AIG Europe (Ireland) Ltd v Faraday Capital Ltd
| Jurisdiction | England & Wales |
| Judge | THE HON MR JUSTICE MORISON,The Hon. Mr Justice Morison |
| Judgment Date | 31 October 2006 |
| Neutral Citation | [2006] EWHC 2707 (Comm) |
| Docket Number | Case No: 2004/1056 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 31 October 2006 |
[2006] EWHC 2707 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
The Hon Mr Justice Morison
Case No: 2004/1056
Mr David Foxton (instructed by Chadbourne & Parke) for the Claimant
Mr Peter MacDonald Eggers (instructed by Clyde & Co) for the Defendant
Hearing dates: 17, 18 and 19 July 2006
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
This is a dispute between Insurers [AIG, the Claimants] and their Reinsurers [The Faraday (Corporate) Syndicate, the Defendants]. The reinsurance contract between the parties contained a Notification of Loss/Claims Co-operation clause in terms which are familiar to the courts:
"Claims Co-operation clause
Notwithstanding anything contained herein to the contrary, it is a condition precedent to any liability under this Policy that:
(a) The Reinsured shall upon knowledge of any loss or losses which may give rise to a claim, advise the Reinsurers thereof as soon as is reasonably practicable and in any event within 30 days..
(b) The Reinsured shall furnish the Reinsurers with all information available respecting such loss or losses, and shall co-operate with the Reinsurers in the adjustment and settlement thereof."
AIG say that they are entitled to an indemnity under the Reinsurance Policy; Faraday say that the condition precedent was not fulfilled and therefore they have no liability under the Policy.
The background to this dispute may be shortly stated. AIG had provided cover to a company called Smartforce under a 'directors and officers' policy. This underlying Policy was expressed to be subject to Irish law. Smartforce was an Irish company which provided "e-learning" courses and reference material for the IT industry. It was listed on the NASDAQ exchange. Under the underlying Policy there were various retentions. For present purposes the relevant retention is to be found in endorsement number 5 which provided cover for "securities claims" in the USA or Canada: the retention in relation to this aspect of cover was US$5 million and a requirement for co-insurance of 25% so that AIG were liable only for 75% of a loss in excess of US$5 million and there was an overall limit to the cover of US$15 million [excess the retention].
In relation to its exposure, AIG did not reinsure in respect of the first layer, that is US$5 million in excess of the retention, but in relation to the next layer of US$5 million [excess of US$5 million excess of the retention] it obtained reinsurance cover in relation to 50% of its exposure from Faraday and Brit, who each took 50% of that risk, leaving each of them with a 25% exposure to claims which 'hit' this layer.
In relation to AIG's exposure at the top layer [US$5 million excess of US$10 million excess the retention under the Smartforce Policy] again this reinsurance cover was placed equally between Faraday and Brit who, between them covered 50% of AIG's exposure at this level.
In relation to AIG's remaining exposure of 50% at each of the two layers, that was covered with a Swiss Re reinsurance Policy.
The claim under the Reinsurances
On 6 September 2002, Smartforce merged with a USA corporation, Skillsoft. The Underlying Policy was converted into a run-off policy covering risks arising out of claims made during an increased policy period of 6 years in respect of wrongful acts before the date of the merger. On 19 November 2002, the management of the new merged enterprise announced that they intended to restate the financial statements of Smartforce for the previous three years [1999, 2000 and 2001] and for the first two quarters of 2002. These disclosures and the subsequent fall in the listed value of Smartforce's shares led to class actions against Smartforce and various of its directors. The disgruntled shareholders were alleging that they had bought their shares at an artificially inflated value which the November disclosures then exposed and they had lost money as a result. These claims were eventually settled following a court ordered mediation in March 2004. A payment of US$30.5 million was made to the class action plaintiffs.
On 2 June 2005, AIG paid Smartforce's claim under the Policy for the full limit of US$15 million and then sought to recover under the reinsurances. All but Faraday have paid up. Faraday say, in a nutshell, that
(1) the losses were notified to them too late;
(2)when properly construed, the clause obliged AIG to notify Faraday of circumstances that might give rise to a claim against Smartforce, as well as actual losses, and that this was not done "as soon as reasonably practicable" or "within 30 days" of AIG's knowledge of the same.
(3) Even if the clause only covers actual losses, AIG were aware of the losses when the shares fell in value [there is a separate argument about defence costs];
(4) in any event the losses were not notified "as soon as reasonably practicable" even if they were notified within 30 days.
Before turning to the issues in more detail, I shall first deal with what I consider to be the proper construction of this clause. There was some evidence to which my attention was drawn which related to the negotiations between the parties and to the internal views of Faraday staff as to what the clause in question meant. The original draft clause [the wording was standard wording produced by JLT, AIG's brokers] was this:
"Notwithstanding anything contained herein to the contrary, it is a condition precedent to any liability under this Policy that:
(a) The Reinsured shall upon knowledge of any loss or losses which may give rise to a claim under this reinsurance, advise the Reinsurers thereof as soon as is reasonably practicable and in any event within 30 days.."
In the signed slip, Faraday deleted the words underlined. There is a note made by the brokers which indicated that the reinsurers wanted to receive advice "as and when it happened to AIG and not just for the r/i layer i.e. 5 x 5" Neither the broker who wrote this note nor Faraday's underwriter gave evidence. It seems to me that I should take the words of the clause as they finally appear from the agreed contract [the slip]. The intention of the parties is to be derived from the words they used to express their bargain, and I am reluctant to pay any attention to the negotiations since, like Mummery LJ in Beazer Homes Limited v Peter Stroude [2900] EWCA 265 at paragraphs 12 and 26:
12. The basic legal principles are not in dispute: evidence of negotiations leading to the making of a contract or of the subjective intentions of the parties as to the meaning of the contract is not admissible for the purpose of construing the contract: Prenn v. Simmonds [1971] 1 WLR 1381 per Lord Wilberforce at 1384C-1385H; Reardon Smith Line v. Yngvar Hansen-Tangen [1976] 1 WLR 989 per Lord Wilberforce at 996E-997D ; and Investors Compensation Scheme v. WBBS [1998] 1 WLR 896 per Lord Hoffmann at 912F-913F. Such evidence is not admissible as part of the factual matrix or as relevant objective background of a contract, as it is not helpful in construing a contractual document.
26. The policy underlying the exclusion of that evidence applies also to evidence of the negotiations and subjective intention of the parties relating to a separate agreement, such as the negotiations for a collaboration agreement between Mr Stroude and BHL which failed to produce a concluded agreement. As evidence of the purpose, meaning and scope of the s106 Agreement, the draft collaboration agreement, the abortive negotiations for it and the subjective intentions of Mr Stroude and BHL in relation to it are quite simply worthless. In some very loose sense they could be described as "background" to the s106 Agreement, but they are far from being the factual matrix or objective setting of the s106 Agreement which Lord Wilberforce and Lord Hoffmann described. Indeed, I would go further than saying that the evidence sought to be adduced is not helpful on the construction issue. Like much material that is irrelevant or only marginally relevant, this evidence is distracting and detrimental to the legal process: it is time wasting, cost consuming and diverts attention away from what matters most when construing a formal written contract, namely, the language which the parties have agreed upon to express their contractual intentions.
To be fair, Mr Macdonald Eggers, who represented Faraday's interests with conspicuous ability, did not press the point. His submission was that
(1) AIG must have had actual knowledge of a "loss or losses".
(2) In the context of a liability policy, the loss or losses must be those borne by the plaintiff shareholders, not AIG.
(3) The loss or losses must be capable of giving rise to a claim (this is merely a matter of possibility as opposed to probability).
(4) The possibility of a claim must be one under the Original Policy.
His alternative submission was that the word "loss" meant "potential loss" in order to give the second part of the clause some efficacy.
So, the question remains, what is the proper construction of the clause?
As I have indicated this was a standard clause in common use. A similar clause was considered by the Court of Appeal in Royal & Sun Alliance Plc v Dornoch [2005] 1 Lloyd's Law Reports IR page 544. The clause in that case was in these terms [and I underline the differences]:
"Notwithstanding anything herein contained to the contrary, it is a...
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