England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM LORD JUSTICE FLAUX
SITTING AS A JUDGE ARBITRATOR

IN THE MATTER OF THE ARBITRATION ACT 1996
IN THE MATTER OF AN ARBITRATION
AND IN AN ARBITRATION CLAIM

		Royal Courts of Justice Strand, London, WC2A 2LL
		04/05/2018

Lady Justice Gloster:

Introduction

1. This is an application made by Equitas Insurance Limited ("the applicant" or "Equitas") under s.69 of the Arbitration Act 1996 ("the 1996 Act") for permission to appeal against the arbitration award dated 7 April 2017 ("the Award") of Flaux LJ (sitting as a judge-arbitrator) ("the Tribunal"), in which he resolved all of the issues in favour of the reinsured, Municipal Mutual Insurance Limited ("the respondent" or "MMI").
2. The background to the arbitration is set out at [1-10] and [31-41] of the Award and need not be repeated here. It suffices to say by way of overview that the dispute raises questions concerning the treatment of mesothelioma claims for the purposes of certain contracts of employers' liability ("EL") reinsurance; and more specifically

i) whether MMI is entitled to present each outwards reinsurance claim to any single triggered reinsurance contract of its choice (i.e. whether it may 'spike' the claims); and

ii) if so, how the resultant rights of recoupment and contribution, arising from the Supreme Court decision in International Energy Group Ltd v. Zurich Insurance plc UK Branch [2016] AC 509 ("IEG"), are to be calculated.

3. Mr Colin Edelman QC and Mr Keir Howie appeared on behalf of the appellant, Equitas. Mr Alistair Schaff QC and Mr Tim Kenefick appeared on behalf of the respondent, MMI.

The issues arising from the Award which are relevant to this application for permission to appeal

4. The relevant issues determined by the Award, so far as the application for permission to appeal is concerned, are the three issues articulated at [42(1), (2) and (4)] of the Award which are as follows:

i) Is MMI to be treated as having settled the inwards claims on the basis that each EL policy on risk was contributing a pro rata share of the loss being paid by MMI ("implied allocation issue")?

ii) If not, is the basis on which MMI is presenting its reinsurance claim contrary to the duty of utmost good faith or an implied contractual duty requiring MMI to present its reinsurance claims in good faith ("good faith issue")?

iii) If MMI is entitled to present its reinsurance claim as it has, what rights of contribution and recoupment do the reinsurers, who are called upon to pay the claim, acquire against any other reinsurers who were also on risk for the claim, and against MMI in respect of any deemed "self-reinsurance"; and how do those rights fall to be calculated? In particular, should they be calculated using:

a) the 'from the ground up' pro rata method of apportionment taking into account the first layer of retention in every year of reinsured exposure, as Equitas contends; or

b) the 'independent liability' method as MMI contends ("recoupment and contribution issue")?

The Award

5. The Tribunal concluded that:

i) MMI was entitled to 'spike' each reinsurance claim to any applicable year of reinsurance cover of its choice; and

ii) the rights of recoupment and contribution acquired by the reinsurers to whom a claim was 'spiked' should be calculated using MMI's methodology.

Implied allocation issue

6. At [71] Flaux LJ held that MMI was entitled contractually to present the entire claim to any one year's reinsurance policy, albeit acknowledging that there would need to be equitable contribution and recoupment to iron out unfairness and anomalies. That, he stated, necessarily followed from the decision of the majority in IEG that each insurance contract covering the insured for the period of exposure was 100% liable.
7. He further held at [79] that the "decision of the majority [in IEG] demonstrate[d] [that] the [Barker v Corus UK Ltd [2006] AC 572 ("Barker")] apportionment exercise [did] not come into play in determining the liability of the insurers under the inwards contracts of insurance." In his view, if Barker apportionment did not affect the joint and several liability of insurers under each triggered inwards contract, there was no "principled basis for concluding that it should nonetheless dictate the issue of the liability of the reinsurers and, indeed, every principled basis for concluding that it should not."

Good faith issue

8. At [101-102] Flaux LJ determined that the duty of utmost good faith was limited, in a claims context, to a duty not to act dishonestly in connection with the making of a claim. In his judgment, given that Equitas rightly eschewed any allegation of subjective want of good faith in this case, no question of breach of the duty of good faith as a matter of English law arose. It was his view that it was no part of the function of an arbitration tribunal to extend the scope of the post contractual duty of good faith, a fortiori where the House of Lords had held it to be limited in that way.
9. He formed the view at [104] that the English cases on which Equitas relied, which involved the exercise of a contractual discretion or power, were simply of no relevance, because MMI had an absolute contractual right to present the whole of its ultimate net loss to any reinsurance policy it chose. He held at [107] that there was no room for the implication of any term or application of some obligation of good faith in this context.
10. He held at [109] that, even if, contrary to the conclusion he had reached, there were some duty of good faith in relation to the allocation of the settlements to particular reinsurances, or some implied term that a decision to allocate should be Wednesbury reasonable, he was quite satisfied that there was no breach of duty or of any such implied term in this case.

Recoupment and contribution issue

11. Finally, having determined that MMI was entitled to 'spike' each reinsurance claim to any applicable year of reinsurance cover of its choice, he dealt with the dispute between the parties as to how the process of contribution and recoupment should be achieved at [111].
12. He held at [118] that there was nothing in the existing authorities, and specifically IEG, which assisted on the issue of retentions. He rejected at [118-120] Equitas' submission that the equitable rights of contribution and recoupment which the majority recognised in IEG had anything to do with the doctrine of subrogation.
13. At [121] he accepted MMI's method as correct. That method involved apportioning the loss for which the 'spiked' reinsurance contracts were liable between the retentions and the various layers of reinsurance in each of the applicable years of reinsurance cover, in proportion to: (a) the amounts that would have been borne by each such layer or retention if the whole of the claim had been presented to each relevant year, and (b) the relative amount of exposure which occurred in each relevant year. That approach employed the 'independent liability' method which had been applied in the liability insurance context in double-insurance situations as regards how retentions should be dealt with.
14. At [126] he held that this approach appeared to accord with fundamental fairness. He was also persuaded by the fact it was the approach which had recommended itself to the market at least in relation to policy years after 1984. ACOD [Accident Circle Occupational Disease] (B) was a standard market clause for use when liability was established on an exposure basis which was included in MMI's reinsurance contracts with effect from 1 January 1984.

Statutory grounds for permission: S.69 of the 1996 Act

15. In order for permission to appeal to be granted against an arbitration award, the application must satisfy the test which is laid out in s.69 of the 1996 Act:

"(1) Unless otherwise agreed by the parties, a party to arbitral proceedings may (upon notice to the other parties and to the tribunal) appeal to the court on a question of law arising out of an award made in the proceedings.

…

(3) Leave to appeal shall be given only if the court is satisfied—

(a) that the determination of the question will substantially affect the rights of one or more of the parties,

(b) that the question is one which the tribunal was asked to determine,

(c) that, on the basis of the findings of fact in the award—

(i) the decision of the tribunal on the question is obviously wrong,

or

(ii) the question is one of general public importance and the decision of the tribunal is at least open to serious doubt, and

(d) that, despite the agreement of the parties to resolve the matter by arbitration, it is just and proper in all the circumstances for the court to determine the question."

Analysis and determination

16. I consider each part of the statutory grounds for permission in turn.

S.69(1) – Questions of law

17. Equitas seeks permission to appeal the following questions:

i) In the event of an insured employee being tortiously exposed to asbestos in multiple years of EL insurance, and the EL insurer settling the employer's claim without allocating the loss to any particular year of exposure, is the EL insurer obliged (in the absence of specific provision for this situation in the corresponding reinsurances) to present any outwards claim in respect of that loss on a pro rata, time on risk basis for the purpose of calculating reinsurance recoveries, either because:

a) the contribution to the settlement of each engaged policy must by necessary implication be treated as having been on that basis ("question 1"); or

b) the doctrine of good faith requires the claim to be presented on that basis ("question 2")?

ii) If the EL insurer is not so obliged, and may present the claim to a single year of his choice, how are the rights of recoupment and contribution acquired by the reinsurers of that year to be calculated ("question 3")?

18. In my judgment all three of the questions raised in Equitas' application are questions of law arising out of an award made in the proceedings and satisfy s.69(1).

S.69(3)(a) – Substantially affect rights

19. I consider that the determination of all three of the questions will substantially affect the rights of one or more of the parties; the decision will have implications for 178 claims, along with a number of claims which the parties expect to encounter in the future.
20. I am not persuaded by the respondent's submission that this part of the test was not satisfied in relation to question 2. MMI submitted that the Tribunal at [109] of the Award held that, even if MMI had been subject to the duty of good faith contended for by Equitas, the judge-arbitrator was "quite satisfied that there was no breach of duty or of any such implied term in this case." Mr Schaff's argument was that this was a finding of fact which was not susceptible to appeal under s.69. Accordingly, even if the Court of Appeal were to disagree with the Tribunal's analysis of the law, the outcome would not be affected.
21. In my judgment, this was not the correct way to consider this part of the test. It is quite clear the court's determination of question 2 would substantially affect how those 178 and future claims are dealt with in law. Accordingly, I consider all three questions satisfy s.69(3)(a).

S.69(3)(b) – Tribunal asked to determine

22. In my view, the applicant's submissions in relation to this section of the statutory test are to be preferred. The Award identifies at [42] the issues which the Tribunal was asked to determine. Questions 1 – 3 are essentially those which the Tribunal identified at sub-paragraphs (1), (2) and (4) of [42] of the Award. Accordingly, I consider that Equitas' application satisfies s.69(3)(b).

S.69(3)(c)(ii)– General public importance and open to serious doubt

23. Equitas does not rely on s.69(3)(c)(i). Accordingly, I turn to consider this application under s.69(3)(c)(ii).

General public importance

24. In my judgment, all of the questions that form the subject of Equitas' application are of general public importance. I agree with the applicant's submission that the questions raised in this appeal have considerable importance for the insurance and reinsurance industry, which expects to face EL claims for mesothelioma based on tortious exposure to asbestos for many years into the future. The question as to how mesothelioma losses should be allocated for reinsurance purposes does appear to be a significant open question for many participants in this market. Clarity at the appellate level would have implications for the approach to be adopted market-wide and will be important insofar as the correct legal approach is held to involve principles of contribution. I am persuaded that the questions raised on this appeal would arise elsewhere and overcome the first part of the threshold in s.69(3)(c)(ii).

Open to serious doubt

25. Even if the court finds that there is a question of law of general public importance, it does not follow that permission to appeal will be granted. In my judgment, the decision of the Tribunal in relation to all three issues is at least open to serious doubt.

Implied allocation issue

26. There is, in my judgment, a problem with the Tribunal's finding at [79] that, if Barker apportionment does not affect the joint and several liability of insurers under each triggered inwards contract, there is no "principled basis for concluding that it should nonetheless dictate the issue of the liability of the reinsurers." I was persuaded by Mr Edelman's submissions that there is a seriously arguable case for treating the insurance and reinsurance positions differently. Accordingly, I consider the Tribunal's decision on this issue is at least open to serious doubt.

Good faith issue

27. I am of the view there is force to the submission that, if it is determined that Fairchild and IEG mean the courts have given the reinsured a choice as to how to allocate its losses to its reinsurers, there could be some basis for a duty of good faith in order to restrain the manner of exercise of the freedom of choice, which this novel principle has created within this unique reinsurance context. Contrary to Flaux LJ's determination, this could require the reinsured to allocate his losses in line with the Barker principles and the normal common law approach. Accordingly, I consider the Tribunal's decision on this issue is at least open to serious doubt.

Recoupment and contribution issue

28. I consider there to be three potential problems with the Tribunal's determination on this issue. First, as Flaux LJ accepted at [120] of the Award, there is nothing in the existing authorities and specifically IEG, which assists on the issue of retentions. This is the major point of dispute in the two alternative methods proposed by the parties.
29. Second, there is a strong argument that the position, when it comes to recoupment and contribution in insurance and reinsurance, is different within the Fairchild enclave.
30. Third, it is arguable that Flaux LJ is wrong in his conclusion that there is no principled basis for the "top down" approach advocated for by the applicant. I see considerable force in the submission that the higher layers of reinsurance in subsequent years should be made good first in any contribution and recoupment process, on the basis that they should always be furthest from the risk.
31. In my judgment, the applicant presents a strong prima facie case to support a different method of calculating recoupment and contribution from that determined in the Award. Accordingly, I consider the Tribunal's decision on this issue is at least open to serious doubt.

S.69(3)(d) – Just and proper in all the circumstances

32. Having overcome the "serious doubt" test in s.69(3)(c) in relation to questions 1 – 3, I consider it is just and proper in all of the circumstances for the court to determine all of these issues, despite the agreement of the parties to resolve the matter by arbitration. While I agree with MMI that the interests of arbitral finality are to be respected, I consider that it is highly relevant that the parties did not choose to exclude s.69.
33. In addition, the issues raised in this case are important ones for the insurance and reinsurance industry. It is probable that the same issues will arise for determination in other arbitrations. For these reasons it is desirable that they should be resolved at the appellate level. As such, I consider s.69(3)(d) to be satisfied.

Satisfaction of other statutory requirements

34. I am satisfied this application meets the other statutory requirements in the 1996 Act.

Disposition

35. Having fully considered the statutory test in s.69 of the 1996 Act and the oral and written submissions of the parties, I would grant permission to appeal on all three questions. But nothing said in this judgment should be taken as reflecting any final views on the issues involved. That will be for the final determination of the court hearing the appeal.

Sir Jack Beatson:

36. I agree. I am satisfied that, for the reasons given by my Lady, the test for permission is satisfied for questions 1 and 3. On question 2, I was initially attracted by Mr Schaff's arguments (see paragraph 20 of my Lady's judgment). This was because of the limited nature of the right to challenge an award given by section 69 of the 1996 Act, because the judge-arbitrator's finding on that question could be categorised as a mixed conclusion of fact and law which does not qualify, and because the fact that the conclusion will affect how claims will be dealt with in law does not in itself turn the question of whether, on the facts, there was a breach into one of law. It will only do so if the conclusion that, on the assumption that there was a duty of good faith or an implied term, there was no breach of duty, stemmed from misunderstanding the true legal principles or was a finding which no rational arbitrator could have made. I have, however, concluded that, since there will be an appeal on questions 1 and 3, and question 2 is closely linked to question 1, permission to appeal should be granted on all three questions.