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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Cheltenham & Gloucester Plc v Sun Alliance & London Insurance Plc [2001] ScotCS 131 (30 May 2001) URL: http://www.bailii.org/scot/cases/ScotCS/2001/131.html Cite as: 2001 SCLR 670, [2001] ScotCS 131 |
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FIRST DIVISION, INNER HOUSE, COURT OF SESSION |
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Lord President Lord Kirkwood Lord Abernethy
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A2903/00 OPINION OF THE LORD PRESIDENT in RECLAIMING MOTION in the cause CHELTENHAM & GLOUCESTER plc Pursuers; against SUN ALLIANCE AND LONDON INSURANCE plc Defenders: _______ |
Act: Connal, solicitor advocate; McGrigor Donald
Alt: Murphy, Q.C.; Brechin Tindal Oatts
30 May 2001
[1] In this action the pursuers and respondents are Cheltenham & Gloucester P.L.C., while the defenders and reclaimers are Sun Alliance and London Insurance P.L.C. According to the pursuers' averments, including the material incorporated brevitatis causa, in about 1990 they instructed a solicitor, William Graeme St. Clair, to act for them in relation to a loan which they had agreed to grant to two borrowers. The loan was to be secured by means of a standard security, which was to be a first charge, over a house that the borrowers owned in Bishopbriggs. At the relevant time there were in fact, however, two prior securities over the house, in particular a standard security in favour of the Bank of Scotland. St. Clair failed to obtain a discharge of that standard security. The pursuers advanced the loan to the borrowers. In due course, in about January 1994, the Bank of Scotland called up their standard security and the house was sold. Once the debt to the Bank had been paid, there were no proceeds available for distribution to other creditors such as the pursuers. The pursuers therefore sued St. Clair at Hamilton Sheriff Court for damages for his breach of contract in failing to ensure that they received a valid, enforceable first security over the subjects.
[2] The defenders were St. Clair's professional indemnity insurers under the master policy with the Law Society of Scotland. In particular the defenders agreed to indemnify him
"1 against liability at law for damages and claimant's costs and
expenses in respect of claims or alleged claims made against the Insured and notified to the Brokers during the Period of Insurance specified in the Schedule by reason of any negligent act neglect error or omission on the part of
a) the Insured or the predecessors in the Practice
b) any agent or correspondent of the Insured or of the
predecessors in the Practice
occurring or committed or alleged to have occur[r]ed or to have been committed in good faith in connection with the Practice.
2 against liability at law for loss or damages and claimant's costs
and expenses in respect of claims or alleged claims made against the Insured and notified to the Brokers during the Period of Insurance by reason of any dishonest fraudulent criminal or malicious act or omission occurring or committed or alleged to have occurred or to have been committed in connection with the Practice on the part of the Insured
Provided that
a) no individual committing or condoning such act or
omission shall be entitled to indemnity under Insurance 2."
In terms of General Condition 2 in the Certificate of Insurance
"Every letter claim writ summons and process shall be forwarded to the Brokers immediately on receipt. No admission offer promise payment or indemnity shall be made or given by or on behalf of the Insured without the written consent of the Insurers who shall be entitled to take over and conduct in the name of the insured the defence or settlement of any claim or to pursue in the name of the Insured the defence or settlement of any claim or to pursue in the name of the Insured for their own benefit any right of relief and shall have full discretion in the conduct of any proceedings and in the settlement of any claim."
Under this condition of the policy the defenders began by conducting St. Clair's defence to the pursuers' sheriff court action but, as the defenders admit in Answer 3 in the present action, on or about 4 April 1995 they withdrew cover and withdrew from conducting the defence. St. Clair himself did not defend the action. Thereafter on 27 June 1995 the pursuers obtained an unopposed decree against St. Clair for payment of, first, £131,696.14 as damages for breach of contract and, secondly, £1,389.24 by way of solicitors' fees. The decree was extracted on 30 August 1995.
[3] In Answer 4 in the present action the defenders aver that they are entitled to avoid their policy of insurance with St. Clair on the ground that, in acting on behalf of the pursuers, he did not act in good faith. They go on to make averments which are designed to show that St. Clair deliberately concealed from the pursuers the existence of the prior ranking standard security over the subjects. In the corresponding article of Condescendence, the pursuers make no reference to the defenders' averments in answer. At the hearing before us, Mr. Connal did not admit the truth of the defenders' averments on this matter, but he appeared not to dispute that the defenders had withdrawn from defending the pursuers' sheriff court action against St. Clair on the basis of the allegation that he had acted in bad faith and that he was therefore not entitled to indemnity by reason of proviso a) to Insurance 2. Mr. Connal did not suggest that, in so withdrawing, the defenders had themselves acted in bad faith.
[4] On 10 September 1997 St. Clair was sequestrated. Section 1 of the Third Parties (Rights against Insurers) Act 1930 provides inter alia:
"(1) Where under any contract of insurance a person (hereinafter referred to as the insured) is insured against liabilities to third parties which he may incur, then -
(a) in the event of the insured becoming bankrupt or making a
composition or arrangement with his creditors...if, either before or after that event, any such liability as aforesaid is incurred by the insured, his rights against the insurer under the contract in respect of the liability shall, notwithstanding anything in any Act or rule of law to the contrary, be transferred to and vest in the third party to whom the liability was so incurred.
...
(4) Upon a transfer under subsection (1) or subsection (2) of this section, the insurer shall, subject to the provisions of section 3 of this Act, be under the same liability to the third party as he would have been under to the insured...."
In reliance on these provisions, in January 1998 the pursuers raised the present action against the defenders for payment of the two sums which they had been awarded in the sheriff court proceedings against St. Clair for breach of contract. In particular in Article 5 of Condescendence the pursuers aver that
"the insured's right to be indemnified by the Defenders under said contract of insurance in respect of his liability under said decree has transferred to and is vest in the pursuers. Reference is made to Section 1 of the Third Parties (Rights against Insurers) Act 1930."
The pursuers' claim is focused in a single plea-in-law in these terms:
"The insured's right to be indemnified by the Defenders in respect of his liability under said decree having transferred to and being vest in the Pursuers, decree should be pronounced as concluded for."
The pursuers have no plea to the relevancy of the defenders' averments.
[5] The defenders originally had a specific plea-in-law (four) to the relevancy and specification of the pursuers' averment on loss and damage but at the start of the hearing in the procedure roll this plea was repelled of consent. Mr. Murphy, Q.C., who had not appeared for the defenders in the Outer House, was unable to say precisely why this had been done, but it appears that it was decided that the particular matter of the relevancy of the pursuers' averments on quantum could be argued in terms of the defenders' (first) general plea to the relevancy of the pursuers' averments. At the procedure roll hearing counsel for the defenders asked the Lord Ordinary to sustain this plea and to dismiss the action. By his interlocutor dated 5 October 2000, however, the Lord Ordinary repelled the defenders' first plea and allowed the parties a simple proof of their respective averments. His Lordship's opinion is reported as Cheltenham & Gloucester plc v. Royal & Sun Alliance Insurance Co. plc 2001 S.L.T. 347. He ended his opinion by allowing the proof and saying (paragraph 14, 2001 S.L.T. at p. 350 K):
"That proof will be concerned primarily, in terms of the pleadings, with whether the actings of the insured were in good faith or not."
The defenders have reclaimed against the Lord Ordinary's interlocutor.
[6] The parties' pleadings are not models of clarity and this lack of clarity appears to have affected the submissions to the Lord Ordinary and to this court. As recorded by the Lord Ordinary, the argument for the defenders was to the effect that, since the pursuers had obtained decree against St. Clair in the sheriff court without having established the facts, the pursuers' averments in the present action about the granting of that decree could not be construed as relevant averments that the pursuers had been granted decree in respect of matters which were covered by Insurance 1 in the Certificate of Insurance. The Lord Ordinary rejected that argument (paragraph 12, 2001 S.L.T. at p. 350 G - I) and, in the hearing before us, Mr. Murphy did not rely on it to any extent. He really acknowledged that, by incorporating the terms of the closed record in the sheriff court action into Article 3 of Condescendence and by averring in Article 2 that the pursuers had been granted decree in that action, the pursuers had made adequate averments that St. Clair had been found liable to them in respect of a breach of contract which would be covered by the terms of Insurance 1 in the Certificate of Insurance. In these circumstances, I am satisfied that the Lord Ordinary was correct to reject this aspect of the attack on the specification of the pursuers' case.
[7] In the course of the argument in this court it soon emerged that the issue between the parties in the reclaiming motion was rather different and of much greater importance, especially since the insurance textbooks are curiously silent on the point. Mr. Murphy contended that it was open to the defenders to defend the present action on two distinct bases. One basis was that, since St. Clair had not been entitled to an indemnity under the policy because his liability to the pursuers arose out of his dishonest or fraudulent actings, the defenders were similarly not liable to the pursuers, who stand in St. Clair's shoes. The other basis was that, in any event, while the decree granted in the sheriff court was conclusive as between the pursuers and St. Clair as to the quantum of the damages for which St. Clair was liable, it was not determinative, for the purposes of the present action, of the quantum of any liability of the defenders to the pursuers, as the statutory assignees of St. Clair. The pursuers' averments that St. Clair had been found liable to them in the sheriff court action were, accordingly, irrelevant to support their conclusions for payment of the sums which they sought in the present action. The action should be dismissed.
[8] Mr. Connal argued that Mr. Murphy's submission was incompatible with the entire scheme of the 1930 legislation. It was well established in the case law that the scheme involved a two-stage procedure. First, the third party had to establish by appropriate proceedings that the insured had incurred liability to him. Once that had been done, Section 1(1) of the 1930 Act came into operation and, at this second stage, the insured's rights against the insurer under the contract of insurance in respect of the liability transferred to and vested in the third party to whom the insured had incurred the liability. When that happened, the insurer was under the same liability to the third party as he would have been under to the insured. It would be destructive of this scheme, and in particular of the requirement for the third party to establish the insured's liability at the first stage, if it were open to the insurer at the second stage to challenge the decree establishing the insured's liability to the third party. That decree had to be regarded as conclusive as to the insured's liability in damages, not merely between the third party and the insured, but also as between the third party, as the statutory assignee of the insured, and the insurer. It followed that, in a second-stage action such as the present, the insurer could not challenge the insured's liability in damages or the quantum of that liability; the insurer could defend the action only on the basis of what Mr. Connal called "policy defences", i.e. defences based on the terms of the insurance policy between the insurer and the insured. While it was therefore open to the defenders to defend the present action on the basis of the proviso to Insurance 2, they could not defend it by challenging St. Clair's liability to the pursuers in the sums sued for. The Lord Ordinary had accordingly been correct to indicate that the proof which he had allowed would be concerned "primarily, in terms of the pleadings, with whether the actings of the insured were in good faith or not." More especially, the proof would not be concerned with matters of quantum.
[9] It does indeed appear that the Lord Ordinary agreed with Mr. Connal's general line of argument, since in paragraph 11 of his opinion (2001 S.L.T. at p. 350 E - F) he says:
"In a case which has proceeded to judgment after evidence has been heard, there may be little difficulty in relation to the second element of required proof, that is to say whether the liability determined in the action falls under the terms of the insurance policy. There will usually be a judgment setting out what has been decided and why. That judgment will be res judicata between the pursuer and the insured and, if the relative decree stands, will effectively bind the insurers on that matter also, albeit that the insurer may still escape liability under and in terms of a clause in the policy. The specific issue which has arisen in this case is whether the decree is still determinative in a case where there has been no opinion or note explaining the basis of a decree, such as, for example, where the decree has been pronounced because the insured has decided not to insist in his defences and has for reason of impecuniosity or otherwise allowed decree to pass. I answer that question, in the circumstances of this case, in the affirmative."
In this passage the Lord Ordinary indicates that, where the third party has sued the insured in proceedings which have been defended and have resulted in a judgment setting out what has been decided and why, that judgment will be res judicata between the third party and the insured and will also, if the decree stands, "effectively bind the insurers on that matter also". The Lord Ordinary does not go so far as to say that the decree will be res judicata, but says that it will effectively bind the insurer on the matter. The insurer will be able to escape from this bond only by setting aside the decree.
[10] Counsel were agreed that there is no authority which deals with this point in relation to the 1930 Act. That being so, it is best to go back to first principles. The 1930 Act effects a statutory assignation in favour of the pursuers of such rights as St. Clair had against the defenders under the policy of insurance. The pursuers' rights against the defenders are therefore coextensive with the rights which St. Clair had against the defenders under the policy. See, for example, paragraph 4 of Lord Macfadyen's opinion in Aitken v. Independent Insurance Co. Ltd. 2001 S.L.T. 376 at p. 378 C - E, where he refers to a body of authority vouching that proposition. While the 1930 Act effects this assignation of the insured's rights, it has no greater effect. In other words, the pursuers' rights are coextensive with, but no greater than, St. Clair's rights against the defenders. That being so, the decree in the sheriff court action between the pursuers and St. Clair will be conclusive as to St. Clair's liability in damages for the purposes of the present action at the instance of the pursuers only if it would also be conclusive for the purposes of an action against the defenders at the instance of St. Clair. So, supposing that St. Clair had been found liable in damages to the pursuers in the sheriff court action, would the defenders have been prevented from challenging that liability and its amount in any proceedings which he brought against them to enforce the indemnity under the insurance policy? In general terms, part, at least, of the answer is clear: the matter would not be res judicata, since the parties to the two actions would be different and the media concludendi would also be different. The existence of the sheriff court decree would therefore give St. Clair the necessary interest to sue the defenders but it would not prevent them from reopening the matter in an action against them at his instance. For this reason the existence of the sheriff court decree cannot, in itself, prevent the defenders from reopening the matter in the present action where the pursuers stand in St. Clair's shoes.
[11] The Lord Ordinary obviously recognised that the sheriff court decree could not make the question of St. Clair's liability to the pursuers res judicata in an action against the defenders who were not party to that decree. But he holds that, while it stands, the sheriff court decree effectively binds the defenders. The Lord Ordinary does not explain by what mechanism, short of res judicata, the law places these effective bonds on the defenders. Nor does he explain on what ground the insurer could seek to reduce the decree which had been obtained in a lawful manner in the action between the pursuers and the insured in a case, such as the present, where the insurer had withdrawn from defending the action. The Lord Ordinary's account of counsel's submissions suggests that this issue was not focused in the debate before him, which concentrated on the supposed difference in the effect of an opposed and an unopposed decree in foro. However that may be, I am unable to accept this aspect of the Lord Ordinary's reasoning.
[12] At the hearing before us Mr. Connal did not identify the mechanism which he claimed had the effect of making the sheriff court decree binding on the defenders, beyond saying that it was really inherent in the scheme of the 1930 Act. Nor did he direct our attention to any specific provision in the Act that was said to bring this about. Still less did he point to any passage in the authorities on the Act where a provision had been interpreted as having that effect. As Mr. Connal was himself at pains to point out, the 1930 Act was a limited reform and one designed to deal with a specific problem. Under the pre-existing law, the proceeds of any insurance policy covering a liability which the insured had incurred to a third party were payable to the insured's trustee in bankruptcy and formed part of the insured's assets to be distributed among his general creditors. The third party whose loss had triggered the claim was treated as simply one of that general body of creditors and was, accordingly, likely to recover only a small dividend. See, for instance, paragraph 1.2 of the Joint Consultation Paper of the Law Commissions, The Third Parties (Rights against Insurers) Act 1930 (1998). Parliament solved the problem by enacting the provisions of Section 1 which in effect assigned the insured's rights against the insurer to the third party. But there is nothing in the terms of the 1930 Act or in the aims of the legislation that would justify the inference that Parliament intended to give the third party any additional advantage which would not be available to the insured in any action at his instance against the insurer.
[13] This is not to say that an insurer will always, or perhaps even often, be able to reopen the question of the insured's liability after it has been determined in proceedings between the third party and the insured. The obligation which the pursuers seek to enforce in this action is the defenders' obligation under the contract of insurance to indemnify the insured, St. Clair. Contracts of insurance are simply one type of contract which gives rise to such an obligation to indemnify. Similar obligations are found, for example, in express terms in contracts for the employment of contractors (as in Caledonia North Sea Ltd. v. London Bridge Engineering Ltd. 2000 S.L.T. 1123) and, by implication of law, in contracts of cautionry, where the cautioner who pays the debt has a right to be indemnified by the principal debtor. Indeed in Esso Petroleum Co. Ltd. v. Hall Russell & Co. Ltd. 1988 S.L.T. 874 at p. 882 G, Lord Jauncey identifies the doctrine of subrogation as applying to contracts of indemnity and to cautionary obligations. In Caledonia North Sea Ltd. I had occasion to explore the link in more detail (2000 S.L.T. at pp. 1138 L - 1145 G). So - even though counsel did not do so - I find it useful to examine the law relating to cautionary obligations to see what light it casts on the approach to be applied in this express contract of indemnity.
[14] Bankton, Institute 1.23.41 says that the cautioner who pays the debt has relief against the principal debtor but
"If he pays, without intimation in due time, to the principal debtor, it is on his own peril, and the principal is not bound to relieve him if he had a good defence against the debt."
This passage shows that the cautioner's right to relief against the principal debtor does not exceed the sum for which the principal debtor was liable and, hence, the sum which the cautioner himself was liable to pay. Bankton cites D.17.1.8.8 and D.17.1.10.11, both from Ulpian 31 ad edictum, in support. In the former Ulpian refers to a rescript holding that, if sureties had knowingly failed to appeal against a decision finding them liable for more than was due, the principal debtor had a defence to any action of relief brought by them. In the second text Ulpian says that sureties can have a right to relief even where they pay without proceedings being brought against them, but he goes on in the immediately following passage to quote Julian's view that a surety will not be entitled to relief if, when sued, he knowingly fails to use a defence that would have been open to the principal debtor and the surety had the means of calling the debtor and demanding that he should take over the action. Voet, Commentarius ad Pandectas 46.1.33 is to much the same effect. Similarly, Bankton says that the cautioner will not be entitled to relief for expenses incurred in pointlessly defending an action against him
"for he ought to have paid, and relied upon his relief, after intimating the distress to the principal debtor, and no defence furnished to him against the debt by the principal."
From these observations it is plain that the terms of any decree against the cautioner are not always conclusive as to the extent of the principal debtor's obligation to indemnify the cautioner. On the other hand, they also indicate that, where the cautioner intimates the proceedings to the principal debtor and he fails to defend the proceedings, this may have a bearing on the principal debtor's liability to indemnify the cautioner.
[15] Erskine, Institute 3.3.65 likewise affirms the right of the cautioner to relief from the principal debtor but points out (3.3.67) that he loses that right in certain circumstances. In particular,
"2dly, The cautioner who pays without either a previous action in which the debtor is called, or a declaration by the debtor that the debt is still due, pays at his peril; and consequently, if the debtor had a sufficient defence against the debt, ex gr. of payment or of compensation, the cautioner loses his relief; Maxwell, 19 Dec. 1632, M. 2115."
Similarly, Gloag and Irvine, Law of Rights in Security, p. 798 say:
"While the cautioner is entitled to be indemnified against the whole loss which he has sustained through the principal debtor's default, his claim of relief can never exceed the amount which he has actually paid.... Further, in order that a cautioner may recover from the principal debtor money which he has paid, he must have been under a reasonable obligation and necessity to pay the money. Thus if he pay money not due by the principal debtor, or against the payment of which the principal debtor had a sufficient defence, such as compensation, no claim of relief will accrue to him, even though, in making the payment, he only yielded to pressure brought on him by the creditor. His duty in such circumstances is to notify to the principal debtor the action of the creditor, so that the debtor may state his defence."
Again, it can be seen that the mere existence of a decree against the cautioner will not necessarily be conclusive of the extent of his right to relief against the principal debtor and that both Erskine and Gloag and Irvine envisage that, when sued, the cautioner should call the principal debtor and give him an opportunity to defend the action. The implication is that, if the principal debtor fails to do so or fails to do so successfully, he will have to indemnify the cautioner against the sum for which the cautioner is found liable.
[16] The English law of suretyship has been influenced by the Civil Law and, where appropriate, English decisions are treated as providing guidance on this matter in our law. In particular, when discussing the general effect of giving notice to the principal debtor of an action against the cautioner, Gloag and Irvine, The Law of Rights in Security, p. 800 quote the statement by Buller J. in Duffield v. Scott (1789) 3 T.R. 374 at p. 377:
"The purpose of giving notice is not in order to give a ground of action; but if a demand is made, which the indemnifying party is bound to pay, and notice be given to him, and he refuse to defend the action, in consequence of which the person indemnified is obliged to pay the demand, that is equivalent to a judgment, and estops the other party from saying that the defendant in the first action was not bound to pay the money."
The exact scope of the principle there stated must be carefully noted. The estoppel arises only where the person who claims to be indemnified gives notice of a demand "which the indemnifying party is bound to pay". So, similarly, any personal exception or bar in Scots law would arise only where the person who refused to defend the action was bound to indemnify the defender. The underlying thinking must be that in those circumstances it can be inferred from the indemnifier's refusal to defend the action that he is satisfied that the defender is bound to pay the sum in question and that his own obligation of indemnity will be measured accordingly. And, of course, in practice insurers will defend or settle proceedings against their insured, where they are bound to indemnify him under the policy. Indeed, more often than not, they will be the domini litis with a potential liability for expenses. See, for instance, T.G.A. Chapman Ltd. v. Christopher [1998] 1 WLR 12. So, a decision by an insurer not to defend an action against the insured may well justify an inference that the insurer accepts the validity and amount of the third party's claim. If the third party relies on that to his prejudice, the insurer may be barred from challenging the validity and amount of the third party's claim. But any such case of bar in an action against an insurer or other indemnifier - which might perhaps fall into the category of acquiescence - would require to be specifically averred and focused in an appropriate plea. On the other hand, no inference that the party notified accepts the validity and amount of the third party's claim can be drawn in circumstances where he denies his liability to indemnify the defender. In that situation - which will be comparatively unusual in insurance cases - the party notified may stand aside on the basis, first, that he does not wish to incur expense in defending an action which is none of his business and, secondly, that he is not concerned with the quantum of a liability against which he has no obligation to indemnify the defender.
[17] Mr. Murphy was accordingly correct to say that, in the circumstances averred by the defenders in Answers 3 and 4, the amount of the decree against St. Clair would not be conclusive of the extent of any liability of the defenders to indemnify him and, therefore, of the quantum of the pursuers' claim in the present action. According to those averments, the defenders withdrew from defending the sheriff court action on the basis that they were not liable to indemnify St. Clair because of his bad faith. In these circumstances the defenders' withdrawal would carry no implication that they accepted the validity or extent of the pursuers' claim in the action against St. Clair. And indeed, in the present action, the pursuers have no averments or plea to the effect that the defenders are barred from challenging this aspect of the pursuers' case because of their failure to defend the pursuers' sheriff court action against St. Clair. That being so, even supposing that at the proof the defenders fail to show that proviso a) to Insurance 2 in their policy with St. Clair applies and they are eventually held liable to indemnify the pursuers as the assignees of his rights under Insurance 1, the defenders will still be entitled to challenge the quantum of the pursuers' claim against them. To hold otherwise, especially in a case such as the present where the insured has allowed an unopposed decree to pass against him, would be inconsistent with the fundamental principle that insurers are bound to indemnify their insured only to the extent of his liability to the third party, including his liability under a reasonable settlement of the claim against him.
[18] I am fortified in that conclusion by the decision of Bingham J., as he then was, in Ben Shipping Co (Pte) Ltd v. An Bord Bainne The C Joyce [1986] 2 All E.R. 177 to which Mr. Murphy referred. The proceedings arose out of a claim by cargo owners for damages against the shipowners for damage to the cargo and for short delivery. The shipowners informed the charterers of the proceedings and invited them to take over the defence on the basis that, in terms of the charterparty, ultimate responsibility for the cargo owners' claim would rest with the charterers as indemnifiers. The charterers refused to take part in the proceedings on the basis, his Lordship inferred, that they did not believe that they were bound to indemnify the shipowners. The shipowners settled the claim and then claimed an indemnity against the charterers. Bingham J. held that the charterers were indeed not liable to indemnify the shipowners but also, obiter, that even if they had been, the charterers would not have been estopped from contesting the liability of the shipowners to the cargo owners and the reasonableness of the settlement of the claim. In reaching that conclusion, Bingham J. relied on a line of authority on obligations of indemnity of various kinds, which began with the observations of Buller J. in Duffield v. Scott - quoted at paragraph 16 above - and ended with the statement of principle by Mellish L.J. in Parker v. Lewis (1873) L.R. 8 Ch. App. 1035 at pp. 1059 - 1060. Bingham J. put his conclusion in these words ([1986] 2 All E.R. at p. 187 b - g):
"To succeed in their estoppel claim, the shipowners must establish as a matter of law that having given notice to the charterers of the claim made against them (the shipowners) in South Africa, and the charterers having declined to conduct the defence, and the shipowners having compromised the claim, they (the charterers) are estopped from contesting the liability of the shipowners to the third party in South Africa and the reasonableness of the compromise and the incurring of costs, even though there was no express contract of indemnity and the charterers bona fide and on reasonable grounds challenged the shipowners' right to indemnity and the claim was settled without immediate reference to the charterers. I do not think any such principle can be clearly found in the authorities relied on. Nor do I think it desirable to attempt to lay down such a far reaching principle. It is of course good sense and common practice for a defendant to give notice of a claim against him and any proposed settlement to a person against whom he intends to seek indemnity or contribution, if such person is not joined as a third party. This gives that person the opportunity to raise any points or objections he wishes, and will make it somewhat harder for him to raise arguments later which he could have raised at the time. It is, however, a large stride from a commonsense tactical practice to a rule of law. The present case is a good example of how unfairly such a rule could work. The charterers did not (it seems reasonable to infer) believe they were bound to indemnify the shipowners against the South African claim. Even if one assumes that they were wrong in that belief, it remains the fact that they need have had and in all probability had no knowledge at all of how the cargo damage occurred. Having dissociated themselves from the proceedings they knew nothing of the terms of settlement. The rule contended for would present the charterers with a choice between taking over the defence of a claim which they believed to be nothing to do with them and thereafter (if that belief was falsified) finding themselves bound to indemnify the shipowners against settlement of a claim even though the claim could be shown to be ill-founded or the settlement unreasonable. The authorities may well support, and I can see virtue in, a much more limited principle, but that would not avail the shipowners here."
Since he founded his argument on what he claimed were the effects of the 1930 Act, Mr. Connal did not engage at all with Bingham J.'s opinion. Even without the benefit of any submissions from him on the point, I can readily see that the Ben Shipping case is distinguishable on the grounds, for instance, that it dealt with a supposedly implied obligation of indemnity, while we are concerned with an express obligation, and that the charterers probably knew nothing about the basis of the claim against the shipowners, whereas here the defenders had originally conducted the defence of the action against St. Clair and had indeed investigated it. Nevertheless, his Lordship's decision is in line with the Scottish and other authorities to which I have referred. Moreover, it strongly supports the conclusion that, where the party called upon to indemnify a defender disputes the existence of any obligation on his part to do so, he is not barred from challenging the existence or extent of the defender's liability to the third party, merely because he has decided not to conduct the defence of the third party's action against the defender. That applies in this case and, on that approach, I would reject the pursuers' argument.
[19] In Caledonia North Sea Ltd., the Piper Alpha litigation, the pursuers, who operated the platform, had settled various large claims, mostly by the relatives of those who had been killed in the explosion. The settlements had been reached only after a series of arbitrations and they were given effect by decrees against the pursuers in "confirming actions" at the instance of the relatives. The pursuers claimed to be indemnified against their liabilities by various contractors, all of whom denied that the express indemnities in their contracts applied in the circumstances. At one stage of the proceedings before the Lord Ordinary (Caplan) the pursuers advanced an argument to the effect that the defenders were barred from challenging the settlements reached by the pursuers with the third parties, since they had had notice of the arbitrations and confirming actions and had not intervened to defend them. The Lord Ordinary followed Bingham J.'s reasoning in Ben Shipping and rejected that argument. See paragraphs 9.3.4 and 11.6.7 of his opinion, unreported, 2 September 1997, www.scotcourts.gov.uk/opinions/Pipervol5.html and www.scotcourts.gov.uk/opinions/Pipervol6.html . As I noted when the case was before this Division, the pursuers did not renew that argument in the reclaiming motion. See 2000 S.L.T. at pp. 1159 L - 1160 D. Lord Caplan's opinion gives further support to the defenders' submission that the sheriff court decree should not be regarded as conclusive in the present proceedings. On the other hand, the pursuers' averments are not for that reason irrelevant. The proper approach is, in my view, to leave the issues of the defenders' liability and of the quantum of any liability to be decided after proof.
[20] I therefore move your Lordships to recall the Lord Ordinary's interlocutor and to allow a proof before answer, which will cover all the outstanding issues between the parties, including the quantum of the pursuers' claim.
FIRST DIVISION, INNER HOUSE, COURT OF SESSION |
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Lord President Lord Kirkwood Lord Abernethy
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A2903/00 OPINION OF LORD KIRKWOOD in RECLAIMING MOTION in the cause CHELTENHAM & GLOUCESTER plc Pursuers; against SUN ALLIANCE AND LONDON INSURANCE plc Defenders: _______ |
Act: Connal, solicitor advocate; McGrigor Donald
Alt: Murphy, Q.C.; Brechin Tindal Oatts
30 May 2001
I am in full agreement with the opinion of your Lordship in the chair and there is nothing I can usefully add. I agree that the reclaiming motion should be disposed of as proposed by your Lordship.
FIRST DIVISION, INNER HOUSE, COURT OF SESSION |
|
Lord President Lord Kirkwood Lord Abernethy
|
A2903/00 OPINION OF LORD ABERNETHY in RECLAIMING MOTION in the cause CHELTENHAM & GLOUCESTER plc Pursuers; against SUN ALLIANCE AND LONDON INSURANCE plc Defenders: _______ |
Act: Connal, solicitor advocate; McGrigor Donald
Alt: Murphy, Q.C.; Brechin Tindal Oatts
30 May 2001
I am in full agreement with the opinion of your Lordship in the chair. For the reasons given by your Lordship I agree that the Lord Ordinary's interlocutor should be recalled and a proof before answer allowed, leaving all outstanding issues between the parties, including the quantum of the pursuers' claim, open.