Judgment - Baker v. Black Sea & Baltic General Insurance Company Limited   continued

(back to preceding text)

      It was argued that the re-insurance policy was not a proportional contract. This may be the reason why Potter J. attached less importance to the decision in the Scor case than I would do. It is true that the insurers took a very high proportion of the risk. But as Millett L.J. pointed out in the Court of Appeal [1996] L.R.L.R. 353, 363, the extent of the cover is not reduced as the proportion taken by the insurers is increased:

     "If it is not implicit in a [98.6 per cent.] re-insurance contract that the indemnity covers the legal costs and expenses of the re-insured, then it is not implicit in a 50 per cent. re-insurance contract either."

      So I would regard the Scor case as another authority in favour of the view that, if the syndicate is to succeed against Black Sea, it cannot be by virtue of a term implied by law. Indeed as Millett L.J. again pointed out, the present case is a fortiori. In the Scor case there was a provision which conferred on re-insurers the right to withhold their approval of a settlement. It was the effect of this provision in particular which made it necessary, in Leggatt J.'s view, and in the minority view of Stephenson L.J. in the Court of Appeal, to apply a term in favour of the insurers. But there is no such provision in the present case.

      The cases principally relied on by Mr. Boyd were Uzielli & Co. v. Boston Marine Insurance Co. (1884) 15 Q.B.D. 11 and British Dominions General Insurance Co. Ltd. v. Duder [1915] 2 K.B. 394. I say nothing about Uzielli's case, since, like others before me, I find it difficult to understand. It should not be regarded as authority for any principle relevant to the present case. As for Duder, the question was whether the insurers, having settled the owners' claim for a constructive total loss at 66 per cent. of the sum insured could recover 100 per cent. from their re-insurers. Bailhache J. held that they could, with the result that the insurers would have made a profit out of the re-insurance. The Court of Appeal disagreed. The contract of re-insurance is a contract of indemnity. Accordingly the insurers could not recover more than they had lost. At the end of his judgment Buckley L.J. said at p. 403:

     "The plaintiffs are, however, entitled to indemnity, and this is not necessarily confined to the 66 per cent. They are entitled to such further sum, if any, as is required to give them an indemnity. The costs, for instance, of obtaining the compromise at 66 per cent. should be added to the 66 per cent."

      Mr. Boyd naturally relies on the reference to the costs being recoverable. There is a similar reference in the judgment of Pickford L.J. at p. 408. But it may be that the costs which Buckley L.J. had in mind are the costs which the owners had incurred: see the statement of facts at p. 395 where there is a reference to the insurers having settled the action "on the terms of paying 66 per cent. of the claim and the owners' costs." Or it may be, as suggested in MacGillivray at p. 395, that the point was conceded. In any event there was no suggestion that the costs could be recovered under an implied term of the re-insurance contract. So the case is not authority for any such general proposition. If it had been, it would surely have been cited ten years later in Scottish Metropolitan Assurance Co. Ltd. v. Groom, since Mr. R.A. Wright was counsel in both cases, and in both cases Bailhache J. was the judge at first instance.

      Although the authorities are not perhaps compelling, the weight of the authorities is certainly consistent with the view that the syndicate cannot succeed in these proceedings by virtue of a term implied by law. On this point therefore I find myself in complete agreement with the judge and the Court of Appeal.

Trade practice or usage

      The starting-point here must be the passage which I have already quoted from Lord Wilberforce's speech in Liverpool City Council v. Irwin. As he pointed out, it is very common in mercantile contracts, where there is an established market usage, to add a term to an otherwise complete bilateral contract, on the grounds that it is what the parties would unhesitatingly have agreed. This was indeed the fabric out of which much of the modern commercial law was created in the 18th and early 19th centuries. Unfortunately the evidence of usage in the present case was left in a somewhat unsatisfactory state, owing to the fact that there were many other issues to be covered at the trial, and it was only at a late stage that the points of claim were amended so as to allege an implied term "in accordance with what is customary in proportional re-insurance."

      Evidence for the syndicate was given by Mr. D.W. Jordan. He has been in underwriting all his working life. In paragraph 65 of his report dated 6 October 1992 (which stood as his evidence in chief) Mr. Jordan says:

     "There are two types of expenses that I understand have arisen. The first is the expense incurred by the plaintiffs by instructing a lawyer or loss adjuster to determine that a claim is a proper loss in accordance with the terms and conditions of a policy of insurance or re-insurance. Under a pro-rata re-insurance it is customary that these expenses are shared on a pro-rata basis. Needless to say these expenses are beneficial to both parties and are incurred as a necessary part of the demonstration of the duty of good faith owed to the re-insurers."

      A little later he says:

     "If the cession requires the services of an assessor the re-insurers pay their share."

Evidence was also given by Mr. Dodds, the syndicate's claims manager. He was asked what the practice is in relation to surplus re-insurances. He replied:

     "All I can say is that I have seen surplus treaties handled for many years and I have seen claims of this nature, fees of this nature paid under those treaties in just the way they are being submitted here.

     Mr. Justice Potter: But can you say whether or not the original arrangements were embodied in a treaty or at least some fuller arrangement than a slip of this kind or slips of this kind?

     (A) my experience is that these treaties didn't go into that detail, it was just market practice that this was the way these sorts of things were handled.

     (Q) You had never known a dispute of it, at any rate?

     (A) I can't recall one, no."

Neither Mr. Jordan nor Mr. Dodds were cross-examined on these points. It is fair to add that the pleading had not been formally amended at that stage so as to allege a trade practice. But as Mr Glennie very fairly conceded, he could have resisted the amendment, or at least applied for Mr. Jordan and Mr. Dodds to be recalled for further cross-examination.

      Mr. Fryer who gave expert evidence for Black Sea, said in chief that it was "common for defence costs to be apportioned proportionate to the interests of the parties involved", but he added that this was not universal. In cross-examination he drew a distinction between proportional insurance on the one hand, and excess of loss and other non-proportional insurance on the other. In the former he would normally expect the re-insurers to pay their share of defence costs, but not in the latter. It was left unclear whether Mr. Fryer was dealing only with cases where the parties had made an express provision one way or the other. What was needed was evidence as to the practice where there is no express provision.

      Potter J. in the course of his judgment correctly summarised the effect of the evidence: [1995] L.R.L.R. 261, 281. But when he came to state his conclusion at p. 282 he unfortunately fell into error. In the first place he said that, despite various amendments made by the parties in the course of the proceedings, no such custom had ever been pleaded by the syndicate. This must have been an oversight, for he had himself given leave for the amendment. Secondly, he said that the evidence did not go beyond an assertion that re-insurers often or usually pay a proportion of the insurer's expenses. But with respect Mr. Jordan's evidence goes further than this.

      These errors serve to undermine Potter J.'s conclusion that the evidence was insufficient to establish a practice "so universally recognised and followed" as to lead to the implication of a term in the contract.

In the Court of Appeal Millett L.J. said [1996] L.R.L.R. 353, 362:

     "The judge rejected the third [submission i.e. trade practice or usage] on the ground that it was not supported by the evidence. This did not extend beyond testimony that re-insurers usually pay a proportion of the legal costs and expenses of the re-insured. The judge was not satisfied that a universal practice to this effect was established. In any case, as he pointed out, it was possible that re-insurers usually paid because there was usually an express provision in the treaty requiring them to do so. I think this conclusion was inevitable. What was needed was evidence of a universal and acknowledged practice of the market for re-insurers to pay such costs whether this is expressly provided for in the treaty or not; or (to put it another way) that it is well understood by underwriters that if it is not intended that the indemnity should extend to the legal costs and expenses of the re-insured, these need to be expressly excluded. There was no such evidence."

The test applied by the Court of Appeal was, if I may respectfully say so, entirely correct. Where I differ from Millett L.J. is in his view of the evidence. On its face, Mr. Jordan's evidence does go beyond establishing what is usual. Mr. Jordan says, in so many words, that it is "customary" for the expense of defending claims to be shared on a pro rata basis. He may have been using the word "customary" in a loose sense. But as there was no cross-examination we cannot tell.

      It is at this point that Mr. Boyd's application to admit fresh evidence becomes relevant. The House did not find it necessary to look at the fresh evidence. Your Lordships were told that it is directly relevant to the point at issue. What should be done? One possible course would be to allow the concurrent findings of Potter J. and the Court of Appeal to stand in the present proceedings, and to leave it to Mr. Boyd to establish a trade practice by fresh evidence in other proceedings. For the failure to establish a trade practice in one set of proceedings does not prejudice other parties in subsequent proceedings: see Beckhuson and Gibbs v. Hamblet [1901] 2 K.B. 73. I would not for my part regard that as a satisfactory solution for two reasons. In the first place I would not be happy to leave the adverse findings of Potter J. and the Court of Appeal to stand when both courts seem to have mistaken the effect of Mr. Jordan's evidence. But I would be equally unhappy to substitute a contrary finding in favour of the syndicate on such scanty material. Mr. Glennie himself shared this concern.

      Secondly, there is the overriding importance of establishing on adequate evidence for the market as a whole whether the alleged trade practice or usage exists or not. The sooner this is done the better. For these reasons the sensible course would seem to be to admit the fresh evidence in the current proceedings. The exceptional nature of Mr. Boyd's intervention on behalf of Equitas justifies, in my view, any breach of the rules in Ladd v. Marshall [1954] 1 W.L.R. 1489. Although Mr. Glennie's formal position was that the rules in Ladd v. Marshall were not satisfied, he did not seek to press the point.

      Then comes the question how the evidence should be received. Mr. Boyd said there were two choices. Either the House could direct the evidence to be taken before an examiner. The House could then itself determine on the basis of the evidence whether or not the syndicate had succeeded in proving the existence of the trade practice or usage. This would have the advantage of finality. The alternative would be to allow the syndicate's appeal, set aside the judgments below, so far as they relate to trade practice or usage, and remit the case to the Commercial Court for further argument on that issue, after hearing the fresh evidence, and any fresh evidence which Black Sea may wish to introduce.

      Of these alternatives I much prefer the second. Difficult questions may arise in the course of hearing the fresh evidence. For example, it may be necessary for the parties to amend their pleadings. Or there may be questions as to the admissibility of some of the evidence. It is important that these questions should be the subject of an authoritative ruling. This could be given by the commercial judge, but not by an examiner.

      But quite apart from the handling of the evidence, it is desirable, in a case of this importance to the market as a whole, to have the views of the commercial judge himself. In that connection counsel may find it convenient to cite a recent article by Mr. William Hoffman On the use and abuse of custom and usage in re-insurance contracts 1998 L.M.C.L.Q. page 43. It is true that a judgment on the central question at first instance could be appealed to the Court of Appeal and thence back to the House. But it is to be hoped that after a full hearing the parties to these proceedings, and the market as a whole, would accept the judgment of the commercial judge. If your Lordships agree, therefore, I would allow the appeal to the extent indicated, and remit all questions relating to trade practice and usage for a further hearing in the Commercial Court. The costs before your Lordships and in the Court of Appeal on the remitted issue should await the outcome of that hearing.


My Lords,

      I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Lloyd of Berwick. I agree with it and for the reasons which he gives I would allow the appeal to the limited extent which he proposes and would remit the question to which he refers to further hearing in the Commercial Court.


My Lords,

       I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Lloyd of Berwick. For the reasons he gives I would allow the appeal to the extent which he proposes and would remit all questions relating to trade practice and usage for a further hearing in the Commercial Court.


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