Munchener Ruckversicherungs Gesellschaft (t/a Munich Reinsurance Company) v Commonwealth Insurance Company

This is an application to set aside the order made by Moore-Bick J. on 8 December 2003 granting the Claimants, Munich Re, permission to serve their claim form out of the jurisdiction of the Court on the Defendants, Commonwealth, at their head office in Canada. The claim concerns Munich Re’s liability if any to Commonwealth under a retrocession contract: Commonwealth were the cedant and Munich Re the retrocessionaire.

The Insurance contracts underlying the retrocession are as follows. A corporation incorporated under the laws of Illinois, where it is based, called Allegiance is one of America’s largest providers of health care products and management services for hospitals and other such institutions. It owns and operates a number of factories and distribution centres both in the USA and elsewhere. Allegiance, through its brokers, Marsh & McLennan, based in Chicago, Illinois, obtained, in 1997, a Master Policy insurance with Zurich American for the period of three years from 30 September 1997. The precise terms of the Master Policy are not relevant to the questions which presently arise for determination. The Master Policy provided that the insurance cover would sit over the top of any other policy in force as an excess policy but that it would ‘drop down’ in the event of any local policy being exhausted or reduced. There was no warranty requiring the Insured to keep or maintain local policies in force. The Master Policy appeared to insure non USA based property on “difference in conditions” terms.

For the second year of the Cover under the Master Policy, Commonwealth reinsured 10% of Zurich American’s exposure on the terms of a certificate of facultative reinsurance. This reinsurance contained a term that Commonwealth would be bound by loss settlements made between Insured and Insurer. Under the reinsurance contract, Commonwealth agreed to accept service of suit at an address in California.

Commonwealth ceded 50% of its participation to Munich Re. The retrocession contract was broked to Munich Re’s London Office through London based brokers, the Paul Group. A broking entity, based in California, called THB, were Commonwealth’s producing brokers. The cover is on a Lloyd’s form, NMA [non-marine association] 1779 and was expressed to be subject to “the same terms, clauses and conditions as in the Original except as may be expressly provided hereby”. The conditions included two provisions on which the parties relied:

There is no service of suit clause for Canada, numbered NMA 1998; there is a service of suit clause for Canada numbered NMA 1970a. There is also a service of suit clause (USA) NMA 1998. The two service of suit clauses seem to me to have very different legal consequences. The real service of suit clause for Canada [NMA 1970a] reads as follows:

The service of suit clause for the USA [NMA 1998] provides:

The clause goes on to provide for an identified person to be served with any suit.

It seems to me that the USA clause amounts to a submission to the jurisdiction of the courts within the USA; whereas the Canadian clause simply provides for service. I have some doubt whether the Canada suit clause has any practical effect when the insurance contract is between two companies, not involving any Lloyd’s syndicates or Names.

Commonwealth say that the country was wrongly specified in the retrocession slip; Munich Re say it was the number of the NMA that was wrong, Canada was correct. The practical effect of this aspect of the dispute is, I think, that if Commonwealth are right, Munich Re have no sound basis for resisting the present application. Having submitted [ex hypothesi] to the jurisdiction of courts in America, including the District [Federal] Court in California, they would have little credibility in contending that this court was the more convenient forum. The position may be different if the retrocession contract simply provided for a method of service in Canada on a Canadian based Corporation, such as Commonwealth. I shall return to this point in due course.

The terms of the Intermediary Clause are as follows:

In addition to the retrocession slip, Commonwealth say that there was a further contractual document in the form of a certificate allegedly provided by THB to Munich Re. Munich Re deny ever having received this document and say that it can have no contractual effect. The Certificate is dated 1 October 1998. It contains two conditions relevant to the present dispute. The first is a ‘follow the settlements’ clause; the second is an arbitration clause which provides for arbitration to be held “in the city in which the [Cedant] Company’s Head Office is located” unless any other place is mutually agreed. The only contractual documents which Munich Re accept and assert they received from THB are two faxes from THB which are referred to in the retrocession slip “All information as per THB’s Facsimiles dated 11^th and 23^rd September 1998”. The slip was scratched on 8 October and was stamped with Munich Re’s UK General Branch Stamp with the acronym LIRMA.

The fax of 11 September identifies properties, property values and deductibles. The fax of 23 September 1998, which was sent by THB to a Mr Billinge of the Paul Group, with instructions to them to “present and secure Munich Re’s participation on an authorization basis as follows” stated that “this structure contemplates local retentions etc.” The fax was used as part of the broke and was scratched by Munich Re on 25 September 1998.

The claim with which this case is concerned relates to a severe fire which occurred on 13 January 1999 at one of Allegiance’s insured properties in Juarez, Mexico. In the earlier fax the total insured value for this property, its contents and cover for business interruption is listed at US$27,335,000. Allegiance made a claim under the policy for some US$50 million and Zurich American settled the claim for US$48,895,700 and, in turn, made a claim for 10% of that sum against Commonwealth. Commonwealth paid just under 10% of the claim and in turn sought to recover a half share from Munich Re. The sums paid by Commonwealth were in tranches. Munich Re has paid, on a without prejudice basis, US$1.3 million on 29 February 2000. They did not believe that their concerns about the inadequacy of the total insured value of the location and the existence of a locally issued policy which was linked to the Coinsurance deficiency Clause within the Master Policy, and to the fax, had been answered. On 7 November 2001 Munich Re made their position clear. They pointed out that the original Master Policy “responds for Difference in Conditions coverage only for Non-USA property. Our understanding is that this section of the Policy can only be triggered by an underlying policy and not in circumstances where there is no underlying policy at all.” They considered that the claim should be adjusted “as though there was a local policy”; they also pointed out that in the Reinsurance Certificate [the contract between Zurich American and Commonwealth], the premises covered by the reinsurance were “as per Schedule on file with company”. The schedule they had seen suggested that the policy was on an agreed value basis with an overall limit and sub-limits, and that no such sub-limits would be required were the insurance to be on the basis of a blanket policy rather than one linked to individual values. The letter concluded by saying that Munich Re would like to move the claim forward and suggested that their various points should be responded to and another video conference could then be arranged. A reply was sent by Commonwealth, suggesting that the fact that the local policy had been cancelled had no impact on Commonwealth’s liability and that they considered a further detailed reply to be unnecessary. There was a threat that if the balance demanded was not paid “we have no option but to file suit”. Munich Re said that the issue of blanket policy versus scheduled first loss policy was still live and as there was no ‘follow the settlement clause’ in their retrocession contract further discussion was called for. There was a further exchange of views in letters dated 28 January 2002 and Munich Re’s response on 4 March 2002, followed by silence. The silence was for a period of 18 months, at the end of which, on 12 September 2003, Commonwealth sent a formal demand together with a notice of arbitration, for an arbitration to be held in Vancouver, British Columbia. Shortly after they were instructed on Munich Re’s behalf, Messrs Clyde & Co took the point that there was no arbitration agreement and this provoked a further short period of silence followed by Commonwealth, by letter dated 18 November 2003, asking Clyde’s not to assume that “we have withdrawn our request for arbitration”.

The next relevant event is the application to Moore-Bick J at the beginning of December 2003. Pursuant to permission granted by this court, the Claim Form in this case was served on Commonwealth in Canada on 15 December 2003. The claim by Munich Re is not just for a negative declaration that nothing is owed by them to Commonwealth; it also seeks recovery of the $1 million odd that they have already paid. 3 weeks later, Commonwealth, through Californian Attorneys, filed a complaint against Munich Re and THB in the federal court for the Central District of California. In the section of the complaint dealing with jurisdiction, the English proceedings are referred to.

Reliance is placed on the certificate allegedly evidencing the retrocession contract as incorporating a follow the settlements obligation. It is alleged that THB acted as the agent of Munich Re for delivery and transmittal of the retrocession agreement “including transmittal of all related documentation supporting Retrocession Agreement and all terms thereto”. The complaint alleges that Munich Re “in acknowledgment of its duties and obligations under its contractual agreement with Commonwealth initially advanced” US$1.3 million odd. No mention is made of the express reservation pursuant to which the payment was made. It is also alleged that Munich Re were in breach of contract by “wrongfully” instituting suit against Commonwealth and refusing to arbitrate the dispute. By refusing to pay, Munich Re is further alleged to have been in breach of the Retrocession Agreement and of their implied duty of good faith and fair dealing. As a result, it is alleged that Commonwealth are entitled to the costs of bringing the Complaint. It is further alleged that by bringing the UK action, Munich Re were in breach of the implied obligation of good faith and fair dealing, and, therefore Commonwealth claim their costs of the UK action as part of their damages for breach of contract.

The causes of action against THB are based upon their alleged negligence and breach of fiduciary duty. In relation to the negligence claim, it is pleaded that:

As to the claim for breach of fiduciary duty, again it is pleaded that:

It is clear therefore, that the claim against THB is only viable in the event that Commonwealth fail against Munich Re, and then only if the reason for the Commonwealth’s failure is due to what THB did or did not do.

The basis upon which leave to serve out of the jurisdiction was granted is to be found in a witness statement of Mr Marangos, a partner in Clyde & Co. He puts forward the reasons why Munich Re say they are not liable to Commonwealth and why they are entitled to a return of what they have paid. First, if there is an obligation to reinsure in respect of a Difference in Conditions in relation to Non-USA property, it implies that there must have been a local policy in existence before liability could arise. There was a local policy which had lapsed due to non payment of premium. Either there was no liability or, as Munich Re had suggested in correspondence, Munich Re’s liability must be based on the difference between the cover given by a hypothetical local policy and the Master Cover. Munich Re say that there is no ‘follow the settlements’ clause in the Retrocession Contract, and in any event, even had such a clause been incorporated, the settlement made by Commonwealth was not “within the terms, conditions and limits” of the Reinsurance Certificate and Commonwealth did not take all proper and business like steps in making the settlements. Further, the effect of the sub-limits were to limit Munich Re’s liability to 5% of the total insured value of the property.

For present purposes, it is sufficient to say that Munich Re’s position is not far fetched but seems credible. They have a good arguable claim against Commonwealth entitling them both to recover the amount paid and to a declaration that they have no liability to Commonwealth. The amount of their claim exceeds the amount of Commonwealth’s claim against them. Commonwealth take the point that Munich Re had not previously asserted a right to recover the amount they paid. This may be a good jury point but the tone of the correspondence shows, clearly, that Munich Re wanted to get rid of what is a relatively small claim as cheaply as possible and in that spirit, a claim for the return of the money paid would not have been constructive. The lack of a prior claim for the return of monies says nothing about the validity of the claim itself, having regard to the circumstances. After such delays by Commonwealth they were entitled, I think, to ‘throw the book at them’ after the abortive arbitration proceedings had been suddenly, unexpectedly and inappropriately launched against them.

In support of the claim that this was a suitable case for service out of the jurisdiction, Munich Re relied upon Rule 6.20(5)(a), namely that their claim was in relation to a contract made within the jurisdiction of this court. Munich Re scratched the slip in London; the risk was broked to them by London brokers, acting on Commonwealth’s behalf. Therefore, Rule 6.20 (5)(b) also applied as the contract was made through an agent trading and residing within the jurisdiction. Third, they asserted that the contract was governed by English Law. The evidence of Mr Marangos concluded thus:

The application to set aside the order of Moore-Bick J. was issued on 30 January 2004 and came before me on 2 April 2004 and was well argued for the day.

For Commonwealth, Mr Bailey argued as follows:

Munich Re must establish three points, in order to sustain the order made.

a good arguable case that the claim falls within CPR 6.20;

that a serious issue to be tried has arisen;

England is clearly and distinctly the most appropriate forum for the trial.

Commonwealth accepted that the first two requirements had been satisfied. They accept for the purpose of this application that the three bases upon which this court’s jurisdiction was founded have been adequately established. The only and real point at issue is whether Munich Re can establish that the English Court is clearly and distinctly the ‘most appropriate forum for the trial’. In argument it was accepted that either the District Court or the English court was the more appropriate forum; there was no other more suitable forum. Mr Bailey of counsel, emphasized that the burden of proof lay on Munich Re to establish that England was more appropriate than California for the trial of the issues; in contrast to the position where an application for a stay is sought of “proceedings started in this country as of right” [as here]: per Lord Goff in Spiliada v Cansulex [1987] AC 460 at page 477E.

The Court’s task is to ascertain the forum in which the case can be suitably tried for the interests of all the parties and for the ends of justice and the factors which will weigh with the court “are legion”. Mr Bailey emphasized that the court will seek to avoid creating a risk of a multiplicity of proceedings and the inherent risk of conflicting judgments. He relied on a passage in the 13^th edition of Dicey & Morris, The Conflict of Laws, which states, at paragraph 12-024, that:

One of the factors was the nature of the relief sought and the court will look to see whether the claim for a negative declaration is useful or contrived. In this case the factors suggest that California is the more appropriate forum since they can encompass not only the issues raised in the English action between Commonwealth and Munich Re but also the issues raised in the District Court relating to California’s contingent claim against THB. In general it is “highly desirable” that claims against brokers should be heard and determined at the same time and by the same tribunal which determines avoidance or coverage issues. Mr Bailey referred me to two reported decisions: Aneco v J & H [1998] 1 Lloyd’s Law Reports 565 at 567, and Kennicott v Minet [2003] Lloyd’s Insurance Reports 37 at 51. If the action remained in the UK and judgment was given in favour of Munich Re, the judgment would not be binding on THB and thus the risk of multiplicity of proceedings and inconsistent judgments would materialize. Mr Bailey submitted that there was an overlap between the issues involving THB and those concerning Munich Re. It was THB who were primarily responsible for the way in which the risk was presented to Munich Re and THB will be involved in the question whether the Certificate of Retrocession was ever presented to Munich Re. Mr Bailey placed considerable reliance on Insurance Corporation of Ireland v Strombus [1985] 2 Lloyd’s Law Reports page 138 and to a passage in Lord Justice Mustill’s judgment at page 144:

The proper law governing the relationship between Commonwealth and THB is probably the Law of the State of California, where THB are based. The governing law could not, on any view be English Law. Because California does not itself recognize the concept of taking jurisdiction over a person on the grounds that he is a “necessary and proper party” there is doubt whether any judgment given against THB [presumably in default] would be enforceable in California. There is controversy between the opinions of the US attorneys which are before the Court on this point.

The fact that Munich Re have indicated that they intend to challenge the jurisdiction of the Californian Court is not a matter which should concern this court at the present time. There is an issue between the parties as to whether Munich Re’s business activities establish sufficient contact within the State to entitle the federal court to take jurisdiction over them on grounds of “diversity”. On an Order 11 application “it is not proper or appropriate that the courts of this country should at the same time try to determine … the matters which, within the jurisdiction of [the US court] are being determined by that court”, per Hobhouse LJ in Excess Insurance v Allendale Insurance Court of Appeal, unreported 8 March 1995. Similarly, I should not have to decide whether or not Munich Re’s argument that any claim against THB is time-barred under Californian Law is of any weight.

The fact that the governing law of the contract between Commonwealth and Munich Re may be English Law is of comparatively little weight. There is no suggestion that there are complex principles of English Law involved. Such differences are readily resolved by the Californian Court. In any event, where as here the retrocession contract incorporates within it clauses in the underlying Master Policy, which is itself governed by the law of the State of Illinois, Illinois Law will be relevant. The Californian court is better placed to determine any disputes about Illinois Law since it will decide the points at issue, not by receiving evidence on Illinois Law but rather by receiving legal submissions from the parties legal representatives as to what Illinois Law is.

In terms of the convenience of the parties and witnesses, the placing brokers have gone into liquidation and the person in the Paul Group who had primary responsibility for broking the retrocession is believed to be in New Zealand. Munich Re’s underwriter is now in Cyprus. THB’s witnesses are all located in California, and the witnesses involved in the valuation of the loss are located within the USA. Commonwealth’s witnesses are located in Canada. Most of the relevant documentary material is likely to be located in the USA rather than in this jurisdiction.

Munich Re’s action in this jurisdiction amounted to a pre-emptive strike to secure the forum of Munich Re’s choice and in the process to reverse the roles of the parties.

On the issue of the service of suit clause, Mr Bailey submitted that I should deal with this matter now rather than ordering a preliminary issue to be determined without prejudice to Commonwealth’s challenge to this jurisdiction. He submitted that having regard to the extrinsic evidence I should conclude that the mistake was the reference to the wrong country. There was some support for this view from a report of a conversation between Mr Billinge and Commonwealth’s Canadian lawyers and it is said that the intention of Commonwealth’s underwriter responsible for both inwards and outwards business was that it was the service of suit clause for the USA that was intended. He said that he never used a Canada service of suit clause. He submitted that the USA service of suit clause was more probable given that the assured and reassured were both domiciled in the USA. “It is inherently likely that the parties would have intended the chain of contracts to be the subject of the jurisdiction of the same courts.”

Finally, the fact that the winning party was not entitled to recover its costs against the losing party in the District Court was not a significant juridical advantage of which Munich Re would be the loser were the action to continue there rather than here. The amount at stake [which Mr Bailey submitted was US$2.3 million] exceeded the likely costs.

For Munich Re, Mr Wynter submitted:

This bare summary of the parties’ submissions does not do full justice to all the submissions made to me but represent a short summation of the main points. I was provided with full and helpful skeleton arguments.

These are the reasons why I have concluded that England is a more appropriate forum for the determination of the disputes between the parties than California. Just as in all the cases to which my attention has been drawn, the factors which inform my conclusion are not principles of law, they represent the application of principles in this particular case. I say this because there was a tendency during argument for counsel to rely on statements of reasons in the decided cases as though they were statements of principle applicable in every case.

Finally, I must deal with the issue as to whether the service of suit clause is Canada or the USA. It seems to me that it is Canada. The contractual documents bear this out. The typescript was altered to substitute Canada for the USA; the explanation for the mismatch between the NMA numbers is obvious in the sense that having altered the country the person who substituted Canada for the USA did not ‘carry it through’. Commonwealth is based in Canada. The fact that most properties were located in the USA does not suggest that, in the contract between a Canadian company and a German company based, for this purpose, in England, and made in England and governed by English law, it would be sensible for the parties to submit to the jurisdiction of a USA court. If there were to be an issue about service, it made more sense for the parties to nominate as the place for service the place where one of the parties was located. The circumstances in which one of the brokers made a statement to Commonwealth’s Canadian Lawyer would need to be investigated before much reliance could be placed on what he is recorded as having said. The lawyer quite properly expressed some doubt as to the reliability of what he was told. On the basis of all the material before me I conclude that the service of suit clause was for service of suit in Canada. As I have indicated, had I reached the opposite conclusion then I would have acceded to Commonwealth’s application.

Therefore, I dismiss this application as I have concluded that Munich Re have discharged the burden of proving that this case is more conveniently and appropriately tried in England than in California.