Case No: 2004 1179 A3
Neutral Citation No:  [2005] EWCA Civ 238
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISION (COMMERCIAL COURT)
(Mr Justice Aikens)
Lower Court Reference [2004] EWHC 803 (Comm)
Royal Courts of Justice
Strand, London, WC2A 2LL

Thursday, 10th March 2005

Before :

LORD JUSTICE BROOKE
Vice-President of the Court of Appeal (Civil Division)
LORD JUSTICE MANCE
and 
LORD JUSTICE LONGMORE
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Between :

	DORNOCH Ltd & ors	Appellants	
	- and -		
	ROYAL AND SUN ALLIANCE INSURANCE PLC	Respondent	

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(Transcript of the Handed Down Judgment of
Smith Bernal Wordwave Limited, 190 Fleet Street
London EC4A 2AG
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LORD GRABINER QC and DAVID WOLFSON Esq
(instructed by Davies Arnold Cooper) for the Appellant
JONATHAN SUMPTION Esq QC and GUY MORPUSS Esq
(instructed by Herbert Smith) for the Respondent
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Judgment
As Approved by the Court

Crown Copyright ©

Lord Justice Longmore:
1.	This appeal, from Aikens J in the Commercial Court, concerns the affairs of The Coca-Cola Company (“Coca-Cola”) who are alleged to have made false statements about their affairs and caused investors to buy their shares at artificially inflated prices.  Two class actions are now proceeding in the United States District Court (Northern District of Georgia, Atlanta Division) in which a number of claimants are making substantial claims against Coca-Cola and named directors of the company.  These are known as the Carpenters Complaint and the Lavalla Complaint which were filed on 27th October and 9th November 2000 respectively.  Para. 114 of the Carpenters Complaint (which may be taken as being mirrored by the Lavalla complaint) says:-
“Plaintiff and the Class have suffered damages in that, in reliance on the integrity of the market, they paid artificially inflated prices for Coke stock.  Plaintiff and the Class would not have purchased Coke stock at the prices they paid or at all, if they had been aware that the market price had been artificially and falsely inflated by defendants’ misleading statements.”
2.	The brokers Marsh & Mclennan (“Marsh”) arranged insurance for Coca-Cola in the form of a Master Subscription Policy (“the MSP”) with a consortium (led by insurers known as Allianz) which included the claimants in the present proceedings, Royal and Sun Alliance Insurance Plc (“RSA”).  RSA took a line of 21.5%.  Coverage Section V was the Directors and Officers Liability Section, stating at the top
“(This section is Claims Made).”
This provided indemnity to Coca-Cola or any subsidiary in respect of what were called “any Securities Claims” made against them during the existence of the policy and also in respect of any such claim made against Directors or Officers of the company
“but only when the Directors or Officers . . .
. . . shall have been indemnified”
by the company.  There were then separate provisions for the Directors and Officers themselves to be indemnified if they were themselves not entitled to indemnification from the company in respect of any claims made against them.  We were, however, informed that no such claims have been made.
3.	Condition A of this part of the cover provided for the consortium to advance defence costs prior to the final disposition of the claim and continued:-
“The Consortium does not, however, under this Coverage Section, assume any duty to defend.  The Insureds shall not admit or assume any liability, enter into any settlement agreement or stipulate to any judgment without the prior written consent of the Consortium.  Only those settlements, stipulated judgment and Defense Costs which have been consented to by the Consortium shall be recoverable as Loss under the terms of this Coverage Section.  The Consortium’s consent shall not be unreasonably withheld, provided that the Consortium shall be entitled to effectively associate in the defence and the negotiation of any settlement of any Claim in order to reach a decision as to reasonableness.”
Condition B then provided that it was a condition precedent to indemnity that the insured should give notice in writing of any claim “as soon as practicable”.
4.	RSA, through Marsh, re-insured the entirety of its participation relating to Coca-Cola’s D&O liability with the syndicates who are the defendants in the instant proceedings (“the Syndicates”).  This re-insurance was contained in two re-insurance slip policies which incorporated “Full Reinsurance Clause” and “Claims Control Clause” as attached.  These clauses read as follows:-
“FULL REINSURANCE CLAUSE
Being a Reinsurance of and warranted same gross rate, terms and conditions as the Original Policy, so far as they may be applicable hereto and shall pay as may be paid thereon, but subject nevertheless to the terms, clauses and conditions of this Reinsurance.
CLAIMS CONTROL CLAUSES
Notwithstanding anything herein contained 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 claim under this policy, advise the Underwriters thereof by cable within 72 hours;
(b)	The Reinsured shall furnish the Underwriters with all information available respecting such loss or losses and the Underwriters shall have the right to appoint adjusters, assessors and/or surveyors and to control all negotiations, adjustments and settlements in connection with such loss or losses.”
5.	It is this Claims Control Clause which is at the heart of this appeal.  RSA knew of the existence of the Complaints by at latest 12th December 2000.  They received copies of them on 30th December 2000.  The Syndicates say that within 72 hours of 15th December 2000, they should pursuant to the Claims Control Clause have been advised of the potential losses accruing to Coca-Cola and RSA.  RSA did not, however, pass on their awareness of the complaints until 19th January 2001.  This, say the Syndicates, is too late and they are, therefore, under no liability to RSA.
6.	Aikens J asked himself two questions:-
(1)	Of whose losses did RSA have to have knowledge for the Claims Control Clause to become effective? – the USA complainants’ loss or Coca-Cola’s loss?
(2)	Did RSA have knowledge of the relevant loss more than 72 hours before 19th January 2001?
His answers to these questions were:-
(1)	The complainants’ losses;
(2)	No.
7.	The Judgment
The judge devoted the majority of his judgment to the answer to the first question.  In paragraph 59 he recorded the Syndicates’ acceptance that the word “loss” denoted an actual loss as opposed to an alleged loss.  He then set out the relevant background (or matrix) against which the Claims Control Clause fell to be construed.  Neither side took issue with this description during the argument and I therefore set it out in full:-
“(1)	Coca Cola and its Directors and officers are insured against legal liability under Section V of the MSP.
(2)	The type of “loss” of Coca Cola, its Directors and officers that is insured by Section V of the MSP is financial loss suffered as a result of claims made against one, two or all three by third party claimants.  The claims by third party claimants will be for money compensation for financial loss that the third party claimants assert they have suffered as a result of the acts, defaults or omissions of Coca Cola,  its Directors or Officers.
(3)	The terms of Section V of  the MSP, including the definition of “Loss”, were known to the Reinsurers when the reinsurance contracts were concluded.
(4)	The reinsurance is on the same terms and conditions as the original policy, so far as applicable.  Moreover, the subject matter of the reinsurance is the same as that of the original insurance in Section V of the MSP:  viz. the liability of Coca Cola and its Directors and officers to third party claimants for acts, defaults or omissions of Coca Cola, its Directors and officers.
(5)	The original insurance is a “claims made” policy. Therefore, in order to be entitled to indemnity under the MSP, claims by third party claimants must first be made against Coca Cola or its Directors and officers during the policy period (or any agreed extensions).
(6)	. . . . . . it is a condition precedent to the liability of the Consortium that it receives written notice “as soon as is practicable” from Coca Cola or its Directors and officers, of any “Claim”  that is made against them.
(7)	There are provisions in Section V of the MSP which stipulate that the insurers under the MSP will not pay for any “losses” by the original Insured where a settlement has been agreed with third party claimants, unless the insurers have consented to the settlement.”
8.	The judge then gave nine reasons for concluding that the loss of which RSA had to have knowledge and of which they had to give notice to the Syndicates was the loss of the claimants who bought shares at artificially inflated prices rather than the loss of Coca-Cola in being required to compensate the claimants for their loss.  His reasoning in essence was that the Syndicates should not be kept in ignorance once RSA did know that the claimants had suffered a loss.
9.	The judge then proceeded to the second question.  He held that three requirements had to be fulfilled before RSA was obliged to notify the Syndicates:-
(1)	there had to be an actual loss;
(2)	the loss had to be a loss that may give rise to a claim on the reinsurance;
(3)	RSA had to have actual knowledge of that actual loss.
He then held that these requirements were not fulfilled before 19th January 2001 when notice was in fact given.  The result was a declaration in favour of RSA.
10.	It is worth pointing out at the outset what an unfortunate dispute this is.  There is a complete mismatch between the original insurance on the one hand which is on a “claims made” basis and requires notification to insurers of “claims” and the Claims Control Clause on the other hand which depends, for notification purposes, on “knowledge” of “loss” on the part of RSA.  This mismatch is compounded by the very short timescale within which RSA have to act on their “knowledge” (72 hours) and the draconian consequences if they fail to act on that short timescale in that the obligation to notify within that timescale is expressed to be a condition precedent “to any liability under this policy”.  It is evident that the clause is a standard clause (it is referred to as such in chapter 4.3 of John Butler and Robert Merkin’s looseleaf “Reinsurance Law”) but with its reference to “loss” and to “adjusters, assessors and/or surveyors” it is more obviously apposite to a property damage policy (covering eg fire or marine perils) than it is to a liability policy.  It also appears to be of some antiquity with its obligation to advise reinsurers “by cable”.  But, however inapposite the clause may be, the court has to give it a sensible meaning in accordance with any helpful canons of construction which may be available.
11.	It is also apparent that, for the judge, it did not in the end matter whose loss it was that RSA had to notify.  According to the judge RSA could not be said to have known of any loss of the American claimants before 19th January 2001.  At that stage all they knew was that there was a claim;  although there might come a time when they could be taken to know that the American claimants had suffered a loss, that time had not arrived by 19th January 2001.  This would all the more be the case if the loss was that of Coca-Cola since there would be no loss to Coca-Cola until their liability had been ascertained by judgment award or agreement, see Post Office v Norwich Union [1967] 2 QB 363 and Bradley v Eagle Star [1989] AC 957.  No question of RSA’s knowledge of such loss could arise in the present case, therefore, until RSA knew of a judgment or settlement – which is still some way in the future.
12.	The submissions
For the Syndicates Lord Grabiner QC sought to withdraw the concession made below that “loss” must be an “actual loss” and submitted:-
(1)	the loss referred to in the Claims Control Clause must refer to a “claimed” loss or an “alleged” loss;
(2)	if it meant an “actual” loss (as had been conceded before Aikens J), no loss would arise until ascertainment if the loss was Coca-Cola’s loss;  nor would it be likely to arise at any earlier stage if the loss were the American claimants’ loss;
(3)	that would be absurd because it would deprive part (b) of the clause of any effective force;  there is no point in being advised about a loss after judgment in the American proceedings and it would be futile then (and only then) to have the right to appoint an adjuster or surveyor;  it would be too late to control negotiations or even to influence them;
(4)	it was only by purposively construing “loss” as a “claimed loss” that the clause as a whole could make sense;  it was necessary to adopt this construction since everyone at the time appreciated that what was being reinsured was Coca-Cola’s liability and in no other way could the Syndicates (who would ultimately have to foot the bill) be meaningfully involved in proceedings which would determine whether the American claimants were entitled to compensation.
13.	Mr Sumption QC submitted:-
(1)	“loss” must mean “actual loss”;  if the parties had meant or intended it to mean a “claimed loss” or an “alleged loss” it would have been easy to say so;  the Syndicates wanted to read into the clause a word that was patently not there;  their argument was tantamount to reading the word “loss” as if it had been “claim”;
(2)	the fact that there was no obligation to notify the Syndicates until RSA knew of an actual loss on the part of the American claimants (or indeed on the part of Coca-Cola) was not of any great moment since it was the duty of RSA and the other members of the Consortium to exercise the rights they had available to them under their own equivalent of the claims control clause and only to make any settlement in a careful and businesslike manner;
(3)	the right to appoint adjusters, assessors or surveyors was in any event futile in the context of a liability policy so the Syndicates would not be deprived of anything of value if they were only notified when RSA knew of an actual loss;
(4)	RSA had (and still have) no “knowledge” of any “actual” loss on the part of the American complainants;
(5)	part (b) of the clause with its reference to the appointment of professionals and the right to control negotiations was, in any event, a powerful pointer to the loss being Coca-Cola’s loss rather than that of the American claimants with whom the Syndicates had noting remotely to do;  how could the Syndicates in fact control negotiations which would be taking place between the American claimants and Coca-Cola?  It might be that RSA could control those negotiations if they had stipulated for a right to do so (in fact they had not), but in practice RSA would, in any event, have to follow the line taken by the majority insurer – here Allianz – in the consortium;  on no view could the Syndicates “control” Allianz.
14.	(1)  “Alleged” or “actual” loss?
There is no difficulty about Lord Grabiner being entitled to withdraw the concession made below to the effect that “loss” means “actual loss”.  The first question in the appeal then becomes whether, in its context in the Claims Control Clause in the reinsurance policy, the word “loss” means, as he submits, an “alleged” loss.  On one view, there is obvious good sense in so deciding if one knows that the underlying insurance is on a “claims made” basis and requires Coca-Cola to give notice to RSA of any “claim” made against them albeit “as soon as practicable” rather than within 72 hours.  It makes even better sense when one appreciates that whoever’s loss it is to which the clause refers, RSA may be unlikely to “know” of any actual loss until the loss has been ascertained which will be long after reinsurers would, as the ultimately paying party, wish to be aware of the events which might create their liability.
15.	Lord Grabiner further reminded us of the fourth principle enunciated by Lord Hoffman in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 913:-
“The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words.  The meaning of words is a matter of dictionaries and grammars;  the meaning of the document is what the parties using those words against the relevant background would reasonably have understood them to mean.  The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary (sic) life), to conclude that the parties must, for whatever, reason, have used the wrong words or syntax . . .”
He added a reference to paragraph 18 of the speech of Lord Steyn in Sirius General Insurance v FAI General Insurance [2004] UKHL 54, [2004] 1 WLR 3251, 3257:-
“. . . . The aim of the inquiry is not to probe the real intentions of the parties but to ascertain the contextual meaning of the relevant contractual language.  The inquiry is objective:  the question is what a reasonable person, circumstanced as the actual parties were, would have understood the parties to have meant by the use of specific language.  The answer to that question is to be gathered from the text under consideration and its relevant contextual sense.”
He encouraged us to escape the prison-gates of literalism and embrace the concept of “business common sense”.
16.	Attractive as that proposition is in general, there are dangers in judges deciding what the parties must have meant when they have not said what they meant for themselves.  This is particularly dangerous when the parties have selected from the shelf or the precedent book a clause which turns out to be unsuitable for its purpose.  The danger is then intensified if it is only one part of such a clause which is to be construed in accordance with “business common sense”.  If the parties had addressed their mind to the question which clause out of a number of standard terms they would have used for the particular requirement which they had in mind, it is by no means obvious that they would have selected a form which was as draconian as the one unwisely but in fact chosen.  It may very well be necessary for reinsurers to be informed within 72 hours if a fire has recently taken place or a cargo is rotting on the quayside.  The sooner an adjuster or surveyor arrives, the more likely it is that he will discover the true cause of the loss.  But if one is selecting a clause which will give reinsurers a degree of control over a claim for financial loss in respect of legal liability (incurred, for example, as a result of purchasing shares) the urgent need for notifying a loss within 72 hours is by no means obvious and still less is it obvious that any delay in notification should mean that the insurers’ claim on their reinsurers will fail altogether, see for example the 30 day provision selected in George Hunt Cranes v Scottish Boiler & General Insurance [2001] EWCA Civ 1964, [2002] 1 AER Comm 366, 368a.
17.	If therefore, the contract had merely said “suitable” Claims Control Clause it would not be difficult to decide that a clause which referred to notice of claim (or a “claimed” loss) was appropriate but one would not incorporate such a clause together with a condition precedent to the effect that, if notice was not served within 72 hours, there should be no liability.
18.	It does not, therefore, seem to me to be any part of the court’s function to go out of its way to give a purposive or business common sense construction to one part of a clause in favour of one party and thus enable that party to seek to take advantage of another part of the clause which has draconian consequences for the other party.  If the parties had decided to choose an appropriate form of clause suitable for the reinsurance of a reinsured’s liability rather than his property, they might very well have chosen a clause with a longer notice period than 72 hours or at least a clause which did not make 72 hours notice a condition precedent to any liability on reinsurers’ part.
19.	A reinsurer of a reinsured’s liability to a third party is prima facie liable to the extent of his subscription once it is ascertained that the reinsured is liable to that third party.  A condition precedent to the liability of the reinsurer operates as an exemption to that prima facie liability.  It is a well-established and salutary principle that a party who relies on a clause exempting him from liability can only do so if the words of the clause are clear on a fair construction of the clause, see Elderslie Steamship Co Ltd v Borthwick [1905] AC 93, Gordon Alison & Co v Wallsend Slipway and Engineering Co Ltd (1927) 27 Lloyds Rep 285, Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, 850D–851A per Lord Diplock and other cases cited in Chitty, Contracts, 29th ed para. 14-005.  In my view the terms of the Claims Control Clause on which the Syndicates rely do not sufficiently clearly exempt them from liability.
20.	Lord Grabiner pointed out that RSA themselves must have assumed that their obligation was to give notice once they knew that a loss was being alleged since they in fact gave notice to reinsurers shortly after receiving copies of the Complaints on 30th December 2000, albeit more than 72 hours after receipt.  To my mind this shows no more than that RSA did not have the terms of their reinsurance policy in mind on 30th December 2000.  If they had had them in mind, they would probably have given notice within 72 hours instead of 20 days later.  But this consideration cannot affect the true construction of what is, on any view, an ill-chosen clause.  It is, moreover, significant that the Syndicates do not suggest that they have been in any way prejudiced by the late notification.
21.	Lord Grabiner further pointed out that, unless loss meant an “alleged” loss, there would be a mismatch between the reinsurance of Coca-Cola’s liability and the liability for the costs of defending the claim against Coca-Cola.  That is because RSA would “know” when they had funded Coca-Cola’s defence costs pursuant to the MSP and, if they wanted to recover such costs from reinsurers, they would have to give 72 hours notice of such funding and thus in effect then be giving notice of an alleged claim.  Ingeniously as this point was put, considerations of costs cannot influence the primary question of the meaning of “loss”.  That would be to let the tail wag the dog.  It is idle to suppose that if notice of funding were given, notice of loss would not be given at the same time (if it had not been given already).  That might mean that reinsurers received notice of a possible loss rather earlier than, on the true construction of the clause, the time when they were entitled to receive it.  But that is not a matter of any consequence.
22.	(2)  “Knowledge” of any loss or losses
Once one has concluded that loss means “actual” loss rather than “alleged” or “claimed” loss it must follow that RSA cannot have had knowledge of any loss.  It was not known by anyone in December 2000 or January 2001 that the American claimants had suffered the loss which they claimed or, indeed, any loss.  The question whether the claimants have suffered any loss is still in dispute.  Lord Hope has recently said in the context of the confiscatory provisions of the Drug Trafficking Act 1994:-
“A person cannot know that something is A when
  in fact it is B”
see R v Montila [2004] 1 WLR 3141, 3149.  Similarly a person cannot know something is A when A is a fact which is contentious but is as yet undetermined.
23.	It is, at this stage, worth pointing out how comparatively unusual the claim is which is brought against the Coca-Cola directors.  It is that their conduct caused the share price to be artificially high at the time when the complainants purchased their shares.  As the judge points out in paragraph 95 of his judgment, the complainants say that they have paid more for their Coca-Cola stock than they should have done.  If that were a proved fact, there would then be an “actual loss” which might give rise to an insurance claim.  But when RSA received the complaints, it was not a proved fact;  it is a possible conclusion which depends on establishing that Coca-Cola stock would have had a lower value if the financial position of Coca-Cola had been accurately stated.  Until this is “known” to be the case, there can be no “knowledge” of any loss.
24.	It might well be different if the claim had been that, as a result of something done by the directors of Coca-Cola the value of the stock had fallen;  particularly if the stock had been rendered valueless.  Then it might be clear that there had been a loss and once RSA were notified of a claim for that loss, it could be said that they then had knowledge of a loss which might give rise to a claim under the reinsurance policy.  Lord Grabiner did indeed seek to say that even in the present case there was a loss “known” to RSA because the share price fell from its peak in July 1998 but that cannot of itself be a loss (rather than natural market fluctuation) until it is established that the price was artificially high at the point of purchase.
25.	It is, however, quite possible that there will be cases in which (on the supposition that the loss envisaged in the Claims Control Clause is, as the judge held, the loss suffered by the third party claimant) it will be known that there has been a loss which may give rise to a claim, well before a complainant’s claim has come to a judgment or a settlement.  All one can say is that the present case is not such a case.
26.	This consideration does, however, show that there may well be cases where, despite the general unsuitability of the particular Claims Control Clause chosen for insertion into the present reinsurance policy, reinsurers would be entitled to receive notice of a loss and appoint adjusters or control negotiations before the third party claim has been finalised and, even, perhaps, at a comparatively early stage in any proceedings brought.  The 3rd and 4th of Lord Grabiner’s arguments (as set out in paragraph 12 above) can thus be seen to be too sweeping.
27.	(3)  Whose loss?
It thus emerges that the question on which the parties appear to have concentrated their main energies before the judge namely “whose loss?” is not material to the outcome of this appeal.  Whosever loss it may be which is contemplated by the clause, RSA did not know of it.
28.	If it had mattered, I would have come to the same conclusion on this question as the judge for what I understand to have been the main reason which he gave.  This was that, if the loss contemplated was Coca-Cola’s loss, that was certainly a loss of which RSA could not have “knowledge” at any time before there was a judgment or a settlement to which Coca-Cola was a party for the simple reason that Coca-Cola are disputing that they are under any liability at all.  On Post Office v Norwich Union principles it will only be when it is determined that Coca-Cola are indeed liable that it can be said that Coca-Cola have suffered a loss.
29.	This would, indeed, render the second part of the clause otiose in practically every case in which it must be intended that it have some value.  The same consequence does not by any means invariably follow if the loss contemplated is that of the third party claimant as I have attempted to show in paras. 23-26 above.  For that reason, if it had been relevant, I would also have agreed with the judge on this aspect of his judgment.  But since it is not determinative, I say no more about it.
30.	Conclusion
I would, therefore, dismiss this appeal.  The moral of this case is that “knowledge” is (or can be) an elusive concept because in any given case a party to a contract may have difficulty in showing what another party “knows”.  It would, therefore, be better if “knowledge” were not used as the trigger for any requirement of notification to a liability insurer or reinsurer.
Lord Justice Mance:
31.	I agree.
Lord Justice Brooke:
32.	I also agree.
ORDER: Appeal dismissed. Appellants to pay respondent’s costs of the appeal, to be subject to detailed assessment if not agreed. Appellants to pay interest at the judgment rate fro today on those costs when they are assessed. Appellants to pay £40,000 on account of costs on or before 31st March 2005. Permission to appeal to the House of Lords refused. 
(Order does not form part of approved Judgment)