England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
MR JUSTICE SIMON Case No: HQ03X02173

		Royal Courts of Justice Strand, London, WC2A 2LL
		03rd November 2006

Lord Justice Scott Baker:

This is the judgment of the court to which each member has contributed.

1. On 26 January 2006 Simon J. gave judgment for six claimants against Royal & Sun Alliance PLC ("the Insurer") in claims under section 1 of the Third Parties (Rights against Insurers) Act 1930 ("the Act"). The Insurer appeals against that judgment in all six cases. It is said that the outcome of this appeal has ramifications for many other cases of a similar nature.

The background.

2. Because of widespread allegations of abuse in residential children's homes in North Wales a Tribunal of Inquiry was set up chaired by Sir Ronald Waterhouse to investigate them. The area covered by the inquiry was North Wales and the period 1974 to 1997.
3. Many of the allegations gave rise to civil claims and the ensuing group litigation was made the subject of a practice direction dated 30 July 1998. The claims were tried in tranches. One of those tranches involved five children's care homes known as the "Bryn Alyn Community" ("Bryn Alyn") owned and operated from 1973 until its financial collapse in 1997 by Bryn Alyn Community Holdings Ltd ("the Company").
4. Fifteen lead cases were chosen to be tried by Connell J. Fourteen of those cases were tried by him between February and April 2001. The Company had gone into voluntary liquidation in March 1997 and took no part in the litigation. But the Insurer attended and participated in the trial as described by Connell J. at paragraph 3 of his judgment:

"…in due course solicitors (for the Insurer)…gave notice to the claimants' solicitors of a potential conflict of interest arising out of an exception clause in the contract of insurance which they had entered into with (the Company). As a result (the Insurer) might be entitled to refuse to indemnify (the Company) against any judgment entered against them in these claims. Accordingly (the Insurer) was added as second defendant and it has contested each claim through leading and junior counsel. It has advanced no positive case, save in the claim by JS, but equally has made few concessions and has required each claimant to prove their claim."

(J.S. is irrelevant to the issues in the present appeal.)

5. On 26 June 2001 Connell J. gave judgment in favour of 13 of the claimants against the Company. He found that there had been extensive abuse at the children's homes owned and managed by the Company. There was an appeal and cross-appeal in which the 13 claimants were successful, see KR and Others v Bryn Alyn Community (Holdings) Ltd and another [2003] QB 1441.
6. Following the appeal the 13 claimants brought proceedings against the Insurer claiming (1) that the Insurer was the Company's liability insurer, (2) that the Company incurred liability to the claimants by the judgment of Connell J. and (3) that in consequence of the Company's liquidation they were entitled to claim directly against the Insurer under the Act.
7. Several of the claims were settled. Two claims failed entirely because all the abuse occurred before 22 August 1976, which was the date from which, as Simon J. held, cover was provided. In the case of two claimants, P.S. and D.J., they succeeded but their damages were reduced by 10% and 25% respectively because part of their abuse occurred before August 1976 when the insurers came on risk. The other four claimants D.K., G.S., G.O'M. and J.M. succeeded entirely. It is the six claimants who succeeded either substantially or in full who are the respondents to this appeal.

The Act.

8. The material parts of section 1 provide:

"(1) Where under any contract of insurance a person (hereinafter referred to as the insured) is insured against liabilities to third parties which he may incur, then

…

(b) in the case of the insured being a company, in the event of a winding-up order being made, or a resolution for a voluntary winding-up being passed, with respect to the company…

if, either before or after that event, such liability as aforesaid is incurred by the insured, his rights against the insurer under the contract in respect of the liability shall… be transferred to and vest in the third party to whom the liability was incurred.

…

(4) Upon transfer under subsection (1)… of this section, the insurer shall … be under the same liability to the third party as he would have been to the insured…"

It is common ground that the respondents cannot be in a better position against the insurer than they would be against the insured.

The policy.

9. The policy of insurance was a Combined Insurances Policy and the relevant wording in the liability section was, from August 1976, as follows:

"A. Indemnity to Insured

1. In the event of…(b) bodily injury to any person not being an employee…happening in the territorial limits and caused in the course of the business the insurers will subject to the limits of liability indemnify the insured in respect of any legal liability incurred in respect of such injury or damage.

D. Exceptions

1…

The Insurers shall not be liable for

8. Injury or damage which results from a deliberate act or omission of the insured and which could reasonably have been expected having regard to the nature and circumstances of such act or omission."

10. There was a change in the policy wording in 1981. The cover remained the same but the exception was broadened to include not just the insured but also partners, directors and managerial employees. Thereafter the material exception read:

"C. Exceptions

This section does not cover liability in respect of…

…

4. Injury damage or financial loss which results from any deliberate act or omission of the insured his partners directors or managerial employees and which could reasonably have been expected having regard to the nature and circumstances of such act or omission…"

11. Simon J. found that from 22 August 1976 the Company was covered under the policy by the Insurer and that the facts did not fall within the exception either before or after its terms were broadened in 1981. In short, the injuries sustained by the respondents were not caused by the deliberate acts of the insured i.e. the Company or, latterly, the insured, its directors or managerial employees.
12. Because this appeal raises the question when the acts of an individual can be attributed to a company it is necessary to describe in a little detail the set up with regard to the Company, the homes and the key individuals.
13. From 1969 until 1990 John Allen operated a number of care homes for children. They were largely, but not entirely, in North Wales. They became known after the first and main home as Bryn Alyn. Bryn Alyn ran five homes, Bryn Alyn Hall, Cotsbrook Community Hall, Pentre Saeson Hall, Bryntirion Hall and Gatewen. In 1972 the Company was incorporated and in 1973 it took over the operation of the business from John Allen.
14. The Company operated successfully for over 25 years before ending in financial failure in 1997. It employed a large number of staff and at times made a significant profit. Its stated aim was to provide an alternative to the strict discipline and training regime of approved schools for children. The majority of the children in the Bryn Alyn homes had been placed in the care of local authorities.
15. In 1995 John Allen was convicted of six offences of indecent assault upon young male residents between 1972 and 1983 and sentenced to six years imprisonment. John Allen was a director of the Company from the outset until he resigned in October 1991.
16. Lest there is any confusion about the name of the Company the brief history is as follows. Bryn Alyn Community Ltd was incorporated on 10 November 1972 and started trading on 1 July 1973. On 1 May 1996 Bryn Alyn Community (Holdings) Ltd was formed as a wholly owned subsidiary of Bryn Alyn Community Ltd. On 9 July 1996 the name of Bryn Alyn Community Ltd was changed to Bryn Alyn Community (Holdings) Ltd and vice versa. Bryn Alyn Community Ltd was put into voluntary liquidation on 6 March 1997. Bryn Alyn Community (Holdings) Ltd was compulsorily wound up in 1998. For the purposes of this appeal the changes of Company identity are of no significance and we refer throughout this judgment simply to "the Company".
17. John Allen set up his first children's home in Holywell in the mid 1960s. This was an after-care facility for borstal boys who had been released on licence. He established the Bryn Alyn Community, which he initially ran as a sole trader, in 1968. He first took a lease of Bryn Alyn Hall but bought the freehold in 1972, incorporating the Company soon afterwards. From the outset he was majority shareholder and chief executive of the Company. He remained majority shareholder until 1989 and chief executive until he resigned in October 1991.
18. The undisputed evidence of David Evans, who worked at Bryn Alyn from 1968 until August 1983 and then again from 1985 was:

"John Allen devised all the original systems relating to childcare that were used at Bryn Alyn until he took a less involved role with the day-to-day running of the homes in the late 1980s. John Allen devised the vast majority of the original internal and external documentation ranging from policy and procedure documents to booklets advertising the facilities that Bryn Alyn could offer. Responsibility for implementation of the policies was devolved to other senior staff as subsequently reflected in the comprehensive practice handbook. At all times until the late 1980s, John Allen was the man in charge. He treated Bryn Alyn as his own property. He came and went as he pleased. He chaired all the board meetings and set the agendas. At all times, John Allen's decision was final. He remained the person in charge of operations until he ceased to be the majority shareholder in 1989."

19. When the Company was incorporated there were two directors, John Allen and Hywel Jones, an accountant. Each held 1 share. The first annual return showed that John Allen had been issued with a further 14,999 shares, Ernest Allen, his father, 3,000 shares and Thomas Askew, his uncle 2,000 shares. In December 1974 a further 4,780 shares were issued to John Allen and a further 4,999 to Hywel Jones. In 1976 John Allen acquired Hywel Jones's shareholding. In 1980 John Allen transferred 2,000 shares to his wife, Norma. Various other share transfers took place from time to time and there was a number of changes of director including members of the Allen family. However, at all times material to this appeal, John Allen was both managing director and majority shareholder.
20. Of the five homes, Cotsbrook was in Shifnal, near the Shropshire/Staffordshire border, the other four in North Wales in a cluster between Wrexham and Mold.

The individual respondents.

21. We turn next to the abuse, as found by Connell J., suffered by each of the respondents.

D.K.

22. D.K. was placed at Pentre Saeson Hall on 7 June 1979 and remained there until 29 January 1980 when he was moved to Cotsbrook Hall where he stayed until shortly before his discharge from care. He was then returned briefly to Pentre Saeson Hall. His discharge was on 12 July 1982 at the age of 17. Connell J. found that when, aged 14, he arrived at Bryn Alyn he was a child who needed specialist care and understanding from adults experienced in problem cases. Unhappily the regime at Bryn Alyn was not based on sympathy, trust and mutual respect.
23. The judge found that it was probable the burden of D.K.'s evidence was accurate. It was that the regimes at both Pentre Saeson Hall and Cotsbrook Hall were such that physical violence by the staff to the residents was part of everyday life. He was bullied by an older man called Arthur, who struck him and got other residents to assault him. He was nearly choked by someone called Terry. At Cotsbrook Jeff Davies was in charge and although Davies helped him a lot to overcome his problems he also assaulted him. "He hammered me and even head butted me once in the face. He really hammered me." The assaults were regular and in full view of other members of staff. Likewise he was assaulted by Del Jones, Dai Jones, Geoffrey, Dave Lynn ("Bear"), David Challinor and Alan French. The situation was so bad that he tried self harm because he had had enough. The regularity of the physical violence was how it differed from what he had experienced in other places. The judge referred to other evidence including evidence about the "Top Dog" system in which older children ruled younger children by the use of force. The judge described D.K. as the victim of serious physical abuse over a period of three years. However, not all of his damage was attributable to his experience at Bryn Alyn. Following adjustment by the Court of Appeal the figure awarded to him for general damages was £35,000.

G.S.

24. G.S. was at Gatewen Hall for about 9 months from January 1989. Gatewen Hall had just over 20 residents who were rather older than G.S. who was 15; they were over 16. Connell J. rejected his evidence of being assaulted on a regular, almost daily, basis. But he said the regime at Gatewen was not appropriate to his needs and violence should not have been used on him to the extent and with the frequency that it was. He found he had been assaulted by Peter Steen, albeit the frequency was exaggerated. He also accepted he had been assaulted by Steve Ford, the individual in charge, after he had stolen a motor car for a joy ride. The judge concluded that the damage for which the Company was responsible was minor in the overall picture relating to him. He was awarded general damages, after adjustment by the Court of Appeal, of £12,000.

D.J.

25. D.J. arrived at Bryn Alyn on 27 March 1975 as a troubled and aggressive child. He was in the care of Bryn Alyn at either Bryn Alyn Hall or Bryntirion until 6 January 1981 i.e. for 5 ¾ years between the ages of about 10 and 16. He claimed to have been both sexually and physically abused at Bryn Alyn. The sexual abuse began shortly after his arrival when he was awoken by two men who carried him downstairs. There was a staff party and he was placed before the assembled company in his underpants. John Allen pulled his pants down in front of everyone and sat him on his knee. Thereafter there developed a sexual relationship with Allen which began with indecent touching by Allen and developed over time to buggery. He was also buggered by Kenneth White (senior) and became known as "John's boy," both by other resident children and the staff. Allen attempted to kiss him when in drink and offered him for sexual favours to friends by whom he was also assaulted and buggered. In exchange for these he was given preferential treatment by Allen as well as expensive presents and money. He viewed Allen as his substitute father. The judge accepted that the broad thrust of his evidence relating to sexual abuse was correct.
26. As to physical abuse, the judge again accepted his evidence. He was slapped, punched, kicked, hit with a stick, made to take cold showers and scrub floors and to run along the road with no shoes on. The perpetrators were Peter Steen, Gareth (who Jones said would punch you as soon as look at you) and Keith Evans (known as "Beef"). The judge found Keith Evans did his best to be fair and consistent but did assault Jones from time to time. Steen was prepared to use violence if he deemed it necessary. Connell J. did not distinguish between Jones' time at Bryn Alyn and Bryntirion; nor is there any finding about the time he spent at each. He awarded him general damages which, after adjustment by the Court of Appeal, amounted to £50,000. However, Simon J. reduced the total award by 25% because of the pre 1976 period when the insurers were not on cover.

G.O'M.

27. G.O'M was placed at Pentre Saeson on 3 January 1984 at the age of 13 and remained there for just over 2 years until 7 February 1986. He complained that he was regularly sexually abused and buggered by John Allen but also physically abused by the staff in general, particularly Alec Rodder and on one occasion by another former resident. John Allen was, at the time, the principal at Pentre Saeson. The abuse was initially touching of the genitals by John Allen and later enforced masturbation of Allen on about 30 occasions, usually in a motor car. He was given money for this. There was a late allegation of buggery by Allen i.e. made very shortly before the hearing before Connell J. All this, the judge accepted and his general damages, after adjustment by the Court of Appeal, were assessed at £45,000.

P.S.

28. P.S. lived in Bryn Alyn from 12 April 1976 until 17 September 1979, a period of approximately 3½ years between the ages of 13½ and nearly 17. P.S. lived either at Bryn Alyn or Bryntirion. He claimed that during his time at Bryntirion he was physically abused by members of the staff in particular the principal John Allen. There were two specific incidents when Allen assaulted him, one when he knocked some paint over a new carpet in the Allen's home at Bryntirion and the other when he had wrongly obtained a discount on a railway ticket and been reprimanded by the transport police. On each occasion he was hit by Allen with the heel of his hand on his chest about a half a dozen times. The judge found that Allen used unjustifiable violence on P.S. from time to time, including on the occasions described. The judge went on:

"However the main burden of the claimant's case relates to the system which was in general operation during the time that he lived in the Community. He describes the atmosphere in Bryn Alyn as such that you had to fight your way or die. He says that the staff were vicious, and in particular Keith Evans or 'Beef', and that other residents were violent towards him. The staff encouraged the "top dog" regime whereby older children were used to discipline the younger children. His case is that violence was an every day occurrence in the Community and he further recalls John Allen giving particular consideration, together with expensive gifts, to his favourite children."

29. He concluded that in summary there was physical abuse by staff to residents including P.S. that ought not, to have been permitted and he was awarded general damages, after adjustment by the Court of Appeal, of £30,000. Simon J. reduced the damages by 10% because some of the abuse occurred before the insurers were on cover.

J.M.

30. J.M. went to live at Pentre Saeson Hall on 2 October 1985 and remained there until 30 May 1986. He then went home before being returned to Pentre Saeson on 8 January 1987 where he remained until June 1989. In all he lived at Pentre Saeson Hall for rather over 3 years. There was a particular difficulty for the judge in his case because he had been seriously sexually abused before he ever went to Pentre Saeson Hall. Further, after he left Pentre Saeson Hall, he met a homosexual by whom he was subjected to further abuse.
31. The abuse alleged at Pentre Saeson was both sexual and physical. Connell J. regarded the former as the more important. John Allen indecently assaulted him while playing snooker at Allen's home. Matters progressed to buggery. J.M. used to meet Allen in the Red Lion public house and then he would be taken either to Allen's home or to a small park near Holt. He would then be assaulted and buggered. He also claimed to have been indecently assaulted, photographed in indecent positions and buggered by Ken Taylor who was the person in charge of Pentre Saeson. The judge found the sexual abuse proved but said the only physical abuse proved (kicking and bullying by care workers at Pentre Saeson Hall) was of an insignificant nature when compared to the proven sexual abuse. His damages were assessed, after adjustment by the Court of Appeal, at £37,500.

The basis of the Company's liability found by Connell J.

32. Claims against abusers personally can only be brought in assault where the limitation period is a non-extendable one of 6 years, see Stubbings v Webb [1993] AC 498. The reasoning and decision in Stubbings v Webb were criticised by this court in A v Hoare [2006] 1WLR 2320, but it remains the law. The respondents' claims or potential claims in assault were thus statute barred, even had the abusers been worth pursuing. Accordingly, the claims against the Company were brought in negligence where the limitation period is 3 years but extendable. They were brought and heard before, but decided after, the decision in Lister v Hesley Hall [2002] 1 AC 215. That is an important case because before it was decided a deliberate criminal act by an employee of a company was always regarded as falling outside the scope of vicarious liability, see e.g. Trotman v North Yorkshire County Council [1999] LGR 584.
33. The issue in Lister was whether, as a matter of legal principle, the employers of the warden of a school boarding house, who sexually abused boys in his care, might depending on the particular circumstances be vicariously liable for the torts of their employee. Lister changed the law. Henceforth vicarious liability could be established when the abuse was "closely connected" with the abuser's employment. But, submits Mr Faulks Q.C., who has appeared on behalf of the Insurers, Lister leaves open the question vicarious liability for what, assault or negligence or both. I shall return to Lister later. The issue in the present case is different; it is whether the acts of the abusers can be regarded as deliberate acts of the insured for the purpose of the relevant policy exclusion.
34. The respondents' claim was not advanced before Connell J. on a Lister basis i.e. vicarious liability for the abusive acts of individual employees. One reason was, no doubt, that it would have run head on into the exclusion clause in the policy when claiming indemnity from the Insurers. Another was the unextendable six year limitation period for trespass to the person. Instead the case against the Company was advanced as one of systemic negligence. Connell J. summarised his findings thus. Both sides relied upon them and they are referred to in the judgment of Simon J.:

"18. Now in the 21^st century a good deal more is known about child abuse than was known in 1973 when the oldest of the claimants went to live in the Community. Nonetheless any organisation to whom the care of problematic children was regularly entrusted must be taken to have known that certain basic skills and understanding would be required of those caring for the children. The Community Homes Regulations 1972 which applied to community homes provided by local authorities required proper provision for the care, treatment and control of children accommodated there, which control was to be maintained on the basis of good, personal and professional relationships between staff and children. In my view equivalent standards were reasonably to be expected of privately run community homes. Further the first defendants set themselves standards which they believed to be appropriate (see for example the Bryn Alyn Care Information Booklet No. 34/1978 which set out guidelines for the standards and quality of care). The aims of Bryn Alyn for the children in their care were, inter alia, "building up their self image, increasing their self discipline and enabling them to make a better adjustment to present day society". The first defendant recognised that each living unit within the organisation would need to establish a clear policy and procedure to ensure that the right persons are selected as residents and that the reception into care of each child is carried out sensitively. All workers must have a real concern for the individual personalities and idiosyncrasies of the residents, an acceptance of their problems and weaknesses and a belief in their strong points as a potential for growth and change. Where at all possible no action should be taken that is likely to diminish the child's self respect or to humiliate him in his own eyes or in the eyes of others. Bryn Alyn was opposed to the use of physical punishment, which was seen as contrary to the total caring process. The possible need for the physical restraint of an aggressive or uncontrolled child was foreseen. Supervision sessions for junior grass roots workers should not be less than two per week for the first 12 months. The document entitled "Bryn Alyn Community – The Alternative" shows clearly the profile of the community, the range of services available and the philosophy of the first defendants. It included the assertion, "The corner stone of the whole developmental process is rooted in the formation of good relationships between adult workers and the young people in their care".

"19. In the result I conclude that on the evidence placed before me these worthy aspirations were not met in very many respects. First the staff were not trained, nor experienced in dealing with damaged children. Keith Evans came via the Army and a civil engineering company to Bryn Alyn in 1974, as it happened he had a certain aptitude for dealing with difficult children, and over the 24 years that he worked in the Community he developed that aptitude through experience rather than training. He said of himself, "In 1974 I had no experience of dealing with young people. I had been a corporal in the Army and I had two children". He described the training in the Community in his early days as, "pathetic", although it improved considerably over time. The employment contract was "absolute rubbish". He was shocked by the violence and addictive tendencies of the children in his care. The training offered was "in service" training only which was very poor until the mid 1980s, the complaint system started off ok, but fizzled out. Nonetheless he said, and I accept, that a lot of good things were done in the Community. Peter Steen came to Bryn Alyn from his own steel erecting business. He had had no formal training for working with difficult children. No training was available until Steve Elliot started some in the 1980s. John Jeffreys had worked for Rolls Royce before working in a local authority children's home and a multi racial youth club for about 12 months leading up to joining the first defendants in the 1970s. He was not trained at Bryn Alyn. He found you could not get hold of senior staff if you had a problem and staff morale was not good. In my view the probability is that these were three of the better care workers employed by the first defendants. In the light of all the evidence I have heard, and despite the denials of unnecessary violence by the three witnesses just referred to, I am satisfied that the homes run by the first defendants were overcrowded with too many difficult children; that the staff were expected to deal with such children with no adequate instruction or training; that the staff were so busy dealing with day to day problems that they failed to heed obvious warning signs about the principal, John Allen (e.g. John Jeffreys said that he knew the children called Allen a bender, a brownie, a queer; Peter Steen knew Allen bought presents for his favourites; Keith Evans heard references to children "bending down for John") and that the use of violence on residents, although forbidden in the first defendants literature, was common place and often excessive; not so much out of malice but because the untrained and uninformed staff could not cope without it. I have no doubt that many of the children living in the Community presented real problems, and could be violent. However the use of the "Top Dog" system, whereby the strongest children were used to control other children by force if necessary was entirely inappropriate; and the evidence satisfies me that the use of violence by staff and by fellow residents on these children was far too frequent and on occasions excessive. Keith Evans specifically denied that this was so. In repeating his denial, I do not believe that he was intentionally misleading the court. Rather he was so occupied with producing pragmatic solutions to difficult situations that over time he had come to forget what had actually occurred on a regular basis. The staff employed by the first defendants failed to prevent other staff from resorting to violence as a matter of course; they failed to keep a proper ear open for indications of improper practice; and they tolerated practices such as the "Top Dog" system which were clearly inappropriate. In passing I observe that the imposition of the punishment called the Scrubs (whereby the miscreant had to dress in T shirt, shorts, and shoes without socks and scrub the floor) was not in my view inherently improper; since some deterrent punishment was necessary from time to time; but the frequency of its automatic use, e.g. for absconders, in my view was inappropriate when some of those punished had absconded for reasons of fear or despair, rather than for the fun of it. Humiliation of a miscreant may be unavoidable at times; but its wholesale automatic use had no place in a properly run system of discipline. In summary the evidence that I have heard supports the conclusions of the Waterhouse Tribunal at paragraphs 21.131, 21.132, and 21.133. Had the staff been properly selected, trained and supervised, I also conclude that they would have questioned John Allen's use of favourites, his giving of gifts to particular children, and his frequent night time presence around the dormitories; with the result that many of his acts of sexual abuse would have been prevented. In summary the system of care operated in the first defendants Community was neither adequate nor properly organised and supervised. In this way the first defendants in my view are proved to have been negligent."

35. Connell J. went on to point out that the assaults themselves would not avail the respondents because any claims based on trespass to the person were statute barred, the unextendable six years limitation period having passed. He said that in the light of Lister an employee guilty of an assault (sexual or physical) was not acting outside the scope of his employment so as to preclude vicarious liability on the part of the Company. Accordingly, he said the Company was vicariously liable and insofar as such conduct could properly be described as negligent the Company could not escape liability on the basis that the perpetrator was acting outside the scope of his employment. But, as he said, the assaults were deliberate as apposed to negligent acts. He said at para 21:

"In the case of sexual assaults which I have found proved it is difficult to see how they can form the basis of vicarious liability in negligence. In every case the sexual assault was a deliberate act, not a negligent one and the assault could properly form the basis for an allegation of breach of duty based on trespass to the person."

36. Thus it is clear that the basis of the judge's finding against the Company was systemic negligence in the operation of the homes and emphatically not vicarious liability for the sexual and physical assaults by John Allen and others. The critical question under the policy does not, however, depend upon the basis of the legal liability of the Company to the respondents. It is the extent to which, if at all, the activities of the abusers can, in the case of each respondent, be regarded as the "deliberate acts of the Insured" before 1981, or the deliberate acts of "the Insured, its directors or managerial employees" after 1981. If they are to be so regarded it must follow that the Insurers cannot be liable since they have expressly excluded liability for such acts. The fact that the Insured may also be vicariously liable for the negligence of its employees, as Connell J. found, is nothing to the point because:

"if the loss is caused by two causes operating at the same time and one is wholly expressly excluded from the Policy, the Policy does not pay"

see Wayne Tank and Pump Co Ltd v Employers Liability Assurance Corporation Ltd [1974] 1 QB 57 per Roskill L.J. at P 75 D, followed in The Miss Jay Jay [1987] 1 Lloyds Rep 32, 40 by Slade L.J. and in The Aliza Glazial [2002] 2 Lloyds Rep 421, 231 by Potter L.J. This was not contested by Mr Robert Owen Q.C who has appeared for the respondents.

The decision of Simon J.

37. Simon J. referred to the finding of systemic abuse by Connell J. and his further finding that each individual's injury and damage resulted from that negligence on the part of the Company, its servants or agents. He noted that there was no finding that any injury or damage had resulted from any deliberate act or omission in respect of which liability attached; the claim had succeeded on the basis of systemic neglect. In short, the damage was caused not by any deliberate act or omission of the Company but by systemic negligence and the exception clause in the policy did not therefore bite. The exception clause was confined to injury or damage resulting from a deliberate act or omission of the insured; it was not concerned with the deliberate acts or omissions of servants or agents who might have been acting in the course of their employment and in respect of whose acts or omissions (deliberate or otherwise) vicarious liability might attach, (para 57).

The Insurer's case.

38. The Insurer runs two main arguments. The first is that the abuse consisted of deliberate acts of abuse, (whether or not there was negligence in permitting them to take place). It was part of a regime which, on Connell J's findings allowed the abuse to take place. This was the responsibility of John Allen who was at all material times chief executive, a majority shareholder and a director of the Company. In those circumstances the abuse was by the insured.
39. The second argument is that in the alternative the abuse was perpetrated by John Allen and other directors or managerial employees of Bryn Alyn whose acts or omissions should be attributed to the Company and thus regarded as abuse by the insured. If there was any doubt about such attribution it was resolved by the 1981 change of wording in the policy.

The first argument.

40. The thrust of this argument is that all of the abuse, whichever individual it was perpetrated by, stemmed from the nature of the regime that existed at Bryn Alyn. It was therefore intentional and fell within the policy exception in that the injury or damage was suffered in consequence of or resulted from a deliberate act or omission of the Insured.
41. Simon J. said that the findings of Connell J. were a significant difficulty in the way of the Insurer's case, a fact, he said, implicitly recognised in para 11.2 of the Insurer's defence where it said:

"John Allen was the [Company's] "alter ego" and by his own personal acts of omissions he devised and implemented or otherwise established a regime in homes operated and managed by the Assured which involved the deliberate infliction of physical and/or sexual and/or emotional abuse on the children (including the Claimants) who resided there. (Emphasis added)."

42. The judge found there was little, if any, support for this allegation in the findings of Connell J; a fortiori the Insurer's submission that the regime "enabled" or "was calculated to permit" abuse to occur. The argument of Mr Faulks, runs thus: Allen's abuse stems from the Company; Allen ran the Company; the regime was rotten to the core. Allen knew exactly what was going on and it was his deliberate choice to permit such a state of affairs. Therefore the Company is fixed with all of the abuse within the meaning of the exception to the policy.
43. Mr Faulks expanded on this contention in his skeleton argument, referring to numerous other passages in Connell Js judgment but, having been given an indication of the court's provisional view, concentrated on his second argument in his oral submissions.
44. We agree that the Insurer is fixed with the finding of Connell J. The evidence simply does not support the Insurer's contention. In our judgment when one comes to the question of attribution it is necessary to look at the individual acts of abuse in each case to see whether the exception to the policy bites.

The second argument.

45. The Insurer's second argument is that the individual acts of abuse were perpetrated by John Allen and other directors or managerial employees of the Company whose acts or omissions should be attributed to the Company and thus regarded as abuse by the insured. Any doubt about attribution in respect of abuse by others than Allen was, it is submitted, resolved by the change of the policy wording in 1981.
46. Simon J. made this finding at para 44 of his judgment:

"There was no finding that the injury or damage resulted from the deliberate act or omission on the part of the assured, its servants or agents, in respect of which liability attached. On the contrary the Judge referred back to the earlier generic findings of neglect in relation to the adequacy of the system, its organisation and supervision; and damages were ordered to be paid on the basis of the neglect and not for the infliction of deliberate harm."

47. In support of his view that there was no basis for saying the cause of the loss was the deliberate act or omission of the Company, he cited Connell J's analysis of D.K.'s case:

"I am satisfied that inexperienced staff, inadequately supervised, accepted a regime in which the use of violence by way of pushes, slaps, cuffs and punches was a regular occurrence. Accepting as I do that D.K. was a complex and difficult child who was himself capable of significant physical violence, nonetheless he was the victim of serious physical abuse over 3 years and at the time in his life when he needed to be able to trust adults and be treated sympathetically by them. He suffered in this way because of faults in the system which was operated in the Community, in which the safety and wellbeing of some of the residents were neglected on a regular basis."

48. He concluded that although the wording changed in 1981 it did not significantly change the terms of the policy, the Insurer still had to show that deliberate acts or omissions were committed by those acting within an operational role and exercising managerial responsibility. He said:

"Again I am not satisfied that the Insurer can bring itself within the exception. At the root of the claim is the negligence which permitted deliberate acts of abuse to occur; but the acts of abuse were not the acts of the Company. The precise status of the abuser within the Company is not the material issue; it is the role of the abuser which is significant. In each case they were not acting in a managerial role, they were acting for their own ends or, as Mr Owen QC put it, 'selfishly and gratuitously'."

49. We cannot accept this analysis. In our judgment what is critical is the true meaning of the policy and in particular the exception clause. If possible the exception clause should be given its natural meaning. The policy covers bodily injury to persons other than employees caused in the course of business. The exception focuses on injury or damage resulting from a deliberate act or omission of the insured. Nothing, we think, turns in this case on the words "and which could reasonably have been expected having regard to the nature and circumstances of such act or omission." There is not, on the face of it, any reason to read the exception, as argued by Mr Owen, as applying only to acts done in the course of the operation or management of the Company.
50. The starting point is to look at the injury or damage. In other words what happened to the abused individual. It is that for which the Insurer is not liable if it resulted from a deliberate act or omission of the insured. The critical question is whether the person who caused the injury or damage is to be equated with the Company and therefore the insured within the meaning of the policy. In this regard it is necessary to look at the findings of Connell J. in respect of each respondent.

The principle of attribution.

51. The court is concerned here with attribution, a principle that is quite distinct from the doctrine of vicarious liability. There is a clear distinction between policy rules governing vicarious liability and the rule of attribution whereby as a matter of law an act or intention of an individual is to be treated as the act or intention of a company. That is not to say that help cannot be obtained from looking at whether the Company is vicariously liable for the act in question of its employee. For if in a case such as the present there is no vicarious liability it is difficult to see how there could be attribution. What then is the principle upon which an act of an individual is attributed to a company? In Lennard's Carrying Company Limited v Asiatic Petroleum Company Limited [1915] AC 705 the House of Lords was concerned with the construction of s. 502 of the Merchant Shipping Act 1894 and "any loss or damage happening without (the ship owner's) actual fault or privity". Viscount Haldane L.C. said at p.713:

"It must be upon the true construction of that section in such a case as the present one that the fault or privity is the fault or privity of somebody who is not merely a servant or agent for whom the company is liable on the footing of respondeat superior but somebody for whom the company is liable because his action is the very action of the company itself. It is not enough that the fault should be the fault of a servant in order to exonerate the owner, the fault must also be one which is not the fault of the owner, or a fault to which the owner is not privy…."

52. In HL Bolton (Engineering) Co. Ltd v TJ Graham and Sons Ltd [1957] 1 QB 159, 172 Denning L.J. said:

"A company may in many ways be likened to a human body. It has a brain and nerve centre which controls what it does. It also has hands which hold the tools and act in accordance with directions from the centre. Some of the people in the company are mere servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others are directors and managers who represent the directing mind and will of the company, and control what it does. The state of mind of these managers is the state of mind of the company and is treated by the law as such. So you will find that in cases where the law requires personal fault as a condition of liability in tort, the fault of the manager will be the personal fault of the company. That is made clear in Lord Haldane's speech in Lennard's Carrying Co. Ltd v Asiatic Petroleum Co. Ltd. So also in the criminal law, in cases where the law requires a guilty mind as a condition of a criminal offence, the guilty mind of the directors or the managers will render the company itself guilty. That is shown by Rex v I.C.R. Haulage Ltd., to which we referred and in which the court said:

"Whether in any particular case there is evidence to go to a jury that the criminal act of an agent, including his state of mind, intention, knowledge or belief is the act of the company… must depend on the nature of the charge, the relative position of the officer or agent, and the other relevant facts and circumstances of the case."

So here, the intention of the company can be derived from the intention of its officers and agents. Whether their intention is the company's intention depends on the nature of the matter under consideration, the relative position of the officer or agent and the other relevant facts and circumstances of the case."

53. In Tesco Supermarkets Limited v Nattrass [1972] AC 153 the House of Lords had to consider criminal liability under the Trade Description Act 1968. Lord Reid said at 171D:

"Where a limited company is the employer difficult questions do arise in a wide variety of circumstances in deciding which of its officers or servants is to be identified with the company so that his guilt is the guilt of the company.

I must start by considering the nature of the personality which by a fiction the law attributes to a corporation. A living person has a mind which can have knowledge or intention or be negligent and he has hands to carry out his intentions. A corporation has none of these: it must act through living persons, though not always one or the same person. Then the person who acts is not speaking or acting for the company. He is acting as the company and his mind which directs his acts is the mind of the company. There is no question of the company being vicariously liable. He is not acting as a servant, representative, agent or delegate. He is an embodiment of the company or, one could say, he hears and speaks through the persona of the company, within his appropriate sphere, and his mind is the mind of the company. If it is a guilty mind then that guilt is the guilt of the company. It must be a question of law whether, once the facts have been ascertained, a person in doing particular things is to be regarded as the company or merely as the company's servant or agent. In that case any liability of the company can only be a statutory or vicarious liability."

He added at 171F:

"……Normally the board of directors, the managing director and perhaps other superior officers of a company carry out the functions of management and speak and act as the company. Their subordinates do not. They carry out orders from above and it can make no difference that they are given some measure of discretion. But the board of directors may delegate some part of their functions of management giving to their delegate full discretion to act independently of instructions from them. I see no difficulty in holding that they have thereby put such a delegate in their place so that within the scope of the delegation he can act as the company. It may not always be easy to draw the line but there are cases in which the line must be drawn. Lennard's case [1915] AC 705 was one of them."

54. In El Ajou v Dollar Land Holdings plc [1994] 2 ALL ER 685, 695j Nourse L.J. having referred to Lennard's case said:

"The doctrine attributes to the company the mind and will of the natural person or persons who manage and control its actions. At that point, in the words of Millett J ([1993] 3 ALL ER 717 at 740): "Their minds are its mind; their intention its intention; their knowledge its knowledge." It is important to emphasise that management and control is not something to be considered generally or in the round. It is necessary to identify the natural person or persons having management and control in relation to the act or omission in point. This was well put by Eveleigh J in delivering the judgment of the Criminal Division of this court in R v Andrews Weatherfoil Ltd [1972] 1 ALL ER 65 at 70, [1972] 1 WLR 118 at 124:

"It is necessary to establish whether the natural person or persons in question have the status and authority which in law makes their acts in the matter under consideration the acts of the company so that the natural person is to be treated as the company itself"

Decided cases show that, in regard to the requisite status and authority, the formal position, as regulated by the company's articles of association, service contracts and so forth, though highly relevant, may not be decisive. Here Millett J adopted a pragmatic approach. In my view he was right to do so, although it has led me, with diffidence, to a conclusion different from his own. "

55. The question in the present case is whose acts are to be treated as the acts of the Insured within the meaning of the policy exception. Questions of attribution can arise in many different circumstances and of course the context – here the insurance policy – is critical. An important recent authority in this regard is Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500. In that case the relevant New Zealand statute required that every person who became a "substantial security holder" (as defined) should give notice of his interest both to the company and to the Stock Exchange as soon as he knew (or ought to have known) he was a substantial security holder. The ex managing director of Meridian used the company's funds to make it a substantial security holder but neither he nor anyone else gave the requisite notice. The question was whether his acts or omissions were the acts or omission of the company so as to render the company liable to the statutory penalties. The advice of the Privy Council (that it was so liable) was tendered by Lord Hoffmann who said the company knew it had become a substantial security holder when it was known to the person who had authority to do the deal. He said that the company's primary rules of attribution will generally be found in its constitution; then he added at 506F:

"These primary rules of attribution are obviously not enough to enable a company to go out into the world and do business. Not every act on behalf of the company could be expected to be the subject of a resolution of the board or a unanimous decision of the shareholders. The company therefore builds upon the primary rules of attribution by using general rules of attribution which are equally available to natural persons, namely, the principles of agency. It will appoint servants and agents whose acts, by a combination of the general principles of agency and the company's primary rules of attribution, count as the acts of the company. And having done so, it will also make itself subject to the general rules by which liability for the acts of others can be attributed to natural persons, such as estoppel or ostensible authority in contract and vicarious liability or tort.

It is worth pausing at this stage to make what may seem an obvious point. Any statement about what a company has or has not done, or can or cannot do, is necessarily a reference to the rules of attribution (primary and general) as they apply to that company. Judges sometimes say that a company "as such" cannot do anything; it must act by servants or agents. This may seem an unexceptionable, even banal remark. And of course the meaning is usually perfectly clear. But a reference to a company "as such" might suggest that there is something out there called the company of which one can meaningfully say that it can or cannot do something. There is in fact no such thing as the company as such, no ding an sich, only the applicable rules. To say that a company cannot do something means only that there is no one whose doing of that act would, under the applicable rules of attribution, count as an act of the company.

The company's primary rules of attribution together with the general principles of agency, vicarious liability and so forth are usually sufficient to enable one to determine its rights and obligations. In exceptional cases, however, they will not provide an answer. This will be the case when a rule of law, either expressly or by implication, excludes attribution on the basis of the general principles of agency or vicarious liability. For example, a rule may be stated in language primarily applicable to a natural person and require some act or state of mind on the part of that person "himself" as opposed to his servants or agents. This is generally true of rules of the criminal law, which ordinarily impose liability only for the actus reus and mens rea of the defendant himself. How is such a rule to be applied to a company?

One possibility is that the court may come to the conclusion that the rule was not intended to apply to companies at all; for example, a law which created an offence for which the only penalty was community service. Another possibility is that the court might interpret the law as meaning that it could apply to a company only on the basis of its primary rules of attribution, i.e. if the act giving rise to liability was specifically authorised by a resolution of the board or an unanimous agreement of the shareholders. But there will be many cases in which neither of these solutions is satisfactory; in which the court considers that the law was intended to apply to companies and that, although it excludes ordinary vicarious liability, insistence on the primary rules of attribution would in practice defeat that intention. In such a case, the court must fashion a special rule of attribution for the particular substantive rule. This is always a matter of interpretation: given that it was intended to apply to a company, how was it intended to apply? Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc. of the company? One finds the answer to this question by applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy."

56. Lord Hoffmann emphasised that the rule of attribution was a matter of interpretation or construction of the relevant substantive rule. In the present case that is the policy and in particular the exception clause. But he concluded with these cautionary words at 511G:

"But their Lordships would wish to guard themselves against being understood to mean that whenever a servant of a company has authority to do an act on its behalf, knowledge of that act will for all purposes be attributed to the company. It is a question of construction in each case as to whether the particular rule requires that the knowledge that an act has been done, or the state of mind with which it was done, should be attributed to the company. Sometimes, as in In re Supply of Ready Mixed Concrete (No. 2) [1995] 1 A.C. 456 and this case, it will be appropriate….. On the other hand, the fact that a company's employee is authorised to drive a lorry does not in itself lead to the conclusion that if he kills someone by reckless driving, the company will be guilty of manslaughter. There is no inconsistency. Each is an example of an attribution rule for a particular purpose, tailored as it always must be to the terms and policies of the substantive rule."

57. Mr Owen submitted first that the exclusion clause only contemplated operational acts done in the course of management of the Company and second that it was impossible to suppose that an assault committed even by a chief executive or majority shareholder, could be said to be the act of the Company; companies just do not do such things and it would be sophistry to suppose that they did.
58. As to the first submission we can, as we have already said, see no basis whatsoever for limiting the exception in this way prior to the amendment in 1981. Mr Owen has a stronger argument in relation to the post 1981 position to which we shall return in a moment.
59. In support of his second submission Mr Owen relied on Meridian. The fact that John Allen was the chief executive and majority shareholder of the Company did not mean his assaults were the acts of the Company.
60. This submission is liable to conflate three different questions. Whether or not a company is criminally liable is a different question from whether the company is liable in tort and both these questions are different from the question whether criminal or tortious acts are to be attributed to the company for the purpose of a clause in a contract of insurance excluding liability for the "deliberate acts or omissions of the insured".
61. Lord Hoffmann raised the question at 507F whose act was intended to count as the act of the company. He answered it by saying that it was a matter of interpretation of the relevant substantive rule. It is necessary to have regard to the language of the rule, its content and policy. In Meridian the relevant substantive rule was a statute; in the present case it is a contract of insurance.
62. We were referred, as was Simon J., to two American authorities Allstate Insurance Co v Edward Mugavero et al 581 NYS 2^nd 142 (Ct. App 1992) and Mount Vernon Fire Insurance v James P Morris III et al 2004 Conn. Super. Lexis 1790. Like the judge, we do not think they assist in the present case. The principle to be applied is to be found in the advice of the Privy Council given by Lord Hoffmann in Meridian; how it is applied depends on the facts of the individual case.
63. As Mr Faulks observed in argument it is a well established principle that a man cannot recover under a policy of insurance for his own deliberate act. As Lord Atkin said in Beresford v Royal Insurance Co Ltd [1938] AC 586, 595:

"On ordinary principles of insurance law an assured cannot by his own deliberate act cause the event upon which the insurance money is payable. The insurers have not agreed to pay on that happening. The fire assured cannot recover if he intentionally burns down his house, nor the marine assured if he scuttles his ship nor the life assured if he deliberately ends his own life. This is not the result of public policy, but of the correct construction of the policy."

64. It is thus unsurprising to find the exception clause in the policy in the terms that it is. The present case is complicated by the fact that the insured is the Company rather than the perpetrator of the actual loss. But Mr Faulks submits that the Beresford principle, although not directly applicable in the present case is relevant when construing the exception clause in particular on the issue of attribution. We agree.
65. What then is the true intention of the exclusion clause? In our judgment it is to exclude liability for damage or injury caused by deliberate acts of the person who is to be regarded as, in effect the Company, as opposed to the acts of those who are mere employees. The undisputed evidence of David Evans that we have recounted in para 18 in our view makes it clear that the deliberate acts of abuse by John Allen fall to be attributed to the Company. It is not just the case that he was managing director and majority shareholder of the Company; he was Bryn Alyn. He treated the Company as his own and nothing of consequence happened without his say so.
66. Suppose Allen had deliberately burnt down one of the homes; we cannot see that the Company could recover under the Policy. It does not seem to us to make any difference that the victims in the present case are third parties rather than, in the example we have given, the insured itself. Suppose, in contra-distinction to the present case, the Company was solvent. Most right thinking people would regard it as abhorrent for the Company to be indemnified by the Insurer against liability created by the criminal acts of John Allen when he, as the majority shareholder, stood to benefit. In the days before incorporation there could have been no question of Allen himself being indemnified by the Insurer.

The June 1981 amendment.

67. The Insurer's New Liability Policy, operative from June 1981, is in booklet form. The policy provisions are on the left hand page throughout the booklet with a commentary in the form of notes on the right hand page, each note corresponding to a policy provision. Opposite the re-worded exception appears the following note:

"Deliberate Acts Exclusion.

This has been modified in two respects.

(a) Since most operational decisions are taken by senior officials we have amended the wording to read "any deliberate act or omission of the Insured his partners directors or managerial employees…..We accept that there is an element of imprecision about the term "managerial employees" but we think that in practice this should not create difficulty because the level at which operational managerial responsibility is exercised will usually be capable of identification in specific sets of circumstances.

(b) (is not relevant)."

68. We would regard the note as an aid to the construction of the clause in the event of ambiguity about the meaning of the new words "partners directors or managerial employees." We certainly would not permit the Insurer, whose document this is, to utilise the note to give the exception clause a meaning that would not otherwise be apparent from its wording.
69. It is to be noted that the reference to operational decisions is to be found only in the note and not in the clause itself. In our view the reference to operational decisions is included solely for the purpose of explaining why the exception has been extended to cover the acts or omissions of directors and managerial employees as well as those of the insured itself. It does not limit the role in which those persons must be operating in order to fall within the exception.
70. The question is therefore who falls within the expression "directors" or more relevantly "managerial employees" in the circumstances of this case. Obviously John Allen does but then his abuse is already within the exception as attributable to the insured. What is the position in relation to those who were at the time of the abuse directors or de facto heads of the individual homes? A document headed "Bryn Alyn Structures" and dated October 1991 states: "Each unit is semi-autonomous and run by a unit Head appointed by the Board." In our judgment such a person falls naturally within the description 'managerial employee'. We would not, however, construe 'managerial employees' as including anyone further down in the Company hierarchy.
71. We return therefore to the individual respondents, and the effect of our conclusions on each individual respondent. D.K. was at Pentre Saeson from June 1979 to January 1980 and again briefly before his discharge in July 1982. In between he was at Cotsbrook. Any abuse by Jeff Davies, who was in charge at Cotsbrook and took place after the June 1981 extension of the exemption clause must be excluded from D.K.'s damages. That apart none of the abuse falls to be excluded.
72. G.S. was at Gatewen for 9 months during 1989. In his case abuse by Steve Ford must be excluded because he was the head of the home at the material time. Abuse by Peter Steen does not fall to be excluded as he was only a team leader, and nor does any of the other abuse which was by unidentified individuals.
73. D.J. had left in January 1981 i.e. before the amendment to the policy the following June. He therefore cannot recover in respect of abuse by John Allen but can recover in respect of other abuse, subject of course to the 25% deduction for the pre 1976 period when the insurers were not on cover.
74. G.O'M. was at Pentre Saeson for 2 years between 1984 and 1986 where, it so happens, John Allen was at the time the principal. He cannot recover for the abuse by John Allen; he can recover for the abuse he suffered at the hands of others.
75. P.S. was at Bryn Alyn and Bryntirion for 3 ½ years between 1976 and 1979. He cannot recover for abuse inflicted by John Allen; he can recover for abuse inflicted by other staff and residents, subject to the necessary 10% deduction.
76. J.M. was at Pentre Saeson for just over 3 years in total, all in the post 1981 period during which he was sexually abused by John Allen and by Taylor who was in charge of Pentre Saeson at the material time. He cannot therefore recover for abuse by either. That leaves minimal physical abuse which Connell J. thought insignificant in relation to the sexual abuse.

Conclusion.

77. Deliberate acts of sexual and physical abuse by John Allen from 1976 when cover began, and similar acts by principals of the various homes from June 1981, when the exception to the policy was extended to include managerial employees, all fall outwith the insured's cover. That is the true construction of the policy and the Insurer is not obliged to meet the claims in respect of these acts. They are, however, liable for the other acts of abuse found by Connell J. The appeal is therefore allowed to the extent we have indicated. Counsel told us they would be able to agree the financial consequences for each of the respondents.
78. There is a quite separate ground of appeal in respect of the order for costs made by the judge. As the appeal is to be allowed, the issue of costs will have to be considered afresh in the light of our conclusions. We invite the parties written submissions.