INSURANCE CO OF THE STATE OF PENNSYLVANIA v. GRAND UNION INSURANCE CO LTD AND ANOTHER

1986 No. CL69

HEADNOTE

COMMERCIAL LIST

1986 No. CL69

IN THE SUPREME COURT OF HONG KONG

HISH COURT

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TRANSCRIPT OF JUDGMENT

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Mortimer J.

1. The Plaintiffs, the Insurance Company of the State of Pennsylvania, (ICSP) claim as the reassured under two contracts of retrocession. Each contract was contained in a slip broked on the London Insurance Market by Lowndes Lambert Construction Limited, (Lowndes Lambert) the second Defendant, to Grand Union Insurance, (Grand Union) the first Defendant. In each case ICSP were reinsurers themselves. The type of business was contractor's all risks, (CAR) and claims were made by the original Insured. ICSP have settled the claims and they now seek full indemnity from Grand Union under the retrocessions.

2. The two retrocessions were described in each slip as 'reinsurance'. The first slip in time, the Mecca Taif Slip, concerned a contract to construct a saline water plant at Mecca Taif in Saudi Arabia. The second, the Fougerolle slip, concerned construction work relating to two roads in Algeria. The facts of this case exemplify the importance of the London Insurance Market. The Fougerolle business involved a French company contracting to work on roads in Algeria, a French insurer, SMABTP, with a French broker, Gras Savoye, broking reinsurance through Lowndes Lambert on the London market to the American Insurance Group of New York. Lowndes Lambert acted eventually for ICSP and also broked for ICSP to Grand Union London for Grand Union Hong Kong. The Mecca Taif business is similarly international.

3. ICSP brought in Lowndes Lambert by amendment as the second Defendant. Their case is alternative and only arises if they fail against Grand Union.

The London Insurance market

4. Before dealing with Grand Union's defence to the action, I will outline briefly some of the salient features of the London insurance market. This will enable me to deal more briefly with the issues in due course. When dealing with reinsurance, including retrocession, the market aims to achieve speed, simplicity and certainty in its dealings; including both the underwriting and dealing with claims. It is upon these qualities that the undoubted success of the market depends. Whether these qualities are achieved depends in part upon the applicable law. In certain types of business - CAR is one - the whole risk involved is often great. One Insurer may be unwilling or unable to accommodate it. The insurer therefore reinsures part of, or all of, the risk. This is achieved by brokers who act for the reassured or retrocedent, not the reinsurer or retrocessionaire. Whenever I speak of reinsurance in this Judgment I include retrocession unless I say otherwise.

5. Reinsurance may take at least two forms. A reinsurer may write a percentage of the whole risk up to 100%; described during this case as 'vertical reinsurance'. Alternatively, or additionally, a reinsurer may take a percentage up to 100% of a layer of the risk involved. Layered reinsurance (referred to as 'horizontal reinsurance') relates to losses up to a certain limit. This may be the first loss or primary layer. Sometimes layered reinsurance involves higher layers between specified limits, but there were none in this case.

6. A reinsurer may be prepared to underwrite a percentage of the whole risk only when he is certain that he can retrocede a primary layer of that risk. That happened in this case. The broker's task is to achieve this. Sometimes therefore, a broker may seek the underwriting of a layer of risk up to certain limits from a retrocessionaire before the retrocedent is prepared to underwrite part of the whole risk. That also happened in the instant case.

7. A contract of reinsurance is contained in a slip drafted by the broker. If necessary this is amended during underwriting negotiations. It contains all the essential terms with abbreviations as understood by the market. This can be seen from the two slips in this case, which I annex to this Judgment as Annex 1, the Fougerolle slip; and Annex 2, the Mecca Taif slip. The slips contemplate that a policy will be issued if called upon. This is not usually required. Once subscribed, the slip constitutes the whole contract between the reassured and the reinsurer. See The General Reinsurance Corporation v. Fennia Patria, [1983] 1 QB. 856 at 866H. The question had arisen in an earlier case decided by Donaldson J. (as he then was), whether a binding contract came into existence before all the lines had been underwritten. That was found to be the wrong approach. Kerr L.J. said at 866H:

" ...... I am in no doubt that Staughton J.was right in the present case in concluding as he did ......, that the orthodox understanding of the position, is correct, viz., the presentation of the slip by the broker, constitutes the offer and the writing of each line constitutes an acceptance of this offer by the underwriter pro tango. The evidence in the present case clearly shows that in the insurance market, this is the intention of both parties to the transaction and the legal analysis must accord with their intention".

8. The underwriter who subscribes first, will usually write the largest line and will become known as the leading underwriter. Sometimes the total lines subscribed may exceed 100% or may exceed the percentage required having regard to the amount of the reassured's retention. In these cases it is the custom of the market to sign down each underwritten line proportionally so that the total lines when written down equal 100% or the percentage required. Each reinsurer is notified by the broker of any signing down in closing instructions, which specify the percentage of his signed down line with the amount of the premium due thereon accordingly.

9. The slips concerned in this case, incorporate certain terms in abbreviated form in accordance with the custom of the market. I refer to the Fougerolle slip.

10. Condition 1 reads:

"Reinsurance of ICSP whose gross (net plus treaties) retention is nil of amounts hereon".

That specifies and indicates that ICSP are the reassured and that they are retaining no amount specified on the slip. This may be a clear indication to the underwriter that there is retention of higher amounts.

11. Condition 2 is a full reinsurance clause excluding rate and retention. This is an abbreviated form. The full clause is as follows:

"That the reinsurance is subject in all respects to the same terms and conditions excluding rate and retention as and to follow the settlements of the Insurance Company of the State of Pennsylvania and to bear its proportion of any expenses incurred whether legal or othervise in the investigation and defence of any claim thereunder. "

12. The important part of that clause is an agreement to follow the settlements; a matter to which I will have to return.

13. I can go to Condition 6; a simultaneous claims payments clause. By this the reinsurer agree to pay its share of any loss simultaneously with the insurers under the original insurance.

14. The aims of such Conditions are these. (1) To avoid the expense of multiple claims enquiries by different insurers and reinsurers in the chain. (2) To simplify and hasten the claims procedures. (3) To reduce or avoid the possibility of disputes arising between reinsurers in the chain, and (4) to have an immediate flow of funds through the chain when a claim is agreed to be settled.

15. If a reinsurer wishes to be involved in the claims procedure, he will require a claims co-operation clause to be inserted. Neither slip in this case has one. Whether a prudent underwriter asks for such a clause depends upon many factors and at one stage those factors were relevant to my consideration of this case. They are no longer relevant and I do not refer to the matter again.

16. Although the contents of a slip will inform an underwriter of many of the features of the risk to which he subscribes, usually this information is not detailed. On the London market, the underwriter is visited by the broker and the broker makes a presentation to him of the risk in summary form. This will be partly documentary and partly oral. The documents may include for example, a draft slip, a precis of necessary information from the contracts, and the insurance file, and there may be other documents such as letters, facsimiles or telexes on specific points. Additionally the broker may tell the underwriter about the background of the interest, and answer questions put by the underwriter.

17. The contract is of the utmost good faith on both sides. The presentation must be fair. The law on this I believe is clear. I respectfully adopt as accurate, the requirements of a fair presentation set out in CTI v. Oceanus [1984] 1 Lloyd's Rep. 476 per Kerr L.J. at 496:

"Having regard to all the circumstances known or deemed to be known to the insured and to his broker, was its presentation in summary form to the underwriter a fair and substantially accurate presentation of the risk proposed for insurance, so that a prudent insurer could form a proper judgment either on the presentation alone, or by asking questions if he was sufficiently put on inquiry and wanted to know further details, whether or not to accept the proposal and if so, on what terms. "

 

Further at 497:

 

"The principle is that if a certain fact is material, so that a failure to draw the underwriter's attention to it distorts the fairness of the broker's presentation of the risk, then it is not sufficient that this fact could have been extracted by the underwriter from material to which he had access or which was cursorily shown to him. On the other hand, if the disclosed facts give a fair presentation of the risk, then the underwriter must enquire if he wishes to have further information. "

18. I was also invited to consider a discussion of the operation of the market in The Zephyr [1984] 1 Lloyd's Rep. 58 at 65-73.

19. I turn to the issues. At the outset the first Defendants raised a multiplicity of issues in the pleadings. Some parts of those pleadings confuse rather than clarify but I hasten to say that the pleading to which I advert was not Mr. Ma's who appears here. Many of those issues were untenable and were properly abandoned during the trial. Those which remain are as follows:

                (1)     The presentation issue. When Lowndes Lambert's Broker Mr. Forder presented the Fougerolle risk with certain undisputed documents, did he also present a translation of the Note de Presentation found in the core bundle at page 131, and also a handwritten translation of a Gras Savoye telex dated 2nd May, 1983?

                (2)     The retrocession/reinsurance issue. Were Grand Union aware at the time when their underwriter Mr. Parry subscribed the Fougerolle slip, that the business concerned was a retrocession and not a reinsurance? It was accepted by Mr. Rokison for Grand Union that if the presentation included the two documents, and the first issue went against him, this issue does not arise.

                (3)     The line issue. When Grand Union subscribed a line of 33% on the Fougerolle slip and 75% on the Mecca Taif slip, on a proper construction, are those contracts for those percentages of the limits on the slips, or for those percentages of the lines written by ICSP?

                (4)         The renovation/reconstruction issue. On a proper construction of the Fougerolle slip, was the risk for the renovation of the two roads whereas was the contract in reality for the reconstruction of the two roads? originally this point was taken by Grand Union as alleged misrepresentation. That was abandoned and the point was taken as a point on construction of the scope of the contract.

                (5)     The issues on quantum. Grand Union put (or seek to put) ICSP to proof that certain claims settled by them fell within the risk covered in the original insurance. Further, they allege that certain claims were settled by them for risks not covered by the original insurance and that in making the settlement ICSP did not take all proper and business-like steps, and that consequently they are not bound to indemnify ICSP in respect of those matters.

The Presentation Issue

20. I turn now to the presentation issue. Mr. Parry was Grand Union's underwriter in London. He only had authority to recommend the subscribing of lines to Hong Kong. Here in Hong Kong that matter was dealt with by Mr. Wong. Mr. Parry was an experienced underwriter, but was inexperienced in the CAR field. Mr. Wong had to rely upon Mr. Parry because he was certainly unversed in the London market. For example, it became clear in the course of his evidence that he had no proper understanding even of the meaning of a full reinsurance clause, although he must have approved the subscribing of many slips containing this clause as a condition.

21. It is and was, Mr. Parry's practice when recommending business to Mr. Wong in Hong Kong to send to him by FAX the relevant documents which had been presented. The two disputed documents were not to be found in Grand Union's files in London nor in Hong Kong. Nor is there any reference to them in the covering document in the bundle of FAX documents which were sent to Hong Kong at the relevant time. This bundle had seven pages. All are accounted for. They do not include the two disputed documents.

22. In the course of his evidence, Mr. Parry frankly admitted that he had no independent recollection of this presentation by Mr. Forder. His evidence is therefore a reconstruction from the absence of the disputed documents in Grand Union's files or records. Some of the paragraphs in Mr. Wong's Statement bear such a resemblance to Mr. Parry's Statement that they could not each have been written or made independently one of the other. I am satisfied that Mr. Parry did not collude with Mr. Wong from the evidence that he gave on the point. The input must have been from another source. The words used are probably also from that source. However, having stated my conclusion about Mr. Parry's and Mr. Wong's statements, I do not think that it is of great assistance in making my decision.

23. The broker Mr. Forder was an impressive witness. I am satisfied he has some independent recollection of this presentation. He was utterly mistaken in his description of another meeting when he said that he had met Mr. Parry. Mr. Parry was on holiday. This does not however, undermine the general accuracy of his evidence. His description of his dealings with Grand Union in relation to the Fougeroller slip - and the other business which led to that slip being underwritten - is supported in detail by contemporaneous documents. I am satisfied that he presented the two disputed documents to Mr. Parry, for the following reasons:

                (a)     The translation of the note de presentation was part of his presentation bundle, if I can so describe it. Although not drafted for this retrocession, it was shown to Mr. Bond of Commercial Union, who made pertinent notes on it. I am therefore satisfied, that Mr. Forder had that document and that it was part of the documents which he intended to make part of his presentation.

                (b)     Gras Savoye's telex was on Mr. Forder's evidence one of his 'best broking tools'. I accept that evidence. It answered questions an experienced underwriter would probably ask and it specified matters he would probably want to know. Those answers contained in the telex would of course require oral explanation.

                (c)     There was no reason for him not showing at least the Gras Savoye telex and there was every reason for him to show that document.

                (d)     Finally, these two documents are specifically mentioned on the slip itself under the rubric "information". That slip was signed, subscribed by Mr. Parry and the alterations on it were initialled by him. It is true that on the slip the date of that telex is wrong. I accept from an examination of the translation that the date was put there in error. The ease with which that error could be made can be seen from a simple examination of the document itself. The slip was also sent to Hong Kong containing reference to these two documents. I believe therefore that Mr. Parry saw these two documents. He cannot remember the occasion but I believe he saw them, he understood them and I think he probably chose not to sent them to Hong Kong on the basis that the rest of the presentation was sufficient for Hong Kong's purpose. I have in mind that Mr. Wong was unversed in the market anyway. He may have thought that the note de presentation was not strictly relevant to this retrocession. It was certainly more relevant to the earlier reinsurance and the telex could only be understood in any event by a detailed oral explanation.

24. This finding disposes of the reinsurance/retrocession issue. The slip was obviously a retrocession from the information contained on those two disputed documents. I must add that had my finding on the presentation issue been otherwise, I would still have found that Mr. Parry was aware at the time of the writing of the slip that this was a retrocession. I would have done so from what I trust would have been a realistic appreciation of the course of dealing between Mr. Parry and Mr. Forder before this ship came into existence. It is underlined by the failure of Grand Union to raise any point upon the retrocession/reinsurance matter for a very long time after documents clearly showing that this was a retrocession were in Grand Union's hands.

The Line Issue

25. Grand Union argues that when Mr. Parry subscribed 33-1/3% on the Fougerolle slip, and 75% on the Mecca Taif slip (whatever was intended by him and Mr. Forder) on a true construction of those slips, Grand Union underwrote 33-1/3% and 75% respectively of ICSP's line or liability. For these purposes, the same principles apply to each slip, and so as did Counsel in the course of submissions, I will deal with the Fougerolle slip only.

26. In relation to this slip, Mr. Rokison submits that Grand Union wrote 33-1/3% of ICSP's liability up to the 7.5 million French francs limit, and ICSP's liability written was 30% because they later wrote a line of 30% signed down to 29.7% of the whole risk. See Slip D.

I mention the boxes on the slips in order to exclude them. It is common ground that the boxes on the slips were completed later and are no guide as to the construction of the relevant point.

27. Mr. Rokison argues that the result for which he contends follows from the fundamental principle of the nature of reinsurance which is to indemnify the reassured against his liability and nothing more. Therefore he submits, that when Mr. Parry wrote 33-1/3% he could only be writing 33-1/3% of the extent of ICSP's liability in this layer, and no more. This is an attractive argument but it is wrong.

28. Evidence which has been given by those who made the contracts and the experts as to their meaning is inadmissible. I must judge the meaning of these lines written on slips from the slips themselves and from their whole factual matrix. This includes the market in which the parties were operating and the commercial purposes of the transaction.

29. The authorities which conveniently set out what is permissible for a Judge to consider in these circumstances, are found in Wace v. Pan Atlantic [1981] 2, Lloyd's Rep. 339 at 343. Mocatta J. refers to three decisions. The first is Prenn v. Simmonds [1971] 1 W.L.R. 1381. At 1385 Lord Wilberforce said:

".... evidence of negotiations, or of the parties' intentions .... ought not to be received, and evidence should be restricted to evidence of the factual background known to the parties at or before the date of the contract, including evidence of the "genesis" and objectively the "aim" of the transaction. "

30. The second authority referred to is Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen and Sanko Steamship Co. [1976] 2 Lloyd's Rep. 621. Again Lord Wilberforce. At 624 he said:

".... No contracts are made in a vacuum; there is always a setting in which they have to be placed. The nature of what is legitimate to have regard to is usually described as 'the surrounding circumstances', but this phrase is imprecise; it can be illustrated but hard to define. In a commercial contract it is certainly right that the Court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating. "

        And further at 625 he said:

" .... What the Court must do must be to place itself in thought in the same factual matrix as that in which the parties were."

31. The third authority is Schuler v. Wickman Machine Tool Sales Ltd. [1973] 2 Lloyd's Rep. 53. 1974 A.C. 235. Mocatta J. refers to a speech of Lord Reid which appears respectively at 57 and 251;

" .... The fact that a particular construction leads to a very unreasonable result must be a relevant consideration. The more unreasonable the result the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear. "

Those are the principles which I must seek to apply on this issue.

32. The background to the subscribing of these lines by Mr. Parry was that it was known by Mr. Forder that ICSP would be unwilling to write a line on the whole risk without being themselves reinsured for a primary layer.

33. In the Fougerolle business the primary layer wanted by ICSP was 5 million at first, later 7½ million francs. In the circumstances, Mr. Forder set out to find a reinsurer prepared to accept a line on the primary layer (at that time) of 5 million. Initially, Mr. Parry was prepared to write a line on that slip of up to 100% but Mr. Wong in Hong Kong would not agree and he said there must be no more than 50%.

34. In the end, Mr. Parry wrote 33-1/3% but at a time when the primary layer had been amended from 5 million to 7.5 million. It was pointed out that by writing 33-1/3% on 7.5 million he achieved exactly the same result as Mr. Wong had indicated by suggesting 50% of 5 million. However, I do not take that matter into account in my decision as it was only in the minds of one of the parties.

35. When Mr. Parry wrote 33-1/3% and it was confirmed, ICSP had not subscribed to a line on the whole risk. Once written the line on the slip is binding. It follows that whatever is written must be certain. Apart from any other considerations, commonsense and commercial efficacy dictates that Mr. Parry could not be writing a line on an order which had not then been placed, and which does not appear anywhere on the slip which constituted the contract. That which does appear on the slip is the limit of 7.5 million French francs, and the natural, obvious and prima facie interpretation of the line written is 33-1/3% of that limit.

36. So far as this slip is concerned I am satisfied that reading the whole of the slip and taking into account the whole of the factual matrix, the written line was 33-1/3% of the limits or (another way of putting it) 33-1/3% of the whole in relation to that slip, not 33-1/3% of order, there being no order at the time and no order on the slip.

37. After that one must consider the fundamental nature of an insurance contract. The lines which were subscribed by ICSP upon the whole risk, were later signed down in accordance with market practice, and in accordance with market practice Grand Union's lines were also signed down as was necessary because those lines could only be written in order to indemnify ICSP against their liability for this layer.

38. The same principle applies to both slips, and I reject Grand Union's interpretation.

39. Mr. Veeder characterised this submission as a 'Temple point'. By this he meant that the first Defendants were contending for an interpretation of the slips which occurred to someone long after the event and which was advanced in an attempt to avoid a liability under the slips. Grand Union's pleading on the point is astonishing. It advanced three possible interpretations. Mr. Hamilton for the Plaintiffs is to be forgiven for not understanding at the outset precisely which point he had to meet. I will not waste further time on it save to say that I am comforted in the knowledge that all the parties to the slip thought at the time that Grand Union had written 33-1/3% on the limits; that the premiums were calculated and paid on that basis; and that the 33-1/3 was signed down upon that basis - incidentally the only basis upon which it could have been properly written down in the circumstances. That writing down was completely accepted by Grand Union.

40. I have said enough about that point and I reject it. I am comforted by the views the parties took as to what line had been written in this respect, it accords with my own view and decision as to what was commercially reasonable. It seems to me that the interpretation contended for by Grand Union is at least commercially anomalous. The reason is (as was ventilated in argument) that the premium is fixed on the slip whereas the risk could very according to the line written by ICSP if it was less than 100%.

The Renovation/Reconstruction Issue

41. I turn to the renovation reconstruction issue. This issue began life as a misrepresentation point by which Grand Union were seeking to avoid the contract. As a misrepresentation point it was abandoned along with some others. The reason was never disclosed. It could be that there never was an answer to waiver raised by the Plaintiffs. I know not and it does not matter. It is now taken as a point of construction. The submission is that the losses were outside the scope of the risk covered in the reinsurance slip. Both Mr. Hamilton and Mr. Veeder submit that this is either a misrepresentation or nondisclosure in the presentation or it is nothing. There is much force in this submission for the slip makes direct reference to the contract concerned and in law the slip constitutes the whole of the contract. However, I will deal with these submissions on their merit for it is at least arguable that as the slip defines the contract as one for the "renovation" of the two roads the scope of the slip sets out risks of an entirely different nature from that which were actually undertaken.

42. The genesis of the Grand Union submission is in the precis of the contract which was part of the presentation found in the core bundle at 68 and 69, coupled with the adjusters report (core bundle 106) and a file note made by Mr. Forder after a claim (core bundle 113(k)). There are other documents to the same effect but those are the main ones. The precis refers not to renovation of these road but to "modernisation" of them. The adjusters report dated 1st June 1984 considers a claim relating to this business and sets out on Page 106:

"We should add that in most cases both on RN20 and CW1 the road followed a new line crossing the existing road at various points. "

 

        The file note made by Mr. Forder says among other things:

"It would seem that the original information stated that some 90% of the contract concerned the rehabilitation of an existing road might be incorrect. "

43. It appears from the documents that a considerable length of these roads was new road rather than simply the re-making of the then existing road.

44. After the claim the point was raised first by Commercial Union who had written a 20% line which had been signed down to some extent. It was Commercial Union's underwriter - described I am sure quite unfairly by one of the witnesses as the "cantankerous Mr. Bond" - who became concerned as to whether the risks which had been set out in the slip and in the free translation of the contract, the precis, were correctly described as renovation or modernisation when perhaps it ought to have been construction or reconstruction. It appears that Mr. Bond was eventually passified on the point if not wholly satisfied. I mention that matter in order to say that the evidence as to what Mr. Bond might or might not have thought or might or might not have done seems to me to be wholly irrelevant to any decision that I have to make. I have to approach the matter now on the basis of the construction of the slips. In doing so I apply the principles to which I have already referred.

45. I should say this; it was submitted to me by Mr. Hamilton, in respect of the presentation point, that I would be entitled to look at what happened after the making of a contract in order to construe it. He referred to a dictum of Lord Denning M. R. in Port Sudan Cotton v. Chettiar 1977 Lloyd's Rep. 5 indicating that the conduct or at least the admissions of the parties after the contract ought to be and were admissible in order to construe the contract. I mention that in order to reject it. That is not the law. Indeed would be astonishing were it the law for a contract could mean one thing when it was made and possibly something else after the parties later conduct had been considered.

46. I therefore approach this matter on the well known principles in the humble knowledge that those principles are often difficult to apply.

47. There is a fine line between "renovation" of an existing road and the "reconstruction" of that road or the "construction" of another road along the same route. In the end it is a matter of language, impression and construction. The nearest synonym to "renovation" is "renewal". The words have to be tested against the nature of the work as it is known, as it is described, and against its overall cost - as has been submitted.

48. I consider these matters. It was a fifty million pound contract and the work contemplated was extensive. It included earthworks, road foundation, surface work, construction of bridges, tunnels, crossroads, ditches, culverts, and drains as one might expect, embankments, topographic work and access roads. It involved the use of explosives and the re-routing of roads. On such evidence as is before me in the documents which I am entitled to take into account as part of the factual matrix of this contract, including the map of the place where the road was to be made or renovated, I am satisfied that the word "renovation" properly covers the work contemplated and the work which was actually carried out, insofar as I am able to judge. And that the work so described in the contract of renovation in the slip covered the work which was actually carried out, and the work which was actually carried out was within the scope of the contract. I so find.

Quantum Issues

49. I turn now to the quantum issues. These issues primarily involve a consideration of the meaning of "a follow the settlements" provision in the full reinsurance clause. Grand Union seek to say either that ICSP were not liable to pay on the original cover because the risks fell outside that original insurance or that in some cases they made so little enquiry before compromising or settling that they did not act in a proper and businesslike manner in settling the claim, and that in those circumstances ICSP cannot prove that those losses fell within the cover.

50. ICSP submits that Grand Union are not entitled to take this point unless Grand Union can show that in making the settlement they failed to act in a proper and businesslike manner and thereby paid claims for which they were not on risk; that they can only avoid payment if (the burden being on Grand Union) they show that the risks were not within the reinsurance contract (that is the contract between ICSP and Grand Union) and that in settling the claims they did not act in a proper and businesslike manner. Further, ICSP contend that there is no evidence upon which I could properly act and decide that they did not act in a proper and professional manner in settling the claims.

51. The follow the settlements provision has a long history. This and its predecessor the provision to "pay as may be paid thereon" have been the subject of much judicial pronouncement over many years. In particular since the follow the settlements provision became usual the question was whether it permitted the recovery by a reinsured in circumstances when it settled the claim without legal liability being established and where the reinsurer was subsequently able to show that the reinsured had not been liable to pay.

52. Mr. Hamilton submits that the effect of a follow the settlements provision is that it is not a defence to a reinsurer to show that a claim could have been defeated in law or fact if it is a compromise. The only provisos being, [a] that it is open to a reinsurer to prove lack of professionalism in the settlement of the claim or, [b] that the risk was not one covered in the reinsurance policy. Although it was not part of his submission he meant the reinsurance policy contrasted with the original policy. Further, he submitted that the onus of bringing themselves within the provisos and proving lack of professionalism or no cover in the reinsurance policy was upon the reinsurers and not upon the reassured.

53. The history of the follow the settlements provision is fully set out in the judgment of Stephenson L.J. in Insurance Company of Africa v. Scor (U.K.) Reinsurance Company Limited [1985] I Lloyd's Rep. 312 at 319 onwards. This decision also of Robert Goff (as he then was) and Fox L.JJ. consigns the earlier cases into history. It is an authoratitive decision on the effect of this provision and although not binding upon me in Hong Kong I have no hestitation in following it with considerable respect.

54. At first instance Leggatt J. concluded that where the reinsured's obligation is to follow the settlements of the original underwriters a compromise whether on liability or amount, will bind the reinsurers unless they can prove either that the compromise was dishonestly arrived at or that the reassured has failed to take all the proper and businesslike steps to have the amount of the loss fairly and carefully ascertained. The Court of Appeal expressed no dissent with the Learned Judges' conclusion. It is in my judgment one way of properly expressing the effect of this provision. Robert Goff L.J. encapsulated the decision of the court at 330, Column 1, when he said:

"When thereafter a clause was used which provided that reinsurers should follow the settlements of insurers, but made no reference to "pay as maybe paid thereon" it would I think be wrong to infer an intention to revert to the meaning attached by Mr. Justice Mathew to the words "pay as may be paid thereon". The intention must, in my judgment, have been to bind the insurers to follow the settlements, even where the effect was that they could not dispute that there was in fact liability of the insurers under their policy with the assured. In my judgment the effect of a clause binding reinsurers to follow settlements of the insurers, is that the reinsurers agree to indemnify insurers in the event that they settle a claim by their assured, i.e. when they dispose or bind themselves to dispose of a claim whether by reason of admission or compromise provided that the claim so recognised by them falls within the risks covered by the policy of reinsurance as a matter of law, and provided also that in settling the claim the insurers have acted honestly and have taken all proper and businesslike steps in making the settlement. "

55. That I am satisfied is the effect of the clause. In that case the insurer had paid on a fraudulent claim and it was held that even so the reinsurer had to follow the settlement because it was made honestly and in a proper and businesslike manner. Dealing with that at the bottom of Page 330, Column 1, Goff L.J. says:

"Furthermore, in my judgment, if insurers have so settled a claim, acting honestly, and in a proper and businesslike manner, then the fact that reinsurers may thereafter be able to prove that the claim of the assured was fraudulent does not of itself entitle reinsurers not to follow the settlement of the insurers. In my judgment they must follow the settlement as they have contracted to do but they must have recourse to their rights of subrogation, arising upon the payment of the claim under the policy of reinsurance, in order to seek to rescind the settlement with the assured and to recover money paid by the insurers under that settlement. "

56. As it effects this case the law is as follows: a reinsurer bound by a "follow the settlements" clause agrees to indemnify the insurer in circumstances in which the insurer agrees to compromise a claim by its insured whether on liability or quantum provided that a] the claim falls within the risks covered by the policy of reinsurance and b] in making the compromise to settle the claim the insurers have acted honestly and have taken all proper and businesslike steps.

57. There are two further matters. First, the burden of showing that the claim is not within the risks covered by the reinsurance or that the reinsured had not acted honestly or in a proper and businesslike manner in making a settlement rests upon the reinsurer who seeks to avoid liability. This accords with the passage from the judgment of Leggatt J. to which I have referred, it accords with the aims and genesis of the provision to follow the settlements; it gives proper commercial effect to that provision; and in modern international reinsurance business it is a necessary commercial interpretation to avoid the unnecessary bringing of witnesses from all over the world to give evidence if the reassured in these circumstances is simply put to proof.

58. Secondly, if the reinsurer challenges a settlement made by the reinsured he can only do so on one or other or both of the two grounds that the settlement was not made honestly or in a proper and businesslike manner, or that it was not within the reinsurance contract. He cannot seek to rip up the settlement and show that claims were paid for which the insured was not liable save as part of proof that the settlement was not made in a proper and businesslike manner. It follows from what was said in the Scor case that he cannot seek to avoid liability by seeking to rip up the settlement by showing that in fact (and only in fact) that the insurer could have defeated the claim. It follows that when Goff L.J. speaks of claims which fall within the policy of reinsurance he is referring to the terms of the policy of reinsurance and not the detailed terms of the original insurance incorporated therein. Were it otherwise he would be nullifying the conclusion which he had already reached.

59. This conclusion in relation to the law effectively puts an end to Grand Union's defence in respect of the individual claims on quantum. Mr. Rokison submitted in the course of his final submissions that the burden was upon ICSP to show that claims fell within the policy and that they could not do so because in certain cases the documents were not there. He submitted that all he had to do was to examine the documents and make out a prima facie case. In the course of the trial I allowed an amendment relating to these claims. The amendment (although late and although objected to) was allowed on the basis that all that was required was an examination of the documents and it is upon that basis that Mr. Rokison sought to make out his case. He made his points by inviting me to look at the documents and construe from them that settlements had been made for losses not within the cover. This was an attempt to do that which is not permissible, to rip up the settlements that had been made on liability and quantum without seeking to show, or be able to show, that they were outside the provisions of the reinsurance policy. In being invited to deal with the matter in this way the defendants were seeking to encourage me also to infer that some claims had been settled in a manner which was not proper and businesslike.

60. Now, in relation to those matters first (to say the least) it is a most unsatisfactory way of approaching matters of fact to look at a number of documents, some incomplete, and to decide facts from them. Secondly, if the defendant Grand Union are seriously seeking to establish a case that these claims were dealt with in a manner which was not proper and businesslike then I would have heard expert evidence on this matter. It is quite impossible on the evidence that I have heard for me to conclude that the claims which were settled in a manner other than was proper and businesslike. Even in the cases where there are claims files - and there were some - where there is no adjusters report; it was suggested that as there is no adjusters report the claims could not have been properly settled. I reject that submission. There is no evidence upon which I could possibly accept such a submission. There is no evidence before me upon which I could properly make a finding that any of these claims were compromised in a manner which was not proper and businesslike. Indeed, the indications are that the claims were properly dealt with, that proper matters were considered. Where there is no adjusters report in the papers on some occasions the report may have been mislaid, on others the claim may have been small or so clear from the claim submitted that a report was unnecessary.

61. In the circumstances it seems to me wholly unnecessary for me to approach the documents which I have been invited to look at in order to try to decide whether or not the claims were proper and part of the insurance cover.

62. Insofar as one can judge the matter from the documents I am able to say that it appears that the losses were covered. So far as the locomotive is concerned for instance, although there was a document shown to me which excluded locomotive from cover there was another document which clearly showed that the locomotive was covered.

63. So far as detritus was concerned although there was a provision which seemed to exclude this there was also another provision which included it up to a certain amount.

64. Roof damage was another matter. There was an exclusion in relation to roofs not properly constructed. Damage occurred and the claim was settled and a deduction was made for the condition of the roof. With the greatest respect to those who appear for Grand Union these points made upon the documents even if open (which I believe they are not), do not begin to get off the ground. Trying to prove a case from examination of documents which may be incomplete is wholly unsatisfactory. I reject it and I do not undertake it.

65. In the result the Plaintiff succeeds against the first defendants and the counterclaim is dismissed. I think it must follow that the second defendants are entitled to succeed against the Plaintiffs; is that not so, Mr. Barlow, your claim must be dismissed against the second defendants, you do not succeed?

66. MR. BARLOW:                      Yes, my lord.

67. COURT:                                               So, there will be judgment for the plaintiff against the first defendant, the plaintiff's claim against the second defendant fails. It follows that the second defendants can have judgment, does it not Mr. Barlow?

68. MR. BARLOW:                         Yes, my lord.

69. [There followed discussion with Counsel]

70. COURT:                                              There will be judgment against the first defendant for US$79.199.96 and for French francs 1,494,943.87 and Pounds Sterling 5,550.93. And, US$635,927.71. Judgment for the second defendant against the plaintiff and all other matters I will reserve.

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