England and Wales Court of Appeal (Civil Division) Decisions

		Neutral Citation Number: [2002] EWCA Civ 1253
		Case No: A3/2002/0131 QBCMI

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM Jules SHER Q.C.
Sitting as a Deputy High Court Judge

		Royal Courts of Justice Strand, London, WC2A 2LL
		31st. July 2002

B e f o r e :

LORD JUSTICE TUCKEY
and
LORD JUSTICE CARNWATH
____________________

Between:


	HIH CASUALTY & GENERAL INSURANCE LTD.	Appellant
	- and -
	AXA CORPORATE SOLUTIONS	Respondent

____________________

(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)

____________________

Julian Flaux Q.C. and Simon PICKEN (instructed by HFW) for the Appellant
Nicholas HAMBLEN Q.C. and Michael COLLETT (instructed by DJF) for the Respondent
____________________

HTML VERSION OF JUDGMENT
AS APPROVED BY THE COURT
____________________

Crown Copyright ©

Lord Justice Tuckey:

Introduction

1. This litigation made its last appearance in the Court of Appeal a year ago when appeals and cross appeals were heard against findings on preliminary issues of construction. This Court’s decision is reported in 2001 2 Lloyds Law Reports 161. In paragraphs 1 – 52 of his judgment Rix L.J. sets out the background to the dispute which I gratefully adopt and will not repeat in this judgment. In short the dispute is between a reinsured (HIH) and its 80% quota share reinsurers (which include Axa) in respect of pecuniary loss indemnity insurance written by HIH to cover loss by the financiers of two slates of films. HIH have paid their insured over $31 million in settlement of their claims under this insurance but the reinsurers say that HIH were not liable and they are not liable under the reinsurance.
2. One of the defences raised by the reinsurers was that both the insurance and the reinsurance contained warranties as to the number of films which would be made: 6 in the 7.23 slate and 10 in the Rojak slate. This was disputed by HIH and on their initiative was the first of the preliminary issues ordered to be tried. This court decided

The 6 film (or 10 film) slate terms were terms of both insurance and reinsurance contracts and were warranties.

In fact by the expiry of the policy periods (22 July 1999 for 7.23 and 8 November 1999 for Rojak) only 5 and 7 films respectively were made. It followed that HIH and their insured were in breach of warranty. Following the decision of the House of Lords in The Good luck (1991) 2 Lloyd’s Rep. 410 it is now clear that insurance law treats such a warranty as a condition precedent to liability under the contract so from the moment of breach there is no cover for the risk insured.

3. However a breach of warranty may be waived and by amendments to its pleadings made after the order had been made for trial of preliminary issues HIH contended that Axa had done so in this case. Axa maintained that HIH’s claim formulated in this way had no real prospect of success and so applied for it to be dismissed summarily under CPR 24.2(1)(a)(i). This application succeeded before Jules Sher Q.C. sitting as a Deputy High Court Judge and HIH now appeal from his decision with the permission of Rix L.J. Similar applications by the other reinsurers await the outcome of this appeal. HIH contend that the judge misdirected himself on the issue of waiver and that there was another compelling reason for a trial. They try to bolster the latter point by applications to amend their notice of appeal and to adduce further evidence in the shape of one statement and more than 1000 pages of documents.

The relevant facts

4. HIH’s amended pleadings alleged simply that from September 1998 in the case of 7.23 and January 1999 in the case of Rojak Axa had received monthly risk management reports which made it clear that the warranted number of films had not been and would not be made and yet it raised no objection until service of its defences in June 2000 when breach of warranty was first alleged. The pleading went on to say that HIH had relied on this conduct because if Axa had raised objections about the number of films the parties would have resolved those objections by agreement, failing which HIH would have pursued the same objections with their insured or denied liability under the original insurances. The legal consequences of these facts were pleaded in various ways including waiver by estoppel.
5. Having referred to the risk management reports and some of Axa’s comments on them the judge concluded:

So Axa knew in the case of Rojak at least by February 1999 that it was not intended to produce more than 8 films and in the case of 7.23 Axa knew that only 5 films were actually being produced at all material times.

Later in the judgment he said:

The evidence before me comes from the solicitors on each side. There is no evidence from the representatives of HIH and Axa who were involved at the relevant times. Despite this it is quite apparent from the correspondence between the parties that neither side realised that the failure to produce 6 films in the 7.23 slate and 10 in the Rojak slate might have the consequence that cover was wholly and automatically discharged on the grounds of breach of warranty. That realisation came, it seems at or about the time of the defences... The important point to make however is that HIH do not assert that Axa (or indeed HIH themselves) were aware that the reinsurance (and insurance cover) had (or even might have) been discharged as a result of breach of warranty in relation to the number of films produced in each slate. That realisation, as I say, came much later...

6. Before this court HIH relied on some other evidence which was before the judge. First the fact that Axa had called for the risk management reports in August 1998 so that the risk could be kept under regular review by their senior management. They also relied on a statement from Mr Forrest, the principal of Flashpoint, who were the executive production company for the films. This statement said that M. Guillot, Axa’s underwriter, showed considerable interest in these and other films being made by Flashpoint and that during 1998 and 1999 they met from time to time in various parts of the world. At no time did M. Guillot express any concern about the reduction in the number of films being made.

The Judgment

7. In dealing with the law the judge started by recognising that where there is a breach of warranty there is no scope for traditional waiver by election because the insurer is automatically discharged from liability upon breach and therefore has no choice to make. This is why only waiver by estoppel availed HIH, if it did. He then said:

Waiver by estoppel or promissory estoppel, as it is more commonly described, involves a clear and unequivocal representation that the reinsurer (or insurer) will not stand on its right to treat the cover as having been discharged on which the [reinsured] (or insured) has relied in circumstances in which it would be inequitable to allow the reinsurer (or insurer) to resile from its representation. In my judgment it is of the essence of this plea that the representation must go to the willingness of the representor to forego its rights. If all that appears to the representee is that the representor believes that the cover continues in place, without the slightest indication that the representor is aware that it could take the point that cover had been discharged (but was not going to take the point) there would be no inequity in permitting the representor to stand on its rights. Otherwise rights would be lost in total ignorance that they ever existed and, more to the point, the representee would be in a position to deny the representor those rights in circumstances in which it never had any inkling that the representor was prepared to waive those rights. It is of the essence of the doctrine of promissory estoppel that one side is reasonably seen by the other to be foregoing its rights.

A little later the judge said:

I should add that so far as the reinsurance is concerned the point is not so much the awareness of Axa as to its rights to treat the cover as discharged but whether it appeared to a reasonable person in the position of HIH that Axa was so aware and was prepared to forego its rights. That is a gloss that is important and can easily be overlooked in this analysis.

8. The judge recognised by reference to The Superhulls cover case (no. 2) (1990) 2 Lloyd’s Rep 431, 450 that a party can represent that he will not enforce a specific legal right by words or conduct.

He can say so expressly .... Alternatively he can adopt a course of conduct which is inconsistent with the exercise of that right. Such a course of conduct will only constitute a representation that he will not exercise the right if the circumstances are such as to suggest either that he was aware of the right when he embarked on the course of conduct inconsistent with it or that he was content to abandon any rights that he might enjoy which were inconsistent with that course of conduct.

9. The judge records Mr. Flaux Q.C., for HIH then as now, as submitting that it was only necessary to show that Axa were aware of the relevant facts which constituted the breach of warranty. It was not necessary to show that Axa knew as a matter of law that these facts constituted a breach of warranty. In support of this proposition Mr. Flaux had cited the well-known passage from Lord Goff’s judgment in The Kanchenjunga (1990) Lloyd’s Rep 391, 399 in which he contrasted waiver by election and waiver by estoppel. The relevant part of this passage says:

... equitable estoppel requires an unequivocal representation by one party that he will not insist upon his legal rights against the other party, and such reliance by the representee as will render it inequitable for the representor to go back upon its representation. No question arises of any particular knowledge on the part of the representor, and the estoppel may be suspensory only. Furthermore the representation itself is different in character in the two cases. The party making his election is communicating his choice whether or not to exercise the right which has become available to him. The party to an equitable estoppel is representing that he will not in future enforce his legal rights. His representation is therefore in the nature of a promise which though unsupported by consideration, can have legal consequences; hence it is sometimes referred to as promissory estoppel.

10. In rejecting Mr. Flaux’s submission the judge said:

It appears to me that all Lord Goff is doing in the sentence underlined is emphasising that in the case of equitable estoppel what matters is how the representation appears to the representee, as opposed to election where the concentration is upon the knowledge of the representor. It is plain from the passage cited from Lord Goff that the representation in the case of equitable estoppel, must be that the representor “will not insist upon his legal rights against the other party.” It seems to me that this sentence makes it clear that the representation must be that the representor is prepared to forego his legal rights. This is particularly so when this language is compared with Lord Goff’s reference a few lines before to the case of election in which the representor has to make an informed choice “made with knowledge of the facts giving rise to the rights”. At any rate, in my judgment, Mr. Flaux can gain no comfort from the passage he cited from Lord Goff’s speech in The Kanchenjunga

11. The judge thought that this conclusion probably made it unnecessary to consider other issues between the parties but he went on to find firstly that Axa’s conduct did not amount to an unequivocal representation that it would not enforce its rights. He accepted the submission by Mr. Hamblen Q.C. for Axa that silence could only amount to a representation where there was a duty to speak.
12. Next, the judge found that the reliance pleaded by HIH was not what was required. What was required was:

that HIH relied upon a representation by Axa that it would not enforce its right to treat the cover as discharged

and there was no evidence of such reliance.

13. Axa had relied in the alternative on estoppel by convention although as the judge records the point was not pleaded and Mr Flaux did not make any oral submissions about it. In rejecting this way of putting the case the judge said:

I do not think that the failure to establish promissory estoppel can be side-stepped in this way. The essential assumption which might ground relief would have to relate to the future conduct of Axa in not asserting its rights to treat itself as discharged from cover. Consistent with what I have held so far, that assumption was not made at any material time for the simple reason that neither side was aware of those rights at any material time. It would not be right to side-step this weakness by removing the focus from the future exercise of rights and concentrating solely upon what Mr Flaux refers to as an “assumed state of facts”.

14. Finally the judge rejected Mr. Flaux’s submission that there was some other compelling reason for a trial. He noted that it had never been suggested that further material was necessary to decide the preliminary issues which were questions of pure construction. He referred to the fact that HIH had had difficulties in obtaining information from JLT, the placing brokers, and that they had had no opportunity to cross examine M. Guillot, but said:

... none of that is a reason why the court should let these proceedings linger on. There is no reason to believe that any further evidence from those sources is going to cure the fundamental weakness in HIH’s case as I have analysed it. It is not appropriate that the court should keep the actions alive just in case something might turn up at trial.

Amendment and new evidence

15. It is convenient to deal with these applications first. The proposed amendment to the notice of appeal is:

If the additional material (including the witness statement from Steven Mitchell, the underwriter) had been before the learned Deputy Judge, he should have held that HIH had at least a real prospect of success of establishing that the insurance and/or reinsurance did not contain the warranties which Axa contends they contained.

Mr Mitchell was HIH’s underwriter. The documents come from JLT who placed both the insurance and the reinsurance, Flashpoint, and Ince & Co. who advised HIH when these projects were being put together. The documents include JLT’s defence to HIH’s claim against them and documents which show that Axa received premium from HIH in January 1998. We have looked at this evidence without ruling on its admissibility.

16. Mr Mitchell’s statement and the vast majority of the documents are said to go to the question of whether the insurance and/or reinsurance did contain warranties. In short this is an issue which has already been decided by this court and so permission to raise it again should be refused. This means that most of the new evidence is not relevant to any issue on this appeal, quite apart from any question as to whether it could and should have been obtained earlier. As I have said the preliminary issues were ordered to be tried on HIH’s initiative on the basis that they were potentially determinative of many of Axa’s defences. So far as the warranty defence was concerned it was common ground between the parties that it only raised an issue of construction. No suggestion was made at any stage that the preliminary issue should be decided on assumed facts or that its resolution would not finally determine that issue.
17. A few of the documents are said to go to the estoppel issue which is the subject of the appeal. A fax from Flashpoint to JLT of 20 February 1998, copied to the reinsurers is said to show that Axa knew that only 5 films were to be made in the 7.23 slate from that time and there are a few other documents which confirm that meetings between Flashpoint and Axa took place. But again assuming that these documents could not have been obtained earlier, they do not advance HIH’s appeal. The judge proceeded on the basis that at all material times Axa knew that only 5 films in the 7.23 slate were being made. He already knew about the meetings between Axa and Flashpoint from Mr Forrest’s statement.
18. For these reasons I would dismiss the applications to amend the Notice of Appeal and adduce further evidence.

The Appeal

19. It is common ground that in order to establish waiver by estoppel HIH had to show

(a) a clear and unequivocal representation by Axa that it would not insist on its right to treat the reinsurance cover as discharged because of the reduction in the number of films which were made; and

(b) such reliance by HIH on this representation as to make it inequitable for Axa to go back on it.

HIH also had to establish that it had similarly waived the breach of warranty by its insured, but the judge did not make any express finding about this and although this point is the subject of a respondents notice, I do not think it is necessary to consider it further for the purpose of deciding this appeal.

20. Mr Flaux submits that the judge effectively held that you could not have an estoppel of this kind unless the representor knew, not only the relevant facts, but also what his legal rights arising from those facts were. This, he submits, led the judge wrongly to conclude that Axa had not made the required representation because it had not made a representation that it was prepared to forego its legal rights and that HIH’s reliance was not of the kind required because it had not relied on any such representation. Knowledge by Axa or HIH that the reduction in the number of films was a breach of warranty was not required. Axa’s representation was to be implied from their conduct in continuing to act as if they were on risk after they knew of the reduction in the number of films. The only right which this reduction gave Axa was to treat the cover as discharged. By continuing to treat it as on foot without protest or reservation of rights Axa acted inconsistently with this right, alternatively any right which it might have had as a result of the reduction. In these circumstances the representation made by Axa was clear and unequivocal and was not derived only from silence or failure to take the point because Axa continued to be actively involved in this cover after they knew of the reduction.
21. There is no dispute between the parties about the relevance of knowledge to waiver by estoppel and there was apparently no such dispute before the judge. Mr Hamblen Q.C. for Axa does not and did not submit that the representor has to have knowledge of the legal right upon which he will not insist. This is clear from the passages in The Kanchenjunga and Superhulls cited by the judge. Mr Hamblen submits however that the representation must carry with it some apparent awareness of the right upon which the representor will not insist. Mr Flaux did not dispute this and I do not think he could have done so because otherwise the representation would lack the necessary character to found the estoppel. As the judge put it “the essence of the plea must go to the willingness of the representor to forego its rights”. Unless the representation carries with it some apparent awareness of rights it goes nowhere: the representee will not understand the representation to mean that the representor is not going to insist upon his rights because he has said or done nothing to suggest that he has any.
22. What I have said illustrates the difficulty in establishing this type of estoppel when neither party is aware of the right which is to be foregone. A representor who is unaware that he has rights is unlikely to make a representation which carries with it some apparent awareness that he has rights. Conversely a representee who is not aware that the representor has a particular right is unlikely to understand the representation to mean that the representor is not going to insist on that right or abandon any rights he might have unless he expressly says so.
23. It follows I think that knowledge, or rather lack of it in this case is important when one comes to consider whether the estoppel has been established. Nothing in the authorities or the texts to which we have been referred casts doubt on this conclusion.
24. But did the judge go wrong on the question of knowledge? I do not think so. He does not say that to found the estoppel Axa needed to know what their legal rights were. In the second passage which I have quoted in para. 8 he makes it clear that it is not Axa’s knowledge which is important but how their conduct appeared to HIH. I agree. His comment on The Kanchenjunga that “the representation must be that the representor is prepared to forego his legal rights” simply follows what Lord Goff says. The judge is not saying that the representor must know what those legal rights are.
25. Following the passage from Superhulls which I have quoted, Mr Flaux developed his case on representation by saying that Axa had adopted a course of conduct which was inconsistent with its right to treat the cover as discharged in circumstances which suggested that it was content to abandon any rights which it might enjoy as a result of the reduction in the number of films.
26. I cannot accept this argument. Axa’s conduct is best characterised as silence or inactivity, not in the face of a claim but in the context of a continuing contractual relationship where on the information before us it is not possible to say precisely when the breaches of warranty actually occurred. As Chitty (para. 3 – 087) says:

Although a promise or representation may be made by conduct, mere inactivity will not normally suffice for the present purpose since “it is difficult to imagine how silence and inaction can be anything but equivocal”. Unless the law took this view mere failure to assert a contractual right could lead to its loss; and the courts have on a number of occasions rejected this clearly undesirable conclusion.

The only exception to this rule is where the law imposes a duty to speak or act, but no such duty is alleged here.

27. The fact that Axa called for risk management reports says nothing about their reaction to the information in those reports about the reduction in the number of films. It is not alleged that M. Guillot discussed the reduction in the number of films with Mr Forrest and in any event there is no suggestion that anything M. Guillot may have said was or was to be passed on to HIH. Conduct from which it might be inferred that Axa thought they were still on risk does not of itself amount to a representation that they would not enforce a right or rights. None of the cases go this far.
28. So I think the judge was right to conclude that Axa did not make a clear and unequivocal representation of the kind required to found the waiver alleged.
29. I also think that the judge was right about reliance. It was not enough to say that if Axa had taken the point earlier HIH would have been able to do something about it. Some more positive act of reliance was required. HIH needed to show that they had attached some significance to the representation alleged and acted on it. Not surprisingly there was no evidence to this effect. As Clarke, the Law of Insurance Contracts says at (para. 20 – 7C):

... if the insured believes that the insurer is unaware of his breach of warranty, he will find it not entirely impossible but certainly rather difficult to convince the court that he justifiably relied on the insurer’s not pleading a breach, of which the insurer was unaware ...

The more so if the insured is also unaware of his breach.

30. In the alternative Mr Flaux relied on estoppel by convention, although he realistically accepted that if he could not establish waiver it was unlikely that this form of estoppel would come to his aid.
31. The classic formulation of such an estoppel by Lord Denning in Amalgamated Investment & Property Co. Ltd. v Texas Commerce International Bank Ltd (1982) QB 84, 122 is:

When the parties to a transaction proceed on the basis of an underlying assumption on which they have conducted the dealings between them – neither of them will be allowed to go back on that assumption when it would be unfair or unjust to allow him to do so.

This is a very broad definition and Mr Flaux accepted that it would not be enough for him to show simply that Axa and HIH had proceeded on the common assumption that Axa continued to be on risk. For present purposes he relied on what Dillon L.J. said in The Amazonia (1990) 1 Lloyd’s Rep. 236, 251:

The modern formulation of the question to be asked where there is a question of estoppel by convention is that the court should ask whether in the particular circumstances it would be unconscionable for a party to be permitted to deny that which knowingly or unknowingly he has allowed or encouraged another to assume to his detriment.

32. Thus formulated it seems to me that the argument based on the estoppel by convention runs into the same difficulties as waiver. Mere silence, inactivity or failure to take a point cannot be enough to found an estoppel by convention. Furthermore I am attracted by the way in which the judge dealt with this point. In other words if estoppel by convention works in this situation at all the common assumption must relate to Axa’s non-assertion of its right to treat itself as discharged from cover. As neither party was aware of this right there was no such assumption.
33. In reaching the conclusions which I have I have borne in mind that this case was decided summarily against HIH. The question therefore is whether they have a real prospect of successfully overcoming the fact that on this court’s construction of the reinsurance contract they were in breach of warranty. I agree with the judge that they do not. I do so reluctantly because this means they are left at least without being able to recover Axa’s proportion of the reinsurance of this risk after paying out in full on the insurance.
34. The argument that there was some other compelling reason for a trial was only faintly pursued. The basis for it advanced before the judge has now largely disappeared as HIH have now obtained the documents which they did not have before which as I have already said do not advance their case on estoppel.
35. For these reasons I would dismiss this appeal.
36. Lord Justice Carnwath: I agree