Judgments - Aneco Reinsurance Underwriting Limited v Johnson & Higgins Limited

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    34. Before I proceed to consider the principal question of fact it is necessary to refer to a preliminary argument by counsel on behalf of the brokers to the effect that on the state of the pleadings and the manner in which the case was conducted at trial it was not open to the majority to decide the case as they did.

    35. Aneco put forward its case on the alternative bases which I have described. The primary case was based on the allegation that the brokers negligently advised on the availability of reinsurance in the market. The allegation was squarely pleaded. It was explored and tested in evidence. It was the cornerstone of Aneco's case throughout before Creswell J and before the Court of Appeal. Evans and Ward LJJ certainly did not think they were engaged on a frolic of their own. Moreover, Aldous LJ did not suggest in his dissenting judgment that the majority was proceeding on a basis not open to them. The technicality of the arguments of counsel for the brokers on this point reminded me of an observation of Holmes J in Braithwaite v Hall, 168 Mass 38. He said, at p 46: "Nowadays we do not require pleadings to guard against all the distortions of perverse ingenuity". The preliminary objection must be rejected.

VII. The Law

    36. Given that this case can be decided by applying settled principles, I do not propose to examine any problems which do not arise. Nevertheless, I must set out, without examination, the contours of established doctrine.

    37. In the leading judgment in SAAMCO [1997] AC 191 Lord Hoffmann illustrated "the scope of duty" concept with an example. He said, at p 213D:

    "A mountaineer about to undertake a difficult climb is concerned about the fitness of his knee. He goes to a doctor who negligently makes a superficial examination and pronounces the knee fit. The climber goes on the expedition, which he would not have undertaken if the doctor had told him the true state of his knee. He suffers an injury which is an entirely foreseeable consequence of mountaineering but has nothing to do with his knee."

Lord Hoffmann said that on the usual principle the doctor is not liable. Lord Hoffmann supported his reasoning saying that, if the contrary were the case, the paradoxical situation would arise that the liability of a person who warranted the accuracy of the information would be less than that of the person who gave no such warranty but failed to take reasonable care: at pp 213H-214A. Lord Hoffmann generalised the principle as follows, at p 213C-F

    "It is that a person under a duty to take reasonable care to provide information on which someone else will decide upon a course of action is, if negligent, not generally regarded as responsible for all the consequences of that course of action. He is responsible only for the consequences of the information being wrong. A duty of care which imposes upon the informant responsibility for losses which would have occurred even if the information which he gave had been correct is not in my view fair and reasonable as between the parties. It is therefore inappropriate either as an implied term of a contract or as a tortious duty arising from the relationship between them.

    The principle thus stated distinguishes between a duty to provide information for the purpose of enabling someone else to decide upon a course of action and a duty to advise someone as to what course of action he should take. If the duty is to advise whether or not a course of action should be taken, the adviser must take reasonable care to consider all the potential consequences of that course of action. If he is negligent, he will therefore be responsible for all the foreseeable loss which is a consequence of that course of action having been taken. If his duty is only to supply information, he must take reasonable care to ensure that the information is correct and, if he is negligent, will be responsible for all the foreseeable consequences of the information being wrong."

The House has twice followed and applied the law as stated in SAAMCO: see 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. In the latter case Lord Hobhouse of Woodborough summarised the SAAMCO principle by saying "it is the scope of the tort which determines the extent of the remedy to which the injured party is entitled": at p 209B.

    38. There was an interesting debate during the hearing of the appeal on the validity or otherwise of Lord Hoffmann's paradox. In a closely reasoned case note Professor Jane Stapleton has argued that conceptually there is no paradox: Negligent Valuers and Falls in the Property Market (1997) 113 LQR 1. In the interests of brevity, and doing less than justice to the full rigour of the argument (at pp 3-5), I cite only one passage, at p 5:

    "Buying a warranty from one's contracting party is a completely different deal than obtaining an obligation of care. If one accepts that the law of contract damages should not allow the plaintiff to shift the bad bargain on to the defendant, it is not paradoxical that the fate into which the former deal locks its buyer might be worse than that of the person protected by the latter. In terms of the protection of the law of contract damages, a contractual warranty can leave you worse off than an entitlement to due care."

The academic debate on this point continues: see, for example, McLauchlan, Negligent Valuer Liability: The Paradox Remains? (1997), 113 LQR 421; Dugdale, The Impact of SAAMCO Professional Negligence, Vol. 16, No. 4, 1 October 2000 - 1 December 2000. Except to point out that the comparison between warranties and obligations to take reasonable care was only one strand of Lord Hoffmann's reasoning, I do not propose to discuss the point. It does not arise and it is not necessary to consider it in the present case.

VIII. The Correct Characterisation of the Case

    39. The background, relevant exchanges, documentation and oral evidence is set in great detail in the judgment of Evans LJ. While his conclusions are in issue, there can be no valid criticism of the remainder of his judgment. In these circumstances, and in a case involving simply the factual categorisation of the case, it would serve no purpose for me to cover the same ground again.

    40. The starting point of the enquiry is not in doubt. If the brokers had carefully performed their duty to report on the availability of reinsurance they would inevitably have reported to Aneco that reinsurance cover was not available in the market. In that event, Aneco would not have entered into the Bullen treaty. The issue is simply: Did the brokers undertake a duty to advise Aneco as to what course of action they should undertake? The argument on behalf of the brokers was that they only undertook a duty to exercise reasonable care to obtain the reinsurance ordered and to report the result of their endeavours. Evans LJ, who has vast experience of the way in which reinsurance business is transacted, gave the answer to this argument. He observed 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": at para 78, p 155H. There was ample material to support this conclusion. Only one item of evidence need be cited. In his evidence Mr Forster accepted that the brokers were advising Mr Crawley as to what reinsurance was available and as to the state of the market. He said:

    "A.  Yes, I think we were advising him of what was available then, and we were advising him about the state of the market at that time, as well.


    Yes, quite, you were advising him as to the state of

    the market?

    A.  Yes."

The core of the reasoning of Evans LJ was at paras 82-84, p156:

    ". . . the fact that no reinsurance cover was available in the market is important, because it introduces an additional head of breach of duty by Johnson and Higgins. They are liable not merely for failing to obtain effective cover on the terms which they reported to Aneco, but also for failing to report that no cover could be obtained.

    The last factor in particular means in my judgment that the Banque Bruxelles principle - compensating the claimant only for the consequences of the advice or information being wrong - fails to provide proper compensation in the present case. Aneco is also reasonably entitled to compensation for Johnson and Higgins' failure to report correctly the current market assessment of the reinsurance risks which Aneco was proposing to undertake. Those risks were central to Aneco's decision and Mr Forster took it upon himself to advise Mr Crawley with regard to them. This is far removed from the lender/valuer relationship and even from the client/professional adviser relationship to which the Banque Bruxelles case applies, and even more so from the doctor and mountaineer.

    I therefore would hold that Aneco is entitled to recover damages for the whole of the losses which it suffered in consequence of entering into the Bullen Treaty, acting on Johnson and Higgins' advice with regard to the availability of reinsurance (retrocession) and therefore on the current market assessment of the risk."

For my part this reasoning is convincing. Ward LJ approached the matter differently. He considered that the correct approach is to ask "for what consequences it is just, fair and reasonable between the parties that the brokers should be held responsible": at p 164E. I would prefer not to adopt this approach. It is a deus ex machina: it will tend to lead to formulaic reasoning. It is best avoided. On the other hand, the reasoning of Evans LJ is entirely consistent with principle.

    41. The contrary reasoning of Aldous LJ, and the arguments of counsel for the brokers, are in my view based on an artificial and unrealistic distinction between reporting on the availability of reinsurance in the market and reporting on the assessment of the market on the risks inherent in the Bullen treaty. These are two sides of the same thing: they are inextricably intertwined. If the brokers had advised Aneco of the non availability of reinsurance cover in the market, that would inevitably have revealed to Aneco the current market assessment of the risk. There was no other credible reason for reinsurance being unavailable. On the evidence Evans LJ was correct to conclude that the brokers breach of duty was their negligent advice "with regard to the availability of reinsurance (retrocession) and therefore on the current market assessment of the risk". In my view the conclusion of Evans LJ is supported by the commercial realities and inherent probabilities in the relationship between broker and reinsured revealed by the documentary and oral evidence.

    42. Counsel for brokers placed great weight on the argument that the conclusion of the majority places a broker, circumstanced in a dual capacity as Mr Forster was, in an invidious position. He argued that the difficulty lies in holding that the broker, who owes a duty to the insured to place the insurance, is simultaneously under a duty of care to the insurer to provide advice to him on whether or not to write the insurance at all. The answer is clear. Any problem of the brokers arising from the performance of their dual functions in this case was entirely of their own making. It cannot divert the House from arriving at the inescapable conclusion on the facts that the brokers assumed a duty to advise Aneco as to what course to take. In the result the brokers' failure to advise that reinsurance was unavailable in the market resulted in a recoverable loss of $35m. The width of the duty assumed by the brokers is determinative of this being the correct measure of damages.

    43. Ultimately, on matters of fact the question is on which side of the line drawn in SAAMCO the present case falls. In my view the majority of the Court of Appeal came to the correct conclusion. The brokers were fortunate in obtaining leave to appeal to the House on what turned out to be issues of fact. Nevertheless, it was necessary to give the closest attention to all the arguments deployed during a three day hearing. Having done so my view is that the arguments of the brokers must be rejected.

IX. Disposal

    44. I would dismiss the appeal with costs


My Lords,

    45. This is another case which is concerned with the extent of a defendant's liability for the consequences of a breach of duty on his part which has resulted in the plaintiffs entering into a loss-making transaction. It is established by the decisions of this House in Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd [1991] 2 AC 249 ("Skandia") and Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191, known as South Australia Asset Management Corporation v York Montague Ltd ("SAAMCO"), that the plaintiff is not entitled to recover damages for the full extent of his loss merely because the defendant knew that he would not have entered into the transaction but for his own breach of duty. There must be a sufficient causal connection between the particular feature of the transaction which occasioned the loss and the subject matter of the defendant's duty of care. The amount of damages which the plaintiff is entitled to recover is limited to the amount of the loss which is attributable to the defendant's breach of duty, and this depends upon the scope of the duty in question. None of this is in dispute; the issue in the present case turns primarily on the correct identification of the scope of the defendant's duty, which is a question of fact.

    46. Stripped to the bare essentials, and omitting for the moment the critical features on which the respondent Aneco relies, the facts are these. In 1988 Aneco was minded to enter into a proportional treaty ("the Bullen treaty") under which it would participate in the excess of loss account of certain Lloyd's marine syndicates. This was a transaction which in the events which happened was to cause Aneco a loss (in round figures) of some $35m. Aneco was not prepared to enter into the Bullen treaty unless it obtained excess of loss reinsurance for its own marine excess of loss account, including but not limited to losses arising from the Bullen treaty. Aneco employed the appellants, the brokers who had acted for the Lloyd's syndicates in obtaining Aneco as a counterparty to the Bullen treaty, to obtain the reinsurance for Aneco. Aneco made it plain to the appellants that it would not enter into the Bullen treaty unless it obtain the excess of loss reinsurance which it required. The appellants obtained it and Aneco duly entered into the Bullen treaty. Unfortunately the appellants had failed to present the risk fairly to the reinsurers, and many of them have repudiated liability. Had they not done so, Aneco's losses under the Bullen treaty would have amounted (in round figures) to $24m. As it is, they are some $35m.

    47. Thus Aneco entered into two separate but interdependent transactions: (i) the Bullen treaty by which it reinsured the syndicates excess of loss business; and (ii) contracts of outward reinsurance (strictly retrocession) by which it obtained excess of loss reinsurance for its own marine excess of loss account, including but not limited to losses under the Bullen treaty. The appellants were Mr Bullen's brokers in the first transaction and Aneco's brokers in the second.

    48. If these were the only facts, Aneco concedes that it could not recover damages in excess of $11m. The concession is plainly correct. The loss of $11m was due to the avoidance of most of the contracts of reinsurance. The loss of the further $24m was caused by Mr Crawley's decision to enter into the Bullen treaty, albeit with the benefit of excess of loss reinsurance, and not by the appellants' failure to obtain valid reinsurance. It had nothing to do with the absence of effective excess of loss protection. Aneco would have suffered this loss even if it had all the reinsurance protection it asked for. Aneco's claim has never been put on the basis that the appellants bore any responsibility for advising Aneco as to the amount of reinsurance it needed. That would involve an exercise of underwriting judgment; the appellants were brokers, not underwriters.

    49. The additional fact on which Aneco relies in order to establish its claim to recover in respect of the retained loss of $24 million is that, contrary to the information which the appellants gave Aneco, the reinsurance which Aneco required was not available in the market; it would have been declined by any underwriter to whom the risk was fairly presented. If the appellants had presented the risk fairly, as they ought to have done, so the argument runs, they would have discovered that the market viewed the Bullen treaty with marked disfavour. If this had been reported to Aneco, it would then not have entered into the treaty.

    50. In the Court of Appeal [2000] 1 All ER (Comm) 129 Evans LJ (with whom Ward LJ agreed) concluded that the appellants, as Aneco's brokers to obtain reinsurance, had accepted responsibility for advising Aneco, not merely with regard to the availability of reinsurance, but with regard to the market's assessment of the risks inherent in the Bullen treaty. If this conclusion is correct, then the appellants would not only have reported the market's unfavourable assessment of the Bullen treaty to Aneco as a matter of fact, but would have been bound to do so as a matter of legal obligation.

    51. My Lords, the fact that the reinsurance which Aneco required was not available in the market is no longer in dispute, and if the conclusion of the majority of the Court of Appeal as to the scope of the duty undertaken by the appellants were correct I would affirm its decision. The additional loss of $24m would still have been occasioned by Aneco's decision to enter into the Bullen treaty with only partial reinsurance protection, and not by the appellants' failure to obtain effective reinsurance. But Aneco's decision would be attributable at least in part to the appellants' breach of duty in failing to ascertain and advise Aneco of the market's adverse assessment of the risks inherent in its decision to participate in the Bullen treaty.

    52. There are, therefore, two questions for decision. The first is whether the conclusion is correct: did the appellants, as Aneco's brokers, undertake a duty to report, not only on the availability of the reinsurance which they were instructed to obtain, but on the market's assessment of the risks inherent in the Bullen treaty? That is a question of fact, not law. If they did not undertake such a duty, a second question arises: what is the measure of damages for a broker's advice that reinsurance is available when it is not? In particular, if he advises that reinsurance has been obtained (and therefore implicitly that it is available) is his liability greater if the reinsurance is in fact not available in the market than if it is? This is a question of law.

    53. Before setting out the facts in more detail, I shall briefly set out the current state of the law.

The law

    54. The law has never imposed liability for all the consequences of a defendant's negligence. It has formulated general rules to restrict the scope of liability within acceptable limits by reference to concepts such as foreseeability and remoteness of damage. In traditional cases of negligent conduct which causes physical injury, it has seldom been found necessary to place limits on the scope of the duty of care or the extent of the defendant's liability for the foreseeable consequences of his acts. Claims for damages for economic loss which is the result of negligent statements or advice, however, are very different. There is a potential for foreseeable but indeterminate and possibly ruinous loss by a large and indeterminate class of plaintiffs. Foreseeability of reliance alone is not a sufficient limiting factor.

    55. One response has been to limit the scope of the duty of care by reference to a test of "proximity". Another has been to decline to admit new categories of liability unless it is "fair, just and reasonable" to do so. Given the existence of a duty of care owed by the defendant to the plaintiff, however, it has generally been assumed that the defendant is liable for all the foreseeable consequences of his breach of duty.

    56. This assumption led the defendants to concede the quantum of damages in Youell v Bland Welch & Co Ltd (No 2) (The "Superhulls Cover" case) [1990] 2 Lloyd's Rep 431. The facts were not materially distinguishable from those of the present case. The plaintiffs wrote insurance contracts in reliance on the advice of their brokers that reinsurance was available on appropriate terms when it was not. Since the plaintiffs would not have entered into the insurance contracts but for the advice, it was assumed that, if the advice was negligent, the brokers were liable for the full amount of the loss on the insurance contracts even though their advice was referable exclusively to the reinsurance.

    57. In Caparo Industries plc v Dickman [1990] 2 AC 605, however, this assumption was shown to be false. The House held that it is not sufficient for the plaintiff to prove that the defendant was in breach of a duty of care owed to him. He must also show that the particular loss fell within the scope of the duty. Lord Bridge of Harwich said, at p. 627:

    "It is never sufficient to ask simply whether A owes B a duty of care. It is always necessary to determine the scope of the duty by reference to the kind of damage from which A must take care to save B harmless."

Accordingly auditors were not liable for their failure to use reasonable care in auditing a company's accounts to a shareholder who relied on the accounts in order to make a take-over bid for the company. They were in breach of their duty of care to the plaintiff because it was a shareholder in the company, but they were not liable for loss which it suffered in a different capacity, shared with every one else, as a potential buyer of the company's shares. Despite the way in which Lord Bridge formulated the issue, I think that it is conceptually better to say that the defendant's liability for the consequences of his actions is limited by reference to the scope of the duty than to say that the duty itself is owed only with respect to a particular kind of loss: see Professor Stapleton's article on Legal Cause: Cause-in-Fact and the Scope of Liability for Consequences: Vanderbilt Law Review (2001) vol 54, p 942.

    58. At p 629 Lord Roskill dealt with liability for the provision of information in terms which are particularly apposite in the present case:

    "I think that before the existence and scope of any liability can be determined, it is necessary first to determine for what purposes and in what circumstances the information in question is to be given".

    The importance of asking this question was overlooked in the Superhulls Cover case. For the moment it is sufficient to say that it is necessary to separate the issue of causation, which is a question of fact, and the issue of legal responsibility, which is a question of law. There is nothing new in this: the bifurcation of causal questions was insisted on by Honore and Hart in the first edition of Causation in the Law published in 1959.

    59. The fallacy which underlay the concession in the Superhulls Cover case was exposed in Bank Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd [1991] 2 AC 249, though not until the case reached the House. A syndicate of banks which was proposing to make a secured loan to a group of companies instructed a broker to arrange credit insurance. The policies excluded liability for loss by reason of fraud on the part of the borrowers. It was a condition of the loan that the banks would advance the moneys only when all the policies were in place. The broker fabricated cover notes and falsely certified that all the policies were in place when only some of them were. The banks duly advanced the moneys. The borrowing companies defaulted, the man behind them turned out to be a swindler who had embezzled the companies' assets, the security proved to be worthless, and the insurers were able to rely on the fraud exemption to any claim under the policies. The banks sued the broker. They proved that they would not have lent the money if they had known that he had deceived them. The "but for" test of causation was satisfied. The consequence (that the banks would lend the money) was foreseeable; indeed it was intended. But the House unanimously dismissed the banks' claim. The loss was caused by the borrowers' fraud coupled with the fact that this was not an insured risk. The brokers' certificate that the insurance was in place did not cause the loss, which would have been exactly the same if all the insurance had been in place as the broker had certified.

    60. The Superhulls Cover case and Skandia were both concerned with separate but interdependent transactions each leading to a different but easily quantifiable loss. But the principle was taken a stage further in SAAMCO. There lenders made mortgage advances on the security of land in reliance on valuations which were subsequently found to be negligent. In each case there was a single transaction and the loss, being the difference between the amount advanced and the amount recovered, was indivisible. But a large part of the loss was due to a fall in the property market between the date of the advance and the date the security was realised. The valuers were not responsible for this save in the sense that, if they had given a correct valuation, the transaction would not have gone ahead at all and the mortgagee would have suffered no loss. The "but for" test was satisfied. Eliminating the loss for which the valuers were not responsible made it necessary to undertake a mathematical exercise, and this required the proper measure of damages to be identified. The courts below simply applied the "but for" test and asked what would have happened if the valuers had performed their duty and valued the properties correctly. In that event none of the transactions would have taken place. The mortgagees were awarded the whole of their loss. The House allowed the valuers' appeals: [1997]AC 191.

    61. Lord Hoffmann gave the only reasoned speech. He applied the principle which had emerged in Caparo v Dickman and Skandia. He observed that a person who is under a duty to take reasonable care to provide information on which someone else will rely in deciding whether to take a course of action is, if negligent, not generally responsible for all the consequences of that course of action. He is responsible only for the consequences of the information being wrong. He is not responsible for losses which would still have occurred even if the information had been correct. It was necessary to exclude from the computation of loss that part of the overall loss which would still have been sustained if the facts had been as represented. This explained why no part of the loss was irrecoverable in Skandia; it was uninsured loss and would have been irrecoverable even if the cover had been fully in place as the broker had certified. In the Superhulls Cover case the same principle would have excluded that part of the loss which would have been retained by the plaintiff even if the desired reinsurance cover had been obtained. In SAAMCO itself it excluded that part of the loss which would have been sustained even if the property had been worth the amount at which it had been valued.

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