Deeny v Gooda Walker Ltd (No. 2)
| Jurisdiction | England & Wales |
| Judgment Date | 25 May 1995 |
| Date | 25 May 1995 |
| Court | Queen's Bench Division (Commercial Court) |
Queen's Bench Division (Commercial Court).
Phillips J.
Andrew Smith QC, Andrew Park QC and David Lord (instructed by Wilde Sapte) for the plaintiffs.
Bernard Eder QC and Simon Bryan (instructed by Elborne Mitchell) for the defendants.
The following cases were referred to in the judgment:
British Transport Commission v Gourley ELR[1956] AC 185
Brown v KMR Services Ltd (formerly H G Poland (Agencies) Ltd)[1994] CLC 492
Deeny & Ors v Gooda Walker Ltd (in voluntary liq.) & Ors[1994] CLC 1224
Deeny & Ors v Gooda Walker Ltd (in voluntary liq.) & Ors (No. 2) [1995] CLC 623
Deeny & Ors v Gooda Walker Ltd (in voluntary liq.) & OrsTAX[1995] BTC 71
O'Sullivan & Anor v Management Agency and Music Ltd & OrsELR[1985] QB 428
Parsons v BNM Laboratories Ltd ELR[1964] 1 QB 95
Stewart v Glentaggart Ltd 1963 SLT 119
Tate & Lyle Food and Distribution Ltd v GLC WLR[1982] 1 WLR 149
Income tax - Damages - Interest - No account taken of taxation on award of damages in favour of Lloyd's names - Interest on damages - Whether regard to be had to tax consequences in awarding interest on damages -Supreme Court Act 1981 section 35ASupreme Court Act 1981, s. 35A.
This was a claim for interest on damages under the Supreme Court Act 1981 section 35ASupreme Court Act 1981, s. 35A.
The plaintiffs, 3062 Lloyd's underwriting members, formed a group to bring an action in negligence against their managing agents ("the defendants"). The names were awarded damages (see [1994] CLC 1224), and in an application by the defendants ([1995] BTC 71) Potter J had refused to make a reduction in the damages to take account of the effect of taxation.
In this claim by the plaintiffs for interest on the damages, the defendants claimed a reduction of the interest to take account of tax. The defendants contended that, even if no regard was paid to the effect of taxation in awarding damages for negligence, it did not necessarily follow that no regard would be paid to the effect of taxation in awarding interest on the damages.
The defendants contended that the underwriting losses sustained by the names would, in many cases, have carried with them tax benefits. Some names will have been able to set off their losses against other profits, thereby reducing tax liability. The defendants, therefore, claimed that interest should be awarded only on the net losses suffered by the names after giving credit for tax savings.
The question was whether, if regard was paid to the effect of taxation in awarding interest, there would be a conflict with the court's decision in relation to the damages.
The plaintiffs submitted that a uniform approach should be adopted to the award of interest in all cases.
The defendants accepted that it would not be practicable to analyse the tax position of the plaintiffs name by name but contended that the court should adopt a "broad brush" approach, giving overall effect to the likely incidence of tax on the names as a group.
Held, awarding damages on 75 per cent of damages recovered:
1. There was no automatic rule that, if no reduction to take account of tax was made in awarding damages, the same applied when awarding interest on those damages. Thus logically there would be no conflict between the court's decision not to take account of the effect of taxation in awarding damages and an approach to awarding interest which had regard to the effect of taxation. Damages were awarded to compensate for the loss of money, or its equivalent, while interest was awarded to compensate for the loss of use of money.
2. In practical terms the court should approach each claim to interest on its merits, placing a pragmatic restraint on detailed investigation of the individual's tax position, but at the same time refraining from awarding interest for loss which the plaintiff was unlikely to have suffered. It would be impracticable to calculate interest on a name by name basis. The names had formed an action group and agreed between them how recoveries should be shared out. In those circumstances, there was no reason why a group approach should not be adopted, effecting an overall reduction reflecting the benefits of the incidence of taxation. Thus, a broad brush approach would be adopted and the court would exercise its discretion to reduce the amount of damages on which interest was awarded.
Phillips J: This judgment deals with the plaintiffs' claim to interest pursuant to Supreme Court Act 1981 section 35As. 35A of the Supreme Court Act 1981 and with one issue that arises in relation to run-off costs.
Supreme Court Act 1981 section 35ASection 35Aprovides:
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(2) Subject to rules of court, in proceedings (whenever instituted) before the High Court for the recovery of a debt or damages there may be included in any sum for which judgment is given simple interest, at such rate as the court thinks fit or as rules of court may provide, on all or any part of the debt or damages in respect of which judgment is given, or payment is made before judgment, for all or any part of the period between the date when the cause of action arose and …
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(b) in the case of the sum for which judgment is given, the date of the judgment.
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The parties are at odds upon:
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(2) the basis upon which interest ought to be awarded,
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(3) the dates from which interest ought to run,
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(4) the amounts upon which interest ought to be awarded,
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(5) the appropriate rate of interest, and
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(6) the credits, if any, which should be allowed against the claim for interest.
The primary head of loss in respect of which the names are entitled to recover damages consists of liability to third parties under contracts of excess of loss reinsurance. These third party liabilities are not discharged directly by the names, but by their managing agents. The managing agents maintain substantial reserves against future claims. These reserves earn investment income. In order to prevent the reserves becoming depleted by the payment of claims, calls are made upon names from time to time. These calls cannot be specifically related to any particular claims.
The plaintiffs originally based their claim to statutory interest upon the premise that their losses were sustained when they paid calls. This approach raised complex problems, including the need to give credit against claims to interest for investment income earned by the reserves and the impossibility of relating calls to specific paid claims. I expressed the view that the plaintiffs' approach was wrong in principle. Their losses were sustained when claims were paid by the managing agents on their behalf. This was consonant with the defendants' submission, to which I acceded, that it was appropriate that judgment should only be entered in respect of paid claims.
The plaintiffs have adapted their claim to interest to accord with the approach that I suggested and now allege that the payment of claims is the appropriate event that triggers entitlement to interest under statute. This approach results in a significant increase in the plaintiffs' claim to interest. Mr Eder for the defendants submitted that the plaintiffs' previous approach to interest was the correct one. Payment of claims only caused losses to the names where they resulted in subsequent calls to make good the payments made.
I reject this submission. The names sustain losses as and when the funds of their syndicates are used by their managing agents to discharge their liabilities.
Mr Eder alternatively submitted that, as an award of interest under statute is discretionary, I should not permit the names to reformulate their claim to interest in a manner which significantly increased it when the defendants had been proceeding on the basis that they would only have to meet the lesser claim. This submission I also reject. I consider that the names should be permitted to advance their claim to interest on a rational basis. I would add that the new approach to interest follows my rejection of the approach that the names were seeking to advance to the assessment of damages. Although the new approach increases the interest they claim, this may...
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