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Session 2001- 02
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| Judgments - Aneco Reinsurance Underwriting Limited v Johnson & Higgins Limited
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HOUSE OF LORDSLord Slynn of Hadley Lord Browne-Wilkinson Lord Lloyd of Berwick Lord Steyn Lord Millett OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENTIN THE CAUSEANECO REINSURANCE UNDERWRITING LIMITED (IN LIQUIDATION) (A BODY INCORPORATE UNDER THE LAWS OF BERMUDA) (RESPONDENTS) v. JOHNSON & HIGGS LIMITED (APPELLANTS) ON 18 OCTOBER 2001 [2001] UKHL 51 LORD SLYNN OF HADLEY My Lords, 1. My noble and learned friend, Lord Steyn has set out the essential matters of fact in this case which statement I gratefully adopt. In my view, as in his, the majority in the Court of Appeal were entitled to find and right in finding on the evidence that the brokers had undertaken a duty not merely to obtain reinsurance cover in the sum of $11m but also to advise on the availability of reinsurance cover in the market, without which the transaction would not have gone ahead. To give that advice involved an investigation as to the market's assessment of the risks involved, as my noble and learned friend, Lord Lloyd of Berwick has shown. 2. It is now accepted that no such reinsurance was available and that the appellants did not advise to that effect. In failing to make the necessary inquiry as to the market's assessment of the risk and to advise that such reinsurance was not available, the appellants were in breach of their duty. I agree with Lord Lloyd and Lord Steyn that the scope of the duty in this case is not the same as in South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191. It is to use Lord Steyn's phrase on the other "side of the line drawn in SAAMCO". 3. I agree with Lord Lloyd and Lord Steyn that there is no justification for limiting the damage to the loss flowing from the failure to obtain the $11m reinsurance: it is the whole loss resulting from their entering into the insurance cover when no reinsurance was available. 4. The Court of Appeal on this came to the right conclusion and I would dismiss the Appeal. LORD BROWNE-WILKINSON My Lords, 5. I have had the advantage of reading in draft the speeches of my noble and leaned friends, Lord Lloyd of Berwick and Lord Steyn. I agree with them and for the reasons which they have given, I, too, would dismiss the appeal. LORD LLOYD OF BERWICK My Lords, 6. The question in this case is whether the brokers, Johnson & Higgins Ltd, are liable in negligence for the whole of the foreseeable loss suffered by Aneco Reinsurance Underwriting Ltd as a consequence of entering into a treaty of reinsurance with an underwriter at Lloyds, or whether the recoverable loss is limited by the principle stated in Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191, also known as South Australia Asset Management Corporation v York Montague Ltd ("SAAMCO") and subsequently applied in Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2) [1997] 1 WLR 1627 and Platform Home Loans Ltd v Oyston Shipways Ltd [2000] 2 AC 190. 7. There is no dispute as to the law. Mr Hunter QC for Aneco accepts that the brokers cannot be held liable for losses which fall outside the scope of their duty of care. Nor is there any longer any dispute as to the primary facts. Thus the sole question is whether in the particular circumstances of this case the brokers' duty of care was limited to the obtaining of satisfactory excess of loss protection on behalf of Aneco, in which case, as the brokers concede, they are liable for about $11 million, but no more; or whether as Aneco contend the brokers assumed a much wider duty of care, in which case they are liable for the full extent of Aneco's loss, amounting to about $35m. 8. It is convenient to start with Youell v Bland Welch & Co Ltd (No 2) (The "Superhulls Cover" case) [1990] 2 Lloyd's Rep 431, the facts of which were very similar. Brokers were instructed to obtain reinsurance on the London market on behalf of insurers, in respect of construction risks on three newbuilding vessels. The brokers informed the insurers that they had obtained reinsurance as "original". But they were wrong. The reinsurance was subject to a cut-off clause whereby the cover terminated 48 months after the commencement of construction. The brokers failed to inform the insurers. Had the insurers been given that information, they would not have accepted the reinsurance, and would have written greatly reduced lines on the original insurance. Phillips J, as he then was, held that the brokers were in breach of their duty of care both in contract and tort, and that the measure of damages was equal to the difference between the amount for which the insurers became liable on the original insurance, and the amount for which they would have been liable if they had written reduced lines. There was an alternative claim for damages based on the amount the insurers would have recovered on the reinsurance if it had not contained the 48 month cut-off clause. But counsel for the brokers conceded that the primary way in which the insurers put their case was the correct approach. 9. Evans LJ [2000] 1 All ER (Comm) 129 held that the decision of Phillips J in the Superhulls Cover case was of direct assistance in the present case, and was correctly decided. Mr Sumption QC submitted that the decision cannot stand in the light of SAAMCO. My noble and learned friend, Lord Millett is of the view that the decision ought to be overruled; but he would forgive the learned judge for failing to anticipate the decision in SAAMCO since the point was conceded by counsel. 10. My own view is that the point was correctly conceded, and that the subsequent decision in SAAMCO has not changed the relevant law, or undermined the authority of Phillips J's decision. It would be odd if it had, since the Superhulls Cover case was not included among the 53 cases cited by counsel in SAAMCO; and its existence cannot simply have been overlooked, since Mr Sumption was leading counsel in both cases. 11. Why, then, does the SAAMCO "principle" not touch on the decision in the Superhulls Cover case? What indeed is the SAAMCO principle? It is surely the principle which has been common ground throughout the argument before us that a defendant is not liable in damages in respect of losses of a kind which fall outside the scope of his duty of care. There was nothing new in that principle. It has been the rule in contract since the decision in Czarnikow v Koufos [1969] 1 AC 350, if not before. It has been the rule in tort since In Re Polemis and Furness Withy & Co Ltd [1921] 3 KB 560 was disapproved in Overseas Tankships (UK) Ltd v Morts Dock and Engineering Co Ltd (The Wagon Mound (No 1) [1961] AC 388. 12. What was new and important in SAAMCO was the application of the principle to valuers, so as to exclude their liability for loss due to a fall in the market: see Platform Home Loans Ltd v Oyston Shipways Ltd [2000] 2 A C 190, 209 per Lord Hobhouse. Thus in the case of valuers, and their like, that is to say, those who undertake to provide specific information, the SAAMCO principle gave rise to a sub-rule, that valuers are not generally liable (the word is that of Lord Hoffmann, at p 214) for all the foreseeable consequences of their negligence, but only for the consequences of the valuation being wrong. It follows that the damages will usually, though not always, be limited to the difference between their valuation and the correct value; see p 222, per Lord Hoffmann, and the Platform Home Loans case p 210, per Lord Hobhouse. 13. In paragraph 12 of their printed case the brokers state this sub rule as if it were a rule of general application in the law of contract.
But this is not what the House decided. So much is clear from the immediately following paragraph in Lord Hoffmann's speech, at page 214 in which he draws a contrast between a duty to provide specific information and a duty to advise generally. It is clear also from a further passage, at p 217, in which he pointed out that it is unusual to have a case in which a plaintiff has suffered foreseeable loss in consequence of entering into a transaction in reliance on inaccurate information where the loss is not a consequence of the inaccuracy of the information. So it would, I think, be a mistake to regard the Superhulls Cover case, if correctly decided, as being an "exception" to some general exclusionary rule established in SAAMCO. It is rather the other way round. The Superhulls Cover case represents the ordinary rule, whereby brokers (and others) are liable in contract for the foreseeable consequences of their negligence, including the adverse consequences of entering into a transaction with a third party, provided such consequences can fairly be held to fall within the scope of the defendant's duty of care. SAAMCO is an example of a special class of case - typically that of a valuer, but not confined to valuers - where the scope of the defendant's duty is confined to the giving of specific information. 14. Next I should say a word about Banque Keyser Ullmann SA v Skandia (UK) Insurance Co. Ltd. [1991] 2 AC 249. The facts were complicated, but are set out with conspicuous clarity in the speech of Lord Millett. I do not repeat them. Prior to SAAMCO, the decision of the House was regarded as depending in the end on a short question of fact, albeit one which eluded the Court of Appeal. The fraud of Mr Lee, and the failure of the insurers to disclose that fraud to the plaintiff banks was at most (in the old forbidden language) a causa sine qua non of the financial loss suffered by the banks. The causa causans was the fraud of Ballasteros. By reason of the latter fraud the insurance which the brokers failed to obtain was in truth valueless. 15. In SAAMCO Lord Hoffmann observed that implicit in Lord Templeman's reasoning was an assumption as to the scope of the brokers' duty of care. Unfortunately the facts surrounding the employment of the brokers in Skandia were never investigated, since the banks' claim against the brokers was settled prior to the trial on payment by the brokers of £10,500,000, being the full amount of their professional indemnity cover. So the assumption as to the brokers' duty of care in Skandia throws little, if any, light on the scope of the brokers' duty of care on the facts of the present case. 16. It is to those facts that I now turn. Was the duty of the brokers confined to the obtaining of excess of loss protection for Aneco, and informing Aneco that they had done so? If so, I would sympathise with Aldous LJ's conclusion. The damages would be limited to the value of the reinsurance which they failed to obtain, namely, $11m. But I am quite unable to accept that the duty of the brokers was so narrowly confined. At the very least they owed a duty to inform Aneco whether or not reinsurance was available. If they had performed that duty carefully, they would have told the insurers that reinsurance was not available, in which case "the whole thing would have collapsed", as the brokers well knew. For it would have been obvious to Aneco that the unavailability of reinsurance was due to the current market assessment of the risks. It is really fanciful to suppose that there might have been some other reason for reinsurance being unavailable. Why then should the brokers not be liable for the full extent of the losses attributable to their breach of duty? Why should it be assumed in favour of the brokers that reinsurance was available on the market, thus limiting their liability to $11m, when if they had done their job properly they would have known that it was not? 17. But the matter does not stop there. After reviewing the letters and telexes passing between the parties, and the oral evidence of Mr Forster on behalf of the brokers and Mr Crawley on behalf of the insurers, Evans LJ concluded that the duty went wider then a simple duty to inform; it included a duty to advise. As early as 18 November 1988 Mr Forster was writing to Mr Crawley: "Would suggest you buy XL protection for up to 10 times income and would envisage comprehensive protection being available at between 30%-40% of NPI…." Again on 7 December Mr Forster wrote:
In the course of his cross examination Mr Forster agreed that he was advising Mr Crawley as to the state of the market. In the light of these and other passages Evans LJ said that it would be "highly artificial" to derive from the evidence any suggestion that Mr Forster was not advising Mr Crawley what course to take. I agree. I agree also with his conclusion at p 156, para 83, that the current market assessment of the reinsurance risks was central to Aneco's decision to undertake those risks, and that Mr Forster took it upon himself to advise Mr Crawley with regard to those risks. This is, as Evans LJ pointed out, far removed from the lender-valuer relationship in SAAMCO. The difference does not depend on calling the one "information" and the other "advice". It depends on a difference of substance, and in particular, of course, on the scope of the advice which the brokers undertook to give. In some cases it may be difficult to draw the line. But I have little doubt on which side of the line the present case falls. 18. It is said that the brokers were acting in two different capacities, as brokers for the underwriter of the underlying business in negotiating the Bullen Treaty, and as brokers for Aneco in negotiating the XL cover. This is true. But I doubt whether it is all that uncommon. In any event if the brokers had found themselves in a difficult or impossible position as was suggested, they would doubtless have dropped out. I should be surprised if, as Mr Sumption hinted, a decision in favour of Aneco will upset the whole course of business at Lloyds. 19. I would hold that the Superhulls Cover case was correctly decided, and that the present case is indistinguishable. In agreement with my noble and learned friend Lord Steyn I would dismiss the appeal. LORD STEYN My Lords, 1. The Shape of the Appeal 20. The central issue in this case is not one of high legal principle but an evaluative one involving matters of fact and degree. This would not have been fully apparent when the Appeal Committee granted leave to appeal. The broad question is whether London reinsurance brokers, who were in breach of duty to a Bermudian reinsurance company, are liable only for the reinsurance cover which the company lost ($11m), or for the total losses which the company suffered on the transaction ($35m). This in turn depends on an assessment whether on the facts of the case it is governed by the "scope of the duty" principle applied by the House in Banque Bruxelles Lambert SA v Eagle Star Insurnce Co Ltd [1997] AC 191, known as South Australia Asset Management Corporation v York Montague Ltd ("SAAMCO") or whether the brokers had undertaken or assumed a duty to advise the company as to what course of action they should take. II. The Bullen Treaty and the Reinsurance Contracts 21. Mr Bullen was the underwriter of four syndicates at Lloyd's which wrote marine excess of loss business, i.e. they reinsured losses of other marine insurers so far as those losses exceeded a particular level. In the autumn of 1998 Mr Bullen discussed with Mr Forster, an experienced broker with Johnson and Higgins Ltd, the idea of a proportional reinsurance of his excess of loss account. Mr Forster drafted a treaty ("the Bullen treaty") on a basis which he believed would be attractive to the Bullen Syndicates. He had identified Aneco Reinsurance Underwriting Ltd (now in liquidation) as potential reinsurers of the Bullen treaty. In truth what was contemplated was a retrocession of this treaty but I will adopt the description of it as reinsurance used during the proceedings. 22. On 15 November 1988 Mr Forster (acting as broker on behalf of the Bullen Syndicates) wrote to Mr Crawley of Aneco offering Aneco a share in the Bullen treaty. From the perspective of Aneco this was inwards business. On 18 November 1988 Mr Forster wrote again to Mr Crawley indicating that Mr Bullen had asked Aneco to consider four units of the Bullen treaty. At the same time Mr Forster suggested that Aneco should purchase excess of loss protection, which he envisaged would be available at between 30-40% of the net premium income. 23. On 30 November 1988 a meeting took place at Lloyd's to discuss the proposal. Mr Crawley, Mr Bullen and Mr Forster attended. Mr Crawley, as Aneco's underwriter, was willing, subject to Johnson and Higgins being able to obtain satisfactory excess of loss protection, to subscribe to 3-3 ½ units of the Bullen treaty on the basis of an estimated premium income of US$400,000-US$450,000 per unit. On behalf of the brokers Mr Forster indicated that he would obtain quotations for excess of loss protection for Aneco. Mr Crawley made it clear to Mr Bullen and to Mr Forster that Aneco's willingness to participate on the lines discussed was subject to the brokers being able to obtain satisfactory excess of loss protection for Aneco. Mr Crawley confirmed this by facsimile dated 5 December 1988 as follows:
Johnson and Higgins were acting as Mr Bullen's brokers in the first or (from Aneco's point of view) inwards transaction and as Aneco's brokers in the second or outwards transaction. Mr Forster knew from the start that if satisfactory outwards reinsurance was not available in the market Aneco would not have proceeded. Mr Forster said in due course at the trial that "the whole thing would have collapsed". 24. On 5 December 1988 Mr Forster, acting as a broker on behalf of Aneco, approached Mr King, a prominent underwriter at Lloyds in the marine excess loss market. Mr Forster divided the reinsurance into six layers, and proceeded to obtain quotes for all six layers from Mr King. Mr Forster passed these quotes on to Mr Crawley on 5 December 1988 (as to the first four layers) and on the next day (as to the top two layers). On Mr Crawley's instructions Mr Forster went back to Mr King and obtained some modification to and improvement of the quotes. On 7 December 1988 Mr Crawley accepted the latest and most favourable of Mr King's quotes, and instructed Mr Forster to go ahead and obtain the reinsurance for which he had obtained the quotes. That involved going back to Mr King with a firm order, and then going round the market looking for other reinsurers to follow Mr King's lead. On 30 December 1988 Mr Forster told Mr Crawley that he had got 100% subscriptions on three of the six layers and was very close to getting 100% on the remaining three layers. On that basis, Mr Crawley wrote the Bullen treaty. Mr Forster completed the slips for 100% subscription in the next few days. 25. The Bullen treaty was a "fac/oblig" treaty i.e. Mr Bullen had the right to choose which if any risks he would cede to his reinsurers, and the reinsurers were obliged to accept the risks so ceded. It was faculative as far as Bullen was concerned, but obligatory as far as his reinsurers (including Aneco) were concerned. It was a proportional treaty, i.e. for each risk ceded Bullen ceded a proportion of his premium equivalent to a proportion of the risk. The outward reinsurance protection of Aneco as ultimately placed was in respect of Aneco's marine excess of loss account. It was on an excess of loss basis and was for $7.8m excess of $200,000 in six layers. 26. Unfortunately Mr Forster negligently failed properly to present the risk to Aneco's reinsurers, some of whom subsequently avoided the policies as they were entitled to do. Euphemistically Mr Forster represented to Aneco's reinsurers that the Bullen treaty was a quota share treaty when it was in fact a fac/oblig treaty. The difference is that a quota share treaty is not facultative as far as the reassured (a person in the position of Bullen) is concerned: he must cede a set proportion of every risk which falls within the limits of the contract, so that everything which meets those criteria is automatically ceded. By contrast fac/oblig treaties are plainly open to abuse. The reassured is able to put onto his reinsurer the least attractive pieces of qualifying business in his book, while keeping what he considers to be the best business for himself. A reinsurer will tend only to reinsure another underwriter on fac/oblig terms if he has considerable trust in the way that his reassured will use it. It is common ground, now, that Mr King would not have agreed to lead the reinsurance of a fac/oblig treaty, and that on a proper presentation of the risk, it would have been impossible to get enough underwriters to subscribe the reinsurance slip, so that the reinsurance that Mr Crawley desired was never available in the market. If Mr Forster had made the enquiries, presentation and disclosure that he should have made, he would have discovered that the outwards reinsurance cover on which Mr Crawley to his knowledge relied from the start was never available. In the event, Aneco suffered a loss on the Bullen treaty of more than $35m, of which they would have recovered $11m from their reinsurers if the reinsurance which Aneco had asked for and which Johnson and Higgins claimed to have obtained had been effective. 27. The brokers received the usual 3% brokerage under the Bullen treaty and 10% in respect of the six excess of loss contracts. III. The High Court Proceedings 28. Aneco sued the brokers in negligence. Aneco formulated its claim for damages on two alternative bases. Its primary case was a claim for all losses which it had in fact suffered by entering into the reinsurance of the Bullen treaty. Aneco put forward this claim on the basis that the brokers had wrongly advised them that the reinsurance was available in the market, and that this advice led them to enter into the Bullen treaty. An indispensable part of this way of putting the claim was that in truth alternative security was never available. The secondary case of Aneco was a claim for all the sums which would have been payable under the outwards reinsurance if it had been in place. 29. After a trial lasting 20 days in the Commercial Court Creswell J found that there had been non disclosure of material facts and that the brokers had been negligent and had been in breach of their duty to exercise reasonable skill and care in placing the reinsurance on Aneco's behalf: Aneco Reinsurance Underwriting Ltd v Johnson & Higgins Ltd [1998] 1 Lloyds Rep 565. After dealing meticulously with the issues on the merits, the judge turned to the question of fact whether alternative security would have been available at a broadly similar price if there had been a fair presentation of the risk. The judge found that if the risk had been fairly presented, it would have been possible to find reinsurance on terms not very different from those obtained by Mr Forster. On this view of the facts Mr Forster's advice that reinsurance was available in the market was not wrong. The foundation for Aneco's larger claim of $35m was therefore not established. The judge accordingly found that the correct measure of damages was US$10,897,752, being the value of the reinsurance cover which had been avoided by the underwriters, on the basis that this sum was the amount for which the brokers had negligently advised that Aneco had been reinsured. IV. The Court of Appeal Proceedings. 30. Aneco appealed against the dismissal of their primary claim. Aneco challenged the judge's finding of fact on the availability of the alternative security. The Court of Appeal took into account expert evidence adduced before the judge, the materiality of the underlying business, and contemporaneous marketing sheets which effectively covered the whole of the London market where this sort of reinsurance might be placed. On this issue the Court of Appeal unanimously concluded that such reinsurance was either not available at all or not available on acceptable terms: Aneco Reinsurance Underwriting Ltd v Johnson & Higgins Ltd [2000] 1 All ER (Comm) 129. In the leading judgment Evans LJ dealt with this point paras 55-72, at pp. 148G-154D. Ward LJ expressed agreement with this part of the judgment of Evans LJ at p 164J. Aldous LJ accepted that alternative security was not available; at p 161B. This was a conclusion of major importance. It became the factual foundation of the argument of Aneco in the Court of Appeal that its primary claim ought to succeed. The issue of the correct measure was, however, still vigorously contested. 31. The Court of Appeal was divided on the issue. The majority (Evans and Ward LJJ) found that the correct measure was Aneco's loss flowing from the Bullen treaty, i.e. $35m. Aldous LJ concluded that the correct measure was the loss flowing from Aneco's assumption that the appropriate reinsurance had been effectively placed, i.e. $11m. Evans and Ward LJJ found that on the facts "the scope of duty" principle stated by the House in SAAMCO was inapplicable: [1997] AC 191. The majority concluded that Mr Forster had assumed the duty of advising Aneco what course to adopt, and that he had wrongly advised that reinsurance cover was available in the market, thereby causing Aneco to enter into the Bullen treaty. Aldous LJ came to the opposite conclusion. He concluded that the duty of the brokers to Aneco was narrow, viz merely "to provide information and to place the reinsurance." at p 162E. V. The Issues before the House. 32. Before the House the Court of Appeal's conclusions on the non-availability of alternative reinsurance cover was accepted. It follows that Mr Forster's advice to Aneco that reinsurance cover was available in the market was wrong and was negligently given. 33. In these circumstances the principal question is: Is the correct measure of damages all of Aneco's losses under the Bullen treaty or is the correct measure equal to the recovery which Aneco would have made under the reinsurance contracts but was unable to make to the extent that those have been avoided? VI. The Preliminary Objection |
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