August 2001 and they discussed SHEPS, CRCs and Conditional Award schemes. Mr. Garner-Jones asked Mr. Torrance to put his comments in writing. Mr. Torrance sent Mr. Garner-Jones two emails, one dealing with CRCs and the other with SHEPS, on 27 August 2001. Neither of these emails caused Mr. Garner-Jones any particular concern. As regards CRCs, Mr. Garner-Jones "firmly believed" that these were not pre-ordained as Mr. Torrance had suggested. He was a member of the Product Signing-Off Board that approved CRCs on 16 November 2001 so it is unlikely that he was genuinely concerned about the viability of the product. As regards SHEPS, Mr. Garner-Jones did not think that the scheme was unviable. His view was that "it stood more than a reasonable chance of being successful". As he told the S@FI Board on 30 August 2001, he did not think that SHEPS were being used in the way that Mr. Torrance thought they were and it was not necessary to suspend their use. He was however content for SHEPS to be reviewed, bearing in mind his personal involvement in the schemes and the risk that this might be seen by the Inland Revenue to amount to collusive tax avoidance. Mr. Garner-Jones, moreover, did not think that there was anything fundamentally wrong with Discounted Option Schemes. As he told Mr. Blakemore on 6 September 2001 in connection with the IRB's prospective review of Discounted Option Schemes, there was "No problem with the core product [b]ut as we have applied the product there may be a problem". He was careful in cross-examination to distance himself from Mr. Torrance's generalised remarks about S@FI products and his belief that S@FI should be shut down. It is clear that he did not endorse these views.
- On 27 August 2001, Mr. Tyre QC prepared a written opinion confirming the advice he had given in consultation on 20 August 2001 in relation to Discounted Option Schemes. In this opinion he confirmed that:
i) The IOM companies used in the Discounted Option Schemes before him were, on the basis of the facts presented to him, resident in the UK for tax purposes, with the result that they were required to file UK tax returns;
ii) Even if the IOM companies were non-resident, returns would still require to be made in respect of interest paid on loans which was "yearly interest";
iii) The disclosures made in the specimen self-assessment return presented to him were inadequate and fuller disclosure needed to be made of the circumstances in which the UK taxpaying beneficiary of the scheme had received shares in the IOM with an allegedly negligible value;
iv) If full disclosure were not made, there was a risk of the Inland Revenue taking criminal action:
"I would for example find it difficult to see how a failure to disclose the receipt of UK source income by [the IOM company] is not either fraudulent or negligent. If such failure were intended to prevent the Inland Revenue from obtaining a full picture of the transactions carried out then that would in my opinion be fraudulent. In such circumstances one could not rule out the risk of common law proceedings";
v) In relation to the merits of the scheme, the grant of the option was open to challenge by the Inland Revenue on the ground that the purported option was not a genuine or valid transaction.
- Mr. Tyre's written opinion was circulated to the NEC on 30 August 2001. According to a note of a subsequent consultation with Mr. Tyre on 26 March 2002, his opinion caused "great consternation" within Kidsons.
- The contemporaneous documents and the evidence of the Kidsons partners showed that there was, however, a marked contrast between what Kidsons thought about Mr. Torrance's wider allegations and what it thought about his specific allegations about Discounted Option Schemes. The latter were well considered and had been supported by the opinion of Leading Tax Counsel. The former were merely expressions of Mr. Torrance's views on issues about which it was recognised that there was room for debate. Mr. Garner-Jones disagreed with his views about SHEPS, and CRCs had already been suspended in view of the administration difficulties which had previously been experienced with certain administrators of the schemes and were not perceived to be a problem. Moreover, the points raised by Mr. Torrance about other schemes were not new points, as Mr. Gwilliam stressed in cross-examination. It was recognised within Kidsons that Mr. Torrance tended to extrapolate specific concerns about one part of an organisation to the organisation as a whole. As a result, as Mr. Gwilliam put it, Mr. Torrance's "concerns about (for example) Discounted Option Schemes became concerns about all of S@FI and its activities". The consequence was that the wider concerns were not taken at their face value or so seriously by the partners to whose attention they were brought.
- The S@FI situation was discussed by the NEC at its meeting on 29 August 2001. The NEC resolved to set up an Independent Review Body ("IRB") to review the issues that had arisen over S@FI products. Although about an hour was spent on the topic of S@FI at this meeting, it appears that not that much time was spent discussing the substance of Mr. Torrance's allegations. According to Mr. Garner-Jones, most of the time was spent discussing the mechanism for setting up the independent review board. Nevertheless, it appears from a passage in the draft minutes prepared by Mr. Patten (which did not find its way into the final minutes, apparently because of disclosure concerns in relation to the Inland Revenue) that members of the NEC identified that Mr. Torrance's key concern was a procedural one. The draft minutes read:
"REG described the concern felt by FHH over the recent Iain Torrance allegations and he now wanted to address the issues and see what had to be done in the present circumstances …
JAH [Mr. Hollingsdale] accepted the need for avoidance schemes but was extremely worried because apparently mistakes had been made which indicated inadequate attention to procedures … the products simply had to be carried out correctly. and Mr. Greatorex emphasised that 'procedures associated with marketing and implementing the products simply had to be carried out correctly'. The NEC noted that this was 'an extremely serious matter'.
There was a meeting of S@FI Board on 30 August to determine how best to review the situation. It was clear that priority should be given to a complete review of the Discounted Option Schemes (DOS) after which other products would be reviewed. It was essential that the review was completed as soon as possible … if anything untoward was found there would have to be [complete] disclosure to the Inland Revenue.
A long debate ensued on how best to set up a review of S@FI products and activity."
- The actual, final, minutes of the meeting recorded as follows:
"Section 5 – S@FI 'A number of issues had arisen over S@FI products and it was decided that an Independent Review Body (IRB) be set up to investigate the position. It was suggested that Ray Armstrong, an ex-partner of PWC, he invited to chair the group and GGJ was requested to approach him'."
- As both Mr. Gwilliam and Mr. Garner-Jones emphasised in their evidence, the matter about which the NEC was seriously concerned in August 2001 was the risk of Kidsons having acted criminally. As Mr. Gwilliam said:
"Yes, but the context here is that Iain Torrance, in his various memos and conversations, was repeatedly stressing tax evasion and repeatedly stressing criminality and amongst the NEC, which was a group of ten people, seven of whom were not tax practitioners, that was the cause of some serious concern that the firm may have strayed into criminal matters."
"My recollection of the discussion that was had at that meeting was still with reference to this criminality point. That had really got under the skin of the NEC members in August. They were very, very concerned at the possibility that the firm had strayed at all into criminal matters."
- Notwithstanding the discussion about the issues which had arisen over S@FI, the NEC did not consider that the matter required notification to Underwriters as a circumstance which might give rise to a loss or claim against Kidsons. As Mr. Gwilliam said in cross-examination:
"Q. And the NEC did not decide that any notification of circumstances which might give rise to a claim needed to be made to the insurers; that is correct, is it not?
A. I do not recall a specific discussion about professional indemnity insurance notification that day. I recall a reference to the fact that we knew that SAFI had called a board meeting for the subsequent day; it had not originally been due to meet on the 30th and there was a passing reference to the fact that they would need to consider matters. But you are right, there was no specific discussion that I can recollect about notification at the meeting on the 29th."
- If Kidsons or the NEC had indeed concluded by this stage that there was a solid foundation to Mr. Torrance's wider concerns, and thus reason to believe that there were deep-seated problems in relation to the entirety of S@FI's activities, which might give rise to claims against the firm, it is inconceivable in my judgment, that there would not have been concerned discussion about prompt notification to Underwriters of all such problems.
- At the meeting on 29 August 2001, the NEC also discussed the question of Kidsons' future, as a firm. By this stage, Mr. Longe, the Managing Partner of Baker Tilly, had approached Mr. Greatorex with a view to merging Kidsons with Baker Tilly. Mr. Greatorex told the NEC that he believed that mid-tier firms (such as Kidsons) were "presently in a state of flux" and that he was in touch on an informal and confidential basis with certain individuals who were keen to consider joint activities with Kidsons. Four such prospects, one of which was a merger with Baker Tilly, were discussed.
- The detailed account of the discussion concerning S@FI was removed from the final version of the minutes of the 29 August 2001 meeting, which merely refer to "issues" having arisen over S@FI products and the decision to set up an Independent Review Body to investigate the position. Mr. Patten's email of 1 October 2001 shows that this matter was considered "delicate" and consideration was given as to whether legal advice should be taken from Pinsents in relation to the text of the minutes. This again reflected the NEC's concerns about criminality. They had been warned by Mr. Torrance that the minutes of their meetings were likely to "be seen by the Revenue sooner (if you make an approach to the Revenue) or later (if you don't)".
- On 30 August 2001, the specially-convened meeting of the S@FI Board was held in order to consider the appropriate response to Mr. Torrance's concerns and the actions he had taken. Mr. Douglas briefly described what he believed to be Mr. Torrance's concerns about S@FI and its products. Nineteen concerns were identified which were based on a list which Mr. Douglas had prepared from the various emails circulated by Mr. Torrance in the latter part of August. The list was read out to the meeting by Mr. Douglas but there was no detailed discussion about precisely what Mr. Torrance's criticisms were, although the discussion lasted about an hour. It appears from the Minutes of the Meeting that such discussion as there was focussed on Discounted Option Schemes; thus the Minutes recorded that "Virtually all of which had been said previously dealt with allegations concerning discounted option schemes", although Mr. Garner-Jones (who had spoken to Mr Torrance) expressed the view that Mr Torrance's "general remarks" were intended to apply to all S@FI products.
- In relation to Discounted Option Schemes, it is clear that the Board understood the concerns to be procedural ones concerning implementation of the scheme, as opposed to its design and viability. Mr. Douglas said that the "allegations about discounted option schemes related to implementation and it seems that Mr. Torrance was not saying the product was flawed. He was extrapolating his experience in Scotland to the whole of S@FI … Mr. Torrance believed that problems would develop from incorrect implementation". The Board agreed that "[t]he allegations over some procedures had to be resolved". When summarising the situation towards the end of the meeting, Mr. Garner-Jones concluded that "there was sufficient evidence to indicate that implementation procedures for S@FI products might not have been up to the mark and this simply had to be addressed in the near future".
- The Board concurred in the NEC's decision to set up an independent review body, although it was clear that realistically it did not by then have much choice in the matter. Pending completion of the independent review, the Board agreed to suspend marketing of Discounted Option Schemes. The Board did not consider there was any need to suspend any other scheme (and no other scheme was in fact suspended). Like the NEC, the Board stressed the need for the review of Discounted Option Schemes to be completed as soon as possible. It is clear that the Board was not inclined to take at face value the concerns expressed by Mr. Torrance about products other than Discounted Option Schemes. Mr. Garner-Jones confirmed that he was content that SHEPS were not being used as Mr. Torrance thought and it was not necessary to suspend their use; and in relation to CRCs and Conditional Share Award schemes, the Board decided that Mr. Torrance should be asked to set out his specific concerns again so that they could be considered.
- Kidsons' insurance position was discussed at the S@FI Board meeting. The final version of the minutes records under the heading "(5) Side Effects of IT's statement":
"In regard to professional indemnity, circumstances existed that might lead to a claim, particularly in relation to the discounted option schemes, and a notification should be made to PII underwriters";
and, under the heading "(7) Conclusions", that:
"there was sufficient evidence to indicate that implementation procedures for S@FI products might not have been up to the mark ".
The draft minutes, on the other hand, prepared by Mr. Patten, recorded:
"(5) Side Effects of IT's statement: …In regard to professional indemnity insurance, if opinion was that circumstances existed that might lead to a claim particularly in relation to the discounted option schemes, then a notification should be made to PII underwriters."
Thus it can be seen that the draft minutes were amended by removal of the words "if opinion was that" and "then".
- Mr. Kealey, on behalf of Underwriters, submitted that the most likely explanation of what happened was that no actual formal conclusion was reached at the S@FI board meeting that circumstances existed which might give rise to a claim, or, even if that conclusion had been reached, no actual decision was taken that such circumstances should be notified to Underwriters; rather the position reached at the meeting was that Mr. Douglas, who was familiar with professional indemnity matters, told Mr. Patten to discuss the situation which had arisen with Mr. Flaxman (who was an independent insurance consultant who regularly advised Kidsons, and Mr. Patten in particular, on professional indemnity issues, including the notification of claims and circumstances) so as to ensure that whatever steps were necessary were taken in order to protect Kidsons' position. Mr. Flaxman had formerly been a director at Millers, was very experienced, and was a person in whom Mr. Douglas placed great confidence. Mr. Davidson, for Kidsons, on the other hand, suggested that the evidence showed that Mr. Douglas gave a specific instruction to Mr. Patten at the meeting to notify underwriters of circumstances which might give rise to a loss or claim. There was some evidence to support Mr. Kealey's analysis. The situation that the Board faced was, as Mr. Patten accepted in his witness statement, an unusual one in that he had not being given a document setting out what he had to notify to underwriters. His contemporaneous manuscript note of his conversation with Mr. Flaxman states: "Decide what notify + how". Moreover, although the draft minutes were amended they were based on manuscript notes made by Mr. Patten at the meeting which, in accordance with his usual practice, were as full and detailed as possible. The evidence also showed that it was unclear when the draft minutes had been amended and which version of the minutes was actually approved at the Board meeting on 20 September 2001. Mr. Douglas, who could have confirmed both matters, was not called by Kidsons. Ultimately, what precisely was decided at the meeting on 30 August in relation to notification to Underwriters is largely irrelevant, since what matters is what was in fact notified to Underwriters. However, my conclusion based on all the evidence is that the best record is probably the minutes in their final form; namely, that a decision was indeed taken at, or subsequently to, the S@FI board meeting that circumstances existed which might lead to a claim and that accordingly circumstances should be notified to Underwriters; but that precisely what circumstances should be notified or how, or in what terms, such circumstances should be notified to Underwriters, was something that was to be left to Mr. Patten to discuss and decide with Mr. Flaxman.
- Mr. Garner-Jones was assigned responsibility by the NEC for preparing instructions to the IRB and became the liaison partner with the IRB. He prepared a briefing memorandum for the IRB shortly after the S@FI Board meeting on 30 August 2001. An early draft which he circulated to certain partners for comment, received the comment that the draft was "too biased just to 'discounted options'. Other products need review". Mr. Garner-Jones discussed and agreed revised wording to reflect this.
- The final version of that memorandum recorded:
i) that the IRB was being established at the instigation of the NEC; see section 2.1;
ii) that the IRB was to conduct an "in depth and immediate review as detailed in section 3 of the Memorandum of all the tax planning business undertaken via HLB Kidsons subsidiary company (S@FI) since 1 May 1999. If such tax planning has been engaged via the Partnership it should also be covered by the IRB's review"; see section 2.3;
iii) that the IRB was to review "the S@FI tax planning strategies as implemented to date for clients, to identify issues and potential issues which could prejudice its or the partnership's operations of tax planning, mitigation or anti-avoidance techniques, or more general services as Chartered Accountants and to report on areas of concern with regards to Official Returns, Disclosure Requirements and client advice as currently undertaken"; see section 3.1;
iv) however, the instructions made it clear that there were to be two aspects to the IRB's work, namely an "Initial Review", defined as being an "early report covering particularly Discounted Option Schemes, disclosures, actions and any other critical recommendations", and a "Further Review", defined as being a "more comprehensive review of product range, disclosures, control procedures and management"; the Initial review was to be commenced immediately and was to be completed by 17 September 2001; see paragraph 4; but the Further Review would only be undertaken if considered necessary following the Initial Review; see paragraph 3.4.1.: "3.4.1. After conducting the Initial Review and unless the IRB considers it unnecessary, then the IRB should work with the Liaison Partner and conduct such further work/investigations as are necessary to prepare a Further Review into areas of concern covering in particular the products known as: - "Second Hand Endowment Policies", "Capital Redemption Contracts" and "Conditional Share Schemes" and then if appropriate the complete product range. Save that if no serious areas of concern remain following the Initial Review the IRB should advise the Liaison Partner on behalf of the NEC and closure of the IRB's duties can then be determined."; see also paragraph 4.3.2: "there may be a requirement for Further Review work to be undertaken and it is anticipated that the IRB will determine if such a Review is required and that, in conjunction with the Liaison Partner [i.e. Mr. Garner-Jones], the IRB will agree a reporting structure and timetable which will be approved by the NEC. It is to be noted that if a Further Review is required the Partnership would wish to see this undertaken and completed at the earliest opportunity".
- Although the briefing memorandum for the IRB expressly referred to all S@FI schemes, and the possibility of a further review into such schemes, the reality was that, at that time, the mandate given to the IRB was merely to investigate Discounted Option Schemes. This is reflected in the IRB's Initial Report produced on 17 September 2001 which stated at paragraph 1.3.1 that:
"in due course it may be necessary to review the entire portfolio of products provided by S@FI, however at the present time the IRB is instructed to examine just one product known as the Discounted Option Scheme and in particular to review 3 particular DOS cases."
It is also consistent with the conclusion which I have expressed at paragraph 102 above. Thus whether or not further schemes were to be reviewed, depended on what, if anything came out of the Initial Review, and whether it became necessary to conduct a further review. This was consistent with Kidsons' low level of concern about Mr. Torrance's wider allegations. However, one of the reasons for leaving open the stated scope of the IRB's work was no doubt the need for Kidsons to be able to show to the Inland Revenue, if necessary, that it had taken all reasonable steps to put its house in order, which was a point that Mr. Torrance had raised. If the IRB's remit had been formally restricted from the outset, the Inland Revenue could have been critical. However, in my judgment, the fact that the scope of the investigation was left open, does not demonstrate that, contrary to my conclusions, Kidsons had any real or pressing concerns at this stage about the validity or implementation of the wider range of S@FI products, other than Discounted Option Schemes. Indeed, the evidence showed that, apart from an aborted attempt to instruct the IRB to review SHEPS in February 2002, no instructions were given to the IRB to undertake any Further Review into any S@FI products and the IRB did not in fact get beyond looking at Discounted Option Schemes.
- Kidsons' concerns in relation to S@FI lightened during September and the atmosphere was marked by a reasonable degree of confidence and reassurance. Gratitude towards Mr. Torrance was replaced by varying degrees of criticism and resentment. On 10 September 2001, Mr. Armstrong of the IRB in the company of Mr. Garner-Jones among others attended a consultation with Mr. Andrew Thornhill QC, who had been instructed to consider the same issues as had Mr. Tyre QC. Mr. Thornhill's advice was positive, and was seen within Kidsons and S@FI to be positive. Mr. Thornhill did not share Mr. Tyre's pessimism about the residency of the Isle of Man companies. He was of the view that the option could be demonstrated to be genuine. He did not think that the IOM companies needed to make any returns to the Inland Revenue. He considered it "highly unlikely indeed almost impossible" that Kidsons had acted criminally. He did not believe that there had been any deliberate misleading of the Revenue nor any fraudulent act perpetrated. His view was that Kidsons had not acted inappropriately and that no necessary disclosure requirements or filing deadlines with the Inland Revenue had been missed.
- On 12 September 2001, the members of IRB interviewed Mr. Torrance over the telephone. The contemporaneous notes of the conversation show that Mr. Torrance emphasised that his primary concern was about the need to ensure that appropriate returns and disclosure were made to the Inland Revenue. He stressed that his concern was not to attack the underlying viability of the scheme. He is recorded as having said:
"I have avoided at all stages questioning the technical merits of the underlying scheme. I have been concerned only that appropriate returns should be made timelessly in respect of those transactions which are carried out in the course of implementing the scheme for any particular individual."
Mr. Douglas and Mr. Sills travelled to Glasgow to meet Mr. Torrance and continue the discussion.
- On 14 September 2001, the IRB submitted their Draft Report on Discounted Option Schemes. The reason the report was in draft was that there was some outstanding information. However, subject to that, the IRB did not expect the general thrust of their review and recommendations to change materially. The IRB considered the Discounted Option Scheme in detail. They concluded that the scheme was not fundamentally flawed but recognised that the Inland Revenue might challenge the validity of the option; that there was no need to make a blanket disclosure to the Inland Revenue; that the question of residency of the relevant scheme companies was more difficult but should be resolved as a matter of urgency given the deadline for filing returns that would required if the companies were resident in the UK. On the key issue of criminality, the IRB concluded that there was no evidence that any criminal activity had taken place. This was a great relief for Kidsons. The IRB recommended that a case by case review of the Discounted Option Schemes should be carried out to ensure that they had been implemented correctly in every instance. This would involve examining the facts of each case to determine the residency of the IOM companies, and the returns and disclosure required, for each case. The draft report also:
i) noted that in due course it might be necessary to review the entire portfolio of products of S@FI;
ii) noted that a considerable volume of additional information would be required for the IRB to report fully and that its report was accordingly preliminary;
iii) made preliminary comments on the operation of S@FI;
iv) warned that:
"It appears to us that there are several operational issues emerging which, if not addressed, could have an adverse effect on other products promoted by S@FI either now or in the future."
v) recommended that other schemes be reviewed in the same manner adding:
"We know of no reason, subject to the points above, which would require suspension of selling those products currently. However, it may be appropriate to consider the risks posed by the quality control issues referred to in reaching any conclusion."
vi) drew attention to quality control issues of importance to all products.
However the draft Report also drew attention to the resource issues involved in any further review.
- The Draft Report was treated as a final report in all but name and used by the NEC and S@FI on that basis. The case by case review of the Discounted Option Schemes recommended by the IRB was in due course carried out under the supervision of Mr. Garner-Jones over the next two years, culminating in a report dated 10 September 2003. On 19 September 2001, Mr. Blakemore sent an email to Mr. Garner-Jones asking him for "an update/further instructions when convenient". However, the only further instruction ever given to the IRB was a request for them to consider the SHEPS scheme in February 2002. This was, as explained above, a scheme in which Mr. Garner-Jones had a particular interest by reason of his personal involvement in the funding of the purchase of life policies sold to clients in connection with the schemes. Kidsons was interested in obtaining further assurance that this funding had not breached the provisions of the Financial Services Act, but it was not concerned about the prospect of claims arising out of these schemes because detailed engagement letters had been prepared in relation to the schemes which made full disclosure of all relevant circumstances and protected the firm from risk (as Mr. Garner-Jones explained to the NEC on 22 January 2002). Aside from SHEPS, no other S@FI product was reviewed by the IRB, or any other independent body, at any stage. Even in relation to SHEPS, the review never went ahead after Mr. Armstrong became ill.
- I agree with Mr. Kealey's analysis of the evidence that, after 14 September 2001, Kidsons regarded the IRB's Draft Report as effectively endorsing its methodology and approach and that, subject to the outstanding review of individual Discounted Option Schemes cases, its house was in order. The IRB was effectively disbanded in about February or March 2002, when Mr. Armstrong indicated that he was too ill to proceed with a review of SHEPS. This was confirmed by the subsequent Project Island Report prepared by Baker Tilly in March 2004 which stated "It should be noted that the IRB having concluded its review and prepared the draft report in September 2001, was disbanded". From no later than March 2002, there was therefore no IRB, and no other equivalent independent body, examining, or responsible for examining, S@FI products.
- On 20 September 2001, there was a S@FI Board meeting at which the IRB report was discussed. According to Mr. Garner-Jones, there was a "different atmosphere" at this meeting, which also was not particularly pleasant. The S@FI Board saw the IRB's report as being "generally supportive". The Board concluded that S@FI was "on the right lines". Another partner, Mr. Sills, said that he "was pleased with the report" and that "Partners will be relieved and we can begin to rebuild confidence in offices again". Despite the fact that Mr. Garner-Jones was unwilling to accept the point when put to him in cross-examination, the impression conveyed by the evidence is that the Board felt that Mr. Torrance had done more damage to Kidsons, than benefit and had unnecessarily set a lot of hares running. The minutes show that every member of the Board apart from one member was critical of Mr. Torrance. As Mr. Kealey submitted, the Board clearly felt that he had acted out of line and gone overboard.
- On 4 October 2001, there was a meeting of the NEC. The NEC (like the Board of S@FI) regarded the IRB's draft preliminary report as substantially supportive. The minutes recorded in relation to the IRB draft preliminary report:
"Thanks to swift action from Mr. Garner-Jones and Mr. Armstrong and his team, concerns over S@FI had been addressed and the initial report was substantially supportive. Nonetheless there were observations which Mr. Harris and Mr. Hull would act on …. The board had agreed to adopt all the recommendations and had determined a procedure for concluding action after the inquiry. The final IRB report would soon be prepared for the NEC ….
Products: The only product with which there was now a problem was the Discounted Option Scheme, given that the Capital Redemption Scheme had ceased in the previous November….
Mr. Harris gave a brief review of other products."
- Mr. Greatorex (then the National Managing Partner) thanked Mr. Harris and Mr. Garner-Jones on behalf of the firm "for promptly addressing the concerns which had been aired over S@FI activity". In cross-examination, Mr. Patten confirmed in that these minutes were, so far as he was aware, an accurate reflection of everything that had been said at the meeting of any materiality or significance. Although Mr. Gwilliam and Mr. Garner-Jones sought to suggest in their evidence that the minutes were inaccurate in stating that the only product about which there was a problem was Discounted Option Schemes, I reject that evidence in the light of the minutes and other contemporaneous materials, which are more reliable than understandably self-serving recollections five years after the event. Mr. Garner-Jones accepted in his witness statement that Mr. Harris did make a statement to this effect at the meeting and he and Mr. Gwilliam also accepted that they did not "correct" the statement, either when it was made or when the minutes were approved at the subsequent meeting of the NEC. In my judgment, even if, as the Kidsons witnesses suggested, the intention at this time was that the IRB would review other schemes, once the further work in relation to Discounted Option Schemes had been completed, the reality was that at this stage the wider concerns in relation to such other schemes, and any past exposure thereunder, had, rightly or wrongly, been allayed, and such a further review was not regarded as any sort of priority. This is supported by the fact that, following the meeting, the S@FI Product Signing-Off Board reviewed and reinstated CRCs on 16 November 2001 and S@FI resumed sales of Discounted Option Schemes with effect from the end of December 2001. Mr. Garner-Jones was a member of the S@FI Product Signing-Off Board and was personally in favour of the reinstatement of CRCs, as the minutes of the S@FI Signing-Off Board Meeting on 16 November 2001 show. This is difficult to reconcile with his, and Mr. Gwilliam's, suggestion that CRCs nevertheless remained an area of concern. In any event, as I have already mentioned, no further instructions were ever given to the IRB to review any other S@FI products (apart from the abortive attempt in relation to SHEPS in February 2002).
- At a meeting on 18 October 2001, the NEC resolved to pursue merger discussions with Baker Tilly. On 23 and 24 October 2001, members of Kidsons' management team met members of Baker Tilly's management team at a hotel in Gatwick. At this meeting, Mr. Sills outlined the S@FI concept and its recent history, but intentionally did not go into detail on the recent issues concerning the setting up of the IRB and associated issues. The version of a memorandum provided to Baker Tilly in relation to S@FI had a reference to "the recent IRB and associated issues" removed. Baker Tilly indicated that they were positive about the concept of S@FI and acknowledged, on the basis of what they had been told by Mr. Sills, that the major issue for S@FI was one of risk management.
- In a supplemental witness statement from Mr. Longe, the Managing Partner of Baker Tilly at the relevant time, tendered on 8 February 2007 immediately before he was due to go into the witness box, Mr. Longe for the first time in his evidence referred to a private conversation which he said that he had had with Mr. Greatorex, on a "Managing Partner to Managing Partner" basis, at the meeting on 23 and 24 October 2001. According to Mr. Longe, Mr. Greatorex told him in this conversation that the IRB had been set up to look into allegations made by a member of staff about S@FI. It was clear from Mr. Longe's cross-examination that the conversation with Mr. Greatorex did not strike Mr. Longe as being in any way significant at the time. He did not report it to the Baker Tilly due diligence team or indeed anyone else in Baker Tilly, either orally or in writing. Nor does it appear that Mr. Greatorex reported it to anyone at Kidsons. The first and only reference to it appears in Mr. Longe's supplemental witness statement. Mr. Longe was patently an honest witness but his recollection as to precise timings or content of conversations was, not surprisingly after the passage of time, fairly vague. I conclude that some sort of discussion took place along these lines between Mr. Longe and Mr. Greatorex, which did not strike Mr. Longe in any way as an obstacle to the merger and which probably conveyed to him that Mr. Greatorex (and the Kidsons' NEC) believed the most serious allegation made by Mr. Torrance to be the charge of criminality and that this had been shown both by counsel and by the IRB to be unfounded. The conversation may also have touched upon Discounted Option Schemes, which subsequently appeared in Kidsons' disclosure letter.
- Between early November 2001 and early December 2001, Baker Tilly conducted due diligence investigations into Kidsons. This included an investigation into S@FI, as there were significant issues about how it was going to operate within Baker Tilly. In the course of these investigations, Kidsons made certain, limited, disclosure to Baker Tilly about general risk management issues concerning S@FI and potential procedural difficulties concerning the tax residency of companies set up as part of Discounted Option Schemes sold by S@FI. Otherwise, Kidsons did not reveal any other or specific concerns about S@FI or its operations, as Baker Tilly's due diligence report reveals. The subsequent Tax Faculty Report, produced in late 2003, also confirms that Baker Tilly's due diligence investigations did not reveal to them the possibility of any significant problems arising out of the operations of S@FI. I conclude that if Kidsons had at this stage been genuinely concerned about wide-spread and deep-seated problems across the entire range of S@FI products, it is highly likely that these concerns would have been reflected in the Disclosure letter or uncovered by Baker Tilly in the course of its due diligence enquiries.
- The due diligence process was concluded by 13 December 2001. Kidsons then revealed to Baker Tilly the potential regulatory problem that had arisen with regard to S@FI in relation to an investigation by the Joint Monitoring Unit ("JMU") of the ICAEW as to whether S@FI had been trading unlawfully without authorisation under the Financial Services Act 1986. This was disclosed by Mr. Greatorex to Mr. Longe on the telephone on 13 December 2001. The JMU's report was then disclosed to Baker Tilly as an attachment to the Disclosure letter. At this stage, the Financial Services Authorisation Committee had not pronounced any decision consequent upon the JMU's findings.
- The disclosure that Kidsons would need to make in connection with the merger agreement was discussed at the NEC's meeting on 13 December 2001 at which Mr. Gwilliam suggested that "erring on the side of caution" was the approach that should be adopted in relation to disclosure. However, the only circumstance relating to S@FI disclosed in or by the Disclosure letter (other than in relation to the JMU Report and a separate claim in relation to Evolution Films) was in respect of Kidsons' potential exposure to claims from clients if the Isle of Man companies set up as part of S@FI's Discounted Option Schemes were found to be resident in the United Kingdom for tax purposes. The Disclosure letter stated that this situation had been "fully disclosed to [Kidsons'] professional indemnity insurers". Again, if Kidsons had had any real concerns about the possibility of claims from clients in relation to the wider range of S@FI schemes, or had thought that the possibility of such claims had already been disclosed to Underwriters, it is inconceivable that the Disclosure letter would not have referred to the fact. I was not impressed by Mr. Gwilliam's attempts in cross-examination to explain why there had been no such disclosure.
- The Baker Tilly and Kidsons partners each voted to proceed with the merger on 19 December 2001.
- The position on SHEPS was discussed at a S@FI Board meeting on 22 January 2002. Notwithstanding the suggestion that these schemes should be reviewed by the IRB, Mr. Garner-Jones confirmed that there was no need to suspend continuing sales of the product. Mr. Patten confirmed in his evidence that the mood at this meeting was positive.
- On 28 February 2002, the NEC discussed the ongoing review of Discounted Option Schemes under Mr. Garner-Jones and suggested that "a summary of the situation should be prepared to put PII underwriters in the picture". This was to be actioned by Mr. Garner-Jones, Mr. Gwilliam and Mr. Patten. On 7 March 2002, Mr. Patten sent Mr. Garner-Jones an email asking for a "concise but comprehensive description of the nature of the difficulties or queries which have arisen and the means by which we hope to resolve all matters satisfactorily". He never received any response to this request.
- On 12 March 2002, the Financial Services Authorisation Committee issued its verdict consequent upon the JMU's report on Kidsons, imposing a Regulatory Penalty of £50,000 upon Kidsons. This presented a major problem for Baker Tilly, which needed to obtain a new registration, as a merged firm, from the ICAEW. It was unclear what impact the JMU's verdict would have upon this process. The fear was that Kidsons' failings would be visited upon Baker Tilly. However, I find as a fact that the regulatory concern which arose as a result of the JMU's verdict was not the reason for Mr. Longe calling on Mr. Berger to begin the process of validating all S@FI products. Still less were they as a result of any concerns expressed by Mr. Torrance. In his supplemental witness statement, Mr. Longe suggested for the first time that he had a conversation with Mr. Torrance on Friday 22 March 2002 but I conclude from Mr. Longe's oral evidence in cross-examination that his recollection is likely to have been faulty as to the date when this occurred. When Mr. Longe was first asked about this (by Kidsons' lawyers) in January 2007, he believed the conversation took place in 2003, which in my view is much more likely given that this was when the problems about the Evolution Films scheme (not relevant to this action) surfaced and that this apparently was consistent with Mr. Torrance's own recollection. Mr. Longe had no notes or records of the conversation, and I consider it unlikely that realistically he could recall the precise date after this length of time. Even if the conversation had taken place, it cannot have been of significance to Mr. Longe because otherwise he would have remembered it more clearly and taken action consequent upon it. The reality was that the validation process was one which, according to the Baker Tilly due diligence report, Baker Tilly had already decided to institute in the event of the merger proceeding.
- On 26 March 2002, a further conference was held with Colin Tyre QC. He was guarded as to whether the two companies involved in the Discounted Option Schemes which he had considered were resident offshore and he maintained reservations about the validity of the option, on the grant of which the scheme depended if it was to work. Mr. Tyre's advice was considered by the NEC at a meeting the following day. Mr. Gwilliam told the NEC that he believed:
"that there was now less risk from the Inland Revenue, but there was still a risk of claims from clients where [discounted option] schemes had failed because of procedural mistakes".
The NEC agreed that it was then appropriate for a "report on the situation to be prepared for PII underwriters".
- The merger with Baker Tilly took effect on 1 April 2002. After the merger, S@FI was rebranded the "Tax Strategy Group" ("TSG"). At the same time, a "Tax Strategy Board" ("TSB") was set up to approve, primarily from a risk management perspective, the tax products marketed and sold by Baker Tilly. As I have already stated, this exercise had its origins in the due diligence process undertaken prior to the merger and had nothing to do with Mr. Torrance or his concerns. It was an entirely independent initiative which was not concerned with examining the historical position. It was a forward-looking exercise to determine which products were considered suitable for sale by the merged firm
- On 30 April 2002 the Policy Period expired.
- By about August 2002, the validation process was complete and the TSG was marketing tax products. These strategies included the Discounted Option Schemes.
- In December 2002, a claim was received by Mrs Angela Rowland (formerly Angela Dawes) in respect of an investment made into the Evolution Film scheme that had been notified to Kidsons' 1999/2001 insurers in March 2001. Mr. Longe asked Mr. Berger, the head of Baker Tilly's tax faculty, to investigate the matter of Evolution Films. His investigation became known as Project Clive. The Project Clive report was produced on 23 April 2003. This revealed serious concerns about the way in which the Evolution film scheme had been sold by Kidsons/S@FI, including the possibility that they may have committed criminal offences by selling collective investment schemes without FSA authorisation. At its meeting on 20 May 2003, the Baker Tilly National Management Team ("NMT") resolved to: suspend Messrs Harris and Hull (who were the main protagonists of the Evolution scheme); and report the matter to the authorities, although the TSG continued in business until August 2003. In about July 2003, Baker Tilly began considering past notifications to Underwriters made in respect of other Kidsons' matters. On 20 August 2003, the NMT decided to disband the TSG. On 10 September 2003, Mr. Garner-Jones completed his report on Discounted Option Schemes.
- At about this time, Mr. Longe came to the view that a full review of all past work of S@FI and the TSG was required. This was provoked by concerns that had arisen as a result of the investigations into the Evolution matter. As the subsequent Tax Faculty Report stated, the failings found in respect of Evolution were not confined to that scheme but were present in the promotion and implementation of other schemes. I accept Mr. Kealey's analysis of the evidence that this review, which culminated in the Tax Faculty Report, was not in any way attributable to Mr. Torrance and the concerns he had raised in August 2001. It was an independently provoked investigation carried out for separate and independent reasons.
- At a NMT meeting on 17 September 2003, Mr. Longe reported upon the work he had initiated to review all past work of the TSG. Again, I accept Mr. Kealey's submission that the minutes of the meeting confirm that this review was undertaken on the instructions of Baker Tilly's NMT, in response to concerns arising out of the Evolution Films investigation, rather than any concerns that had arisen in August 2001 as a result of matters raised by Mr. Torrance. On 18 September 2003, Mr. Randall, a senior partner in the Baker Tilly Tax Faculty, circulated a note to all Baker Tilly partners reporting on the reviews that were then being undertaken into past work of S@FI/TSG. It is clear from this note that the team set up to carry out this work had been only very recently established.
- On 26 September 2003, the Tax Faculty Report was produced. It evaluated the possibility of claims arising out of S@FI products and revealed shortcomings both in the management of S@FI and in strategy implementation. The Tax Faculty Report identified 15 types of tax avoidance products promoted by S@FI and identified that more than 1,000 sales were being reviewed. A broad range of potential problems was identified relating to whether the schemes were viable tax avoidance strategies, whether they had been properly sold, and whether they had been properly implemented. Indeed Mr. Longe confirmed in re-examination that the concerns referred to in paragraph 1.10 of the Tax Faculty Report were only identified as a result of the investigation into Evolution.
- On 3 October 2003, Baker Tilly sent a copy of the Tax Faculty Report to Camerons under cover of a letter stating that it was the report "anticipated in earlier correspondence relevant to the original notification in August 2001". The letter went on to state that following the ill health of "Ian Torrance", (although the reference clearly should have been to Mr. Armstrong), Mr. Garner-Jones had taken over responsibility for the investigation, but his reporting duties had been delayed by the merger and concerns arising from Evolution Films. According to the letter, Mr. Berger, the head of Baker Tilly's tax faculty, had "completed the research" following certain reorganisations.
- In my judgment, this was a misleading description of the genesis of the Tax Faculty Report, which was, as stated above, not a continuation of the IRB's work. It was an independent report produced for independent reasons. There was no connection, whether in subject matter or timing, between the Tax Faculty Report and the work of the IRB, which had been disbanded by the end of March 2002. Mr. Garner-Jones had not taken over responsibility for the IRB's investigation – all he had done was assume responsibility for the individual case reviews of Discounted Option Schemes recommended by the IRB in their Draft Report of 14 September 2001. Nor was it correct to say that his reporting duties were delayed by the Evolution matter – he had not been involved in the Evolution investigation at all. In my judgment the Tax Faculty Report could not accurately have been characterised as a continuation and completion of the IRB reporting process, since that was not the case.
- Millers presented the Report to Underwriters in October 2003. It was also notified to Baker Tilly's then current insurers, i.e. the insurers on Baker Tilly's 2002/2003 policy. Having received the Tax Faculty Report, Underwriters instructed Camerons to advise on coverage. Camerons reserved Underwriters' position on 4 October 2003. On 11 October 2004, Camerons rejected cover under the Policy on Underwriters' behalf, on the grounds that the Tax Faculty Report was too late to constitute valid notification under the Policy and no other valid notification had previously been made. In March 2005, notification was also made to underwriters of Baker Tilly's policy for the period 1 December 2004 to 30 November 2005 to embrace allegations which might not be covered by prior notifications in respect of S@FI.
Issue iii) At the Policy's inception on 1 May 2001 and at all material times thereafter was Camerons Underwriters' agent for purposes of receiving notifications under the Policy?
- Before addressing the issue of notification, it is necessary to deal with a contention made by Kidsons, but not supported by any of the other parties, namely that Camerons was Underwriters' agent for purposes of receiving notifications under the Policy, and that, accordingly, notification given to Camerons was effectively notification to Underwriters. In previous years the policies had included provisions that claims and circumstances should be notified to Camerons; that "receipt of all such notices by [Camerons] shall be deemed to constitute proper notice to Underwriters"; and that Camerons should act as claims handlers for Underwriters. Although Mr. Davidson accepted that when the Policy (i.e. for the 2001/2002 policy year) was issued, it did not continue the previous claims handling arrangements, he argued that because, when the insurance incepted, it did so on the basis that there were terms "to be agreed lead underwriter only", the reality was that Underwriters and Kidsons operated on the basis that it was "business as usual" pending finalisation of a claims handling agreement between Underwriters and Camerons. Accordingly, he submitted that, until 29 April 2002, the previous arrangements continued because nothing else had been agreed.
- I reject this submission. As Mr. Harvey's careful analysis of the evidence demonstrated, the oral evidence pointed in only one direction in confirming that Camerons was not the agent of Underwriters for the receipt of notifications at any relevant time, nor was it held out by Underwriters to be such agent at any relevant time. The evidence of Mr. Patten, and other witnesses on this aspect, was without exception to the effect that a claims handling agreement was never concluded for the period 1 May 2001 to 30 April 2002. In particular, Mr. Patten agreed, that although Camerons had been Underwriters' agent for receiving notifications in previous periods up to 30 April 2001, he had appreciated at all times that for Camerons to be Underwriters' agent for that purpose after 30 April 2001 they would have had to have been appointed as such by Underwriters. Thereafter, as each relevant document was put to him, he agreed that there was no stage at which he had been under the impression that Camerons had been appointed as Underwriters' agent for receiving notification. The evidence of other relevant witnesses was to similar effect.
- Accordingly, I conclude that there is no legal or factual basis upon which it could be asserted that Camerons was Underwriters' agent for the receipt of notification of circumstances during the Policy Period.
Notification:
Issue iv) Does the particular communication, properly construed, satisfy the requirements of GC4?
Issue v) If so, what, if any, circumstances does the particular communication notify?
- I turn next to address the issue of notification. In this context it is convenient to deal with Issues iv) and v) together in relation to each communication alleged to be a notification under GC4.
- In the light of the principles articulated in the authorities to which I have referred in paragraph 75 above, the questions which I have to ask myself in relation to each relevant communication alleged to be a notification under GC4 are whether it complies with the requirements of GC4 and how, on an objective appraisal, a reasonable recipient with knowledge of the terms of the Policy would have understood the relevant communication. The latter question is to be answered, in Lord Steyn's words in Mannai supra at 767-8, "taking into account the relevant objective contextual scene"; thus "the inquiry is objective: the question is what reasonable persons, circumstanced as the actual parties were, would have had in mind".
- In order to answer these questions, I turn now to consider the various communications that were made to Underwriters and the circumstances in which they were made. Before doing so it is relevant to summarise briefly the relevant expert evidence that was adduced at trial in relation to London Market practice as to the notification of circumstances. I emphasize, however, that in the present case the meaning and effect of the documents presented to Underwriters is a matter for the Court's determination as there is nothing in any of the relevant communications that is esoteric market jargon, requiring the expertise of a Lloyd's underwriter to explain it. Accordingly, the experts' views on the meaning of the letters and other communications are inadmissible and of no assistance to me. Likewise, for the same reason, the evidence adduced in cross-examination of Underwriters' witnesses about their understanding or interpretation of the various letters and/or references to S@FI in Millers' bordereau or Camerons' data sheets is of very limited relevance, although one can envisage that in certain circumstances their reaction, or non-reaction, might give some guide to how the reasonable recipient, circumstanced as the parties were, might have regarded the communication. But on the whole, their evidence does not assist on the construction of these documents, which is a matter of law.
Expert evidence
- Expert evidence was given of London Market practice by two experienced claims underwriters, Mr. Clegg (called by Underwriters) and Mr. Ellis (called by Millers). Their evidence was supplemented by evidence from the underwriters, claims examiners and brokers who saw the documents presented in this case. In the event, and in the light of that evidence, the parties were able to agree in writing a number of propositions concerning the relevant practices in the market which were as follows:
"Agreed Propositions
1) That any form of scratch by an Underwriter on a document demonstrates:
a) that at least that document has been presented to that Underwriter, and
b) that the Underwriter scratching the document has seen at least that document.
2) That if an Insured (by his broker) purports to notify a circumstance to an Underwriter, that Underwriter cannot subsequently contend that the Insured has not purported to do so unless that Underwriter put forward some appropriate qualification in his scratch at the time of presentation.
3) That an unqualified scratch by an Underwriter on a document presented to him as a purported notification of a circumstance does not mean:
a) that every subsequent claim made against the Insured necessarily arises out of any circumstance or circumstances described in that document,
b) that the Underwriter is prevented from subsequently arguing that the Insured has not in fact notified the circumstance or circumstances described in that document timeously,
c) that the Underwriter is prevented from subsequently challenging the extent of the Insured's actual awareness of any circumstance or circumstances purportedly notified to him in that document, or
d) that the Underwriter is prevented from subsequently taking coverage points in respect of any claim that might arise out of any circumstance or circumstances described in that document.
4) That the validity of a purported notification of a circumstance does not depend on a choice by the relevant Underwriter as to whether or not he 'accepts' that purported notification.
The assent of Kidsons to these propositions is given subject to the reservation that an Insured would have no actual knowledge of the same unless informed of them by his broker or other insurance adviser. Miller is content that, for the purposes of this trial of the pleaded issues between Kidsons and Underwriters, Kidsons' assent is given on that basis."
- Underwriters submitted, and I accept, subject to certain qualifications, that, over and above these agreed propositions, the expert evidence established additional matters. Certain of the propositions are fairly obvious and are conclusions that the Court would be likely to arrive at in any event, without the assistance of expert evidence, and merely on an application of the principles set out in the cases to which I have already referred, or upon an analysis of the evidence. It is nonetheless useful to set them out.
General
i) The burden is on the assured through his broker to give notice in accordance with policy requirements of any circumstance of which he becomes aware during the policy period which may give rise to a loss or claim.
ii) The responsibility for formulating and communicating the notification of any circumstance is on the assured, in conjunction with his broker. It is the assured who knows the relevant facts and knows that the insurer is dependent upon him to tell the insurer what he knows in fair, comprehensive and comprehensible terms.
iii) It is important for the information presented to an insurer for the purposes of notifying a circumstance to be sufficiently clear to convey to the insurer, so that the insurer is on notice in relation to any relevant event or occurrence:
a) that there is a circumstance;
b) what that circumstance is; and
c) that the circumstance is one which might give rise to a loss or claim against the assured .
iv) The insurer is under no obligation to do the assured's job for the assured. The assured therefore assumes the risk of information presented to the insurer proving to be inadequate or insufficient for its purpose or otherwise invalid.
v) It is the broker's obligation to prepare a claims file promptly upon first receipt of advice from an assured concerning a potential claim. The claims file must contain all relevant information, including all coverage information. These requirements are enshrined in the 1999 Lloyd's Claim Scheme, which applied in this case.
vi) The claims file must be kept up to date and be available for examination by insurers at all times; see paragraph 9.9 of the Lloyd's Claim Scheme.
vii) A broker may, in addition to producing and maintaining individual claims files, create a bordereau listing the claims and circumstances notified to the policy. The bordereau operates as a summary of the information contained in individual claims files. It should be an accurate representation of the claims and circumstances notified to the broker.
viii) Where a bordereau is used, the bordereau file should be presented together with the underlying claims files, since they are intended to be, and are in practice, read together. The insurer must be able to review all material information when a presentation is made to him. It was normal practice for any supporting documents or files to be shown with a bordereau. From this one can conclude that it would be wrong to consider the information contained in a bordereau, or bordereau file, divorced from the underlying claims file. A bordereau file, if used, may be a part of the notification process, but it cannot have any greater effect than the information contained in the underlying claims files, which constitute the primary notification material. In other words, the material in the claims files and bordereau file must be read compositely and for that reason should be presented to insurers compositely.
Presenting Notifications to Insurers
ix) Both the broker and the insurer are expected to act in good faith and be frank and open with each other.
x) So far as the broker is concerned, he is expected, when notifying a circumstance, to:
a) provide the insurer with all material information known to the broker concerning the circumstance, including anything unusual about the matter being presented;
b) provide the same information to the whole market, i.e. leaders and followers; and
c) inform the following market of any rejection or reservation by the leading insurer, and vice versa.
xi) Normal practice is for notifications of claims and circumstances to be made to claims representatives of insurers. Very occasionally, a claim or circumstance may be presented to a placing underwriter, but if this happens, it will usually be in the context of renewal, where the same information will be relevant for both claims and placing purposes.
xii) It may exceptionally happen that information that is provided by a placing broker to a placing underwriter as information material to the risk also happens to constitute information about a claim or circumstance. If the purpose of presenting the information to the insurer is to notify it as a claim or circumstance, that should be made clear by the placing broker, either by so informing the placing underwriter so that he can refer the matter to his claims department, or by the placing broker arranging for claims brokers to present the information to the insurer's claims representatives.
xiii) Absent any Market Agreement or other agreement between the parties, notification of claims and circumstances is required to be made to each insurer subscribing to the policy.
xiv) In the case of Lloyd's insurers, the Lloyd's Claims Scheme provided for notification of the kind of claims and circumstances involved in this case (being special category claims as defined in Annex B to the Scheme) to be made to the leading two Lloyd's underwriters and XCS (the successor to the Lloyd's Claims Office): see paragraph 3 of the Lloyd's Claims Scheme. Although paragraph 3.1 defines the term "leading underwriter" as being the first underwriter or second underwriter in respect of special category claims, it was common ground that in relation to professional indemnity matters the practice is for notification to be made to the first and second Lloyd's underwriters, before notification to XCS on behalf of the following market. In this case, that meant notification to Syndicate 839 (which was the Leading Underwriter on the slip) as well as Syndicate 683, the second Lloyd's lead, before notice to XCS on behalf of the following Lloyd's market.
xv) In the Company market each insurer handled its own claims. For the Kidsons Policy, The Underwriter and Royal & Sun Alliance were members of the International Underwriting Association ("IUA") and subscribed to the CLASS electronic trading system. International Insurance Company of Hannover Limited and Great Lakes Reinsurance (UK) Plc were represented by Admiral Underwriting Agencies ("Admiral"), which handled claims on their behalf. They did not subscribe to the CLASS system.
xvi) Insurers should be seen in the order in which they appear on the slip: see paragraph 9.2. of Lloyd's Claims Scheme.
The CLASS System
xvii) CLASS is the electronic claims system used by insurance companies who are members of the IUA. The system is operated by the broker inputting a sequence into the system for a particular risk. The sequence comprises a number of screens, containing information in respect of the policy to which the sequence relates. The sequence is intended to be read in conjunction with the underlying paper claims files. The purpose of the information in the sequence is to provide a link to the relevant paper bordereau and from there to the individual claims files.
xviii) The CLASS system does not dispense with the need for presentation of paper claims files. The practice is for these to be presented to the IUA lead insurer once the CLASS sequence has been entered.
xix) The response of the lead IUA company to the sequence is circulated to other IUA subscribing companies. The following IUA companies can then accept the lead's response or ask for further information.
Insurers' Responses to Notifications
xx) It is accepted practice for an insurer presented with information concerning a claim or circumstance to record (or "scratch") a response to the information presented to him. However, whether or not the information presented constitutes a valid and effective notification under the policy is a mixed question of law and fact that is not determined by the nature of the insurer's scratch. Whatever the insurer says at the time the information is presented to him cannot, in the absence of an actual waiver or estoppel (which is not suggested in this case), convert a valid and effective notification into an invalid or ineffective one, or validate an ineffective or invalid notification. Thus, as Mr. Ellis agreed, a claims examiner who scratches information presented to him is acknowledging that he has seen the information on the date it was presented and that cover will have been triggered in respect of that policy year in respect of any circumstance that might thereby have been validly communicated. The claims examiner is generally not in a position to judge whether valid or effective notification has been made and is not expected to make a binding decision, one way or the other, at that point in time. There is no obligation upon the claims examiner to turn to solicitors at that stage to opine on the meaning of the document presented to him or the validity and effect of any circumstance purportedly notified. Thus Mr. Ellis confirmed both in cross-examination and in re-examination, that an insurer was not prevented from subsequently disputing the validity or effectiveness of a circumstance that had previously been "accepted".
xxi) The same principles apply to "acceptance" of a CLASS sequence by an insurer by way of a "CAA" entry. The insurer is not bound by such an entry from subsequently disputing the validity and effectiveness of notifications linked to the sequence. The "CAA" response is no more than an acknowledgement that the sequence has been reviewed and there is nothing on the information within the sequence which causes the claims examiner to raise questions: Thus all the "CAA" response indicated was that the insurers had received the notifications contained within the sequence.
xxii) There was no obligation upon a claims examiner who was in any doubt about any matter to ask questions of the broker. The insurer owed no such "duty" to the assured or his broker as the insurer is not bound to perfect notification of a claim or circumstance for the assured .
xxiii) A practice requiring an insurer to commit himself upon first notification of claims and circumstances would in any event be impracticable. Claims examiners see dozens of claim and circumstance notifications every day. They could not be expected to judge, once and for all, whether each such notification was valid and effective at the moment of presentation. That would require examination of the surrounding facts of each claim and circumstance and consideration of the legal effect of the policy and its terms. These are not matters that brokers expect (or could reasonably expect) to be considered and resolved, on a binding basis, by claims examiners upon presentation of the claim or circumstance in question.
xxiv) Of course, if a claims examiner presented with a purported notification actually recognises a defect in the notification or forms the view that what he has been presented with is in fact insufficient to constitute a notification, then he should out of fairness to the broker so inform the broker. This, however, is a reflection of the collaborative nature of the claims notification process rather than evidence of the existence of a binding practice of the kind alluded to by Millers, which I do not accept.
xxv) Where a claims examiner notices something about information presented to him that causes him unease and indicates this to the broker, whether by scratching the document "wp", or "rejecting" the notification of a circumstance, he is alerting the broker to the unease he has about the adequacy of the document or its contents He is, in effect, inviting the broker to clarify the position.
xxvi) It is recognised in the market that it takes time for notification of a claim or circumstance to be made to following insurers, with the result that there may be a delay between the time of first notification of the matter by the assured to his broker and notification by the broker to the following market. The kind of delay that is acceptable would normally be measured in weeks or at most "some months". More than this would not be acceptable, especially since the market recognises the importance of insurers receiving information about claims and circumstances promptly.
Delay
xxvii) Mr. Ellis suggested in his Report that there was a market practice which operated to prevent the Lloyd's following market objecting to the lateness of a presentation made to XCS after expiry of the policy period if the two leading underwriters have received the notification within the policy period. There was, however, no support for the existence of such a practice in any Lloyd's literature and its existence was denied by Mr. Clegg. In cross-examination, Mr. Ellis accepted that there was nothing to prevent the following market relying upon their legal rights in the situation adverted to by him, whether or not they had suffered prejudice. He did not suggest that the "practice" to which he was alluding had the effect of a custom and agreed that it did not override relevant policy terms. I find that there was no such market practice as was contended for by Mr. Ellis. Indeed, Mr. Ellis further accepted in cross-examination, that there was nothing to prevent XCS, or any other underwriter, from objecting to the lateness of a notification even if it had not done so upon first presentation of the notification.
The 31 August 2001 letter
- On 31st August 2001 Mr. Patten wrote to Mr. Marcus Elwes (a placing broker at Millers) rather than to the Millers' claims broker, Mr. Salter, in the following terms:
"S@FI Limited
You will recall that the fiscal engineering activity of the practice has been channelled through S@FI Limited, which is manned in entirety by partners and staff of HLB Kidsons. Fiscal engineering work has developed significantly over the last year or two and now forms about 7% of the turnover of the practice.
The products marketed by S@FI Limited have all been validated by virtue of Counsel's opinion (in some cases two opinions) but a tax manager in Edinburgh, Iain Torrance, has expressed the view that the Inland Revenue, if minded, could be critical of some procedures followed in certain cases.
The Board of S@FI and the National Executive Committee of HLBK intend to investigate this view fully and have approached Ray Armstrong, who I gather has been a senior Inland Revenue official and has retired as a partner in PWC, to invite him to carry out the investigation and submit a report.
The Board has taken the view that this might be regarded as material information for insurers. There is no sign of a claim arising at the present time, but the Board feels that it is appropriate in the circumstances to advise what is happening and to take your instructions."
- According to the evidence before me, the letter was written with the assistance of Mr. Flaxman, an independent insurance consultant/adviser trading as Insurance Management Solutions Ltd, who had been retained by Kidsons to assist and advise in relation to insurance matters, including in relation to claims notifications, and who, as Mr. Patten described, "acted in a sense as client side adviser". Mr. Flaxman was not, however, called by any party as a witness in this action. Nor was he, nor his company, Flaxman Partners Limited, a party to the action. I therefore make it clear (because there is a possibility of further litigation relating to the events which are the subject matter of this case) that my conclusions in this judgment in relation to factual matters, insofar as they relate to Mr. Flaxman, have been reached on the basis of the oral and documentary evidence adduced before me and without the assistance of any oral evidence from Mr Flaxman. It is plain, from the evidence before me, that the 31st August letter was drafted in the terms that it was, and was sent to Mr. Elwes rather than to Mr. Salter, on the advice of Mr. Flaxman.
- Given what Kidsons knew about the extent and nature of Mr. Torrance's allegations as at 31 August 2001, this letter was coy in the extreme if it was indeed intended to be a notification of circumstances giving rise to a claim. Indeed Mr. Davidson, on behalf of Kidsons, realistically accepted that the letter was reticent in the wording it used. Quite apart from a general disinclination to alarm insurers when there might not be any need to do so, the reasons for Kidsons' reticence with Underwriters at the time when the 31 August letter was prepared were apparent from the evidence before me.
- First, by the end of August 2001, there were concerns about Kidsons' poor claims record which had given rise, and would in the future give rise, to problems about obtaining cover at a reasonable premium. Mr. Patten had correctly anticipated in February 2001 that Kidsons would have a "tough time" renewing their cover with effect from 1 May 2001 on acceptable terms. The claims statistics at the time of renewal showed that Kidsons' loss record exceeded the premium paid to insurers over the previous ten years by a ratio of more than 2:1. This was bound to be taken into account by insurers when considering renewal. Indeed on 20 April 2001 Millers had warned Mr. Patten that:
"the claims record for the partnership over the last 10 years remains very poor, in insurers view, in terms of profitability of the account and, as a result, the viability of it as an insurable risk ongoing, particularly in the current hardening market".
- In their report dated 13 June 2001 on the placing of the Policy for the 2001/2002 year, Millers explained that renewal of the insurance programme in 2001 was "a lot more difficult than usual" for a number of reasons, including Kidsons' poor claims record and the frequency of claims: "The sheer frequency and regularity of large claims negated any arguments put forward by Millers (as in previous years) about upwards trends and made the exercise, in insurers eyes, a largely actuarial one, whereby they had to calculate the level of premium necessary to return the account to profitability". When Mr. Patten reported to the NEC at its meeting on 6 July 2001 on the cover that had been placed for the 2001/2002 year, the NEC agreed that every effort should be made to "reduce the potential level of claims". Although Mr. Patten denied in cross-examination that this affected his thinking at the end of August 2001 I do not accept his evidence on this point. I conclude that he and Mr. Flaxman would have taken this into account when considering what, if anything, to notify and, if anything, how. Moreover, at this stage it was unclear whether there was real reason to believe that claims might be made against the firm and the position would hopefully become clear (or clearer) once the IRB had reported, which it was expected to do very shortly. There was no need to alarm Underwriters unduly. In reality, as Mr. Patten did accept, the problems of which he became aware towards the end of August 2001 concerning S@FI were "extremely unwelcome given Kidsons' problems with obtaining insurance at a reasonable premium". I accordingly infer that this was one of the reasons why he and Mr. Flaxman gave such careful consideration to the terms of the letter to be sent to Underwriters, and why it was that he was anxious to avoid alarming insurers when it might turn out there was no need to do so.
- The second consideration operating upon Kidsons' thinking at the end of August 2001 was a concern that S@FI activities might possibly not be covered by PI insurance at all, either in whole or part, even though Underwriters had not previously taken the point when circumstances had been notified during the previous year in relation to Evolution Films. There were three reasons for this concern:
i) First, Kidsons had not provided answers to question asked by Underwriters in connection with S@FI's activities as long ago as June 1999 and Mr. Patten was concerned that this failure might prejudice Underwriters' view of any request that might be made by Kidsons for confirmation of cover in respect of S@FI's activities. Any explicit notification of a circumstance relating to S@FI activities, especially a wide-ranging one of the type that Kidsons alleges to have been contained within the 31 August letter, would necessarily have raised in Underwriters' minds the question of whether these activities were covered. Mr. Patten (and it appears Mr. Flaxman) were not unnaturally concerned to avoid this, at least in August 2001 prior to receipt of the IRB's report.
ii) Second, re-examination of the question of coverage for S@FI's activities by Millers in August 2001, at Mr. Flaxman's request, established that there was at least doubt in Mr. Elwes' mind about the extent of cover for the fiscal engineering activities carried out under the auspices of S@FI. Thus, for example, on 24 August 2001 Mr. Flaxman had telephoned Mr. Elwes at Millers to ask "his opinion of extent of cover for S@FI." The note of the conversation records:
"[Mr. Elwes] asked 'why ?' [Mr. Flaxman] explained that [Terry Patten] had been asked by [Mr. Douglas of Kidsons] to confirm cover because they are reviewing the S@FI role within [Kidsons] for strategic reasons. [Mr. Elwes] said that he would get back to [Mr. Flaxman]'. "
On the same date Mr. Elwes wrote to Mr. Flaxman:
"Further to our telephone conversation of today I have had a look through the file and my view is that, whilst the activities have been noted by insurers, this was subject to further information which has never been provided. Therefore if one was going to be categorical one would say that it is not currently covered under the policy, although obviously were a claim to arise out of this activity we would seek to argue the exact opposite.
In addition, we did obtain a quotation over 2 years ago for a separate stand-alone policy, again which was subject to the additional information.
My view is that this has been going on for so long now that we probably ought to start afresh and if Terry [Patten] could provide the relevant information then we will re-approach insurers to obtain their views."
iii) Third, an issue had arisen during August 2001 as a result of a JMU review as to whether S@FI had been trading unlawfully without authorisation under the Financial Services Act 1986, in which case its activities would not be covered by reason of Policy exclusions.
- I accept Mr. Kealey's submissions that the evidence established that each of the above matters was operating upon the minds of the relevant individuals within, or acting for, Kidsons at the end of August 2001 and that they provided a powerful stimulus for Kidsons to be as circumspect as possible when communicating with Underwriters at the end of August 2001 about the situation which had arisen in respect of S@FI. Given the uncertainty about whether, and the extent if at all to which, S@FI was covered by PI insurance, it was obviously sensible for the protagonists, Mr. Patten and Mr. Flaxman, to test the water with the underwriting side of insurers through the offices of Millers. If the mention of S@FI and its cover caused no ripples, this would clearly smooth the path for any notification that might ultimately have to be made.
- The contemporaneous notes made by both gentlemen of Mr. Patten's telephone conversation with Flaxman in relation to the drafting of the 31 August 2001 letter, although in abbreviated note form, clearly, in my judgment, show the following;
i) that Mr. Patten explained that Mr. Torrance, whom he described as a "whistleblower", had raised concerns about "procedural matters [in respect of] Discounted options products", having worked in S@FI for 15 months, and that the concern was about whether tax avoidance had crossed over to tax evasion;
ii) that Mr. Patten said that it was not known if the allegations were true and that the NEC/S@FI Board had sanctioned the setting up of a review by an ex-Inland Revenue man;
iii) that Mr. Patten told Mr. Flaxman that there were no known claims or known circumstances which could give rise to a claim;
iv) that Mr. Patten and Mr. Flaxman discussed whether they should write to Millers and if so, to whom at Millers the letter should be sent; that they concluded that the letter should be sent to Mr. Elwes (a placing broker at Millers) and not to Millers' claims director, Mr. Steve Salter;
v) that Mr. Flaxman advised and it was agreed that the less said was best as Kidsons were not seeing this as a claim: Mr. Patten's note records "Write to Steve Marcus – less said best – not seeing it as a claim";
vi) that Mr. Flaxman advised Mr. Patten not to be alarmist and to avoid conversation with Mr. Elwes;
vii) that Mr. Flaxman advised that the letter to Millers should state that there was no known circumstance likely to give rise to a claim (at the present time) but that Kidsons felt it was appropriate under all the circumstances to advise what was happening and to take instructions.
- In cross-examination, Mr. Patten refused to acknowledge the obvious inferences to be drawn from these notes, but since he had little or no recollection of his conversation with Mr. Flaxman, and his evidence was otherwise self-serving, I derived little assistance from his attempts to gloss the clear thrust of the conversation between them. I agree with Mr. Kealey's analysis of the evidence, namely that the notes of the conversation between Mr. Patten and Mr. Flaxman show that they intentionally put together a letter which was studiedly non-committal ("not be alarmist"), gave away as little as possible ("less said best") and was deliberately sent to the placing, and not claims, side of Millers. Their clear objective was to mention, almost as it were in passing, the possibility of a matter in the briefest language, and to avoid notifying a circumstance until and unless it was established that it was necessary, following receipt of the IRB's report, which was expected shortly. Mr. Patten knew that the NEC and the S@FI Board had stressed the need for the IRB to report on Discounted Option Schemes as soon as possible and had every reason to believe that the IRB would do so. Mr. Patten and Mr. Flaxman were attempting to present the S@FI matter to Underwriters in such a way as not to give the latter any cause for alarm; and, in particular, so that they would not react by disputing coverage for S@FI. They thought that this would best be done by having the letter shown to Underwriters by Mr. Elwes as an underwriting (rather than claims) issue, thereby enabling them to test the water to see whether Underwriters reacted adversely to the mention of S@FI. Indeed this letter was sent, rather than a lengthy one which Mr. Patten had been preparing in draft on 24 August in relation to S@FI's activities.
- As can be seen, the 31 August 2001 letter itself did not specifically refer to "circumstances" at all. It merely mentioned "material information for insurers". It may well be that, given what he had recorded in his draft minutes of the S@FI board meeting, Mr. Patten did not appreciate that the board's decision had been that "circumstances" should be notified, if indeed that had been the board's decision at that stage as opposed to when the minutes came to be finally signed. It may be, on the other hand, that he thought, in the light of his conversation with Mr. Flaxman, and his statement to the latter that there were no known circumstances which could give rise to a claim, that in the light of all the problems about insurance, it was better not to notify circumstances until the IRB's report had been obtained. It may be that he approached the matter in a Machiavellian fashion and thought that, if it were necessary at a later date to do so, it could be argued that the letter was indeed a notification of circumstances which might give rise to a claim. Whatever his precise intention matters not, since as I have already stated, Kidsons' subjective intention as to the function of the notice is irrelevant. What is clear, however, is that, had Kidsons wished to do so, it could have written a letter to Underwriters expressly setting out the allegations made by Mr. Torrance, which Mr. Douglas had listed and read out to the S@FI Board meeting and informing Underwriters that these allegations were circumstances which might give rise to claims. Mr. Patten, however, chose not to report these allegations on the basis, he suggested, that they had not been "substantiated" although, in my view, his real reasons for the letter being drafted in the terms which it was were those which I have already set out.
- In order to assess, how, on an objective appraisal, a reasonable recipient with knowledge of the terms of the Policy "circumstanced as the actual parties were" would have understood the 31 August 2001 letter, it is relevant to refer to the fact that, in the past, it had been the practice of Kidsons, through Mr. Patten, (a) explicitly to state when giving notice under GC4 that notice was being given of circumstances that might give rise to a claim and (b) to send the written notice to Mr. Salter, the Claims Director of Millers, and not to Mr. Elwes, in the placing department. Such former practice is part of "the relevant objective contextual scene".
- When the 31 August 2001 letter was received by Mr. Elwes at Millers, it was not understood by him to be notification of a claim. He saw the letter in the context of the discussions he had had the previous week concerning updating the coverage position on S@FI. He commonly received this kind of information from assureds about their business during the course of a policy and his practice was to pass it on to insurers. He reacted in the way in which, it would appear, Mr. Patten and Mr. Flaxman intended and expected him to do. As he says in his witness statement, had the letter been addressed to Mr. Salter, he would have seen it in a claims context and might have viewed it differently. In my judgment, his reaction was that of an objectively reasonable broker in his position.
- He responded in a letter dated 4 September 2001, by suggesting to Mr. Patten that Millers should get his letter of 31 August 2001 "noted by insurers for information purposes" and by advising that Underwriters would be likely to want to know the findings of Mr. Armstrong once he had completed his investigation.
The presentation of the 31 August 2001 letter to Underwriters on 27 September 2001
- On 27 September 2001, a Mr. Stephen May, a Broking Director at Millers, took the 31 August 2001 letter to Mr. Christopher Day of Chartwell Managing Underwriters ("CMA"), a placing underwriter for Syndicate 839, the Lead Underwriter on the slip. A copy of the 31 August 2001 letter was provided to Mr. Day, in a placing context, and scratched by him:
"WP - Please keep uwrs fully advised. Noted for information only."
Mr. Day did not understand the letter to be notification of a circumstance. He thought it was providing information which the assured thought might be material to the risk. Had he understood the letter to be attempting to notify a circumstance, he would have made it clear that the broker needed to advise the Syndicate's claims department. In my judgment, although what he subjectively thought was being communicated to him is not determinative of whether a notification was in fact made, his reaction was that of an objectively reasonable underwriter in his position.
- By scratching the 31 August 2001 letter in the way which he did, Mr. Day was making it clear that he wanted more information, was requesting that Underwriters should be kept fully advised and in the interim was reserving insurers' position. Mr. Elwes understood the effect of Mr. Day's scratch. He agreed that the use of the notation "wp" was standard in this context where an insurer wished to reserve its rights. However, in the light of the expert evidence as to market practice which I have set out above, even if there had been no such reservation, Underwriters would not have been prevented from thereafter disputing the validity and effectiveness of that information.
- On 5 October 2001, Mr. Elwes of Millers wrote to Kidsons confirming that it had seen Underwriters on Kidsons' behalf, and that Underwriters had "noted the information on a strictly without prejudice basis and asked that they be kept fully advised … the details provided have been noted for information purposes only" and suggesting that once Mr. Armstrong's investigation report had been completed, a copy should be forwarded to Millers to show Underwriters.
Conclusion in relation to the presentation on 27 September 2001
- I have no hesitation in concluding that, on an objective appraisal, the presentation of the 31 August 2001 letter to Mr. Day was not, and did not purport to be notification of a circumstance. Mr. Day was shown the 31 August 2001 letter in his capacity as a placing (not claims) underwriter by experienced brokers who well knew the distinction between claims and placing matters. The letter itself was couched in such a way as not to alert insurers to what was going on within Kidsons. It did not say it was purporting to be notification of a circumstance or otherwise indicate that to be its purpose. It did not make it sufficiently clear and unambiguous to leave a reasonable recipient in no reasonable doubt that it was purporting to notify a circumstance that might give rise to a claim. I accept that it is possible for an assured to give notice of a claim or of circumstances that might give rise to a claim to the underwriting/placing side as opposed to the claims side of an insurance organisation. However, each case needs to be examined in its proper factual context, and against the legal requirement that, if notice is to be validly and effectively given, the reasonable recipient must be left in no doubt that notice is being given. Here the context was wholly inconsistent with the notion that Kidsons, through Millers, was attempting to notify to Underwriters circumstances which might give rise to a claim. I do not regard Mr. Ellis' views on this point (namely that the presentation to Mr. Day constituted notification of a circumstance) as admissible, as they are not legitimate expert evidence. But even if they were, I reject them as wholly unrealistic. Mr. Ellis' evidence is also inconsistent with Millers' pleaded case, which is that the presentation of the 31 August 2001 letter to Mr. Day was not notification of a circumstance. In my judgment, the presentation of the 31 August letter to Mr. Day on 27 September was not, and did not purport to be, notification of a circumstance.
The presentation of the 5 October 2001 letter, the S@FI claims file and the bordereau to Underwriters in October 2001
- On 5 October 2001 Kidsons wrote to Camerons providing details and "a set of papers" for five additional cases that Kidsons was referring to Camerons under a claims handling agreement as between Kidsons and Camerons. The letter stated:
"Claims handling with effect 1 May 2001: … there are five additional cases, some of which pre-date the finalisation of the claims handling agreement and a couple are recent. I am enclosing a set of papers for each of the additional five. The details are as follows:
….
'KI01/009 S@FI Limited'."
- The "papers" relating to that case comprised a copy of the (unscratched version of the) 31 August 2001 letter, together with Millers' responses to it. Camerons acknowledged receipt of that letter and "papers" in respect of "KI01-009 S@FI Limited" on 30 October 2001. Although addressed only to Camerons, Mr. Patten, apparently by mistake, sent a copy of Kidsons' 5 October 2001 letter and enclosed "papers" to Mr. Salter at Millers. Upon receipt of that letter, Mr. Salter concluded that it and its enclosures constituted a notification of the circumstances referred to therein, and created a S@FI claims file. There was a dispute on the evidence as to whether the claims file made up for the S@FI matter included a copy of the 31 August 2001 letter as scratched by Mr. Day, as opposed only to containing the unscratched version of that letter.. A copy of the scratched version was what was disclosed in these proceedings as being on the claims file. Both Mr. Matthew Howes of CMA (a claims examiner for the Lead Underwriter Syndicate 839) and Mr. Gage believed that they saw the scratched version of the 31 August 2001 letter because, if they had not, they would have wanted to see it and would have annotated the file accordingly. Mr. Salter however said that he was certain that the scratched version was not put onto the claims file, until October 2003. It is not necessary for me to decide the point as if the scratched version of the 31 August letter was not on the claims file, the surrounding correspondence was, including Mr. Elwes' letter of 5 October 2001 reporting to Mr. Patten that Millers had shown the letter to Underwriters, who had noted the information on a strictly without prejudice basis, for information purposes only, and had asked to be kept fully advised. This would have made it obvious to anyone reading the claims file, even without the scratched version of the letter, the basis on which underwriters had seen and noted the 31 August 2001 letter.
- On 17 October 2001, Millers presented the S@FI claims file, together with the Millers' bordereau file and the slip, to Mr. Howes, a claims examiner for Syndicate 839. The Millers' S@FI claims file at that time comprised:
i) A Millers' cover sheet. That document recorded;
a) "Date of Loss" – "31/08/2001 NOTIFIED"
b) "Loss Details: S@FI LTD. KI01-009";
ii) Kidsons' 31 August 2001 letter to Millers;
iii) Millers' 4 September 2001 letter to Kidsons;
iv) Millers' 5 October 2001 letter to Kidsons;
v) Kidsons' 5 October 2001 letter to Camerons.
The 2001 claims bordereau bore the title
"HLB KIDSONS CHARTERED ACCOUNTANTS"
Professional Indemnity Insurance
12 months at 01 May 2001
Policy No. PKID00101 – Primary Layer GBP2,000,000 any one claim
Claim Circumstance Notification Bordereau for period: to 15th Aug 2001 (see individual data sheets attached)".
There were 9 other cases referred to in the bordereau apart from S@FI. In each of those cases the name of the claimant or potential claimant was recorded together with a summary of the nature of the claim or potential claim. In relation to S@FI the following information was recorded:
"'CMK Ref KI01-009'"
'CLAIMANT NAME S@FI Ltd'
'CLAIM MADE DATE 31/08/01'
'NATURE OF CLAIM Possible tax errors in fiscal engineering work'
'ADDITIONAL INFORMATION Matter unquantified as no claims'."
It was of course inaccurate on any basis to identify S@FI as the claimant or potential claimant.
- On 17 October 2001 Mr. Howes of CMA scratched Kidsons' letter dated 5 October 2001 without comment, and the bordereau without comment. In his evidence Mr. Howes stated that he had scratched this information to confirm that he had seen it. I accept his evidence that he understood that the 31 August letter had previously been shown to his Syndicate, either because he saw a scratched version of the letter in the claims file or because he read the correspondence in the claims file which made this clear. He did not think that he was being provided with any new information; he did not see any need to take any specific action in relation to the S@FI matter, since Mr. Day had already reserved Underwriters' position by noting the 31 August 2001 letter on a without prejudice basis. Although he said in cross-examination that he would have appreciated at the time that the presentation of documents on Kidsons' behalf was an attempt by it to notify a purported circumstance, he did not consider that it was appropriate for him, given the previous reservation, the fact that there was such limited information available, and where a report was apparently to be forthcoming from the assured, to get into a debate with brokers as to whether a circumstance had been notified. Mr. Stewart in his closing submissions suggested that Mr. Howes had accepted that, because he had not made a scratch to the effect "we do not accept this as a circumstance", it followed that he must have thought the contents of the 31 August 2001 letter amounted to a circumstance. Although the one-word answer to a question put by Mr. Stewart might, taken on its own, provide a basis for such a submission, that was not, in my view, Mr. Howes' actual position when his evidence is considered in its entirety. All he was actually accepting was that he appreciated that an attempt was being made to notify a circumstance, but the rights and wrongs of that were being left for another day. In any event, as all counsel agreed, his views as to whether a circumstance had been notified are not relevant.
- It was not suggested to him in cross-examination that this was an erroneous approach or that he should have acted differently. So far as the bordereau was concerned, he saw the purpose of the bordereau being to monitor the erosion of the aggregate excess and aggregate policy limits (if any), but since the figures were at this stage all zeros, he did not attach significance to the document.
- On 18 October 2001, Millers presented the same material shown to Syndicate 839, i.e. the S@FI claims file and the 2001 Millers bordereau, to Ms Jean Hackworthy, a claims assessor for Syndicate 683, the second lead Lloyd's Syndicate on the Policy. Again there was an issue as to whether the scratched version of the 31 August 2001 letter was on the file, but for similar reasons it is not necessary to decide the point. Ms Hackworthy was under the misapprehension that there was a claims handling agreement in place, as had been the case under previous policies, under which the second lead Lloyd's syndicate had no role to play in receiving notifications or handling claims. The bordereau was scratched by Ms Hackworthy as follows:
"Seen nil o/s. Please advise how claims reserves are going to be managed at LCO. As per C/H agreement we do not need to see files routinely."
Following that presentation Millers also noted
"Saw Jean Hackworthy at 683 who commented that she would be happy for us not to see 683 as 2nd U/W as all reserves would be seen at LCO."
- Millers did not at this stage in October 2001 attempt to show the 5 October 2001 letter, the S@FI claims file or the bordereau file to any following insurers, whether via notification to XCS on behalf of the following Lloyd's market, by entry of a CLASS sequence for IUA underwriters or otherwise. It is unclear why it did not do so, especially if it was intending to notify the S@FI matter. Mr. Salter agreed that Millers should have done so. It appears that the matter was simply overlooked.
Summary of counsel's submissions in relation to the presentation of the 5 October 2001 letter, the S@FI claims file and the bordereau to Underwriters in October 2001
- Kidsons and Millers, by Mr. Davidson and Mr. Stewart respectively, contend that the October 2001 presentations, consisting of the 31 August 2001 letter, the 5 October 2001 letter, the S@FI claims file and the bordereau amounted to a valid notification of the state of affairs that were causing concern to S@FI and Kidsons and that were to be investigated. They submitted that the scope of the circumstances notified was defined by reference to the scope of those concerns and that investigation. These, it was submitted, included all the concerns expressed by Mr. Torrance since these were expressly referred to in the 31 August 2001 letter in the sentence "Iain Torrance, has expressed the view that the Inland Revenue could be critical of some procedures followed in certain cases". It was further submitted that these also included all matters that were going to be investigated and to form the subject matter of the proposed report; these were expressly referred to in the letter in the sentence:
"The Board of S@FI and the National Executive Committee of HLBK intend to investigate this view fully and have approached Ray Armstrong, ….., to invite him to carry out the investigation and submit a report."
It was further submitted that Millers 2001 bordereau – making reference under "NATURE OF CLAIM" to "possible tax errors in fiscal engineering work" by S@FI – gave the plainest indication of the nature of Kidsons' concerns, and of the matters that Kidsons was to investigate. Thus it was contended, the scope of the concerns and the investigation (and thus of the circumstances that were being notified) were further clarified. Reliance was also placed on the fact that the Claims File included copies of Millers' letters to Kidsons dated 4 September and 5 October 2001 which explicitly referred to the investigation that was to be carried out into those concerns and to the need to show a copy to Underwriters as and when it was completed. It was argued that the "defining" of the notified circumstances by reference to the scope of the matters being investigation was thus emphasised further. Finally, in paragraph 142 of his written closing submissions, Mr. Davidson went so far as to submit that what was notified to Underwriters as circumstances which might give rise to a claim were "the full range of S@FI activities".
- Mr. Harvey, on behalf of Camerons, put the argument in similar, albeit slightly more limited terms. He submitted the letter made specific reference to both (a) Mr. Torrance and the views he had expressed about S@FI and (b) the investigation to be carried out by Mr. Armstrong; and that, on a fair reading, the 31 August 2001 letter is giving notice to Underwriters of the two, linked, circumstances namely (a) that there were matters of concern which had been raised by Mr. Torrance relating to the tax aspect of certain S@FI products and (b) that Kidsons were instituting an investigation by Mr. Armstrong. Accordingly, Mr. Harvey submitted that the next step is to consider whether the sample claims which the parties have identified for consideration, arise out of the matters about which Mr. Torrance was expressing concern and/or which were to be investigated by the IRB. Mr. Harvey's approach involves identifying Mr. Torrance's concerns; he submitted that at a high level his concern was that S@FI was implementing products on the strength of generic Counsel's opinions and without proper regard to the individual situation of the particular client; and at a deeper, or more focussed, level, those concerns related to the specific concerns which Mr. Torrance had identified as shown by the contemporaneous documents. Mr. Harvey accepted that, insofar as any distinction should be drawn between the inherent efficacy of any tax avoidance scheme and its implementation, Mr. Torrance was mainly concerned with the way in which the scheme was being applied and implemented, rather then the validity of any scheme. He disagreed with the philosophy of taking a scheme "off the shelf" and applying it for a client without considering the client's particular situation, and his particular tax consequences. He was responsible for dealing with implementation.
- Mr. Kealey, on the other hand, submitted as follows:
i) He accepted that, once the 31 August 2001 letter, and related information concerning S@FI, was put into a S@FI claims file, presentation of that material, whether together with the bordereau file or otherwise, purported to be notification of any such circumstance as may thereby validly have been made. Consequently he accepted that the presentations made to Underwriters in respect of the S@FI matter during October 2001, and 2002, constituted purported notifications. However he submitted that the nature and extent of the notification so made depends upon construction of the documents presented to Underwriters.
ii) As to that he submitted that the only circumstance of which notice was purportedly given on 17 and 18 October 2001 by the 31 August 2001 letter was that, in the view of a tax manager in Edinburgh, if minded the Inland Revenue could be critical of some procedures followed in certain cases: i.e. some of the steps taken in the implementation of some cases.
iii) He submitted that on 17 and 18 October 2001, notice was not purportedly given either (a) of any possible issue about the validity or essential technical efficiency of the products; or (b) of any possible issue about the fundamental viability of the whole range of S@FI products; or (c) of any possible issue about the integrity or competence of S@FI senior personnel; or (d) of any possible issue about the viability of S@FI going forward; or (e) of any possible issue about mis-selling, or false representations to clients; or (f) of any possible issue about the marketing of the products to clients; or (g) of any possible issue falling outside the scope of procedures of which the Inland Revenue might, if minded, be critical.
iv) The Millers bordereau that in October 2001 accompanied the 31 August 2001 letter was intended to be, and is to be construed as, merely a summation of the contents of that letter. It does not extend the scope or meaning of the notified circumstance beyond that set out in the underlying letter.
v) The only circumstance of which notice was effectively given on 17 and 18 October 2001 to the two leading Lloyd's syndicates was in respect of procedures followed in certain cases relating to Discounted Option Schemes: this was because by the time when purported notification was made to these two syndicates of the circumstance set out in the 31 August 2001 letter, the only circumstance of which Kidsons was aware falling within the description of "some procedures followed in certain cases" related to Discounted Option Schemes.
- The above is necessarily merely a summary of the extensive written and oral submissions of counsel in relation to this issue.
Conclusion in relation to the presentation of the 5 October 2001 letter, the S@FI claims file and the bordereau to Underwriters in October 2001
- I accept Mr. Kealey's submission that the Millers bordereau which accompanied the 31 August 2001 letter in October 2001 should be regarded and construed as merely a summary of the contents of that letter. The reasonable recipient would not in my judgment regard the statement in Millers' bordereau "NATURE OF CLAIM: Possible tax errors in fiscal engineering work" as extending the scope or extent of what had been notified in the actual underlying letter. This approach was confirmed by the expert evidence, which I have already set out, namely that a bordereau file, if used, may be a part of the notification process, but it cannot have any greater effect than the information contained in the underlying claims files, which constitute the primary notification material. In other words, the material in the claims files and bordereau file must be read compositely and for that reason should be presented to insurers compositely. That seems to me to be common sense in the absence of any express indication that the summary information on the broker's bordereau file is intended to extend the scope of what is in the underlying letter.
- I also conclude – and indeed as much was conceded by Underwriters – that the reasonable underwriter recipient on the claims side of the presentation of the 5 October 2001 letter, the S@FI claims file containing the 31 August 2001 letter and the other correspondence, and the Millers' bordereau file, might have appreciated that an attempt was being made on Kidsons' behalf purportedly to notify a circumstance or circumstances giving rise to a claim. That would have been obvious from the circumstances that the presentation was being made to the claims side of Underwriters, by means of the documents which I have identified, including the bordereau entitled "Claim Circumstance Notification Bordereau" and the claims handling letter of 5 October 2001 to Camerons which referred to "five additional cases".
- However, for reasons different from those put forward by Mr. Kealey, and indeed more fundamental than his, I conclude that there was no effective notification to the Lloyd's lead and second lead Underwriters, by means of the presentation on 17 and 18 October of the 5 October 2001 letter, the S@FI claims file (including the 31 August 2001 letter) and the bordereau, of any circumstance or circumstances which might give rise to a loss or claim against Kidsons. My reasons for this conclusion are as follows:
i) I have already held in an earlier section of this judgment that Kidsons was aware for the purposes of GC4 in October 2001 of the wide ranging views that had been expressed by Mr. Torrance as set out in the contemporaneous documentation. Likewise I have already held that the fact that, by 17/18 October the partners' concerns had been allayed and that, after 14 September 2001, Kidsons regarded the IRB's Draft Report as effectively endorsing its methodology and approach and that, subject to the outstanding review of individual Discounted Option Schemes cases, its house was in order, does not mean that the firm ceased to have such "awareness" for the purposes of GC4 of the wide concerns that had been expressed by Mr. Torrance. So I do not agree with Mr. Kealey that the "awareness" point per se prevents the October presentation amounting to a notification other than of the limited circumstances relating to Mr. Torrance's views about procedures followed in certain cases relating to Discounted Option Schemes.
ii) However, in my judgment, the reasonable underwriter recipient of the documentation presented to Underwriters in October 2001 would not, when he came to read the 31 August 2001 letter, the 5 October 2001 letter and supporting documents, have concluded that the assured was actually thereby giving notice of a circumstance or circumstances giving rise to a claim, whatever he may have thought the assured was attempting to do by presenting the Millers' claims file and 2001 claims bordereau. The statements in the documents were, and the reasonable recipient would have thought that they were, insufficiently clear and unambiguous to constitute notice of a circumstance giving rise to a claim under GC4.
iii) Thus there is no identification of any error, act or omission, or potentially negligent or otherwise wrongful conduct on the part of the assured; there is no identification of any victim or possible claimant; there is no mention of the possibility that any client of the firm or S@FI, or other individual, might suffer loss as a result of any identified error, act or omission, or potentially negligent or otherwise wrongful conduct on the part of the assured; there is no statement in the body or the heading of any of the letters that the assured is in fact by means of those letters notifying a circumstance which may give rise to a claim, unlike other letters sent by Kidsons in respect of other unrelated circumstances, and which were (and were at the time) accepted by Underwriters to constitute notifications under the Policy; indeed there is no reference to a circumstance or circumstances at all - the use of the phrase in the last paragraph "in the circumstances" is clearly not being used in that sense. Moreover, the description on the 2001 claims bordereau was general and in any event could not extend what was said in the letters into a notification, since as I have held its only function was to be a short-hand summation of what had been received to date. It wrongly referred to S@FI as the "claimant"; although, on the application of Mannai principles, that error might have been overlooked if the documentation otherwise adequately identified a circumstance, in the event it adds to the ambiguity.
iv) The matters which the 31 August 2001 letter and supporting documentation do expressly state are far too vague and nebulous to be construed as a valid notification of a circumstance or circumstances which might give rise to a claim.
v) Thus the first paragraph was merely addressing the nature of S@FI's business. This may, as the last paragraph of the letter said, have been "material information for insurers", but only in the sense of being information relevant to the risk and not information relevant to presentation of a possible claim or circumstance.
vi) The second paragraph is in such vague terms that it cannot fairly or properly be said to constitute notice of circumstances which might give rise to a loss or claim. On the contrary, the emphasis is primarily upon the soundness of the business; thus the reader is told that there was no issue in respect of the validity or essential technical efficiency of the products: they had "all been validated by virtue of Counsel's opinion (in some cases two opinions)". The paragraph then refers, again in vague and tentative terms, to a tax manager in Edinburgh having "expressed the view that the Inland Revenue, if minded, could be critical of some procedures followed in certain cases", i.e. some of the steps taken in the implementation of some cases. But the reader is not given any idea whatsoever as to what the potential Inland Revenue criticisms might be, what "procedures" are being referred to, or in relation to the implementation of what "products" the views (whatever they might be) are being expressed. There is no statement that the result of such possible procedural criticisms by the Inland Revenue will be possible claims by clients against S@FI or Kidsons. Rather, the letter emphasises that there was no sign of a claim arising. As Mr. Gwilliam confirmed in his evidence, and is obvious, the Inland Revenue, when evaluating whether a tax scheme achieves a legitimate avoidance of tax, or has been properly implemented, is not interested in whether the client has been negligently advised by his tax adviser.
vii) The reader is then informed that the Board of S@FI and Kidsons' NEC had appointed an experienced outsider with a senior Inland Revenue background to investigate fully and report. Again, this does not of itself identify any circumstance.
viii) Thus the recipient was not being told either (a) there was any possible issue about the validity or essential technical efficiency of the products; or (b) that there was any possible issue about the fundamental viability of the whole range of S@FI products; or (c) that there was any possible issue about the integrity or competence of S@FI senior personnel; or (d) that there was any possible issue about the viability of S@FI going forward; or (e) that there was any possible issue about mis-selling, or false representations to clients; or (f) that there was any possible issue about the marketing of the products to clients; or (g) that there was any possible issue falling outside the scope of some wholly unidentified procedures, relating to wholly unidentified products, of which the Inland Revenue might, if minded, be critical, in some unidentified cases.
ix) The high water mark of the potentially adverse information being presented to Underwriters was thus that Mr. Torrance, a tax manager in one office, had expressed the view that the Inland Revenue might, if minded, be critical of some wholly unidentified procedures, relating to the implementation of wholly unidentified products marketed by S@FI in some, again wholly unidentified, cases. The conveying to Underwriters of the fact that such a view had been expressed, and the fact that it was going to be investigated by an independent person such as Mr. Armstrong, does not, in my judgment, on any reasonable analysis, amount to adequate notification of a circumstance or circumstances giving rise to a claim for the purposes of GC4. The reasonable recipient, if asked, would simply have had no idea what circumstance had been notified, what claim or loss it might give rise to, or what the potential exposure might be. He would not be any further informed by the description in the October bordereau that the nature of claim was "possible tax errors in fiscal engineering work", not merely because the description is so vague as to be useless, but also because it does not even reflect the view of Mr. Torrance, as stated in the 31 August 2001 letter, that the Inland Revenue might be critical of "procedures".
x) Finally, the reasonable recipient, circumstanced as the parties were, would necessarily have appreciated that the context in which the 31 August 2001 letter had originally been written and presented to Underwriters was ostensibly to inform the placing side of Millers and Underwriters about the nature of S@FI's business. This again would have militated against any interpretation of the letter as a notification of circumstances.
Presentation on 19 April 2002 to the lead Lloyd's syndicate 839 of the letter dated 28 March 2002 and accompanying documentation
- Although in contact with Kidsons regularly in relation to other matters, nothing further was heard by Millers (or it appears by Camerons) in relation to the S@FI matter until late March 2002. On 28 March 2002, two days after the consultation with Mr. Tyre QC, and one day after the NEC meeting when Mr. Gwilliam had told the NEC that he believed:
"that there was now less risk from the Inland Revenue, but there was still a risk of claims from clients where [discounted option] schemes had failed because of procedural mistakes"
and the NEC had agreed that it was then appropriate for a "report on the situation to be prepared for PII underwriters", Kidsons wrote to Camerons, with a copy to Millers in the following terms:
"S@FI Limited
Some months have passed since we last corresponded. We have put a lot of effort into a technical investigation of the sale of products with the intention of having a report prepared by the Independent Review Board under Ray Armstrong referred to in my letter of 31 August 2001.
This work has been slowed to a certain extent because of health problems suffered by Ray Armstrong and his ability to carry on leading the investigation is now in question. There is likely to be a further delay in the production of the report.
A meeting was held on Tuesday 26 March 2002 with Colin Tyre QC who had raised observations on two transactions concerning Discounted Option Schemes. The result of the meeting was a general view that the technical efficiency of the products was accepted but in some instances there might be procedural difficulties involving the Trustees for each scheme affecting the implementation of the scheme and this might lead to the possibility of criticism in the future.
Graham Garner-Jones, a tax partner in our Chester office and one of the Managing Partners for S@FI was present at this meeting and will very shortly be producing a report to summarise the results of the meeting and the general activity in this area over the last few months".
Millers added the 28 March 2002 letter to its S@FI claims file.
- Interestingly, although not relevant at this stage of the proceedings, on 4 April 2002, Ms Turnbull of Camerons replied to Mr. Patten's letter of 28 March 2002. She stated that until further information was available,
"it, of course, remains unclear whether this constitutes a circumstance/claim within the terms of the policy and, accordingly, we are not in a position to confirm whether cover will apply".
Mr. Patten faxed a copy of Camerons' letter to Mr. Garner-Jones and Mr. Harris. Despite the warning in it that the information provided to Underwriters might not constitute a circumstance within the terms of the policy, neither of them responded to Mr. Patten on this point.
- On 19 April 2002 the S@FI claims file, including the 28 March 2002 letter, and the Millers' 2001 bordereau were presented to Ms Constable on behalf of the Lloyd's Lead Underwriter, syndicate 839. By that time Millers' bordereau also included Camerons' bordereau for September – November 2001. This in turn included:
i) a 2001 Summary Report which identified as "Claim No KI01-009" S@FI Ltd;
ii) the S@FI data sheet prepared by Camerons which read as follows:
"1. Miller Claim No : KI01-009
…
4. Policy Period : 12 months at 01/05/01
…
7. Date of claim made against K.I. : 31/08/01
8. Date of notification to CM : 31/08/01
9. Claimant : S@FI Ltd
…
13.(a) Policy Situation :- Annual aggregate excess £1 million – on exhaustion refer to wording
(b)Claim Situation :- Concern that tax products marketed by S@FI Ltd (manned entirely by staff and partners of Insured) could be criticised. Awaiting results of investigation being conducted by independent expert (retained by S@FI) to see if concerns founded.
Await update once investigations complete
(c) Liability :- Possible"
Again, the statements that purportedly recorded that S@FI was "the claimant" and that the date of claim made against Kidsons was 31 August 2001 were simply wrong. No claim had been made at all. However, the actual position, namely that S@FI was in fact marketing the products, and not the claimant, and that liability was "possible" was discernible from the narrative. Ms Constable scratched the 28 March 2002 letter "Await any relevant CMS [Camerons] comments".
Conclusion in relation to the presentation on 19 April 2002
- In my judgment, the presentation of the 28 March 2002 letter, together with the other documentation, did at this stage amount to a valid notification of circumstances to the Lloyd's Lead Underwriter, for the purposes of GC4. Underwriters were on this occasion being informed that Mr. Tyre QC had advised on two transactions concerning Discounted Option Schemes, and that, although he had accepted "the technical efficiency of the products", he had advised that in "some instances there might be procedural difficulties involving the Trustees for each scheme affecting the implementation of the scheme and this might lead to the possibility of criticism in the future". On a fair reading of the 28 March 2002 letter, and of the summary contained in the S@FI data sheet prepared by Camerons of the earlier 31 August 2001 letter, and in the context of the investigation into S@FI products, in my judgment the reference in the 28 March 2002 letter to the fact that
"in some instances there might be procedural difficulties involving the Trustees for each scheme affecting the implementation of the scheme and this might lead to the possibility of criticism in the future"
cannot sensibly be read as confined to the two specific named examples of Discounted Option Schemes that Mr Tyre was considering. Mr Tyre was clearly instructed to consider those two particular cases as examples of potentially wider procedural problems in relation to Discounted Option Schemes and that would have been clear from the information that Underwriters were given. Thus the circumstance or circumstances which were effectively being notified was or were that there had in the past, in the view of leading counsel, been procedural defects in the implementation of Discounted Option Schemes involving the Trustees, exemplified by the two particular transactions which Mr Tyre was considering. The bordereaux adverted to the possibility of claims, and liability, and although the information provided was still exiguous, the reasonable recipient would at this stage, in my judgment, have appreciated that, in the light of the adverse observations of Mr. Tyre, Kidsons was indeed notifying the possibility of claims arising from procedural defects ("difficulties") involving the Trustees in relation to the implementation of Discounted Option schemes.
- However I reject the wider contentions of Kidsons, Camerons and Millers that the documents presented amounted to notification of any more extensive concerns in relation to the whole range of tax avoidance products marketed by S@FI and which were said to be (but which were in fact not) the subject of the investigation for similar reasons to those which I have expressed above in relation to the presentation of earlier documents. In particular, I reject the argument that somehow the Millers' or Camerons' data sheets or bordereaux could extend the scope of the notification in the letter. As Mr. Kealey submitted, and as I have already accepted, the expert evidence showed that the bordereaux and claims data sheets were, and would be regarded as, accompaniments of the underlying letters of notification, would be regarded as intended summaries of those underlying letters, and have to be construed accordingly in that context. I thus agree with Mr Kealey's submission that, if, as I have found to be the case, there was an effective notification in April 2002, that notification was limited to procedural problems affecting Discounted Option Schemes.
- There was no presentation at this time to the Second Lloyd's Lead Underwriter of the 28 March 2002 letter, and accompanying documents, but that was unsurprising given the instruction by the Second Lloyd's Lead Underwriter that it did not wish to see claim files routinely. In those circumstances it seems to me that, albeit the Second Lloyd's Lead Underwriter was operating under the misapprehension that a claims handling agreement was in place, when it was not, it must be treated as having been content to accept any valid notification of circumstances to the First Lead Lloyd's Underwriter as effective notification to it. Accordingly I conclude that the presentation of the 28 March 2002 letter, together with the other documentation, to the Lloyd's Lead Underwriter did at this stage also amount to a valid notification of circumstances to the Second Lloyd's Lead Underwriter, for the purposes of GC4, but in the limited terms as to scope which I have already outlined.
- Mr. Kealey did not suggest that these presentations did not comply with the time requirements of GC4. In my judgment, it was in any event, in all the circumstances, reasonable for Kidsons to wait until it had received the advice of Mr. Tyre in relation to these schemes before making its notification to Underwriters. Accordingly, in my view the start date for the purposes of computing the period that could be described as "as soon as practicable" should be taken as 27 March 2002, the date of the NEC meeting that considered Mr. Tyre's advice.
Presentations to the Company market
- On 18th April 2002 Millers entered the S@FI claim details on the LPC CLASS system. The 2nd Defendant, The Underwriter Insurance Company Limited ("The Underwriter"), which was the lead IUA company insurer, and the 3rd Defendant , Royal and Sun Alliance Insurance plc ("RSA") subscribed to the CLASS system. On 19 April 2002 the claims bordereau file was presented to The Underwriter by Millers. The claims bordereau was scratched by a claims manager for The Underwriter before being returned to Millers on 22 April 2002. On 22 April 2002 the S@FI claims file was also presented to The Underwriter. That file was retained by it and only returned on 14 May 2002 . On 22 April 2002 The Underwriter's claims manager, Mr. Gage, made a "CAA" entry on the LPC CLASS system thereby releasing the CLASS Sequence to the following IUA companies (in this case, RSA). On 25 April 2002 RSA made a "CAA" entry of its own on the LPC CLASS system acknowledging the CLASS sequence.
- Millers had not indicated that there was anything unusual, or any urgency, about the information presented to The Underwriter in April 2002. It could have broked, but chose not to broke, the Kidsons' notifications personally. Mr. Gage reviewed the claims files in due course. When he saw the S@FI claims file on 10 May 2002, he concluded that the information in the claims file was insufficient to constitute proper notification and scratched the 28 March 2002 letter accordingly:
"We do not accept this as a notification. It may be as the insured say material information that should be presented to uw'rs."
The S@FI claims file was returned to Millers on 14 May 2002. Millers did not react to Mr. Gage's rejection of the S@FI notification. It appears to have been completely overlooked.
- Admiral, which represented the 3rd Defendant, International Insurance Company of Hannover and the 4th Defendant, Great Lakes Reinsurance (UK) plc, was provided with Camerons' bordereau and data sheets, containing reference to S@FI, on 17 April 2002. The Millers' bordereaux file, and underlying Kidsons' claims files, including the S@FI file, were supplied to Admiral on 21 May 2002, following requests they had made for information on certain matters (not including S@FI) on 23 April 2002. The bordereaux and claims files were returned by Admiral, duly scratched but without comment, on 11 June 2002.
- Underwriters contend that the notification which was purportedly given to the company market as set out above was not given as soon as practicable, and therefore was ineffective, as not complying with the requirements of GC4. Even if effective, they contend that because of the state of Kidsons' awareness, any notice was confined to procedural difficulties affecting the implementation of Discounted Option Schemes.
Conclusion in relation to presentations to the Companies market
- In my judgment the notification given to all Underwriters in the company market was, in the circumstances, given as soon as practicable, and therefore complied with the time requirements of GC4. The relevant documents were provided to The Underwriter and RSA within the Policy Period. Although the Millers' bordereaux file, and underlying Kidsons' claims files, including the S@FI file, were not supplied to Admiral until 21 May 2002, it had received the Camerons' claims file within the Policy Period. The period of time since 27 March 2002 (namely the date on which the NEC considered Mr. Tyre QC's advice, and resolved that a report should be given to Underwriters, which, as I have said, I take as the starting date for the computation), was not that long. The market evidence showed that some latitude would be allowed in this respect.
- For the same reasons that I have already stated in relation to the presentation on 19 April 2002 to the lead Lloyd's syndicate 839 of the letter dated 28 March 2002 and the accompanying documentation, I also regard the notification to the company market as a valid notification of circumstance or circumstances for the purposes of GC4, but in the same limited terms as to scope which I have already outlined in relation to the presentation on 19 April to the lead Lloyd's syndicate.
- For reasons already stated, I do not accept Mr. Kealey's argument in relation to "awareness" although I have effectively reached the same conclusion by a different route.
Presentation to the following Lloyd's market
- No information was presented to XCS, the successor to the Lloyd's Claims Office representing the following Lloyd's market, until July 2002 (over 2 months after expiry of the Policy). No presentation at all was made to XCS during the Policy period. The first presentation to XCS in respect of this policy year was on 24 July 2002. Millers' Files Left Out Book shows that the Millers' bordereau file was deposited with XCS on 24 July 2002, but there is no specific evidence that the claims files were also deposited. Mr. Salter agreed in cross-examination that he would have expected the claims files to be presented together with the bordereau file, as good practice required that the following market should receive the same information as the leading market. There was certainly no impediment to Millers providing the claims files to XCS. As Mr. Kealey accepted, the likely explanation was that the claims files were presented to XCS but that there was an oversight in recording this deposit in Millers' Files Left Out Book 2002.
Conclusion in relation to the presentation to the following Lloyd's market
- In my judgment the notification given to the following Lloyd's market was not given as soon as practicable and therefore was not compliant with the time requirements of GC4. Notice which was not given until 24 July 2002 almost 3 months after the expiry of the policy period, cannot, on any realistic basis, be regarded as given "as soon as practicable", if the start date is taken as 27 March 2002. There was no impediment to the following market being notified within the Policy Period, as indeed the Lead Underwriters and for the most part, the Company market were. Although the experts agreed that it was not unusual for there to be delay in presentation to the following market, and Mr. Ellis opined that "in practice" no point would be taken, Underwriters are nonetheless entitled to take the point that strict compliance with the requirements of the Policy was necessary and that, even allowing for latitude in presentation to the following market, notification at the end of July was not on any basis "as soon as practicable".
- Even if I were wrong in this conclusion, for similar reasons to those stated above, any notification was confined to procedural difficulties affecting the implementation of Discounted Option Schemes as referred to in the letter dated 28 March 2002.
The Tax Faculty Report
- As I have already indicated earlier in this judgment, on any basis, the notification purportedly given to Underwriters of the Tax Faculty Report in October 2003 was far too late to qualify as having been given "as soon as practicable". It is not therefore necessary to set out the details of the presentation of the Report to the market. However I should express my conclusions in relation to two points that were raised in this connection. First, I do not accept that, because the Tax Faculty Report was scratched "N/E" by LCO/XCS, that means that there was any acceptance of the notification, or that that somehow is inconsistent with rejection, or with any point being taken on late notification, by Underwriters. No waiver or estoppel argument was maintained in this context. The expert evidence, to which I have already referred, made it quite clear that, despite a "neutral" scratch, it was open to Underwriters to contend that no valid notification had been given. Second, the Tax Faculty Report did not represent the state of Kidsons' awareness at the time when the policy expired. Nor, as I have already said, was it some sort of seamless continuation of the IRB Report. By the date of the Tax Faculty Report, things had moved on significantly.
Issue vi): whether the claims which have arisen in respect of S@FI fall within the scope of any such circumstance as may have been so notified?
- In order for a claim to come within the scope of a circumstance notified under GC4, the claim must be one "to which th[e notified] circumstance has given rise". This requires that the loss or claim should be sufficiently causally related to the fact, event, happening or condition which comprises the notified circumstance, such that it can be fairly said to have arisen out of it.
- Mr. Kealey submitted that it was not a sensible or appropriate procedure for the Court to work out, on the basis of the tendered documents and submissions, supported by what was, at best, a brief oral summation, what the answers were in relation to the sample claims, identified by the parties. That was, he submitted, an exercise that was necessarily dependent upon the conclusion which the Court arrives at in relation to notification. He suggested, as he had in Underwriters' Opening Submissions, that the best course was for the Court to decide the principal and substantive issues relating to notification. He submitted that, once those issues had been decided, the parties and the Court should then address the question of the sample claims, if that were to prove necessary in the light of the Court's substantive determination, on the basis that, whatever is decided by the Court in relation to notification, will, it is hoped, assist the parties in resolving among themselves the correct answers to the sample claims.
- In the light of my conclusion in relation to the notification issue, I consider that that would indeed be a sensible approach. I will hear argument from counsel in due course as to the appropriate directions to be given for the resolution of that issue, if the parties are not able to agree amongst themselves what are the consequences of my judgment in relation to the sample claims.
Consequential and post-judgment matters
- As this judgment is being handed down in vacation when necessarily some counsel are away, I will hear any argument on consequential or post-judgment matters on Thursday, 27 September 2007, or Friday, 28 September 2007 or at such other time as may be convenient to the parties thereafter, to be arranged through the usual channels. I extend all parties' time for applying to this Court for permission to appeal against my judgment until the conclusion of such hearing, and likewise extend time for lodging any notice of appeal to the Court of Appeal, or notice of application to the Court of Appeal for permission to appeal, until 14 days after such hearing.
- Finally, I thank leading counsel, junior counsel and the respective teams of solicitors, for the extremely helpful written and oral arguments which have been provided in this case, as well as for the careful presentation of the extensive documentary materials. Apart from being of great assistance in the preparation of this judgment, they enabled a heavy commercial trial with witnesses to be concluded within a 13 day trial period. This would not have been possible in the absence of such efficient trial preparation.
