Omega Proteins Ltd v Aspen Insurance UK Ltd

The claimant, Omega Proteins Limited (“Omega”), carries on business processing by-products from animal carcasses used in the meat industry which it then supplies to pet food manufacturers and others. Northern Counties Meat Limited (“Northern Counties”) was a meat processing company which operated a cutting plant in Sunderland. Northern Counties supplied Omega with animal carcasses which were contaminated in the manner that I shall describe. Omega intermingled the contaminated material supplied by Northern Counties with sound material supplied by others. The effect was that the entire bulk was unfit for any commercial use. Unaware of the contamination Omega supplied the bulk to one of its customers – JG Pears (Newark) Ltd (“Pears”). Pears used the material and suffered losses in consequence. Pears had on-sold the material as meat and bone meal to pet food manufacturers and as tallow to Webster Thompson Limited.

The animal material which Northern Counties processed and sold was subject to EC Regulations (in particular, EC Regulation 1774/2002) introduced following the BSE crisis. This regulatory regime was introduced in an attempt to control and eradicate transmissible spongiform encephalopathies in animals.

EC Regulation 1774/2002 divides animal material into three categories, of which two are relevant:

“Category 1” material – this must be labelled “for disposal only”, must be indelibly colour-stained bright blue or green, is not permitted to enter any food chain and must either be incinerated and burnt as fuel or buried as land fill; and

“Category 3” material – this must be labelled “not for human consumption” but can be used to manufacture other products and is not colour-stained.

EC Regulation 1774/2002 also:

Originally, the United Kingdom had the benefit of a derogation from the latter provision which allowed the use of the vertebral column of cattle and did not require it to be classified as “specified risk material” until the age of 30 months.

In 2006 the European Union agreed to lift the export ban on British beef which had been imposed following the BSE crisis. As part of the price of this agreement, the UK agreed to bring its classification of “specified risk material” into line with that which applied elsewhere in the EU. By Commission Regulation (EC) No 657/2006 of 10 April 2006, published in the Official Journal on 29 April 2006 and in force on 3 May 2006, and the Transmissible Spongiform Encephalopathies (No. 2) Regulations 2006 (2006/1228) made on 2 May 2006 and taking effect on 3 May 2006, the age of animals for the purposes of Category 1 was reduced in the United Kingdom to 24 months. The new Regulations classified the vertebral column of cattle aged over 24 months as “specified risk material”.

Northern Counties failed to act promptly to comply with the new law. Between 3 May and 8 July 2006 Northern Counties supplied to Omega 28 deliveries totalling just over 220 metric tonnes of animal material which was certified as Category 3 but which in fact, unknown to Omega, contained the vertebral column of cattle aged over 24 months and was therefore specified risk material falling into Category 1 and accordingly fit only for disposal. It was this material which was mixed with other material thereby contaminating the whole bulk that was then supplied by Omega to Pears. Pears processed it and sold it as bone meal to pet food manufacturers and as tallow to Webster Thompson Limited. This contravention of the law was discovered by the State Veterinary Service, an agency of the Department for the Environment, Food and Rural Affairs (“DEFRA”), which required the contaminated material to be disposed of as Category 1 material.

Webster Thompson began an action for damages against Pears. Pears joined Omega as a third party claiming damages for breach of contract and Omega joined Northern Counties as a fourth party on the same basis. The principal breach alleged against Northern Counties was of a term that the material supplied should be Category 3. There were also claims for breach of implied warranties of fitness for purpose and satisfactory quality.

On 13^th May 2008 Webster Thompson obtained summary judgment against Pears.

On 18^th May 2009, following a two day trial, HH Judge Mackie, QC, sitting as a judge of this court, held that Omega was liable to pay damages to Pears for breach of contract and that Northern Counties was liable to indemnify Omega against its liability to Pears.

The judge held that as a result of Northern Counties omitting to comply with the new law in time, vertebral column from animals over 24 months of age became mixed into low risk Category 3 material thus making it (the Category 3 material) a Category 1 animal by-product. Category 1 material was thereby supplied by Omega, through no fault of its own, when Category 3 should have been delivered. This was a breach of an express term that the material to be supplied would be Category 3 (paragraph 32 of the judgment). In addition the judge held that there was a breach of the implied terms of satisfactory quality and fitness for purpose (paragraphs 34 to 41). These breaches of contract caused loss to Pears who were entitled to damages as a result. Pears was, therefore, entitled to recover damages for breach of contract which, the judge understood, had for all practical purposes been agreed (paragraph 42).

No claim or allegation was made in the proceedings that Northern Counties had been negligent or that it was liable to Omega by virtue of any non contractual duty or obligation.

In relation to the claim by Omega against NCML, the judge found that the factual findings he had made in the dispute between Pears and Omega applied equally to the claim against Northern Counties. He held that:

In the event, the Judge was not required to make any determination on quantum. An order was drawn up by which it was ordered that Omega should pay Pears the sums of € 252,103.94 and £ 97,360.34 plus interest of € 8,802.92 and £ 9,926.60. The order further declared that Omega was liable to indemnify Pears in respect of its liability to a further company, Harris Tobias Limited, and any other parties who purchased material from Pears during the period from 3 May 2006 to 17 July 2006 inclusive.

It was further declared that Northern Counties was liable to indemnify Omega in respect of Omega’s liability to Pears (whether resolved by judgment or reasonable settlement) and all of its costs (including those costs incurred by Omega in defending Pears’ claim).

The defendant, Aspen Insurance UK Ltd (“Aspen”), provided Northern Counties with insurance under a combined liability insurance policy which provided cover against Employers’ Liability, Public Liability, Product Liability, and Pollution Liability.

Northern Counties is in liquidation and unable to satisfy any judgment against it. In the present action Omega claims against Aspen under the Third Parties (Rights Against Insurers) Act 1930 pursuant to which Northern Counties' rights under the policy have vested in Omega.

The relevant insuring provision is as follows:

Section C has a number of exclusions including the following

In this claim, brought under CPR Part 8, Omega seeks a declaration that Aspen is liable to indemnify it under the terms of the policy with Northern Counties for the liability that it has incurred as a result of the judgment of Judge Mackie (“the Mackie judgment”). As between Omega and Aspen there is no dispute as to the facts found in the Mackie judgment.

Omega accepts that the liability for which it seeks indemnity arises under a contract whereby Omega agreed to supply Northern Counties with Category 3 material. The fact that liability arises under a contract does not, however, mean that cover is automatically excluded. The insurance is against “all sums which the Insured becomes legally liable to pay for damages” in connection with accidental loss of or damage to property. Whether or not there is cover depends on whether “such liability would have attached in the absence of such contract or agreement. …”

That raises the question identified in para 32 -017 of MacGillivray on Insurance Law (11^th Ed, 2008) in the following terms:

I agree, at any rate so far as the present clause is concerned. It invites consideration as to what liability would have attached in the absence of a contract; not as to what liability in tort would have arisen in the presence of one; nor as to whether there was liability in tort as well as in contract. The court has to consider what liability there would have been if there had been no contract between Omega and Northern Counties but the facts were otherwise as they were. On those facts there would, in my judgment, have been a liability on Northern Counties in tort if it had been negligent in allowing Category 1 material to be supplied without any warning that it was Category 1 material: an action which would foreseeably cause and did cause actual physical damage to Omega’s property.

Whether there was such a liability (i.e. a liability in tort if no contract had existed) was not something that Judge Mackie decided or had to decide. He could not have done so as part of the ratio of his decision. Given that there was in fact a contract, any decision on that basis would have been wholly hypothetical.

Aspen contends that the Mackie judgment “definitely and conclusively determines the liability of the Claimant for the purposes of establishing whether there is liability under the Policy” (Skeleton argument, para 31).

Mr Andrew Prynne, QC, for Aspen, places reliance in this respect on the observations of Tomlinson J, as he then was, in London Borough of Redbridge v Municipal Mutual Insurance Limited [2001] Lloyd’s Rep IR 545 at 550, in which he said at paras 12-3:

Accordingly, so Aspen submits, Omega cannot go behind the Mackie judgment, which conclusively determines that the liability of Omega was in contract and does not find that there was liability on any other basis. That omission, Aspen submits, is fatal to Omega’s present claim. Omega is bound by Judge Mackie’s findings.

Mr George Leggatt, QC, for Omega, submits that that proposition is incorrect for four reasons.

Firstly, it would mean re-writing the clause so as to read: “unless the judge in the trial which established liability had expressed the view that liability would arise in the absence of contract” or something to that effect.

Secondly, since the question posed by the exclusion is a hypothetical one, on which Judge Mackie could not have reached a binding or dispositive decision, it makes no sense, and the parties cannot have intended, that his failure to make such a decision should conclusively determine whether or not Omega can recover.

Thirdly, in most cases the insured is the person who claims against the insurer, having itself received a claim from a third party. It is the third party’s choice what claims he makes, or does not make, against the insured. It cannot be right, and the parties cannot have intended, that the question of what cover the insured is entitled to under the contract of insurance should be determined by the choice which the third party happens to make. If that were so, it would have the consequence that, as Judge LJ said of an argument advanced in MDIS v Swinbank [1999] Lloyd’s Rep IR 516 at 525 (as to which see paras 41-48 below):

Mr Prynne submits that in the present case it was open to Omega to claim against Northern Counties in tort. That, submits Mr Leggatt, is no answer. Normally it is the insured (i.e. the person in the position of Northern Counties) who claims and he is likely to have had no influence on the nature of the claims made against him. The true interpretation of the contract, which is to be made in the light of the circumstances in which it was made, cannot be determined in the light of the fact that Northern Counties has gone into liquidation and its rights have been transferred to Omega in consequence.

Fourthly, Aspen’s proposition does not address the position if the third party and the insured agree a settlement of a claim. In that case the terms of the settlement cannot be determinative: but, if that is so, there is no reason why there should be a distinction in approach as between settlement and judgment.

In my judgment these submissions are all well founded and Omega is not foreclosed from recovery because of the terms of Judge Mackie’s judgment.

Tomlinson J’s decision would appear, at first blush, to point to a different result. As a first instance decision it is not, despite the eminence of its source, binding on me, and, even if it was, it is distinguishable, both because Tomlinson J referred to what would “normally” be the position and because each case depends on its own facts.

I have, however, to say that I cannot, with great respect, agree with Tomlinson J’s conclusion or with his reasoning. In order to explain why that is so it is necessary to consider a number of decisions which preceded Redbridge.

In West Wake Price v Ching[1957] 1 WLR 45 accountants took out a policy to cover themselves against loss for any claim which might be made against them in respect of any “act of neglect, default or error” arising out of the conduct of their business. The policy contained a King’s Counsel clause whereby the underwriters agreed to pay any such claim without requiring the plaintiffs to dispute it, unless a leading counsel (to be mutually agreed upon) advised that the claim could be successfully contested and the plaintiffs consented to it being contested, that consent not to be unreasonably withheld. A clerk in the firm received money which ultimately could not be accounted for from two of the firm’s clients. The clients issued writs against the firm claiming damages for (i) negligence or breach of duty as accountants; (ii) money had and received; and (iii) money converted by the plaintiffs to their own use. The underwriters refused to indemnify the firm and the plaintiffs sought a declaration that the claims formulated against them were based in negligence and in consequence brought into operation the Queen’s Counsel clause (as it had, by then, come to be known) under which the underwriters were bound to indemnify them.

The actual decision was that, despite the form of the statements of claim, there was in each action really only one claim [as opposed to cause of action], which was primarily in respect of fraud; that to fall within the scope of the policy the character of the claim must not be a mixed one for fraud and negligence but for negligence alone; and, accordingly the claim was outside the scope of the policy. The case is not an authority as to the conclusiveness or otherwise of an action against the insured for any purpose as between the insured and the insurer.

In the course of his judgment Devlin J said (p49):

A little later he said of the obligation in the policy to pay the costs of legal proceedings :

The reference to “when all the facts were known” could mean “when all the facts were established by the judgment against the insured”. But in MDIS v Swinbank [1999] Lloyd’s Rep IR 516 in the Court of Appeal – see para 46 below – the Clarke LJ, as he then was, read the words as meaning that if on the true facts the proximate cause of the loss was fraud which was not covered by the policy, then underwriters would not be liable. It certainly does not appear that Devlin J was saying that any finding at the trial was conclusive.

Devlin J later recorded the submission of Mr Paull for the assured that “in considering whether or not [the claim] is within the policy, that is whether it is in respect of negligence, all that can be looked at is the claim, as formulated by the claimants – the writ and the Statement of Claim”. Of this submission he said “I do not consider that the underwriters are bound by the way in which the claimant has chosen to formulate his claim. I think that underwriters can properly invite the court at this stage to ascertain the true nature of the claim and to make such inquiry as is necessary for the purpose.”

In McDonnell Information Systems Ltd v Swinbank & Others [1999] 1 Lloyd’s Rep 98 (i.e. MDIS v Swinbank at first instance) McDonnell (the Assured) was insured against any claim for which the Assured might become legally liable alleging:

Dishonesty of Employees

McDonnell settled a claim by its customer based on misrepresentation and breach of contract in respect of a contract for the supply of computer software and hardware. At no time did the customer allege fraud. McDonnell accepted that some of its employees had lied about the reasons for delay in delivery but they denied that the claimant had entered into the contracts on the strength of those lies. Mance J held that the policy did not draw a distinction between liability established by a judgment and liability established under a settlement. He cited Devlin J in West Wake in saying that, in a case which goes to judgment the judgment would “in all probability settle the facts in the light of which the question [of causation] could be answered”. In a case compromised short of judgment, it was necessary to ascertain the real basison which the case was compromised and it was not enough to rely upon the manner in which the claim against the assured had been formulated. Accordingly if the insurers were able to show that all or part of any liability established by the compromise was caused by the dishonest, fraudulent or malicious acts or omissions of any of McDonnell’s employees, rather than neglect, error or omission, any cover would have to be found in 2 (b) rather than 2 (a), and if they could also show that such acts or omissions were perpetrated after McDonnell could reasonably have discovered or suspected the improper conduct of its employees, the exception in clause 2 (b) would be potentially applicable to such liability as might be shown to have been proximately caused by such acts or omissions.

In relation to “the real basis on which the case was compromised” Mance J observed:

The appeal was unsuccessful: [1999] Lloyd’s Rep IR 516. Clarke LJ rejected the submission that attention must be directed only to material emanating from the claimant in determining the cause of the loss. As he put it:

Having stated how he read Devlin J’s words in West Wake (see para 41 above) above he held that:

Judge and Peter Gibson LJJ, gave concurring judgments, that of Judge LJ including the passage cited at para 31 above.

As it seems to me in liability insurance such as this the position, generally speaking, lies thus:

The insured must establish that it has suffered a loss which is covered by one of the perils insured against: West Wake; Post Office v Norwich Union [1967] 2 QB 363; Bradley v Eagle Star Insurance Co Ltd [1989] 1 AC 191; Horbury Building Systems Ltd v Hampden Insurance NV [2007] Lloyd’s Rep IR 237,245;

That may be done by showing a judgment or an arbitration award against the insured or an agreement to pay;

The loss must be within the scope of the cover provided by the policy;

As a matter of practicality, the judgment, award, or agreement may settle the question as to whether the loss is covered by the policy because the insurers will accept it as showing a basis of liability which is within the scope of the cover;

But neither the judgment nor the agreement are determinative of whether or not the loss is covered by the policy (assuming that the insurer is not a party to either and that there is no agreement by the insurer to be bound).

It is, therefore, open to the insurers to dispute that the insured was in fact liable, or that it was liable on the basis specified in the judgment; or to show that the true basis of his liability fell within an exception;

Thus, an insured against whom a claim is made in negligence, which is the subject of a judgment, may find that his insurer seeks to show that in reality the claim was for fraud or for something else which was not covered, or excluded by, the policy: MDIS Ltd v Swinbank;

Similarly, an insured who is held liable in fraud (which the policy does not cover) may be able to establish, in a dispute with his insurers, that, whatever the judge found, he was not in fact fraudulent, but only negligent and that he was entitled to cover under the policy on that account.

In Redbridge the policy indemnified the claimant in respect of all sums:

In 1998 and 1999 the Pensions Ombudsman made a series of determinations which obliged Redbridge to pay compensation to 14 of its former employees who had taken early retirement in reliance on misleading information as to their pension entitlement furnished by Redbridge. Under sections 151 (3) and (5) of the Pension Schemes Act1993 the Ombudsman’s determinations were binding on the claimant authority and enforceable in the county court as if they were judgments of the court. The Ombudsman had determined that the employees concerned had suffered an injustice as a result of maladministration.

The insurers refused an indemnity on the basis that the claim fell within an exclusion because the conduct of the former Chief Executive in putting together the early retirement packages had amounted to misconduct in a public office. Tomlinson J held that the insurers would not be entitled to rely on the exception if the Chief Executive was found at any subsequent trial to have been guilty of misconduct in a public office. The Ombudsman’s determinations were findings of legal liability on the part of Redbridge to pay sums as compensation for loss or damage. The liability was a statutory liability imposed in consequence of maladministration and the Ombudsman had no jurisdiction to determine the existence of any other type of liability. He had found that the lack of proper arrangement and failure to exercise proper supervision amounted to maladministration and the insurers had rightly conceded that that must have been attributable to negligence of one or more of Redbridge's employees. But, as Tomlinson J pointed out, the determination made no mention of misconduct in a public office, which would have been an allegation wholly irrelevant to anything which the Ombudsman had to decide.

He then enunciated the propositions set out in the passage which I have cited at para 26 above.

My reasons for disagreeing with Tomlinson J are as follows.

Firstly, if, as between the insured and the insurer, one is concerned only with the basis upon which liability was established by the judgment (or its equivalent) I do not find it easy to see how, in Redbridge, it was possible to say that negligence was established. As Tomlinson J pointed out the Ombudsman only had jurisdiction to decide whether there was maladministration and could not have found that there was negligence, a matter which he had no jurisdiction to decide. True it is that the insurers conceded that the maladministration was due to negligence. But, if what matters was what the judgment established, and only that, the concession was irrelevant.

The judge thought (a) that it did not matter much whether the concession was based on what was in the Ombudsman’s determinations or that, as Mr Edelman QC for the insurers pointed out, on what was contained in the Auditor’s Report; and (b) that in the absence of the admission he would have had no difficulty in inferring negligence from the determinations alone. This approach would appear to allow reliance on the determination and anything necessarily to be inferred from it. If that is so, it is difficult (i) to see why Omega cannot rely on the Mackie judgment as giving rise to an inference of negligence (if it does); or (ii) to reconcile it with Tomlinson J’s observation that:

Next, the judge held that it was normally neither permissible nor possible to look beyond or outside the four corners of the determination itself for the basis of the liability to which the insured had become subject. Impermissibility was said to arise because, if liability has been established by a court or tribunal of competent jurisdiction it was not open to another court in litigation between different parties to say that the basis of the liability was in fact other than that which it was determined to be.

If A successfully sues B to judgment the basis upon which he succeeds will be apparent from the judgment. It will not be open to C to say that A succeeded on another basis. To do so would be to re-write history. But if A succeeds in suing B and B then claims against C, it is open to C to claim that in truth B was not liable to A (either at all or to the same extent), or that, if liable, it was not on the basis decided by the judge or not only on that basis. Unless B and C have by contract agreed something different, a judgment given in proceedings between A and B is neither binding on, nor enforceable by, C in subsequent proceedings between B and C. The authorities to this effect were recently reviewed and applied by the Court of Appeal in Sun Life v Lincoln National[2005] 1 Lloyd’s Rep 606.

Among these authorities was Hollington v Hewthorne[1943] 1 KB 587 where it was held that not even a criminal conviction was admissible at common law to prove negligence. In that case Lord Justice Goddard had said:

Other cases were Young, ex parte In re Kitchin[1881] 17 Ch D 668 and The Vasso [1979] 2 Lloyd’s Rep 412 (a judgment or award obtained by a creditor against the principal debtor does not bind and is not evidence against the surety (Footnote: ³)); Hayter v Nelson Home Insurance [1990] 2 Lloyd’s Rep 265 (absent agreement a retrocessionaire is not bound by an award against reinsurers in favour of original insurers); Sacor Maritime S.A. v Repsol Petroleo S.A, [1981] 1 Lloyd’s Rep 518 (sub-charterers not bound viz-a-viz time charterers by an award in arbitration between owners and time charterers); Mills v Cooper[1967] 2 QB 459 (that which a party to new proceedings was in law estopped from asserting had to be the same assertion as was made “in his previous cause of action or defence in previous civil proceedings between the same parties or their predecessors in title”); Secretary of State for Trade & Industry v Bairstow[2004] Ch 1. None of these cases, insofar as they ante-dated Redbridge appear to have been cited in it.

As to impossibility, the judge said that if the liability is expressed by the primary judgment to have been determined on one basis it is simply not a logical possibility that the imposition of liability in fact arose from different facts and matters. As I have said, it is, of course, true that the liability imposed by the judgment necessarily arises from the facts and matters that the Court finds to be established. But the proposition that that renders it impossible to look outside the four corners of the judgment assumes that, as between the insured and the insurer, the court is not concerned with the true basis or bases of liability of the insured (i.e. the basis, if any, on which the assured ought to or could have been found liable, which may or may not be the same as the basis upon which he was in fact found liable) but only with whether or not the basis of liability specified in the original judgment fell within the cover of the policy.

This, itself, assumes that what the insurer has agreed to cover is only such liability as is found by another court in proceedings against the insured, whether those findings were correct or not, and whether or not the insured could also have been found liable on another basis as well. That is not, however, the nature of the cover which, in the present case is against “all sums which the Insured becomes legally liable to pay”. Whether in truth there is such a liability begs the question as to who shall determine that question. As to that, in circumstances where no cause of action or issue estoppel arises the insured (and the insurer) are both, absent some special agreement, entitled, in my judgment, to have the matter determined by the judge who hears the suit to which they are both party.

Lastly, Tomlinson J referred to Mance J’s reference in McDonnell to Devlin J’s statement that, in a case which goes to judgment, the judgment will “in all probability settle the facts in the light of which the question could be answered” and to the fact that the passage in which he had made this reference had been expressly approved by the Court of Appeal at page 524. A little later he expressed the view that Devlin J’s reference to a claim which, “when all the facts were known”, turned out to be in respect of fraud was a reference to the trial process culminating in a judgment. He does not appear to have been referred to the fact that at page 524 Lord Justice Clarke read the passage quoted quite differently.

In Redbridge Tomlinson J also held that, if it was permissible to prove that a criminal offence had been committed and this was proved, the commission of the offence would not in any case be a cause of the loss: see end of para 14.

A view contrary to that of Tomlinson J is expressed by Aikens J, as he then was, in Enterprise Oil Ltd v Strand Insurance Co Ltd[2006] 1 Lloyd’s Rep 500. In that case the essential question was whether Enterprise was entitled to recover from Strand under a liability policy amounts paid out under a Settlement Agreement with a company called Rowan, and what it had to do in order to be entitled to such recovery. The judge found that Enterprise had not proved its loss from a peril insured against. He considered, obiter, whether, if it had proved its loss, the fact that the settlement agreement did not specifically identify any amount as being for tortious interference with the service agreement (for its liability for which Enterprise had claimed indemnity under the policy) would have prevented recovery.

Aikens J observed that in MDIS all members of the Court of Appeal started from the proposition that:

Aikens J disagreed with the decision of Colman J in Lumberman‘s Mutual Casualty Co v Bovis Land Lease Ltd [2005] 1 Lloyd’s Rep 494 to the effect that it was a precondition for recovery under a liability policy that the insured had ascertained, by virtue of the wording of a judgment, award or settlement agreement itself, the specific cost to the insured of discharging its insured liability.

The primary reason for his reaching that conclusion was because:

I agree. The insured must, equally, as between himself and the insurer, be able to claim that any finding in the judgment is not correct, or to claim that he was also liable on other grounds

Aikens J also pointed out that a judgment, award or settlement between an insured and a third party is not concerned to ascertain the loss of the insured under a liability policy and is irrelevant to those parties. He also observed that if a settlement agreement identified certain heads of claim as referable to certain causes of action that were within the perils insured against that would be evidence that the insured had suffered a loss that was covered by the policy; but, as MDIS Ltd v Swinbank showed, that could be challenged by underwriters and, if so, the question of whether there had been a loss covered by the policy would be decided on evidence extrinsic to the settlement agreement.

The same, as it seems to me, must apply in the case of a judgment. Aikens J himself pointed out that, if Colman J’s principle was correct it must apply to judgments and awards as well as settlements, but that they are not concerned with potential liability under liability policies “and they should not be forced to be involved”.

Mr Prynne submitted that it was possible for the court to determine whether the sums awarded against the insured by an underlying judgment constituted heads of claim falling within the indemnity provided by the insurers as in Rodan v Commercial Union [1999] Lloyd’s Rep IR 495; but not whether there was a basis for liability other than that addressed in the judgment. I agree with the former but not the latter proposition.

In Commercial Union Assurance Co Plc. v NRG Victory Reinsurance Ltd [1998] 2 Lloyd’s Rep 600 the Court of Appeal determined that it would be quite impractical for an English Court trying a dispute concerning the reinsurers’ liability to the reinsured not to treat the judgment of a foreign court as to the reinsured’s liability as decisive and binding, save within the most circumscribed limits which it held to be as follows:

that the foreign court should in the eyes of the English Court be a Court of competent jurisdiction;

that judgment should not have been obtained in the foreign court in breach of an exclusive jurisdiction clause or other clause by which the original insured was contractually excluded from proceeding in that court;

that the reinsured took all proper defences;

that the judgment was not manifestly perverse.

The Court gave effect to this conclusion by holding that it was an implied term of the reinsurance contract in question that, absent any provision to contrary effect, the insurer would treat the decision of a foreign Court of competent jurisdiction as to the liability of the reinsured to his original insured

In reaching that conclusion the Court had rejected Mr Sumption's submission

I do not regard this decision as pointing to any different conclusion in the present case. The fact that the decision of a foreign court was to be treated as binding arose as a result of the preparedness of the Court of Appeal to imply a term of some considerable complexity into the reinsurance contract in question, which provided worldwide reinsurance cover. Parties can always agree, expressly or impliedly, that they will be bound by decisions of particular courts or bodies. The fact that in that case the parties were regarded as having made such an agreement by implication does not affect the present case where no such implication arises, and where the court in question is not, in any event, foreign.

Even if the approach of Tomlinson J in the Redbridge case is correct, it is only the primary facts which are taken to be fixed by the judgment against the insured. He recognised that it is still permissible for the court to draw further inferences from those facts. In Redbridgethe policy covered loss caused by negligent acts of the council’s employees. The Ombudsman had made a finding of maladministration by the council but not that there had been any negligent act by any employee. As noted above, it was conceded that the maladministration was attributable to negligence of the council’s employees and Tomlinson J made it clear that if the concession had not been made he would have had no difficulty in inferring from the Ombudsman’s findings that the failures identified by the Ombudsman must have involved negligence on the part of the council’s employees. (Footnote: ⁴)

Further, the Redbridgecase is not in any event dealing with a situation where the policy expressly requires a hypothetical question to be answered in order to determine whether an exclusion in the policy applies. Answering such a question does not involve saying that the basis of liability is other than that established by the judgment. In order to determine whether this contractual liability is covered, the Policy requires the Court to answer a question (‘would the insured still have been liable in the absence of the contract?’) which could not have been determined in the action against the insured because that action was concerned with the actual facts and not with the hypothetical question posed by the Policy. There is nothing in the conclusions or reasoning of Tomlinson J in Redbridge which prevents the Court from answering such a hypothetical question where the terms of the policy specifically require this – as is the case here.

For all the above reasons, I do not accept that the Mackie judgment forecloses any question as to whether the liability of Northern Counties comes within the cover of the policy. It was no part of Judge Mackie’s function to decide whether it did, much less to decide the hypothetical question as to whether or not, in the absence of a contract, Northern Counties would have come under any liability. In my opinion his judgment established that Northern Counties had suffered a loss and it was then open to either party to show what the cause or causes of the loss was or were. The insurers were at liberty to seek to show that the loss was not (in whole or in part) caused by a peril insured against and Northern Counties to show that it was.

The next question is whether Northern Counties would have been liable in the absence of the contract pursuant to which they supplied the product.

Mr Leggatt submits that the thing speaks for itself. He draws attention to the fact that in Caroll v Fearon [1998] PIQR P416 the Court of Appeal explicitly discountenanced the suggestion that the principle res ipsa loquitur could not apply to product liability. Just as the fact that the product complies with minimum standards set by governmental or other organisations is evidence against negligence in the producer, so, if the product does not comply with such standards, this is evidence of negligence.

There are, he submits, ten factors, apparent from the Mackie judgment, which should lead the court to conclude that there was negligence, i.e. a failure to take reasonable care to avoid damage to property or health:

Northern Counties was in the business of processing meat and operating a cutting plant: para 8.

Those activities were subject to statutory regulation for the protection of public health: para 6.

The regulations contain strict rules to ensure the segregation, identification and disposal of special risk material: para 5.

The strictness of those rules reflects the seriousness of the harm which they were intended to prevent: para 30.

The importance of complying with these rules was underlined by the fact that failure to comply with them constitutes a criminal offence: para 8.

If a company is subject to such rules it must be a part of its business to keep itself informed of any changes of the law and to comply with them; this must, in particular be so, if the consequence of noncompliance is potentially very serious and if it is a criminal offence not to comply.

The change in the law which took place was part of the price for lifting the export ban on British beef. The change took place in the context of publicised negotiations and as part of those negotiations: para 3.

Despite this Northern Counties failed to act promptly to comply with those regulations: para 10.

Such failure continued even after a warning had been given on 8^th June which must have been a warning connected with the implementation of the legislation: para 11 and 14.

As a result Omega was in breach of its obligations to its customers, through no fault of its own, something which Judge Mackie did not say about Northern Counties: para 32.

I agree that the correct inference from the matters set out in the previous two paragraphs is that Northern Counties failed to take reasonable care to see that the product which they were supplying to Omega was both something which they could lawfully supply and safe in the sense that it could be used without unacceptable risk to human health and, more importantly for present purposes, without damaging, by rendering unusable, any Category 3 product with which, as would foreseeably happen, it was mixed. I do not accept the submission of Mr Prynne that they are matters equally consistent with no fault as with fault.

I was at one stage concerned as to whether it could be said that Northern Counties was or may have been, as Mr Prynne submitted, excusably ignorant of the change in the law, in the absence of specific evidence as to how they were or should have been informed of the change. As is apparent from para 6 above the relevant Regulation was made on 10^th April 2006, published in the Official Journal on 29^th April, and in force 4 days later on 3^rd May, having been brought into effect in England & Wales by an instrument made the previous day.

The evidence recorded in the Mackie judgment at para 11 refers to the Meat Hygiene Service having on 8^th June 2006 “identified a problem” at Northern Counties and dealt with it by giving a verbal warning. This may well have been, and I infer probably was, a problem in relation to the supply of material containing vertebral column material from animals aged over 24 months. The same paragraph records that on 19^th June the State Veterinary Service (“SVS”) inspected the premises of Alba to which Northern Counties consigned its meat and concluded that material consigned as Category 3 from Northern Counties may have contained vertebral column from animals aged over 24 months. On 21^st June the SVS wrote to companies, which included Alba and Omega, and the letter to Omega referred to the need for blue stain to be applied to any material downgraded to Category 1. An internal SVS e-mail of 14^th July recorded that Northern Counties had been visited (on 19^th June) ; that they had not been segregating the >24 month vertebral column from the <24 month and had consigned it all as Category 3 material ; but “they have now been enlightened as to the errors of their ways”.

I have, however, come to the conclusion that, in a matter such as this, it was incumbent on a company in the position of Northern Counties, as part of its duty of care, to keep itself informed of the up-to-date position so far as the use of vertebral column material was concerned. The terrible consequences of BSE, both to the health of those affected by it and on the British economy, were matters of public knowledge, as was the fact that a severe regulatory regime was in force to deal with the crisis represented by the so-called “mad cow disease”. The importance of the scheme was reflected in the fact that breach of the regulations was a criminal offence. Whilst the Official Journal and the Statutory Instruments of the United Kingdom are not the easiest material to locate, the law is not a secret. The law with which I am concerned was changed in return for the lifting of the export ban on British beef in negotiations the nature and upshot of which was public knowledge; and the change ought to have been known, if necessary, through appropriate trade organisations, in what is described by Judge Mackie as an industry “in a close knit community of companies that worked in harmony together” to those whose trade it was to deal in processing and cutting meat.

In the absence of any evidence that the change in the law was not widely known and not discoverable by reasonable means, I infer that it ought to have been known and acted upon by Northern Counties.

I have reached this decision without regard to the incidence of the burden of proof. In those circumstances it is strictly unnecessary to decide what that incidence would have been, had I been in doubt. But, in case I am wrong in the finding which I have made, and in the light of the fact that the matter was fully argued, I propose to deal with the question.

The relevant exclusion is that Aspen will not indemnify Omega against any liability arising:

There seem to me two possible views of that clause. The first is that, since it is an exclusion clause Aspen must bring themselves squarely within it and show that the liability of Northern Counties (a) arises under a contract and (b) that such liability would not have attached in the absence of such a contract i.e., so far as the present case is concerned, that Northern Counties was not negligent. The second is that Aspen bring themselves within the clause by showing that the loss arose under a contract and that it is then for Northern Counties (and, hence, now, Omega) to show that the exception to the exclusion applies by showing that Northern Counties was liable in negligence.

The problem of construction is considered in MacGillivray at para 19-007 in the following terms:

Mr Leggatt directed my attention to the decision of Bailhache J in Munro Brice & Co v War Risks Association in which he dissented from a decision of Lush J in Hurst v Evans[1917] 1 KB 352, and laid down certain rules as to the onus of proof in insurance cases to the following effect:

Mr Leggatt submits that these rules may be regarded as applying by analogy to a clause such as the present which has a general exclusion (for “liability arising ...under any contract or agreement”) and an exception from an exclusion ( “unless such liability would have attached in the absence of such contract or agreement”). In that respect I understood him to say that, for present purposes, Bailhache J’s propositions should be reformulated in something like the following manner:

Put more shortly the question may be said to be whether the exclusion covers all contractual liabilities save some specified exceptions (e.g. all contracts except contracts for the sale of goods), in which case the insured must prove that the liability in question arose under an excepted contract, or whether the exception to the exclusion (“unless such liability would have attached in the absence of such contract”) covers every contractual liability, in which case the insurer must show that the liability in question is one which would not have arisen if there was no contract, i.e. in the present case that the insured was not negligent.

The nature of exclusion 3 is that each and every liability which arises under any contract is excluded unless it would have attached anyway; so that the latter qualification is applicable in every case. In the light of the approach taken in Munro Brice, which I accept cannot be definitive for present purposes, and the fact that this is an exclusion clause with an exception, it seems to me that in order for the insurer to bring itself within the exclusion it must show that the liability in question arose under a contract and that the exception is inapplicable. In the present case that would involve showing that, absent a contract, there would have been no liability in negligence.

If that is so, insurers have not established that to be so.

Accordingly, as I hold Omega is entitled to be indemnified by Aspen under the terms of the policy in respect of such legal liability as Northern Counties would have owed towards Omega on the assumption that there had been no contract between Northern Counties and Omega.

The assumption is significant. Omega is not entitled to recover that which it could only recover from Northern Counties in contract. In the present proceedings the question of damages was not explored in any depth nor the extent to which the sum awarded by Judge Mackie would be irrecoverable if the claim was in negligence. As I understood him Mr Leggatt accepted that Omega would not be able to recover the value of the 220 tonnes themselves, that being the “Product” which caused the resulting damage.

Subject to any submissions that Counsel may seek to make on the form of the order I shall declare accordingly.