R (Geologistics Ltd) v Financial Services Compensation Scheme
| Jurisdiction | England & Wales |
| Judge | Lord Justice Waller |
| Judgment Date | 18 December 2003 |
| Neutral Citation | [2003] EWCA Civ 1905 |
| Docket Number | Case No: C1/2003/0715 |
| Court | Court of Appeal (Civil Division) |
| Date | 18 December 2003 |
[2003] EWCA Civ 1905
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
QUEEN'S BENCH DIVISION
THE ADMINISTRATIVE COURT
MR JUSTICE DAVIS
Royal Courts of Justice
Strand,
London, WC2A 2LL
Lord Justice Thorpe
Lord Justice Waller and
Lord Justice Latham
Case No: C1/2003/0715
Sir Sydney Kentridge QC, Rory Phillips QC (instructed by Herbert Smith solicitors) for the Appellant
Colin Edelman QC, Colin Wynter (instructed by Davies Arnold Cooper solicitors) for the Respondent
This is an appeal from a decision of Davis J given on 4 th March 2003. He had to consider the extent of the obligation of the Financial Services Compensation Scheme (the Scheme) under sections 6(4) and (5) of the Policyholders Protection Act 1975 (the 1975 Act). These subsections deal with the extent of the indemnity provided by the Scheme to policyholders where an insurance company has become insolvent and where the policyholder has taken out “compulsory” insurance.
Under the policy which the respondents (Geologistics) had with Independent Insurance Company Limited (Independent) Geologistics had cover for Employers' liability i.e. insurance that they were “compulsorily” required to take out, and other cover which they were not so required. If Independent had not become insolvent, Geologistics would have recovered under the policy (1) damages payable by Geologistics as employer to an employee; (2) costs, payable by Geologistics to the employee, of any action brought by the employee; and (3) costs incurred in defending any claim.
Once Independent became insolvent there has never been any dispute that by virtue of Section 6(4) and (5) of the 1975 Act the Scheme was obliged to indemnify Geologistics for (1) any damages for which Geologistics had been found liable to pay to the employee; (2) any costs which Geologistics had been found liable to pay the employee. The dispute related to whether the Scheme was obliged to pay the costs which Geologistics were as at the time of Independent's liquidation bound to pay their solicitors Davis Arnold Cooper (DAC) for defending the claim.
The judge found that the Scheme was liable to pay the costs of defending the claim but he gave permission to appeal.
The judge set out in his judgment the relevant terms of the policy, and the relevant terms of both the 1975 Act and other legislation on which submissions turned, with comments and explanations which are not in issue. I append to this judgment a section from his judgment setting the background to the submissions made on the appeal [see schedule 1].
The judge was of the view that the object of the 1975 Act was to provide a degree of protection for policyholders, and that section 6 was to provide protection to corporate policyholders because they had been compelled to insure. Sir Sydney Kentridge QC, as Mr Phillips had done in the court below, challenged the judge's view as to the object of the 1975 Act, and in particular Section 6 of that Act. Reliance was placed on the long title and to the reference to the “Act ….protecting policyholders and others..” So it was submitted that the primary purpose of Section 6 was to protect the third parties who were intended to be the beneficiaries of the compulsory insurance referred to in that Section. Why, Sir Sydney submitted, should there be the exception to the general rule that corporate policyholders should not recover unless it was to protect the third parties in favour of whom compulsory insurance was required to be taken out?
The answer seems to me to be first that the Act as a whole is clearly by the provisions such as Section 8(2) concerned with protecting policy holders albeit in that context private policyholders, and only to the extent of 90%. The language of Section 8(2) and Section 6(4) is the same save for the fact that the indemnity is 100% and corporate policyholders are now included. Furthermore the fact that corporate bodies are included and the extent of the indemnity is increased to 100%, is consistent with the notion that, because insureds have been forced to take out insurance and pay premiums, therefore, if insurance companies become insolvent, all policyholders ought to be protected completely.
Obviously there is benefit to the third party victims as well; and that Parliament may also have had in mind. The critical point is that Sir Sydney wished to use the argument that the object was to protect third party victims so as to construe Section 6(4) and (5) as if their sole or at least primary purpose was to assist victims as opposed to indemnifying policyholders. In my view that is not a legitimate construction of the statute.
Sir Sydney also relied on the provisions of the 1975 Act other than Section 6 to show that the Scheme is funded by the insurance industry, and to show the scheme was not intended to provide a complete indemnity. In the context of insurance that is not compulsory, corporate policy holders get no rights against the scheme at all, and even private policyholders get only 90%. So, submitted Sir Sydney, it should be a matter of no surprise that a corporate or indeed a private policyholder should bear the risk of paying their own costs of defending a claim where the insurance company has become insolvent.
Mr Edelman also sought to place Section 6 in the context of the whole Act. He submitted that the intention of Parliament can be divined from first looking at Section 8(2), seeing as I have already indicated the same language being used in Section 6(4). Then he pointed out that Section 6 (5) is followed by Section 6(6). He submitted that what Parliament must have had in mind was the providing of a complete indemnity where the policy was a policy “required” by one of the statutes, and a complete indemnity covering anything that would normally have been covered by such a policy. That, he submitted, is what Section 6(5) is designed to achieve and that is apparent and confirmed, he submitted, by Section 6(6) which provides for recovery by private policyholders and only to the extent of 90% for aspects which would not be covered by a “compulsory” policy if that was the only type of insurance covered.
The correct approach to the construction of Section 6(4) and (5) to which the above submissions go is clearly important, and I confess to being inclined to Mr Edelman's submission, but the language of the subsections must be the starting point. For convenience I repeat sections (4) and (5) of subsection 6:
“(4) Subject to sections 9, 13 and 14 below and the following provisions of this section, it shall be the duty of the Board [the Scheme] to secure that a sum equal to the full amount of any liability of a company in liquidation towards a policyholder or securityholder under the terms of any policy or security to which this section applies is paid to the policyholder or securityholder as soon as is reasonably practicable after the beginning of the liquidation.
(5) Subsection (4) above does not apply by reference to any liability of a company in liquidation under the terms of a policy to which this section applies arising otherwise than in respect of a liability of the policyholder which is a liability subject to compulsory insurance.”
Subsection (5) is certainly capable of a very narrow construction. That construction, which was essentially that put forward by Sir Sydney, involves saying that the liability of the insurance company to which subsection (4) would apply on its natural language, is to be construed as not encompassing any liability other than an established liability of a policy holder which he is obliged to have compulsorily insured. Sir Sydney sought to support this narrow construction by reference to certain authorities. He argued that the authority relied on by the judge dealing with the words “in respect of” advocated too wide an interpretation of those words and that other authorities demonstrated that a narrower construction was apposite.
There was cited to the judge, the decision of Boreham J in the case of Paterson v Chadwick [1974] 1 WLR 890. As the judge said, that was a decision on the ambit of the phrase “in respect of” as used in section 32 of the Administration of Justice Act 1970, a very different statutory context to the present. In the course of his judgment, Boreham J referred to some observations of Mann CJ in the Australian case of Trustees Executors & Agency Co Ltd v Reilly [1941] VLR 110, itself a decision on an Australian statute, the Farmers Protection Act 1940. At page 893 of the report, Boreham J said this, having referred to the fact that certain authorities had been cited to him, including the Reilly case:
“I refer to [that case] for this reason: that it is the one case in which reference was made and an explanation attempted —an explanation rather than a definition —of the words ‘in respect of’, again in the particular context in which Mann CJ found them.
It is right that one should say this. This was a decision given under the Farmers Protection Act 1940, by section 5 of which farmers were protected from process or proceedings ‘in respect of’ a debt unless a notice had been served upon the farmer in question. In the decision, Mann CJ was faced with the contention that they were ejectment proceedings, that they were not proceedings in respect of a debt, but in respect of failure to deliver up possession. In the course of giving his judgment, Mann CJ attempts this explanation of the words ‘in respect of’, at page 111:
“The words “in respect of” are difficult of definition, but...
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