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:-

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

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:-

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:-

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.

Aikens J asked himself two questions:-

The Judgment

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.

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:-

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.

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.

The submissions

Mr Sumption QC submitted:-

(1) “Alleged” or “actual” loss?

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:-

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.

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.

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.

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.

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.

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.

(2) “Knowledge” of any loss or losses

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.

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.

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.

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.

(3) Whose loss?

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.

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.

Conclusion

I agree.

I also agree.