England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		18th November 2004

The Hon. Mr. Justice Moore-Bick

Mr. Justice Moore-Bick:

1. Introduction

1. The claimant in this action, R+V Versicherung AG ("R+V"), is a leading German insurance company with its main offices in Wiesbaden. It carries on business in its own right as a reinsurer and also acts as the holding company of a number of subsidiaries which carry on various kinds of direct insurance business in Germany and elsewhere. The defendants are members of a group of companies that operates under the name of Risk Insurance and Reinsurance Solutions carrying on business in a number of different countries as insurance brokers and underwriting agents. The day to day operations of the group are under the general control of Mr. Jean-Claude Chalhoub who was based in its Paris office. Where it is necessary to do so I shall refer to specific companies within the Risk group, but for most purposes it is sufficient simply to refer to the group as a whole as "Risk".
2. The present action arises out of the relationship that developed between Mr. Chalhoub and one of R+V's senior underwriters, Mr. Daniel Gebauer, over the course of the period from the early part of 2001 to the end of 2002. It concerns in particular two binding authorities signed in September 2001 under which R+V authorised the first defendant, Risk Insurance and Reinsurance Solutions S.A., (known for convenience as "Risk France") to write contracts of reinsurance on its behalf obtained through the London market. These binding authorities related to property and personal accident risks respectively. I shall refer to them as 'the property binder' and 'the personal accident binder', as appropriate, and sometimes together as 'the London binders'. Each of the binders was contained in a document that can best be described as a reinsurance slip which, among other things, made provision for commissions to be paid by R+V to Risk in respect of all business written for its account. The rates of commission were broadly in line with, but if anything rather more generous than, the prevailing market rates for business of this kind. Each binder included a clause stating that the document contained the entire contract between the parties, but in fact at the same time as they signed each contract the parties signed a separate addendum containing additional terms. These addenda provided for Risk to receive an additional commission of 40% of the original gross premium in respect of all contracts written during the first year and for R+V to receive what was described as a "cession" of 30% of the share capital of Risk Insurance and Reinsurance Solutions Ltd ("Risk UK"), an English company formed by Risk to act in most respects as an underwriting agent in the London market.
3. The main thrust of R+V's case is that Mr. Gebauer and Mr. Chalhoub conspired to defraud R+V by putting in place the two binders and their addenda in order to enable Risk to obtain very large amounts of money by way of commission to the detriment of R+V. It says that once the contracts had been put in place the existence of the addenda was hidden from the management of R+V and that steps were taken to mislead the accountants and other employees within R+V about their true effect by giving false descriptions both of the nature of the 40% deduction and of the acquisition of shares in Risk UK. The motive for the conspiracy is said to have been personal financial gain. On 17^th April 2003 R+V gave notice to Risk terminating all current underwriting authorities, including the two binders, with immediate effect.
4. Although R+V bases its case squarely on the allegation of conspiracy, it also alleges that even if the binders were not affected by fraud in their inception, Risk has abused them and acted in disregard of their terms in such a way as to undermine the basis of trust and confidence that is fundamental to any underwriting agency. It relies on this as an alternative ground for terminating Risk's authority to act on its behalf. In those circumstances R+V has brought this action seeking, among other things, damages for conspiracy, a declaration that it is not bound by the addenda and a declaration that Risk's authority to underwrite on its behalf was effectively terminated when the binders were revoked on 17^th April 2003.
5. All these allegations are strenuously denied by Risk and Risk France as the party to the binders has brought a Part 20 claim seeking damages against R+V for the wrongful termination of the contracts.
6. The allegations of conspiracy relate primarily to events that occurred in the period leading up to the signing of the binding authorities in the autumn of 2001, but both parties relied on evidence of events occurring over the whole of the period between early 2001, when Mr. Gebauer and Mr. Chalhoub started doing business together, and the spring of 2003 when an audit of Risk's underwriting operations in London and Paris conducted by Chiltington International GmbH ("Chiltington") on behalf of R+V led to the discovery of certain documents that caused R+V's management to terminate the binders. Both sides relied on various aspects of that evidence as supporting or undermining the credibility of the witnesses and it is therefore necessary to describe in some detail the course of events during that period before turning to consider the issues that arise out of them, the parties' detailed submissions and what conclusions can properly be drawn. At this stage I shall not seek to deal with many of the issues of fact that arise for decision in this case but will make my findings on them when I come to consider the arguments in detail.

2. Events leading up to the signature of the London binders

7. Mr. Gebauer joined R+V in July 2000 as a senior underwriter and head of one of the departments dealing with non-life treaty reinsurance. He had previously had extensive experience of insurance and reinsurance business having spent the previous 24 years as an underwriter and underwriting manager with Agrippina Rückversicherung AG (later Zurich Rückversicherung (Köln) AG and now Converium Rückversicherung (Deutschland) AG) in Cologne. As a senior underwriter he was responsible for the management of his department, reporting to Mr. Wolfgang Kernbach, one of R+V's directors and the member of the management board responsible for external reinsurance operations, that is, the reinsurance of risks written by insurers outside the R+V group. At the time this represented only a small part of R+V's business.
8. At the time of Mr. Gebauer's appointment Mr. Kernbach was aged about 60 and had suffered from a certain amount of ill-health. He was entitled to retire in May 2003 and although no final decision had yet been made, both he and Dr. Förterer, the chairman of the management board and chief executive officer of R+V, had that in mind. When choosing a new senior underwriter, therefore, both Mr. Kernbach and Dr. Förterer were looking for someone who might eventually succeed to Mr. Kernbach's position and when Mr. Gebauer joined the company Dr. Förterer made it clear to him that he would be a candidate for the position.
9. In the earlier course of his employment with Agrippina Re Mr. Gebauer had got to know Mr. Chalhoub in his capacity as chairman of a Spanish insurance company. However, as a result of a change in his position within the company Mr. Gebauer ceased to have any regular contact with Mr. Chalhoub for the best part of ten years and did not renew the acquaintance until January 2001 when he was already employed by R+V. R+V had been doing business on a small scale with Risk for some years and the circumstances which brought the two of them together again were probably the renewal of an existing contract between R+V and one of Risk's clients.
10. In the early part of 2001 Mr. Chalhoub was looking for additional reinsurance capacity to support a medical insurance scheme administered by a company in the Risk group called Inaya Holdings Ltd. Risk was promoting the scheme in various Middle Eastern countries where it was underwritten by a number of different insurance companies. Two of these, UFA Insurance Company and UFA Bahrain Insurance Company, were companies with close links to the Chalhoub family, but it is right to say that none of the remaining 11 original insurers appears to have had any connection with either the Risk group or the Chalhoubs. The terms of the contract were set out in a document described as a reinsurance placement slip. Some of its provisions are rather opaque and many of the specific conditions were defined only by reference to "clause R", none of which appear to have been attached. I assume that in each case the intention was to refer to a form of wording developed or routinely used by Risk itself. The Inaya contract took the form of a quota share treaty under which R+V accepted 35% of the 75% cession by the original insurers. Premium income was estimated to be US$7.5 million in a full year. Deductions in respect of commissions were stated to be 30% all inclusive. The slip was signed on 23^rd February by Mr. Diesing and Mr. Peter, two of the underwriters in Mr. Gebauer's department. On 16^th March separate slips were signed by Mr. Gebauer and Mr. Peter for risks underwritten in Egypt, Lebanon and Saudi Arabia and the Gulf respectively omitting Condition 19 which provided for 5% commission to Inaya. At the same time the 'Deductions' clause was replaced by a clause headed 'Cedants' Commissions' which provided for a deduction of 25% all inclusive. I am satisfied that was done at the request of Mr. Chalhoub in order to conceal from the cedants the fact that Inaya was taking a 5% commission.
11. When giving evidence Mr. Gebauer described this as new and exciting business which he had not seen before, but although it was new to him he was willing to accept a substantial line. When asked why he had not been more cautious he said that he did not believe in writing what are sometimes called "watching" lines. He preferred to try to understand the business and, if he was satisfied that he did understand it and that it was good, take a substantial line. This was the first of a number of the occasions on which he seemed to me to display a degree of confidence in his own underwriting and commercial judgment bordering on arrogance.
12. Shortly afterwards on 3^rd April 2001 Mr. Gebauer agreed on behalf of R+V to participate in the reinsurance of what was known as the 'FSL Personal Accident Plan'. The placing information stated that the original insurer was an American company, Fidelity Security Life Insurance Company ("FSL"), but that the underwriting was managed on its behalf by a company called Insurance Management International which was the name under which Risk conducted operations in the United States. Risk also managed and placed the reinsurance acting as brokers on behalf of FSL. The information also stated that the plan had been running profitably for some years. None of the existing reinsurers had sought to cancel its participation, but Mr. Chalhoub offered R+V through Mr. Gebauer the opportunity to participate in place of one of the existing reinsurers.
13. Although Mr. Gebauer had been told that the reinsured was to be FSL, the slip relating to this cover named Pancyprian Insurance Company as the primary reinsured. It also provided for companies in a group known as 'Group Mepa' to be included as reinsured in addition to FSL. Group Mepa was at that time owned and controlled by Mr. Chalhoub's father, Henri Chalhoub; Pancyprian was one of the companies in the group. Both Pancyprian and Group Mepa can therefore fairly be described as Chalhoub entities. In affidavits sworn in May 2003 in opposition to R+V's application for a freezing order both Mr. Gebauer and Mr. Chalhoub referred to the FSL contract in terms which suggested quite unambiguously that Pancyprian was reinsuring FSL in respect of its participation in the personal accident cover and that R+V was reinsuring Pancyprian in respect of that risk. That also seems to have been Mr. Gebauer's understanding at the time since in an e-mail message sent to Mr. Chalhoub on 3^rd April 2001 he referred to the reinsured as "Pancyprian and/or as original". However, on 31st July 2001 Mr. Gebauer signed another slip naming FSL as the sole reinsured which inevitably gave rise to further questions about the nature of Pancyprian's involvement. When he gave evidence Mr. Chalhoub said that it had been Risk's intention to market the plan worldwide and to use Pancyprian or other companies in the Mepa group as insurers in countries outside the United States. I think that goes some way to explaining the second slip in which the cover was expressed to be limited to risks originating in the United States where FSL was the original insurer. It is likely that this slip was signed in order to enable Risk to provide an original contractual document to FSL.
14. Mr. Gebauer said that he had been aware of the existence of the FSL Plan for some time, having rejected an opportunity to participate in it some years before when he was at Agrippina Re. He knew it had been profitable and was therefore keen to take a share. I do not think that there is anything sinister in that, although if the form of the slip was dictated by Mr. Chalhoub's intention to offer the same cover in other markets using Pancyprian as the original insurer, it is difficult to understand how he and Mr. Gebauer could have given such a misleading explanation of the position in their affidavits.
15. The contact between Mr. Gebauer and Mr. Chalhoub in relation to the Inaya and FSL contracts provided the opportunity for more general discussions of other business. The suggestion that R+V should become involved with Risk in underwriting in the London market appears to have been raised for the first time quite early in 2001. To my surprise both Mr. Gebauer and Mr. Chalhoub were both extremely vague about the origin and subsequent development of this proposal, not only about when it had first been mooted, but about the way in which it had come about, how it took shape and indeed about every aspect of the discussions that led to its final conclusion. In the affidavit to which I referred earlier Mr. Chalhoub gave the impression that although R+V had only recently decided to withdraw from treaty underwriting in the London market as a result of having suffered serious losses in previous years, Mr. Gebauer was interested in re-entering that market in order to write facultative business. That may be so, but given that in early 2001 Mr. Gebauer was only head of one of the non-life treaty reinsurance departments and had no responsibility for facultative underwriting, it is surprising that he did not immediately refer the proposal to Mr. Peter Lehnert who was then head of the facultative department. The explanation may lie in the fact that the board of R+V was not willing to make additional funds available to the reinsurance department at that time. At all events, I think that Mr. Chalhoub saw an attractive business opportunity for Risk if he could produce a scheme that would enable R+V to capture London market business without apparently being called upon to make any significant initial investment. With this in mind he instructed one of Risk's senior employees, Mr. Michel Tannous, to produce a business plan that would serve as a basis for discussions with Mr. Gebauer.
16. Mr. Gebauer recalled that Mr. Chalhoub had produced a business plan for the purposes of discussions at a meeting between them in Paris on 2^nd May. He said that it was covered with handwritten amendments and that he had asked Mr. Chalhoub to produce a clean copy before they discussed it any further. Unfortunately no copy of the plan in its original form has survived; the version available at trial which bears the date June 2001 had been printed out, probably for the purposes of these proceedings, in May 2003. One can see from the computer record that the document had originally been created on 20^th March 2001, but had subsequently been modified, perhaps on more than one occasion, before reaching its final form. This final plan comprised a large number of pages of detailed figures containing a breakdown of the estimated start-up and first year operating costs of the proposed London office as well as five-year cashflow projections based on a range of different assumptions as to the growth of premium income and likely loss ratio.
17. If an initial version of the business plan was available at the end of March, as seems likely to have been the case, I doubt whether Mr. Chalhoub would have waited until the beginning of May to pursue discussions with Mr. Gebauer. I think it likely, therefore, that if a document covered in handwriting was produced, that occurred rather earlier than Mr. Gebauer suggested, perhaps in late March but more probably sometime in April. However, nothing of significance turns on that. It will be necessary to consider the business plan and the discussions that surrounded it in more detail at a later stage, but for the moment it is sufficient to note that although Mr. Gebauer said that Mr. Chalhoub sent him one or possibly two copies of the final version of the business plan which he kept in his office, no copies of it have since been discovered in any of R+V's files.
18. It is reasonably clear that Mr. Gebauer and Mr. Chalhoub had reached agreement on all the significant terms of this arrangement by 14^th June 2001 when Risk France wrote to Mr. Gebauer setting out details of the proposed venture. The operation that Mr. Chalhoub was proposing was in substance a joint venture between R+V and Risk to underwrite facultative reinsurance risks in the London market. It was agreed that Risk would set up an underwriting box at Lloyd's run by professional underwriters with supporting administrative staff to accept personal accident and property risks offered by brokers in accordance with the practice of the market. The operations were to be conducted by a new company, Risk UK, that would act as underwriting agent for R+V under formal binding authorities. Risk UK would be immediately responsible for the costs of setting up this new office and for the day to day expenses of its operation in return for which it would be paid a commission in the usual way and also a share of any profits in the form of a profit commission. Mr. Chalhoub realised from the start, however, that this venture would impose a substantial financial burden on Risk immediately prior to and during the initial period of trading. The capital outlay in obtaining premises and equipment and the costs of staff salaries would not be recovered until premiums began to flow and commission could be paid. He therefore proposed, and Mr. Gebauer agreed, that during the first year R+V should pay Risk an additional commission of 40% of the gross premium. The agreement to pay this additional first year commission lies at the heart of the dispute between the parties.
19. Given the nature of the operation that the parties had in mind, it is surprising that it did not give rise to correspondence of any kind, whether in the form of letters, faxes or e-mails, until the letter of 14^th June 2001. From the outset the project appears to have been very much the outcome of a personal relationship between Mr. Gebauer and Mr. Chalhoub, but even so, it is difficult to understand why nothing was reduced to writing, even in the form of e-mails. Mr. Gebauer said that he was in the habit of keeping notes in spiral bound notebooks, all of which have since gone missing, but that does not explain why there is not the slightest reference to their discussions in any of the contemporaneous documents. Moreover, the letter of 14^th June is curious in itself, being couched in terms that would be appropriate if R+V were being approached for the first time to participate in such a project but which scarcely reflect the discussions that must by then have taken place. It is all the more curious given the fact that it enclosed a draft binding authority in the form of a reinsurance slip and addendum which reflected the terms agreed in principle between them. This provided for Risk to accept property and associated risks on behalf of the reinsurer and for Risk to retain 40% of the first year's premiums against the cession of a 30% share of its capital. (Although no specific Risk company was identified in the draft agreement, I think the intention must have been to refer to what in due course became Risk UK as the company running the London office.) It is interesting to note that from the very beginning the terms relating to the 40% first year commission and the cession of the 30% interest in Risk were contained in an addendum rather than in the main body of the slip.
20. To return to the London reinsurance market, whether to write treaty or facultative business, represented an important strategic decision for R+V which had only recently withdrawn from that sphere of operations because of disappointing results. As such Mr. Chalhoub's proposal was a matter that ought to have been referred to Mr. Kernbach as the director responsible for the reinsurance department and perhaps also to the management board. However, none of the contemporaneous documents suggest that Mr. Kernbach was informed of the existence of this proposal, let alone of Mr. Gebauer's agreement to it. Sometime early in the summer of 2001 (the minutes are dated 15^th June but suggest that the meeting may have taken place on 2^nd May) the management board held a meeting at which the directors considered R+V's future strategy in relation to reinsurance generally. It led to the setting up of a working group to examine the reasons for the poor performance of external reinsurance operations in the past and to study ways of improving that section of the business in the future. Mr. Gebauer (who was not present) said that he had not been told of the meeting and had not been asked to provide Mr. Kernbach with any information in preparation for it. The minutes of the meeting show that Mr. Kernbach put forward various proposals, including the expansion of R+V's presence in local markets such as Singapore where it already had a branch office. There is no mention of re-entering the London market or of becoming involved in an operation to obtain business through a representative office in London. If Mr. Kernbach had been aware of any such proposals by the time that meeting took place, it is unlikely that he would have failed to make any reference to them.
21. During the evening of Sunday, 17^th June 2001 Mr. Gebauer forwarded to his office computer an e-mail sent to his personal address by Mr. Chalhoub a few days earlier. It read as follows:

"Dear Daniel,

While I hate to put my nose in something that does not concern me directly, and after our discussions of yesterday I was thinking that the ongoing Brainstorm meetings in your company provide the ideal opportunity to push forward the idea you mentioned of R+V having larger stakes with fewer players.

The concept would certainly promote stability and guarantee a return to profits in the short term but also on the longer run. This could certainly be R+V own path and niche in the currently changing world of reinsurance.

The solution of a more focused approach and a selected number of strategic partnerships towards achieving longer term, stable business relationships makes certainly sense!

I would take this everyday in lieu of small participations spread over hundreds of contracts with no strategic goal and guarantee of continuity.

Having some sort of participation, in a way or another in the capital of companies or organizations (e.g. by way of letting them invest the premium reserves they hold for R+V Re in their own shares or through other methods), would perfectly fit such new development patterns; ensuring that not only is the business ceded to R+V Re profitable, because the stakes are important, but also because companies would be thinking more in terms of strategic partnership, as they take a longer and wider view to the relationship with R+V than the simple transfer of risks.

. . . . . . . . . . . . . . . . . . . .

Jean Claude

PS: I guess this is what Life companies have been doing all along in another sort of way, encouraging long term partnership by paying high first year commissions, hence securing their channels of distribution and generating confidence and loyalty among their agents."

22. The following Wednesday, 20^th June, there was a meeting of the reinsurance working group set up by the board under Mr. Kernbach. Mr. Gebauer was a member of the group and was present at the meeting. Mr. Lehnert, who presented an analysis of the business underwritten from different sources during the previous five years, told the group that some heavy losses had been incurred on business accepted through London brokers but that in general R+V was underwriting fewer facultative risks from the London market than before. There seems to have been no indication that Mr. Gebauer was taking steps to enable R+V to return to active underwriting in the London market. About a month later, on 16^th July, there was a meeting of the management board of R+V at which Mr. Kernbach reported on the work carried out so far by the working group. Again, there is nothing to indicate that he made any reference on that occasion to a proposal that R+V should return to the London market.
23. If the document that Risk sent to R+V under cover of the letter of 14^th June was no more than a draft of the proposed terms, by July matters had certainly moved on. Despite the apparent absence of any correspondence between the parties during the intervening period, by the final week in July revised terms had been produced for both a property binder and a personal accident binder. Each of these was signed on behalf of R+V by Mr. Gebauer and one of the assistant underwriters in his department, Mr. Plotka, on 24^th July.
24. In each case the contract was contained in a document broadly similar in its structure to other contracts produced by Risk. It identified the reinsured as

"To be declared by Risk insurance and Reinsurance solutions UK (hereinafter named Risk) and/or as original"

and the insured as

"As declared to the Reinsurer by Risk and/or as original".

The interest insured was described as

"Being a reinsurance of policies/certificates underwritten by Risk on behalf of the Reinsurer".

Although describing itself simply as a 'reinsurance agreement', therefore, each agreement was in reality a binding authority giving Risk UK the right to make contracts of reinsurance on behalf of R+V, subject to the restrictions contained in the rest of the document. Neither Mr. Chalhoub nor Mr. Gebauer appears to have been concerned by the fact that Risk UK had not yet been incorporated.

25. Each of the binders was expressed to continue in force for 3 years, in the case of the property binder from 1^st October 2001 and in the case of the personal accident binder from 1^st July 2001. Each of them also contained a term stating that the agreement represented the entire contract between the parties, but despite that, in each case further terms were contained in an Addendum, as had been the case in the original draft. Those terms included the following:

"Risk will retain 40% of the first 12 months reinsurance gross premiums written (for the share of the Reinsurer) from the reinsurance account against the immediate cession of 30% share in the capital of Risk.

Risk may request the purchase of the shares ceded to the Reinsurer in case the later [sic] withdraws his reinsurance support, or in case of change in the composition of the rest of the shareholding of Risk.

In either case the values of said shares will be calculated in the same manner as the one of the original cession e.g. Based on 40% of the last 12 month reinsurance premiums written by Risk (for the share of the Reinsurer).

This amount will be paid by Risk to the Reinsurer over the following 12 months.

In case of plurality of Reinsurers, each Reinsurer will be awarded a portion of the 30% share in the capital of Risk prorated to his participation in the total reinsurance premium written by Risk.

In conjunction with the shares of Risk, and for as long as the Reinsurer holds said shares in Risk, the Reinsurer will be reserved a seat on the Board of Risk. In case of plurality of Reinsurers the seat will go to the Reinsurer with the largest participation."

26. On one copy of each binder Mr. Gebauer added the following additional clause in manuscript to the Basic Conditions:

"Underwriting guidelines to be reviewed by the Reinsurer and Risk every six months."

27. Finally it is necessary to mention the following two clauses which appeared in both agreements:

"SETTLEMENTS: Risk to collect premiums into and pay claims straight from the Reinsurer escrow bank account to be established in the UK by Risk in the name of the Reinsurer – Bank interest on the account are the property of the Reinsurer.

CLAIMS Claims to be paid directly out of the reinsurer escrow account. Reinsurer to leave in said Escrow Account a minimum of Euro 50,000 or 5% of net premiums written and collected during the last 12 months, whichever is the greater . . . . . . "

28. On 27^th July 2001 Mr. Gebauer and Mr. Plotka also signed a short form of each document which omitted most of the detailed conditions (including the two just mentioned) and to which no addendum was attached. None of these documents appears to have been signed by or on behalf of any Risk company.
29. In addition to bearing the signatures of Mr. Gebauer and Mr. Plotka each agreement also bears a manuscript notation showing the extent of R+V's participation and R+V's internal reference number, X84449 in the case of the personal accident binder and X84450 in the case of the property binder. R+V maintained a record of reinsurance treaties on what was known as the 'CIG system', a computer system which contained brief details of the parties, the broker and the essential terms of each contract. A reference number was generated automatically for each new contract when it was entered in the system so the reference numbers for the two binders must have been added after the contracts had been entered on the computer. Two copies of the signed documents were returned to Risk Paris under cover of a letter dated 25^th July 2001 which was also signed by both Mr. Gebauer and Mr. Plotka. It is clear, therefore, that both contracts were entered in the CIG system soon after they were signed and before the originals were returned to Risk. Indeed, a print-out of the data relating to the personal accident binder shows that information relating to that contract was entered on 25^th July. It is apparent both from the terms of the letter and from the fact that the relevant data was entered in the computer that Mr. Gebauer regarded R+V as bound as from that time.
30. It is convenient at this stage to give a slightly fuller description of the CIG system and of the way in which data was entered in it. The system was designed to contain a wide range of data relating to all kinds of reinsurance treaties. When entering information relating to a new contract the operator would be presented with a screen, known as the 'A' screen, containing various fields for completion. They included fields relating to the identity of the cedant and the broker, the inception, cancellation and expiry dates, the managers responsible for the contract within R+V, and certain information about the contract terms. Some of the fields were compulsory in the sense that information had to be entered in order for the data as a whole to be entered in the system, but others were optional. Once the compulsory fields of the 'A' screen had been completed the system automatically assigned a reference number to the contract. Thereafter the operator could enter a series of 'B' screens containing fields relating to the particular terms of the contract. These were all optional, so it was possible to enter a contract in the system and obtain a reference number for it without entering any details of its terms. A print-out of the 'A' screen could be obtained at any time. It would reflect the original entries and any subsequent alterations or additions, but would not identify the dates on which such alterations or additions had been made.
31. It was possible to obtain details of the contract terms that had been entered through the 'B' screens by viewing the screens themselves or by asking the computer to provide a summary of the contract terms. This was known in R+V as a list or 'slip'. When provided in the form of a slip the information was presented in a series of boxes on the printed page rather than as a series of print-outs of the individual screens which varied in number depending on the nature of the contract. The first box on the slip contained the information currently entered on the 'A' screen; subsequent boxes contained information entered through the 'B' screens. Producing a list in this way made it possible to view in a few pages of text information that appeared in the 'A' screen and a series of different 'B' screens. A slip of this kind reflected both the original entries and any subsequent alterations or additions; it also gave the date on which the information in the 'B' screens (but not the 'A' screen) had last been modified.
32. On 29^th October 2002 Mrs. Dörthe Plass, one of the underwriting assistants in Mr. Gebauer's department, obtained a slip showing the terms of the personal accident binder. It showed that the data in the 'B' screens had been entered or last modified on 26^th July 2001. However, when a small team consisting of Mr. Hoff, one of R+V's underwriters, Mrs. Holzlehner, a treaty administrator and Mrs. Schwärzel, one of the technical accountants, examined the entries for the property binder in January 2003 they found that no details of the contract terms had been entered in respect of that contract at all. It is clear that someone took the trouble to enter both contracts in the system via the 'A' screen on 25^th July 2001 and that someone (not necessarily the same person) also entered details of the terms of the personal accident binder the following day, but that no one ever entered any information relating to the terms of the property binder.
33. The data entered into the computer in relation to the personal accident binder suggested that it was a quota share treaty and did not make it clear that it was in fact a binding authority. A code was included that identified Risk as a cedant. In the 'B' screen headed "Comments" the following had been entered against the heading "Reserves and Deposits":

"Depot gegen Abtretung von 30% Anteil an "Risk" [Deposit against transfer of 30% share in Risk.]"

34. Between the end of July and the end of August 2001 there were further discussions between Mr. Gebauer and Mr. Chalhoub which related in part to the property and personal accident binders, though there is almost nothing in the way of contemporary correspondence that refers to them. On 22^nd August 2001, however, Mr. Chalhoub sent an e-mail to Mr. Gebauer attaching a proposal relating to the Inaya contract designed to meet Mr. Gebauer's requirement that R+V should have some influence over the underwriting and the ability to monitor and control the administration of the programme. The main element of this proposal was that Inaya should receive an additional 10% of the gross premium each year during the first four years of the contract against the immediate cession to R+V of a 20% share in its capital. In addition R+V would have a seat on the board of Inaya. As in the case of Risk UK, Inaya was to have the option to purchase the shares if R+V decided to withdraw its support against a payment of 10% of the premium written during the preceding four years. One can see how closely this proposal reflects the terms of the addenda to the two London binders.
35. In September each year a conference known as the 'Monte Carlo Rendez-vous' is held in Monte Carlo for those involved in the reinsurance industry. Mr. Kernbach attended the conference on behalf of R+V between 9^th and 13^th September 2001 and during that time had a brief meeting with Mr. Chalhoub. If Mr. Kernbach had been aware of the proposals for underwriting in the London market one might have thought that the subject would have been raised in conversation between them, but there is no evidence that it was. Mr. Gebauer said that he did not recall having told Mr. Kernbach that he had signed the agreements in July, but he did say that he had prepared a briefing paper for Mr. Kernbach prior to his attendance at the conference summarising R+V's business with Risk. However, no copy of any such briefing paper has been found on R+V's files and it was not suggested to Mr. Kernbach that he had learned of the London venture by that route.
36. Risk UK was incorporated on 18^th September 2001 with an authorised share capital of £500,000 divided into 500,000 ordinary shares of £1 each. 1,000 shares were issued, 2 to the original subscribers, 299 to Risk France and 699 to its parent company in Cyprus, Risk Insurance and Reinsurance Solutions S.A. ("Risk Cyprus"). The original subscribers later transferred one share each to Risk France and Risk Cyprus.
37. On 28^th September 2001 Mr. Tannous brought a large number of contracts to Wiesbaden for signature by R+V. They included several revised agreements relating to the Inaya business and also new versions of the personal accident and property binders. These now named Risk France rather than Risk UK as the party by whom the reinsured was to be declared and had already been signed by the second defendant, Reass France S.A.R.L. One can see from the terms of the documents themselves that these versions incorporated the manuscript additions to the conditions previously made by Mr. Gebauer. Otherwise the terms were the same, except that the commencement date of the personal accident binder had been put back from 1^st July 2001 to 1^st October 2001 and the first renewal date from 2^nd July 2004 to 31^st December 2004. The Addenda remained in their original form. There appears to have been no correspondence of any kind between R+V and Risk relating to these two binders between July and September and there is nothing in the documents, therefore, to explain what led to the execution of the new agreements. It is likely, however, that Mr. Gebauer or Mr. Chalhoub had already realised that since R+V was not authorised to carry on insurance business in the United Kingdom, it could not accept business through an underwriting agent in this country. It could, however, underwrite through an agent in Paris and it is likely that the scheme was modified in this way to avoid infringing the statutory restrictions. On this occasion the documents were signed by Mr. Gebauer and one of the underwriters in his department, Mr. Peter. Since the contracts retained their original reference numbers, it was not necessary to make any further entry in the CIG system and one can see from a slip printed in October 2002 that no changes were made to the entry for the personal accident binder to reflect the revised commencement and cancellation dates.

3 The subsequent course of events

38. The review of R+V's external reinsurance operations that Dr. Förterer had set in motion in May 2001 continued throughout the following months. At a meeting of the management board held on 8^th October Mr. Kernbach and Mr. Gebauer presented a further report from the working group outlining the strategy which it proposed should be adopted in order to return external reinsurance operations to profit. This was broken down into sections discussing promising markets, types of contracts, financial targets and the internal organisation of the reinsurance department within R+V. Surprisingly, perhaps, no reference appears to have been made either in the report or at the meeting itself of the recent decision to start accepting business through an underwriting agent with a presence in the London market.
39. Some weeks later, however, rumours about the London market project began to circulate within R+V. On 21^st November 2001 Mr. Kernbach sent a personal note to Mr. Gebauer in the following terms:

"Facultative underwriting in London

Telephone call from Mr. John Fyfe, a Director of Alwen Hough & Johnson, London on 20.11.2001.

John Fyfe was asking whether we would underwrite business on the London market. He also asked about the legal status of this office, because there is apparently a rumour in the market that we have a representative or other branch office in London. Before this goes any further, I would ask that you let me know urgently how things stand, because names are being named and I have absolutely no information with regard to people, equipment, costs etc.

As I said, John Fyfe has already been approached and is asking for urgent information. Before we commit ourselves materially, please let me have your report so that we can consider carefully what approach to take. I also assume that Mr. Lehnert is up to speed and that the matter has been agreed with him. Please let me know immediately on your return."

40. It is not clear exactly what response Mr. Kernbach had received to that message when he sent the following memorandum to Mr. Gebauer on 6^th December marked 'Personal/Confidential' which I set out in the form in which it appears in one of the translations before me:

"Facultative underwriting, London, Italy, Cyprus, Belgium

In my memo dated 21.11 I told you that I had been asked by the London market whether we had an underwriting office in the City. You recently gave me the first verbal information about the intention of underwriting facultative business.

In the interim the R+V underwriters appear to be becoming uneasy and unwilling since in Italy apparently Mr. Koob has in no way been informed about the option of underwriting facultative business. Mr. Moretti says the same and is urgently requesting information or the resolution of uncertainties.

Although I am naturally personally hugely in favour of us absolutely profiting from the current market situation, underwriting powers of representation [sc. binding authorities] and similar absolutely may not be issued without the prior permission of the department head or, where applicable, the holding company board. These underwriting powers of representation – regardless of the level – may not be issued without the underwriting guidelines, cost framework etc were known and also approved. Internally explicit instructions have already been issued that this was an "untenable situation".

Please could you therefore provide rapid, comprehensive details of whether and in what form we have given approvals for the underwriting and/or optional transactions. In my opinion these approvals could be purely provisional since – as mentioned before – to date there has not been any definite decision."

I think it likely that the expression "approvals for the underwriting and/or optional transactions" might be better translated "agreement for underwriting treaty or facultative business".

41. On 7^th December Mr. Gebauer responded as follows by e-mail:

"Re: Project Facultative Underwriting in London

Dear Mr. Kernbach,

After our telephone conversation this evening I have definitely cancelled this project. I felt that this was not the right time to implement this project. Nevertheless I would be grateful if you could assist me next year in finding an alternative solution. Over the next two years we must assume that things will work out well in facultative reinsurance. We should not let this opportunity pass unused."

42. A few minutes later the same evening Mr. Gebauer sent the following e-mail to three underwriters in the facultative department, Mr. Lehnert, Mr. Moretti and Mr. Koob with a copy to Mr. Kernbach:

"Re: Project Facultative Reinsurance London

Dear Colleagues,

We have definitely turned this project down for this year. Implementation failed due to the haste of the intended underwriter for this business who could not wait for the formalities linked with such a project.

Should you be approached by the market re this project you should tell your contact that this project – at least for the time being – will not be realised in this form."

43. A few days later, however, a different picture emerged. On 10^th December Mr. Gebauer sent the following e-mail to Mr. Lehnert, Mr. Moretti, Mr. Koob and Mr. Hoff (one of the treaty underwriters responsible for UK business), again copied to Mr. Kernbach:

"Re Project Facultative Reinsurance London

Dear Colleagues,

Since it has become clear to me that there have been some misunderstandings re the Project Facultative Reinsurance London, this is to give you a summarised project status report.

General

To be able to utilise the particularly attractive market environment to the best advantage, we wish to expand our facultative reinsurance in an opportunistic manner.

London is an important market for facultative reinsurance. On the London market the traditional capacity has collapsed drastically after the events of 11^th September 2001.

Risk Insurance and Reinsurance Solutions (RISK)

RISK is a company based in Paris. RISK has set up a structure that we want to use for facultative reinsurance. RISK is not a Lloyd's syndicate. R+V has no capital holding in RISK.

. . . . . . . . . . . . . . . . . . . .

Business

RISK has a box in the Lloyd's building. The underwriters are based there and evaluate the business provided by the brokers. In the event of a positive decision the offer is scanned in and sent as a placement slip to Wiesbaden. In Wiesbaden the offer is again checked and, if appropriate, stamped and signed. The signed slip is e-mailed from Wiesbaden to London, printed out there and handed to the broker.

This ensures that the business is underwritten in Wiesbaden not in London.

. . . . . . . . . . . . . . . . . . . ."

44. This series of messages is somewhat puzzling and is made all the more so by the fact that Mr. Lehnert, who was head of the facultative department and of comparable seniority to Mr. Gebauer, was in London on 6^th December visiting Risk's box at Lloyd's. In the course of his visit Mr. Lehnert met both Mr. Chalhoub and the property underwriter in London, Mr. Hugh Rivington. It is very regrettable that as a result of Mr. Lehnert's subsequent illness and untimely death it has not been possible to obtain his account of these events. However, the record he made of his visit to London, dictated when he was back in Wiesbaden on 10^th December, does shed some light on his understanding of the position at that time. It begins as follows:

"After Mr. Gebauer had made contact with RISK the visit served to discuss details of possible facultative underwriting by RISK.

The technical process is to be altered from now on. Where RISK wants to underwrite a risk the slip is faxed to us in Wiesbaden. Here it is stamped and signed and faxed back to RISK so that formal underwriting is by R+V. . . . . . . . . . . . . "

45. In the light of this report it is doubtful, to say the least, whether Mr. Lehnert was aware that an agreement of any kind had been signed at that stage. On the contrary, he appears to have been investigating the method of operations in London with a view to the possible employment of Risk as a representative office that would make an initial assessment of risks before referring them to R+V in Wiesbaden for the final underwriting decision to be taken. He even noted that R+V had to be responsible for claims management. These are all contrary to the terms contained in the binders.
46. Meanwhile, during the autumn of 2001 Mr. Chalhoub had been taking steps to set up the box at Lloyd's and to make the other arrangements necessary to enable Risk UK to start business. He had already recruited Mr. Rivington to act as a property underwriter and general manager and he later recruited two more underwriters, Mr. Tom Phipps to write personal accident business and Mr. Kelvin Mercer to write contingency risks.
47. In order for Risk UK to function as a business it needed to have bank accounts. Moreover, as already mentioned, each of the binding authorities provided for a bank account to be opened in R+V's name to receive premiums. In November 2001 Mr. Gary Wyatt, an accountant whose firm acted from time to time on behalf of the Risk group and who was one of the directors of Risk UK, made the necessary arrangements for accounts to be opened with HSBC in the name of Risk UK. However, although initial enquiries were made about the formalities of opening an account in the name of R+V, no steps were in fact taken to do so. Whether any significance is to be attached to the manner in which Mr. Wyatt went about opening the accounts or to the failure to open an account in the name of R+V are matters to which I shall return at a later stage.
48. The first risk accepted under the property binder was written on 6^th December 2001. The slip presented to Mr. Rivington at the Lloyd's box was sent by fax to Risk France where it was scratched by one of the Risk underwriters in Paris, Mr. Jean-Noel Yvonne and stamped "for and on behalf of R+V Versicherung AG." It is not clear whether Mr. Lehnert was aware of that particular piece of business or, if he was, that he realised that Risk was underwriting it on behalf of R+V. However, I think he must have been aware that Mr. Rivington was referring risks to Paris because he specifically noted in the report of his visit to London that the underwriting procedure was to be altered to ensure that risks were accepted in Wiesbaden.
49. Mr. Rivington was understandably keen to bring Risk's presence in London to the attention of the wider market. On 7^th December he wrote to various brokers informing them that Risk was in business as a new underwriting agency and seeking the approval of their security committees. In his letter he referred to the fact that R+V would be a 30% shareholder in Risk with a seat on the board. Despite his general enthusiasm for publicity, however, Mr. Chalhoub did not like that and told him not to refer to the shareholding again until after the formal inauguration of the venture.
50. On 14^th December 2001 pursuant to the terms of the addenda 300 shares in Risk UK were transferred from Risk France to R+V. A share certificate was despatched by courier in an envelope addressed to Mr. Gebauer at R+V and marked "Strictly Private & Personal. To be opened by addressee only". The envelope certainly reached R+V because there is a signature acknowledging its receipt, but Mr. Gebauer said that it did not reach him and that he remained completely unaware of its existence. The share certificate has never been found.
51. After he returned from his visit to London in December 2001 Mr. Lehnert was involved with Mr. Tannous in attempts to establish a direct computer link between London and Wiesbaden that would allow people in R+V's offices to view documents held at the Risk box. The main purpose of the system was said to be to enable R+V's underwriters to examine placing slips presented in London before giving their approval on-line. In the event the system never came into operation, but the very fact that attempts were made to set it up was consistent with Mr. Lehnert's understanding that the formal underwriting was to be carried out in Wiesbaden rather than London.
52. Throughout December rumours of R+V's activities in the London market continued to circulate within the reinsurance department. On 20^th December 2001 Mr. Moretti sent an e-mail to Mr. Gebauer with a copy to Mr. Kernbach saying that he had heard from a broker in London that very morning that R+V's agent had underwritten business using an R+V stamp. He wanted to know what the official position was. Mr. Kernbach told him to discuss the matter with Mr. Gebauer.
53. On 1^st January 2002 Mr. Gebauer was appointed to the position of Head of Front Office, Non-Life which effectively made him chief underwriter for the whole of non-life reinsurance. Underwriting in London continued, but there were no significant developments until about 11^th March (the precise date is not clear) when Mr. Gebauer and Mr. Chalhoub signed a memorandum of understanding in the form of an endorsement to the personal accident binder. A few days later on or about 14^th March 2002 they signed a similar memorandum of understanding relating to the property binder. Each memorandum expressly authorised Risk Paris to bind reinsurance risks for R+V's account, to issue documents on behalf of R+V evidencing cover, to process claims and to arrange reinsurance on behalf of R+V such that R+V's net participation in any risk did not exceed €1.5 million and £1.5 million respectively, but they did not address the requirement for the opening of an escrow account. In each case Risk was given authority to write business worldwide. Each of these memoranda was signed by Mr. Gebauer alone on behalf of R+V.
54. A formal inauguration of the Risk operation in London was arranged for 15^th March 2002. It was attended by Mr. Kernbach, Mr. Gebauer and Mr. Lehnert on behalf of R+V and by Mr. Chalhoub, Mr. Cooper (Risk's chief operations officer), Mr. Wyatt and Mr. Rivington, among others, on behalf of Risk. The event began with a visit of about 30 minutes to the box at Lloyd's where those present were introduced to each other and were given a brief description of the administrative processes involved. Photographs were taken and the party then moved to the Dorchester Hotel where Mr. Chalhoub gave a presentation describing the nature of the operation in more detail. A representative of one of the City firms of solicitors also gave a presentation explaining the steps that R+V would need to take in order to obtain authorisation to carry on insurance business in the United Kingdom.
55. Mr. Chalhoub made his presentation with the aid of a series of computer-generated slides. Copies of all the materials used at the presentation were later sent to Mr. Hoff who had been unable to attend the event and from these one can see exactly how Mr. Chalhoub described the operation to his audience. Three of the slides were in the form of cartoons depicting the essential elements of the underwriting process. The first showed a Risk underwriter sitting at his box in Lloyd's writing property and personal accident business, but with a caption showing the underwriting decision being referred to Wiesbaden and the business being reported to Paris. The next slide described the various stages in the business process: the producing broker bringing his placing slip to the box, the underwriters deciding whether to accept or decline the business and, if they decided in principle to accept it, sending the slip in electronic form to Wiesbaden and Paris. The third slide, which described the flow of money, showed premiums and bank interest going into an account described as "Intrust Bank Account in London for R+V" containing a floating fund and claims, underwriting fees and profit commission being paid out. Any surplus over the floating fund was shown as being paid out to R+V in Wiesbaden.
56. In addition to the cartoons there was a longer series of slides containing text which described various aspects of the operation. These included the following statements which are particularly relevant to the issues in this action:
"Why us? We underwrite for profit not income.

Dealing with us avoids expensive start up costs and the long term capital commitment that otherwise would be necessary.

Fee Structure and Money Flow

We charge a basic fee on net premiums written, so that our interest is to pay the least commission out and get the highest net premium for a risk; the same as you. . . . . . . . . . .

The benefit to you is that all of the business development is at our expense.

. . . . . . . . . .

The monies are paid by producers direct into a special bank account in your name, so there are no possible delays or withholding of funds. Bank interest on the account is for you to keep.

. . . . . . . . . .

Unlike any other Underwriting agency, we do not manage premium payments; they go directly into your account with no credit delay, so you have the entire benefit of the cash flow.

We therefore believe our expertise comes at no extra cost, with no initial investment."

57. In the course of the presentation there was a minor flurry of concern when Mr. Kernbach turned to Mr. Lehnert to ask whether the contract was a good one from R+V's perspective. He was assured that it was.
58. There was obviously some uncertainty at this time among London brokers about the nature of the relationship between R+V and Risk. On 22^nd March 2002 a broker sent a fax to Dr. Pleister, the chairman of R+V's supervisory board, asking for confirmation that Risk in London was authorised to underwrite business on behalf of R+V. Dr. Pleister worked in Berlin, but the fax was sent, no doubt by mistake, to Mr. Gebauer's office in Wiesbaden. Mrs. Plass sent Mr. Gebauer an e-mail asking what she should do with it. He said that he would reply by telephone. Perhaps he did, but the enquiry prompted him to consider again the terms in which R+V should issue so-called 'letters of comfort' confirming the position. On 11^th April Mr. Kernbach and Mr. Gebauer wrote to another large London broker confirming that Risk was authorised to accept facultative reinsurance business on behalf of R+V and on 29^th April a letter in the same terms, also signed by Mr. Kernbach and Mr. Gebauer was sent to the broker who had made the original enquiry. Mr. Kernbach said that such letters of comfort (of which there are several examples) merely served to confirm Risk's position as a producing broker for R+V, but in view of their terms it is impossible to accept that.
59. Following the inauguration meeting Mr. Gebauer and Mr. Rivington had started to develop underwriting guidelines relating to the reinsurance of property risks and this task was subsequently taken up by Mr. Lehnert who sent various comments to Mr. Rivington by fax on 25^th March. His message shows that he had already received a list of risks written on behalf of R+V. It is apparent from his comments that by that time it had been agreed in principle that at least 60% of the property business should relate to industrial policies originating in the European Union. Work on the production of underwriting guidelines was interrupted by Mr. Lehnert's illness and in the event a final version was never produced.
60. On 15^th April the management board of R+V met to give further consideration to the strategy for external reinsurance. Mr. Kernbach thought that the opportunity for growth was limited by a shortage of manpower and capital, but that significant growth could be achieved if greater resources were made available. The board was not persuaded that the reconstruction programme had yet proved effective and decided that for the time being the business of external reinsurance should not be expanded. The London operation does not appear to have been mentioned at the meeting, despite the fact that it represented a new venture in this area of business.
61. During the spring of 2002 Dr. Förterer decided to obtain some outside assistance in evaluating this aspect of R+V's operations. He therefore instructed Chiltington to undertake an analysis of the strengths and weaknesses of R+V's external reinsurance operations. The project was carried out by one of Chiltington's senior consultants, Mr. Rolf Urselmann, with two assistants, Mr. Stapf and Mr. Hussmann. In order to obtain a broad understanding of R+V's existing operations Mr. Urselmann had two meetings with Mr. Gebauer towards the end of April during the second of which he asked, among other things, whether R+V had representatives or underwriting facilities abroad. Mr. Gebauer told him about the Singapore branch, the underwriting agency in Cyprus and the representative offices in Miami and Sydney, but he did not mention the Risk binders or the operation in London. When he gave evidence Mr. Urselmann agreed that all the R+V staff had been very co-operative, but the fact remains that Mr. Gebauer did not tell him about this important aspect of R+V's underwriting arrangements. One of the underwriters in the facultative department, Mrs. Bianca Jung, did mention the London arrangements when she was interviewed by Mr. Urselmann in early May, but she was not able to give him a clear understanding of their nature. She knew they were linked in some way to Lloyd's, but seems to have thought at that time that R+V was involved in some kind of property underwriting pool.
62. Chiltington produced an initial report which it sent to R+V under cover of a letter of 30^th May 2002. The report contained an analysis based on interviews with R+V employees and the reports produced by the working group on external reinsurance operations. It referred in three places to the existence since the beginning of 2002 of an underwriting authority in London for facultative Lloyd's business. Chiltington expressed the view that all existing underwriting authorities should be reconsidered.
63. At some time in late April or early May Mr. Chalhoub learnt that Chiltington had been instructed to carry out an analysis of R+V's reinsurance operations. It is probable that he was told of it by Mr. Gebauer, possibly after he had become aware that Mr. Urselmann had been told about the existence of the London operation. Mr. Chalhoub was clearly under the impression that binding authorities were a sensitive subject within R+V because on 16^th May he sent an e-mail to Mr. Gebauer containing a spirited defence of the arrangements. Although it was headed "Food for Thought", it was actually in the nature of a script which Mr. Gebauer could use to justify his position to senior management within R+V. The flavour of the document can be obtained from the opening passages which read as follows:

"Writing a treaty is also giving your pen away, so everything we do in Wiesbaden is basically giving our pen away!

If R+V does not write Facultative reinsurance from London we should not write it from Wiesbaden either. . . . . . . . . . . . . . . "

There followed a number of points specifically in favour of the operation in London which included the following:

"§ Wiesbaden has direct control over the underwriters in London . . . . . . . .

§ We have been offered to take a significant participation in the capital in the London operation."

and concluded with a passage which began

"Our suggestion is to limit our facultative operation in Wiesbaden to Germany, the Netherlands and Switzerland and take a significant participation in, or all of, the capital of the London operation; to write from there facultative reinsurance in a professional way for the rest of the world under our strict control in Wiesbaden . . . . . . . . "

The use of the word "we" in this document is particularly striking.

64. Dr. Förterer received the report from Chiltington in early June 2002. Soon after it reached him he sent a copy to Mr. Kernbach for comment but without identifying any particular aspects which concerned him. A few days later Mr. Kernbach responded. He referred to the "underwriting offices in Cyprus and London" and said that they were writing very selective business which R+V regarded as desirable. Underwriting in Cyprus was being carried out under a binding authority granted in favour of a named person and Mr. Kernbach's comments might have been intended to give the impression that similar arrangements applied to the London operation. At any rate, he did not suggest to Dr. Förterer that the underwriting decisions relating to business presented in London were being taken in Wiesbaden. Dr. Förterer said that he and Mr. Kernbach had previously agreed that R+V should not grant binding authorities, or, as he put it, "give its pen away", and that Mr. Kernbach had assured him shortly afterwards that R+V had not done so. Mr. Kernbach told him, he said, that it was possible to organise underwriting authorities in a way that gave the principal a great deal of control over what was written. In my view Mr. Kernbach was seeking to allay Dr. Förterer's concerns by emphasising the extent to which R+V could exercise control over underwriting agents through the imposition of underwriting guidelines and monitor the operation of the underwriting itself.
65. Meanwhile there had been two further developments in relation to the Risk binders. The first related to the FSL business. Mr. Chalhoub had been seeking to persuade some of the other reinsurers of FSL to reduce their shares or cease their participation altogether in order to enable R+V to increase its share. In early April 2002 he and Mr. Gebauer agreed to commute the previous year into the current year, to treble the size of R+V's share and to integrate the business into the Risk UK book. In practical terms that meant that the FSL business was treated as if it had been written by Risk on behalf of R+V under the personal accident binder rather than by R+V directly. One result was that in the first year Risk took a commission of 32.5% under the FSL contract and a further 40% under the addendum.
66. The second development concerned the reinsurance of a French insurance company, Mutuelle des Provinces de France ("MPF"), which Mr. Gebauer and one of the underwriters in his department, Mrs. Ileana Wolff, had accepted on 1^st August 2001. The contract was described in the slip as a quota share reinsurance of third party liability and other risks written by MPF through another Risk company by the name of Assurem. It provided for the payment of 32.5% commission and brokerage of 2.5% + 1%. The business had been produced to R+V by the Risk broking arm in Paris, Reass France S.A.R.L. On 24^th April 2002 Mr. Gebauer sent an e-mail to Mr. Chalhoub confirming R+V's agreement to the transfer of this contract to Risk UK since inception. Again, the effect of that was to treat the contract as if it had been written by Risk on behalf of R+V under the property binder rather than by R+V on its own behalf with the result that in the first year Risk obtained an additional commission of 40% of original gross premium.
67. During the summer of 2002 R+V through Mr. Gebauer continued to do other business with Risk. On 2^nd July 2002 Mr. Gebauer and Mr. Peter signed a slip in respect of the renewal of a quota share reinsurance of Union Franco-Arab d'Assurances ("UFA"). This was another contract produced by Risk France relating to an insured in which Chalhoub interests, in this case Group Mepa, was the majority shareholder or manager. The contract was unusual in that R+V agreed both to act as reinsurer of UFA or, if UFA so chose, to cede to UFA a proportion of risks underwritten on its behalf by UFA. In substance, therefore, the contract enabled Group Mepa to write risks as manager of UFA and reinsure them with R+V or to write risks as manager of UFA in the name of R+V and reinsure them with UFA. Total deductions in the form of commissions received by Group Mepa and Risk amounted to 32.5%.
68. Later, on 10^th September 2002 while they were at the Monte Carlo conference Mr. Gebauer agreed at the request of Mr. Chalhoub to change the anniversary date of the UFA contract from 31^st March to 31^st December each year. Since the contract was expressed to be continuous subject to three months' notice of cancellation at each anniversary date, R+V had to give notice of cancellation on or before 30^th September if it wished to prevent the contract from running on to 31^st December 2003. Mr. Gebauer's agreement to that change is reflected in a fax addressed to Risk dated 18^th September 2002 to which I shall return in due course.
69. On 19^th August 2002 Mr. Chalhoub approached Mr. Gebauer with another piece of business. He had learnt that another reinsurer, ING Re, had decided to cease underwriting in Europe in order to concentrate on business in the United States and thought that there was a possibility of taking over the entire book of risks that it was currently writing in Europe. The suggestion was to take over individual accounts as and when they came up for renewal.
70. Mr. Gebauer thought this was an attractive proposal and accordingly on 27^th August he and Mrs. Plass signed an agreement giving Risk France authority to accept on behalf of R+V risks previously underwritten by ING at their anniversary dates. This agreement is of interest partly because it is another example of an agreement providing for Risk to establish an escrow account for the benefit of R+V into which premiums were to be paid and from which funds to meet claims were to be drawn. That does not appear to have surprised Mr. Gebauer or caused him to ask any questions about the nature of the account or what steps were required to set it up.
71. It is convenient at this point to describe another agreement relating to the business written by ING which Mr. Chalhoub introduced to Mr. Gebauer in September 2002. Mr. Chalhoub's access to the ING business as a whole had come about through his contacts with the underwriter who had been responsible for the business of ING in London, Mr. Jonathan Bowers. Mr. Bowers suggested that as part of its restructuring ING might also be interested in ceding to R+V retrospectively the greater part of the risks it had written on the account since January 2002. According to Mr. Gebauer and Mr. Chalhoub they discussed both aspects of the proposal with Mr. Kernbach towards the end of August 2002 and obtained his agreement in principle to taking over the ING book of business, including the 2002 unexpired accounts. They said that since ING's plans were still uncertain, however, Mr. Kernbach had agreed that Risk should be given authority in terms that were broad enough to enable Mr. Chalhoub to negotiate on behalf of R+V in relation to both aspects of the business. The agreement to taking over ING's existing 2002 book of business is said to have been confirmed on 11^th September during the Monte Carlo conference when Mr. Kernbach and Mr. Gebauer met Mr. Chalhoub at a dinner hosted by Mr. Kernbach at a restaurant called Le Roquebrune.
72. Although Mr. Kernbach initially denied that he had agreed that R+V should take over any of the ING business, he did eventually accept that Mr. Gebauer may have raised the matter with him and I think it likely that he did approve the proposal to write the business previously written by ING as and when individual contracts came up for renewal. I am unable to accept, however, that he agreed to R+V's reinsuring ING's existing contracts. The binding authority signed on 27^th August quite clearly relates only to accounts previously written by ING and offered to R+V at their individual renewal dates and did not give Risk authority to reinsure ING's existing 2002 book of business. Risk's authority to bind R+V to a retrocession of those risks is said to be contained in a fax message from Mr. Gebauer to Mr. Chalhoub dated 19^th September 2002 which purports to give Risk authority to bind R+V in respect of treaties underwritten by ING under the 2002 year of account retroactively from 1^st January 2002. In his witness statement Mr. Chalhoub described this fax as being no more than a clarification of the existing ING binder and a written confirmation of what had been agreed with Mr. Kernbach and Mr. Gebauer on 22^nd August and 11^th September. He said that Mr. Gebauer sent him the fax on 19^th September, but it has since become apparent that that is not correct and that the history of this document is much more complicated and to some extent still uncertain. I shall return to it at a later stage when I come to consider the history of a group of five faxes, of which this is one, apparently sent by R+V to Risk between 18^th September and 22^nd November 2002.
73. At all events, on 14^th January 2003 Risk did eventually sign an 85% quota share reinsurance of ING's existing 2002 business on behalf of R+V relying on the authority said to have been granted by the fax dated 19^th September 2002.
74. Meanwhile another development, not directly relating to the London binders, had taken place that would in due course lead to the unravelling of the relationship between R+V and Risk. For some time Mr. Chalhoub had been trying to interest Mr. Gebauer in a new project known as the 'High Excess of Loss Programme', or "HELP". By the end of May 2002 matters had progressed to the point at which Mr. Chalhoub was able to send Mr. Gebauer proposals for an agreement to be entered into between R+V and Insurance Actuarial Consultants, described by Mr. Chalhoub as a division of Risk France. Although worded in somewhat opaque terms, the proposed agreement amounted to a binding authority to evaluate excess of loss insurance programmes relating to a wide variety of risks using software developed by Risk and to write reinsurance on behalf of R+V if the business met certain criteria.
75. The HELP programme was being organised by a Mr. Andrew Lothian on behalf of Risk and he in turn had instructed a firm of brokers, Carvill, to obtain a quote for retrocession support. For that purpose they approached an insurance company based in Barbados, Manufacturers P & C Ltd ("MPCL"). At a meeting with MPCL's chief executive officer, Mr. Andreas Kusay, in August 2002 sufficient progress was made to enable Carvill to draft a retrocession agreement that would provide the basis for further negotiations. At that stage Mr. Kusay was told that the reinsurer would be R+V, but he was not made aware that Mr. Chalhoub or Risk was involved in the project.
76. Matters then proceeded apace. On 28^th August 2002 Mr. Kernbach and Mr. Gebauer signed an agreement on behalf of R+V with Insurance Actuarial Consultants ("IAC") under which R+V authorised IAC to evaluate excess of loss reinsurance programmes using its software and to accept on behalf of R+V risks that met certain minimum requirements. IAC was to be allowed a profit commission on a sliding scale. By an addendum of the same date it was agreed that the rates of profit commission would be significantly increased if the total premium income exceeded US$30 million.
77. It was an express term of the agreement that IAC was to arrange excess of loss reinsurance to protect R+V's net line and both Mr. Chalhoub and Mr. Gebauer appear to have understood that such reinsurance had to be in place before the agreement became effective and underwriting could begin. Mr. Kernbach said in cross-examination that he regarded the document that he signed as nothing more than a draft which was not intended to be legally binding. However, whether he had read it only superficially, as he said, or not, I have little doubt that he was aware of its general thrust and that the purpose of signing it was to commit R+V in some way. There is in my view no other plausible explanation for adding his signature to that of Mr. Gebauer who had already signed the document when it was presented to him. Mr. Kernbach's explanation for putting the terms relating to the enhanced profit share in an addendum, namely that there was a late change to the terms agreed between the parties, was equally unpersuasive.
78. In view of the fact that the HELP project had Mr. Kernbach's support it might well have been implemented had it not been for the arrival on the scene of Dr. Christoph Lamby who joined R+V on 2^nd September 2002 as general manager with a view to taking over Mr. Kernbach's position on his eventual retirement. Although Dr. Förterer had originally thought it likely that Mr. Gebauer would succeed Mr. Kernbach, the board considered it wise to consider a wider range of candidates and in the event Dr. Lamby had been chosen. Dr. Lamby was sceptical about the HELP project from the moment he learnt about it and as time went on he became determined to ensure that it was not implemented. He eventually succeeded in extricating R+V from it, but that did not occur until some weeks later.
79. The 2002 Monte Carlo Rendez-vous took place in the week beginning 9^th September, very shortly after Dr. Lamby had joined R+V. Back in April Mr. Kernbach and his wife had arranged to entertain Mr. Chalhoub and his father and their respective wives and also Mr. Gebauer to dinner at Le Roquebrune. Dr. Lamby accompanied Mr. Kernbach and Mr. Gebauer to Monte Carlo but was not invited to join them for dinner with the Chalhoubs. That was said to reflect the feeling of discomfort that already existed between Dr. Lamby on the one hand and Mr. Kernbach and Mr. Gebauer on the other, but I do not think that very much can be read into it, even though as time went on it became increasingly clear that Dr. Lamby did not see eye to eye with them. The occasion had been arranged several months earlier and Dr. Lamby had joined R+V only about a week before the conference took place. It was essentially a social occasion and it may be that Mr. Kernbach did not feel that he knew Dr. Lamby well enough to introduce him as an additional guest.
80. On 10^th September Mr. Kusay and other representatives of MPCL met Mr. Lothian and representatives of Carvill at Monte Carlo to discuss the proposed retrocession in support of the HELP project. Mr. Kusay realised that the transaction involved a considerable risk for R+V because the retrocession involved only a limited transfer of the risk and he wanted to speak to a member of R+V's board to satisfy himself that R+V fully understood the implications of the contract. Accordingly, a further meeting was arranged for 5^th October in Paris. While he was in Monte Carlo Mr. Kusay happened to bump into Dr. Lamby whom he already knew from his previous employment. He was surprised to learn that Dr. Lamby was unaware of the business being negotiated between MPCL and R+V.
81. One of Dr. Lamby's first priorities after joining R+V was to gain a thorough understanding of its external reinsurance business. As soon as he returned from Monte Carlo he sent an e-mail to Mr. Gebauer asking him for details of all R+V's underwriting agents. One specific question he asked in respect of each agent was 'How is he compensated?'. Later that month Mr. Gebauer responded with details of the various agencies used by R+V. He provided a good deal of information in relation to the operation in London, but in relation to remuneration he simply said that Risk received a commission and a share of profits. He said nothing that might have alerted Dr. Lamby to any particular feature of R+V's relationship with Risk, including the 40% first year commission, or to any shareholding in Risk UK. Later, on 16^th October Mr. Gebauer sent Dr. Lamby a fax setting out further details of R+V's underwriting agents. Again, however, he made no mention of the 40% first year commission payable under the London binders or the 30% shareholding acquired by R+V.
82. Towards the end of September Dr. Lamby heard rumours in the market that Risk was appointing an underwriter in London to write business on behalf of R+V. He made various enquiries of Mr. Gebauer which eventually resulted in an e-mail sent on 23^rd September in which Mr. Gebauer referred to the position of Mr. Lothian and his involvement with the HELP project. This was the first time that the HELP project had come to Dr. Lamby's attention. When describing the project Mr. Gebauer stated in terms that the underwriting would be entirely facultative and would be carried out in Wiesbaden.
83. On 5^th October 2002 Mr. Kernbach and Mr. Gebauer attended a meeting in Paris with Mr. Kusay, Mr. Lothian, Mr. Chalhoub and representatives of the brokers Carvill. Dr. Lamby had not been informed of the meeting, the primary purpose of which, as far as Mr. Kusay was concerned, was to ensure that Mr. Kernbach was aware of the scope of cover provided by the proposed retrocession. Mr. Lothian contemplated that a further meeting would take place within a few days which would also be attended by Dr. Lamby, but in the event nothing came of it and the matter next surfaced at the Baden-Baden conference.
84. In October each year a reinsurance conference is held in Baden-Baden and naturally in 2002 Mr. Kernbach, Mr. Gebauer and Dr. Lamby attended on behalf of R+V. For the first time Mr. Chalhoub attended the conference and Mr. Kusay was also present. Even before the conference opened on 21^st October Dr. Lamby had formed serious reservations about the HELP project. He was aware that a draft retrocession agreement was under consideration, but at that stage he did not know that a document had already been signed by Mr. Kernbach and Mr. Gebauer and believed that R+V was under no binding obligation, especially since the retrocession had not yet been put in place. Mr. Kernbach, Mr. Gebauer and Dr. Lamby were due to meet Mr. Chalhoub on 22^nd October to discuss the project. Dr. Lamby knew that Mr. Gebauer had arranged to meet Mr. Chalhoub at the airport on 20^th October and asked him to warn Mr. Chalhoub that R+V would not be going ahead with the project.
85. During the afternoon of 21^st October Dr. Maneth of R+V sent Dr. Lamby his comments on the HELP project by fax. He considered that the proposal had not been properly evaluated from a financial point of view and drew attention to a number of specific matters about which he was concerned. This only reinforced Dr. Lamby's view that the project was too risky and he insisted on discussing with Mr. Kernbach and Mr. Gebauer how they should approach their forthcoming meeting with Mr. Chalhoub. Mr. Kernbach and Mr. Gebauer, however, were still in favour of pursuing the project and so the discussions were inconclusive.
86. At this point a rather unusual event occurred. A broker from Carvill telephoned Mr. Kusay at Baden-Baden pressing him to give an immediate commitment on behalf of MPCL to accept the retrocession of R+V's risks under the HELP project. Mr. Kusay was unable to give an unconditional commitment at that stage, but he was persuaded to provide a manuscript letter written on hotel stationery confirming MPCL's agreement in principle, subject to reaching agreement on a contract wording. The letter was addressed to Mr. Chalhoub and was sent by fax from Baden-Baden to Paris from where it seems to have been immediately re-transmitted to Mr. Chalhoub in Baden-Baden. The fact that a letter of that kind should have been written in that way is distinctly surprising since one would have expected any confirmation of MPCL's position to have been sought and given formally through ordinary business channels rather than in this very informal manner. In all the circumstances I think one can properly draw the inference that Mr. Gebauer had warned Mr. Chalhoub that Dr. Lamby was seeking to call off the HELP project and that Mr. Chalhoub was trying to reinforce the position as best he could in advance of the meeting the following day. Moreover, there is other evidence that some dubious tactics were being employed to bring the matter to a conclusion. On 1^st November Dr. Lamby reported to Dr. Förterer that he had had a telephone conversation with MPCL the day before in the course of which he had been told that Carvill had told MPCL that he (Dr. Lamby) wanted the retrocession completed that day. Dr. Lamby, of course, had given no such instructions and it is difficult to see where Carvill could have obtained that information if not from Risk.
87. On 22^nd October 2002 Dr. Lamby and Mr. Gebauer met Mr. Chalhoub at Baden-Baden to discuss the HELP project. Dr. Lamby made it clear that R+V would not be going ahead with it and the meeting thereupon came to an abrupt end. The next day Dr. Lamby spoke to Mr. Kusay who showed him a manuscript document which I am satisfied, despite Dr. Lamby's uncertainty, must have been a copy of the letter he had sent Mr. Chalhoub the day before. It was not until the next day, 23^rd October, that Dr. Lamby obtained a copy of the HELP contract itself from Mr. Gebauer. He realised for the first time that a contract had already been signed with Risk, which caused him considerable surprise and concern in itself, and he was then able to consider that document in conjunction with the draft retrocession. He thought that there were large gaps in the cover which left R+V seriously exposed. His response to the situation was to contact Dr. Förterer and ask to see him urgently that same evening. They met at Dr. Förterer's house and having heard what Dr. Lamby had to say Dr. Förterer instructed Chiltington to carry out an investigation into the HELP project. He also asked for a report from Mr. Gebauer.
88. Chiltington's report on the HELP project reached Dr. Förterer on 28^th October, a few days after the conclusion of the Baden-Baden conference. That same day in response to his earlier request Mr. Gebauer sent Dr. Förterer a report in the form of a memorandum. In it he complained about various aspects of Dr. Lamby's behaviour. His main complaint was that Dr. Lamby wanted to make a few dramatic decisions to impress on people the fact that he had arrived and was in charge, without having any regard to the commercial wisdom of those decisions. In his own words, he was complaining that Dr. Lamby wanted to "send a signal" to the staff without much regard to the consequences. In his memorandum Mr. Gebauer explained and defended at some length Risk's function as an underwriting agency for R+V in London, Paris and Rome (though he did not mention the 40% first year commission or the 30% holding in Risk UK) and maintained that the HELP project would be very profitable. He said that Dr. Lamby was objecting to it simply in order to send the signal that he was looking for.
89. Later that day Dr. Förterer saw Mr. Kernbach and Mr. Gebauer at their request to discuss their difficulties with Dr. Lamby. At Mr. Kernbach's request Dr. Lamby himself was not asked to attend. The complaints made by Mr. Kernbach and Mr. Gebauer largely echoed the contents of Mr. Gebauer's memorandum. Dr. Förterer made the point that the HELP contract gave IAC authority to accept business and settle claims on behalf of R+V which was contrary to company policy. Mr. Gebauer told him that the agreement was merely a framework document and that it did not give Risk any underwriting authority and Dr. Förterer asked him to obtain confirmation of that from Risk itself. At the conclusion of the meeting Dr. Förterer asked Mr. Gebauer to send him by the end of the day various documents, including copies of all the other contracts between R+V and any of the Chalhoub family companies. Later the same day there was an exchange of e-mails between Mr. Gebauer and Mr. Chalhoub confirming that Risk would not have power under the HELP project to accept business on behalf of R+V and that each risk would have to be individually evaluated and accepted in Wiesbaden. That was further confirmed by a fax sent by Mr. Chalhoub to R+V during the evening of 28^th October.
90. On 30^th October 2002 Dr. Förterer sent a note to Mr. Kernbach and Mr. Gebauer asking for further information about the HELP project. By that time he had obviously received a copy of Mr. Chalhoub's letter of 28^th October dealing with underwriting authority but had not received copies of any of the other contracts with Risk. Dr. Förterer expressed surprise that several binding authorities had apparently been granted without informing the board. That, together with his dissatisfaction with the information provided by Mr. Gebauer in relation to the HELP project, led Dr. Förterer to instruct the internal audit department to investigate R+V's binding authorities and its relationship with the Risk group generally.
91. On 1^st November Mr. Gebauer sent Dr. Förterer additional material relating to the HELP project and a list of the contracts in which Risk was involved as broker or coverholder. He also sent copies of the contracts giving Risk authority to underwrite on behalf of R+V. The list of underwriting authorities included the two London binders identified by their reference numbers, but the documents attached to the list were the July, not the September, versions of the contracts and did not include either of the addenda.
92. Having had a chance to examine the scope of R+V's relationship with Risk, Dr. Förterer had another meeting with Mr. Gebauer on 8^th November at which he told him that in his view Mr. Gebauer had acted irresponsibly in allowing the volume of business transacted with Risk to expand to such an extent so quickly. He told Mr. Gebauer to start discussions with Mr. Chalhoub to bring the HELP project to a close. Over the week-end Mr. Gebauer had a number of telephone conversations with Mr. Chalhoub and on 12^th November he reported to Dr. Förterer that he had told Mr. Chalhoub that R+V could not implement the project. It is not clear exactly what passed between Mr. Gebauer and Mr. Chalhoub on the telephone, but as a result of their conversations a meeting between Dr. Lamby and Mr. Chalhoub was arranged for 20^th November in Paris to enable them to have further discussions about the HELP project.
93. Between 14^th and 19^th November there occurred a curious exchange of correspondence between Mr. Gebauer and Mr. Chalhoub about the profitability of the business produced by Risk for R+V. It began with an e-mail from Mr. Chalhoub to Mr. Gebauer on Thursday, 14^th November asking how much, according to R+V's figures, Risk had produced in net profits for R+V. Mr. Gebauer responded later the same day saying that because R+V would be closing its books for the 2001 underwriting year by the end of that week, he preferred to wait until Monday, 18^th November to produce the relevant statistics from R+V's system. On Tuesday, 19^th November Mr. Gebauer sent Mr. Chalhoub by e-mail statistics relating to Risk business for the period 1^st October 2001 to 30^th September 2002 that appeared to have been derived from R+V's records. However, although presented in a different form, the figures were identical to those which Risk had itself sent to R+V some days earlier, as Mr. Gebauer admitted. What he had done was to take the figures from electronic files he had received from Risk and present them in a slightly different form on R+V headed slides. Mr. Gebauer's explanation for all this was that Dr. Förterer had expressed himself unhappy about the volume of business accepted through Risk and that he was therefore looking for quota share reinsurance. Mr. Chalhoub, he said, had indicated that he might be able to find reinsurers interested in taking part of the business and he had reproduced the figures in a more attractive format for that purpose. It was, he said, entirely coincidental that he had transmitted those statistics to Mr. Chalhoub the day before he was due to meet Dr. Lamby.
94. On 20^th November, Dr. Lamby and Dr. Hasse duly had a meeting with Mr. Chalhoub in Paris. Mr. Hussmann of Chiltington was also present. Dr. Lamby and Dr. Hasse explained that the reduction in R+V's credit rating prevented it from entering into a three year contract of the kind involved in the HELP project. Mr. Chalhoub did not like it, of course, but appeared to acquiesce in R+V's decision. He said in evidence that he could not remember whether he had produced the figures he had received from Mr. Gebauer at the meeting in an attempt to persuade Dr. Lamby that the business produced by Risk was profitable for R+V, but when Dr. Hasse wrote to Mr. Chalhoub on 29^th November confirming the gist of the meeting he referred to the fact that Mr. Chalhoub had emphasised that the Risk business as a whole was worth US$10 million to R+V, saying that that did not match R+V's own figures. On 5^th December Mr. Chalhoub responded by asking how the figures could not match since they were R+V's own. It is clear, therefore, that whether he actually produced the document at the meeting or not, Mr. Chalhoub did seek to support his argument by putting forward the statistics as having originated with R+V. I think that Mr. Edelman Q.C. was right, therefore, in saying that one, if not the sole, object of this complicated exercise was to provide Mr. Chalhoub with ammunition for use in his discussions with Dr. Lamby.
95. On 23^rd November 2002 Mr. Gebauer and his wife drove to Paris. It had been their intention to entertain Mr. Chalhoub and his wife in Cologne for the week-end, but at the last minute Mr. Chalhoub felt unable to make the trip and Mr. Gebauer decided to take his wife to Paris instead to do some shopping. While they were there Mr. Gebauer met Mr. Chalhoub and, according to their evidence, handed him a number of documents which he was anxious to receive. The circumstances surrounding the production of these documents and Mr. Gebauer's visit to Paris present some of the most curious features of the case to which it will be necessary to return at a later stage. For present purposes, however, it is sufficient to say that the documents in question were prints of five fax messages of different dates relating to different contracts, each signed by Mr. Gebauer, together with a photocopy of each document bearing R+V's stamp authenticated by Mr. Gebauer's initials. Mr. Gebauer and Mr. Chalhoub were asked about these documents on a number of occasions in the course of preparing for the trial and in response gave a variety of inconsistent accounts of how and when they had been produced and delivered to Mr. Chalhoub. Moreover, it is a curious fact that no copies of any of these documents could be found in R+V's files. It will be necessary to consider these five faxes in more detail at a later stage.
96. Mr. Gebauer was taken ill during the journey home from Paris and was unable to go to work for some days. He returned to his office on Friday 29^th November when he was confronted with the results of the investigations into the HELP project and the relationship with Risk in general. In the light of the criticisms of the way in which the relationship with Risk had been handled Mr. Gebauer was suspended from duty and a week later he resigned from R+V. A week or so after that Mr. Kernbach asked to be allowed to retire for health reasons on 31^st December 2002 and his request was granted. I have little doubt that this was regarded by all concerned as a face-saving solution to a potentially embarrassing situation.
97. The next step as far as Dr. Förterer and Dr. Lamby were concerned was to set in motion an audit of all transactions carried out by Risk for R+V. Dr. Lamby wrote to Risk on 20^th December informing it of R+V's intention in that regard and proposing a date in January for the audit to be carried out. In the event it was carried out by Mr. Iain Brown of Chiltington in London and Paris during March 2003 accompanied by members of R+V's staff. In the meantime, however, enquiries continued on other fronts. On 9^th January 2003 Mr. Hoff and Mr. Köhler, a member of R+V's group audit department, had a meeting with Mr. Gebauer which was described as very constructive. Mr. Gebauer did not want to discuss the Chiltington report on which he had been asked to comment at the meeting on 29^th November because he thought that it was unfair not to have given him the documents in advance. Mr. Hoff and Mr. Köhler asked him some specific questions about various contracts, including the London binders. In response to a question about the amount of deductions he said that he could remember a figure of 8% with claim fees on top. He did not mention the 40% first year commission. He was asked at some length about the documents that he took to Mr. Chalhoub on 23^rd November, but it is more convenient to deal with what he said about them at a later stage.
98. On 7^th February 2003 Mr. Hoffmann, R+V's lawyer, interviewed Mr. Kernbach about the matters raised in Chiltington's report that had been presented on 29^th November. Mr. Kernbach complained that he had not been given a proper opportunity to deal with matters on that occasion. He said that Mr. Gebauer had made a very good impression on him and that as a result he had left matters very much in his hands. He regarded the HELP contract as an umbrella agreement that might or might not give rise to specific contracts of reinsurance at a later stage and did not think that a binding contract had come into being as a result of signing the document in August 2002. In response to a specific question from Mr. Hoffmann Mr. Kernbach agreed that Mr. Henri Chalhoub had offered him a seat on the board of UFA. In his note of the interview Mr. Hoffmann recorded Mr. Kernbach as saying that he had sent a fax to Mr. Chalhoub refusing the offer, but that he could not obtain access to his own copy because he was moving house and it was in the hands of the removal contractors with the rest of his papers. When he gave evidence, however, Mr. Kernbach agreed that he had in fact accepted the offer and said that Mr. Hoffmann must have misunderstood him or made a mistake when making his note later on. I am unable to accept either of those explanations. Mr. Kernbach did not quarrel with the suggestion that he had told Mr. Hoffmann that his personal papers were unavailable and I can see no reason why he should have been asked to produce a copy of the fax if he had not challenged Mr. Hoffmann's assumption by saying that he had turned the offer down. I am satisfied, therefore, that the note, which was made shortly after the event, is indeed accurate and that Mr. Kernbach did wrongly deny that connection with Mr. Henri Chalhoub.
99. Mr. Gebauer was interviewed again, this time by Mr. Hoffmann, on 11^th February 2003. He said that he regarded the HELP contract as a declaration of intent rather than a binding reinsurance contract and that R+V could not become bound to any particular risk without its specific agreement. He said he had not seen Mr. Chalhoub since the conference at Baden-Baden the previous October. According to Mr. Hoffmann's note, Mr. Gebauer initially denied having been in Paris at all on 23^rd November, but later said that he was unsure of his whereabouts and would have to ask his wife. In cross-examination Mr. Gebauer said that the note was wrong in this respect and that he had been asked about 22^nd November, but I do not think his recollection is reliable on that point, if only because 22^nd November was a Friday and he was in the office that day. I am satisfied that the note taken by Mr. Hoffmann's assistant, Miss Bender, is much more likely to be accurate. During that interview Mr. Gebauer was asked a number of questions about the documents that he took to Paris on 23^rd November. Again, however, it is more convenient to consider what he said about them at a later stage.
100. On 12^th February 2003 Mr. Chalhoub and Mr. Cooper met Dr. Förterer and Dr. Lamby in Wiesbaden to discuss the relationship between R+V and Risk generally. Mr. Chalhoub described the development of the business during 2001 and 2002, referring in particular to the high degree of co-operation that had been developed in marketing and underwriting stemming from the operation in London. However, he made no reference to the contribution to the venture made by R+V in the form of the 40% first year commission or to R+V's participation in the capital of Risk UK which might have been thought to reinforce the close nature of their relationship. Dr. Förterer explained that there appeared to have been an explosion in the volume of business done between R+V and Risk between the beginning of 2001 and the end of 2002 which was contrary to good business practice. He said that Mr. Gebauer had exceeded his authority and had entered into too many long-term contracts in breach of the board's guidelines. In the end, however, they agreed to set up a commission to examine all the treaties between R+V and Risk with a view to highlighting any problems or weaknesses. As it turned out, however, that decision was overtaken by events.
101. Meanwhile arrangements for the audit had been going ahead, though not without some difficulty. Between 5^th and 7^th March 2003 Mr. Brown and Mrs. Jung examined Risk's files in London. Among other things they noticed a "security" deduction of 40% of gross premiums, but no one in the London office could explain the basis for it. They were told to take the matter up in Paris. They also noticed that, instead of being paid into an escrow account as provided for in the contract, premiums were being transferred to an account in Switzerland.
102. On 17^th March the audit moved to Paris. This time Mr. Brown was accompanied by an employee from R+V's Accounts department, Mrs. Martina Schwärzel. Mr. Brown raised the question of the "security" deduction with Mr. Cooper and asked to see original signed copies of the two binders. He was provided with copies of both documents, including the addenda, which of course explained the basis of the 40% deduction. Later that evening Mr. Brown sent a fax to Dr. Lamby attaching a copy of the addendum to the personal accident binder.
103. In the light of these developments Mr. Gebauer was interviewed for a third time on 26^th March 2003, again by Mr. Hoffmann. He was shown the addenda and asked for his comments. He said that it was normal for an underwriting agent to retain a premium deposit and that this was essentially a similar case. The cession of shares in Risk UK had been agreed as security for the repayment of 40% of the final year's premium to R+V. He described the agreement as providing security and denied that there had been a purchase of shares in Risk UK.
104. Mr. Kernbach was also interviewed again by Mr. Hoffmann on 4^th April. He was first shown the addenda on which he was asked to comment. He said he knew nothing about them, but he realised that they provided for R+V to take a shareholding in Risk UK, for which neither he nor Mr. Gebauer had authority. He was then shown the binders themselves. He said he had no knowledge of them and had not been involved in them in any way. He described the inauguration event as a mere photo-opportunity and said that he had thought that all the underwriting decisions would be made by R+V in Wiesbaden.
105. On 17^th April 2003 R+V wrote to Risk terminating the binders with immediate effect.

4. The nature of R+V's case

106. R+V contended that the two London binders were the outcome of an unlawful conspiracy between Mr. Gebauer and Mr. Chalhoub in which all four Risk defendants participated. Accordingly, when it discovered the true position it was justified in terminating those binders with immediate effect together with any other binding authorities under which Risk had been appointed to underwrite on its behalf. It seeks a declaration to that effect and damages representing the losses it has suffered as a result of the conspiracy.
107. Conspiracy may take a variety of forms, but one of the simplest is that which is alleged to have occurred in this case, namely, an agreement between two or more persons to commit a wrongful act against a third which, when implemented, causes damage of some recognised kind. In order to be actionable a conspiracy of this kind does not require a predominant motive to harm the third party; it is sufficient that the object of the conspiracy is to harm him by performing an unlawful act of a kind that will in the ordinary course of things cause damage: see Lonrho plc v Fayed and others [1992] 1 A.C. 448 and Kuwait Oil Tanker Co SAK v Al Bader [2000] 2 All ER (Comm) 271. Conspiracy to defraud, if it leads to the third person being deprived of his property, fulfils these criteria in the most obvious way, of course, but a conspiracy to use any form of unlawful means against another person is actionable if it results in damage. I mention this because another, rather less stark, way in which R+V put its case was that Mr. Gebauer and Mr. Chalhoub conspired to use unlawful means in the form of deliberate breaches by Mr. Gebauer of his duty as an employee to deprive R+V of its property. Fraud, of course, requires dishonesty, and to establish that Risk through Mr. Chalhoub was party to a conspiracy to defraud R+V must establish not only that Mr. Gebauer was acting dishonestly in purporting to commit R+V to the binders, but that Mr. Chalhoub knew that he was doing so and was therefore acting dishonestly as well. For practical purposes, however, the same is true of R+V's alternative case. It is still necessary for it to establish that both Mr. Gebauer and Mr. Chalhoub knew that when Mr. Gebauer purported to commit R+V to the binders he was acting in breach of duty. In either case, proof that one object of the conspiracy was to cause R+V to part with funds without its agreement would satisfy the requirement of an intention to harm, whatever the underlying motives may have been.
108. Although R+V maintain that Mr. Gebauer had exceeded his authority in granting long-term binding authorities to Risk, the essence of its case against him and Mr. Chalhoub, and therefore against all the defendants, is that they were parties to a conspiracy to defraud R+V by enabling Risk to take an additional 40% of the gross premiums written in the first year under the London binders. The means by which that was to be achieved are said to have been the two addenda which were intended to provide a sufficient pretext for the deductions should some justification be required by R+V's accountants. When an issue of this kind arises it is natural to ask oneself whether there is any motive for dishonesty because in general people are not dishonest in the absence of some inducement. This is an important factor to bear in mind in any case involving allegations of fraud or other reprehensible conduct. Although the issue is one to be decided on the balance of probabilities, there is a long line of authority emphasising that cogent evidence is required to establish an allegation of this kind. One of the more recent cases in which this principle was considered is In re H (Minors) [1996] AC 563 in which Lord Nicholls reaffirmed at pages 586-587 that

". . . . . the court will have in mind as a factor, to whatever extent is appropriate in the particular case, that the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability"

109. Mr. Edelman on behalf of R+V did not dispute any of this and did not shrink from submitting that the motive in this instance was greed and that bribery was the inducement for what, if he is right, can only be described as gross misconduct on Mr. Gebauer's part. That case was put squarely both to Mr. Gebauer and Mr. Chalhoub. Not surprisingly, each of them vigorously denied it.
110. It is right to say at once that there is no evidence that Mr. Gebauer received any money directly or indirectly from Mr. Chalhoub or any of the companies with which he is associated. Nor is there any direct evidence of any other form of bribery. Nonetheless, Mr. Edelman submitted that bribery remained the most likely explanation for the events that occurred. However, it is not necessary for R+V to prove bribery as such; proof of dishonesty would be sufficient, whatever the motive behind it.
111. Although R+V's primary case was that there was in this case a straightforward conspiracy between Mr. Gebauer and Mr. Chalhoub to defraud R+V for personal gain, Mr. Edelman submitted that it was sufficient for R+V to establish an agreement between Mr. Gebauer and Mr. Chalhoub to a course of conduct that they both knew involved a breach of duty on the part of Mr. Gebauer towards R+V regardless of their motives. I think he was right about that inasmuch as the tort of conspiracy consists in the formation and implementation of an agreement to commit a wrongful act of any kind against another person. It is worth reiterating, however, that in order to establish the existence of a conspiracy it is necessary for R+V to show that Mr. Chalhoub knew that the course of action which they had agreed upon involved a breach of duty on Mr. Gebauer's part. In the context of this case that really amounts to proving dishonesty.
112. These principles were not seriously disputed, but Mr. Schaff Q.C. on behalf of Risk pointed out quite correctly that if there was an unlawful conspiracy between Mr. Gebauer and Mr. Chalhoub it must have come into existence by July 2001 at the latest when the first agreements with their addenda were signed. He submitted, therefore, that although subsequent events may shed some light on the existence of a conspiracy at an earlier date, any evidence of collusion between Mr. Gebauer and Mr. Chalhoub during the latter part of 2001 and 2002 must be examined carefully to see whether it really does tend to support that conclusion. He accepted that, if the binders were the product of a dishonest conspiracy between Mr. Gebauer and Mr. Chalhoub, the agreements as a whole are not binding on R+V. Failing that, however, he submitted that the agreements were unaffected by subsequent developments in the relationship between them, whatever they may have been. I think that is substantially correct, but it is also necessary to bear in mind that although the conspiracy is alleged to have been set in motion with the execution of the binders, it is said to have continued throughout the following eighteen months until Mr. Gebauer's employment with R+V came to an end in November 2002. One cannot therefore draw a hard and fast line between events occurring in the summer of 2001 and those that occurred later.
113. Although R+V relied primarily on the existence of a conspiracy to justify its termination of the binders, it also contended that Risk had abused them in ways that demonstrated its unwillingness to abide by their terms and so entitled R+V to treat them as discharged. This is a quite distinct limb of the case which calls for separate consideration.

5. Was there a conspiracy?

114. In support of his submission that there was an unlawful conspiracy between Mr. Gebauer and Mr. Chalhoub Mr. Edelman relied on a wide range of matters, some relating directly to the binders themselves and the circumstances in which they came to be signed, and others relating to subsequent events. It is convenient to consider them under separate heads, while reminding oneself that they are inextricably related to each other and must ultimately be considered as a whole.

(1) Suppression of the addenda

115. Mr. Edelman submitted that there was powerful and all-pervading evidence that Mr. Gebauer and Mr. Chalhoub had both systematically suppressed the existence of the addenda in order to ensure that knowledge of the terms agreed between them was withheld from R+V for as long as possible. If that is right, it provides powerful evidence in support of R+V's case that Mr. Gebauer and Mr. Chalhoub knew that what they were doing was wrong. There are many aspects to this submission, but one of the most significant relates to the position of Mr. Kernbach and the extent to which, if at all, he was informed about what was going on.

(a) Did Mr. Gebauer tell Mr. Kernbach about the binders?

116. Mr. Schaff submitted with some justification that this is one of the central issues in the case. Although R+V has criticised Mr. Kernbach for allowing Mr. Gebauer too much freedom of action and failing to keep proper control over his activities, it has never suggested that Mr. Kernbach was involved in a dishonest scheme of any kind or that he withheld from the management board of R+V of which he was a member information that he ought to have drawn to its attention. It follows that if Mr. Gebauer kept Mr. Kernbach properly informed about the existence and terms of the London binders, including the addenda, he can hardly be found to have acted dishonestly. On the other hand, if Mr. Gebauer did withhold important information from Mr. Kernbach, it becomes necessary to ask why, and one obvious explanation is that he knew that what he was doing was wrong. I propose to begin my analysis of the evidence, therefore, with this question.
117. It is important to remember that before taking up his employment with R+V Mr. Gebauer had spent many years with one of the major continental reinsurers. It is likely, therefore, that he had a degree of experience and breadth of vision that was not shared by everyone in the reinsurance department of R+V which was primarily a direct insurer which wrote a limited amount of external, that is, open market, reinsurance. He joined R+V at a time when its participation in external reinsurance was under review as a result of several years' bad results and he soon saw one of his functions as being to help reinvigorate the department and bring it back into profit. He quickly impressed Mr. Kernbach with his professional ability, but his underwriting philosophy, which favoured writing larger lines on fewer risks in preference to smaller lines on a larger number of risks, clearly differed from that of his immediate predecessor. He was well aware that London is the prime market for facultative reinsurance and that R+V could expect to have access to better quality business if it had a presence of some kind in London. Indeed, Mr. Kernbach himself accepted in his third interview that it was a good idea in principle to write facultative reinsurance in London, provided it was done in the right way. In the spring of 2001, however, the board of R+V had neither the funds nor the will to embark on the major strategic exercise of setting up a reinsurance underwriting office in London.
118. Mr. Chalhoub is a classic entrepreneur. He has been active in the world of insurance and reinsurance for many years as a senior manager of various companies in which his family has interests. He controls the affairs of the Risk group and uses his contacts and experience to exploit opportunities in the market as they present themselves, engaging Risk in the capacity of broker, underwriting agent, or both simultaneously in relation to the same business. He has imagination and is capable of being charming and persuasive. In the circumstances it is not surprising that, having renewed his acquaintance with Mr. Gebauer, Mr. Chalhoub should have appreciated the opportunities that a close association with R+V through an underwriting office in London offered: the prospect of enhancing Risk's standing in the market as well as substantial income in the form of commission and profit-sharing. Equally, from Mr. Gebauer's point of view collaboration with Risk had already demonstrated the potential to produce interesting new business of a kind that R+V was not currently writing. In his view a presence in the London market would give R+V access to the kind of business that it ought to be writing. The proposal put forward by Mr. Chalhoub provided an opportunity to achieve that objective without causing a stir, without using R+V's name and without needing to ask the board for funding which he knew was unlikely to be forthcoming. To have acted in a surreptitious manner, giving away as little information as possible until the project had proved itself, would have been entirely consistent with his objectives.
119. Mr. Gebauer said that he had referred Mr. Chalhoub's proposal to Mr. Kernbach immediately after their first discussions and had done so for three reasons: because it involved facultative underwriting, which at that time was not his responsibility; because it involved a three-year contract, for which he lacked authority; and because the premium income was expected to exceed €2 million, which also put it outside the limits of his authority. Mr. Gebauer said that he discussed two possible outcomes with Mr. Kernbach based on ten year's underwriting, one which he regarded as distinctly likely and one which he regarded as rather unlikely. The former showed a satisfactory profit, the latter a small loss. In each case, he says, they discussed the value of the 40% "deposit" at the end of ten years and the way in which it should be treated in R+V's accounts in the meantime. He also said that he told Mr. Kernbach about the proposed "security" in the form of shares in Risk UK. Mr. Kernbach, he said, told him to talk to Mr. Lehnert about it. Mr. Lehnert was not enthusiastic about the idea, but he did not actively oppose it, so he continued his negotiations with Mr. Chalhoub.
120. For his part Mr. Kernbach denied that he had had any discussions of that kind with Mr. Gebauer. He said that he had not been aware of the existence of the London office until much later and that he had never been aware of the contents of the addenda.
121. On an issue of this kind the credibility of the witnesses inevitably comes under scrutiny. Mr. Schaff submitted that little reliance could be placed on anything Mr. Kernbach said about his involvement in these matters after the relationship between R+V and Risk had turned sour in October 2002. In particular, he mounted a sustained attack on the reliability of the various statements made by Mr. Kernbach when he was interviewed for the second time by Mr. Hoffmann on 3^rd April 2003 following the discovery of the addenda.
122. The arrival of Dr. Lamby at R+V at the beginning of September 2002 and the direct involvement of Dr. Förterer following the Baden-Baden conference in October that year undoubtedly did lead to a complete reappraisal of R+V's relationship with Risk, beginning with the HELP project and then extending to all other areas of business. Moreover, I think it is fair to say that Dr. Lamby was determined to be his own man and to put his stamp on the reinsurance department. He was certainly not willing simply to indorse existing approaches and took determined action to ensure that the HELP project, which he thought was not in R+V's interests, was stopped in its tracks. It is hardly surprising, therefore, that there was considerable friction between him and Mr. Kernbach and Mr. Gebauer. However, the facts speak for themselves and the arrival of Dr. Lamby does not account for the way in which matters subsequently developed.
123. I think that Mr. Schaff was right in submitting that until things started to go wrong in October 2002 Mr. Kernbach was quite content in principle for R+V to do business with Chalhoub companies, though it is not clear that he appreciated fully the extent to which Mr. Gebauer had permitted the relationship to grow. However, the climate clearly did change after Dr. Lamby joined R+V. His concerns led to the direct involvement of Dr. Förterer, whose approach to external reinsurance was more cautious than Mr. Kernbach's, and the review of the relationship between R+V and Risk which he instigated did lead to criticism of both Mr. Kernbach and Mr. Gebauer. Once Dr. Lamby had succeeded in putting a stop to the HELP project Mr. Kernbach must have realised that there was a risk that he would come under criticism and by 29^th November that had become a real likelihood. I think that Mr. Schaff was broadly right, therefore, in saying that from that time on he did his best to distance himself from anything to do with Risk. For this reason alone it is necessary to treat a good deal of what he said in his interviews with Mr. Hoffmann with caution. That is particularly true of his second interview when it must have been clear to him that his own position was in jeopardy. Accordingly, I do not place much, if any, weight on what he said on that occasion.
124. However, in attacking Mr. Kernbach's credibility Mr. Schaff went rather further and submitted that in some cases he was not simply evasive but demonstrably untruthful. One example was said to be his statement to Mr. Hoffmann that he had turned down the offer of a seat on the board of UFA. Another was said to be his evidence that until after the inauguration meeting in London he believed that underwriting was to be carried out in Wiesbaden. In view of these various criticisms and the importance of his evidence it is necessary to consider Mr. Kernbach's reliability as a witness generally.
125. It is apparent that Mr. Kernbach's acquaintance with the Chalhoub family was of long standing. He had been on good terms with Mr. Henri Chalhoub for many years and had enjoyed a certain amount of social as well as business contacts with him. In the light of the expansion of business and the increased degree of co-operation between R+V and Risk the offer of a seat on the board of UFA as a non-executive director with generous fees might be seen as an attempt to influence Mr. Kernbach in favour of Risk. To have taken up a seat on the board of another company of any kind would have required the approval of R+V's supervisory board. To have accepted a seat on the board of a Chalhoub company at that time would probably have been regarded as unacceptable. Mr. Kernbach knew that and therefore did not mention the matter to Dr. Förterer; in those circumstances he may have felt bound to tell Mr. Hoffmann that he had refused the offer. His suggestion that Mr. Hoffmann had misunderstood what he said is wholly implausible. I am satisfied that Mr. Hoffmann's note is accurate and that Mr. Kernbach lied about this matter.
126. Mr. Kernbach's evidence that he thought that the underwriting would be carried on in Wiesbaden is, however, much more plausible. I shall consider Mr. Gebauer's evidence on this point in greater detail a little later, but he said himself that he had understood and intended that the formal underwriting decision would be made in Wiesbaden and had not abandoned that intention until after the inauguration meeting. One can see a similar understanding reflected in Mr. Lehnert's report of his visit to London in December 2001. I think it likely that, insofar as Mr. Kernbach was aware of the London operation, he did believe that risks would be referred to Wiesbaden for acceptance and that that understanding was reinforced by what he saw and heard during Mr. Chalhoub's presentation at the inauguration meeting. I do not accept, therefore, that his evidence on this point was false.
127. The criticisms that can fairly be made of Mr. Kernbach as a witness make it doubly necessary to examine critically his evidence in relation to any contentious issue, particularly any issue in relation to which he might himself be open to criticism. However, it does not justify regarding him as wholly unreliable, any more than Mr. Gebauer or Mr. Chalhoub, both of whose evidence can also be criticised in a number of respects. Mr. Schaff submitted that Mr. Gebauer and Mr. Chalhoub gave their evidence openly and fairly, but they also had an incentive to dissemble and their accounts, like those of other witnesses, must be set against the contemporaneous documents which can generally be relied on with some confidence to provide an unvarnished picture of events. Tested against the documents there were many instances in which the evidence given by Mr. Gebauer and Mr. Chalhoub was no less implausible, as will become apparent when I come to consider the facts in greater detail. It would be unsafe, therefore, to approach the matter with any firm preconceptions about the relative reliability of these three central witnesses.
128. In his affidavit sworn on 6^th June 2003 in support of R+V's application for a freezing injunction Dr. Lamby disclosed that one of R+V's employees had recently approached Mr. Hoffmann anonymously claiming to have left certain documents on Mr. Kernbach's desk at the end of 2001 or early in 2002 which disclosed the fact that R+V was to take a shareholding in Risk UK. Apparently the employee in question was sufficiently concerned by what Mr. Gebauer was doing to seek to alert Mr. Kernbach to what was going on. The employee was unable to say, however, whether Mr. Kernbach had actually seen or read the documents. Mr. Kernbach denied ever having seen them.
129. Mr. Hoffmann, who gave evidence from Germany by video link, confirmed that he had indeed been approached by an employee of R+V who had given him the information described by Dr. Lamby in his affidavit. However, I am satisfied that both German law and professional etiquette prevented Mr. Hoffmann from identifying the employee without his consent and, since that consent had not been given, he declined to do so. Nonetheless, on the basis of professional confidentiality he had sent Dr. Hasse, Dr. Förterer's assistant and himself also a practising lawyer, a copy of the documents which the employee had told him he had placed on Mr. Kernbach's desk. The fact that the documents had been provided on that basis led Dr. Hasse to think that he could not make any use of them that might encourage speculation (or worse) about the identity of the informant. As a result, although the documents themselves were disclosed along with other documents in the case, they were not identified in a way that enabled Risk's lawyers to understand which documents were said to have been put on Mr. Kernbach's desk. Unfortunately, that information was provided only after Mr. Kernbach had finished giving evidence.
130. The documents that, to the best of the informant's recollection, were put on Mr. Kernbach's desk were

1. a copy of a letter from Mr. Rivington (presumably to a London broker, although the name had been deleted) describing Risk's London operation on behalf of R+V which included the statement that R+V would be a 30% shareholder in Risk;

2. a copy of the confidentiality letter that Risk UK required brokers to sign before being given copies of the memoranda of authority setting out brief details of the two binding authorities and letter of comfort confirming that Risk had been authorised to accept business on behalf of R+V;

3. a copy of a letter of comfort dated 16^th November signed by Mr. Gebauer on behalf of R+V and addressed 'To whom it may concern' confirming that Risk was authorised to accept business on behalf of R+V and that R+V would discharge any liabilities arising under any business written by Risk on its behalf;

4. copies of the memoranda themselves;

5. incomplete copies of the two binders;

6. a draft letter from R+V referring to the downgrading of R+V's credit rating.

131. I can see no reason why an employee of R+V should have deliberately fabricated the account that was given to Mr. Hoffmann and I therefore accept that someone did place some documents on Mr. Kernbach's desk at some time in or around December 2001. There is obviously some room for doubt about the identity of those documents, but if the information that reached Dr. Lamby is accepted, as I think it should be, they must have included a copy of Mr. Rivington's letter which is the only document in which the shareholding is mentioned. It is likely that a broker in London sent someone in R+V by fax, all together, copies of various documents the firm had received from Risk. It is clear from the date stamp on the letter from Mr. Rivington that it could not have come into the possession of the informant before 7^th December, but apart from that there is no way of knowing when he or she received it. One cannot know with any certainty, therefore, when the documents were put on Mr. Kernbach's desk. The turn of the year is a notoriously busy time in the insurance world, as various witnesses testified, and with Christmas not far away the possibility that Mr. Kernbach did not consider the documents in any detail, or indeed at all, is a very real one. On the basis of the limited evidence before me I am not satisfied that they were brought to his attention.
132. However, if Mr. Kernbach had seen the documents, what would he have learnt? That depends in part on how they were presented to him. If Mr. Rivington's letter was on the top of the pile, as it was in the bundle prepared for the trial, he would almost certainly have seen the references to Risk and R+V and also the 30% shareholding. If the confidentiality letter, or the letter relating to the downgrading of R+V's credit rating were on top, he would have seen little of immediate interest and might well not have bothered to read any further. Given these uncertainties, I do not think that the fact that Mr. Kernbach did not take the matter up with Mr. Gebauer points strongly to the conclusion that he must already have known what was in the addenda to the London binders. Mr. Kernbach said that he did not see these documents and I see no reason not to accept what he said.
133. When considering Mr. Kernbach's knowledge of what was going on in relation to the London operation a good deal of assistance can be derived from the contemporaneous documents, not only for what they record, but for what they do not record. If Mr. Gebauer's account of events is correct, it is surprising that a project of this importance is not reflected in any of the contemporaneous documents apart from the agreements themselves. However, the difficulties in the way of accepting his evidence that he told Mr. Kernbach about Mr. Chalhoub's proposal to establish an underwriting office in London become even greater in the light of the messages passing between Mr. Kernbach, Mr. Gebauer and the other underwriters in R+V in late November and early December 2001. I agree with Mr. Schaff that the tone of Mr. Kernbach's note to Mr. Gebauer of 21^st November is not really consistent with his having heard for the first time that something might be going on in London, but, if it is to be taken at face value, it is impossible to reconcile its substance with the conclusion that Mr. Kernbach knew that R+V had already given Risk authority to underwrite on its behalf.
134. The subsequent exchanges pose similar difficulties. Mr. Kernbach's comment in his memorandum to Mr. Gebauer of 6^th December that

"You recently gave me the first verbal information about the intention of underwriting facultative business [sc. in London]"

and his assertion that any approvals could only be provisional because no definite decision had been made could not have been written by someone who knew that contracts had already been signed. Mr. Lehnert clearly did not think that anything had been finally decided because in the report of his trip to London he said that the visit served to discuss details of a possible facultative underwriting by Risk. Moreover, Mr. Gebauer's own e-mails of 7^th December assuring Mr. Kernbach and the other underwriters that the "project" had been cancelled are only consistent with his understanding that none of the recipients was aware at that time of the true position. The so-called "Project Status Report" sent by Mr. Gebauer on 10^th December described how the business would work, but did not make it clear that a final decision had been made, let alone that risks had already been accepted.

135. When referring at an earlier stage to Mr. Kernbach's note to Mr. Gebauer of 21^st November I qualified my remarks with the words "if it is to be taken at face value". I did so because when he was asked to explain Mr. Kernbach's message of 6^th December Mr. Gebauer suggested that he might have written it for the file in order to exonerate himself if something later went wrong. This inevitably brings one back to the arguments surrounding the documents placed on Mr. Kernbach's desk by the anonymous employee. If, as Mr. Schaff submitted, Mr. Kernbach already knew about the existence of the binders and the contents of the addenda, Mr. Gebauer's explanation leads to the conclusion that all these messages must have been written disingenuously with a view to presenting a false picture to the rest of the department and anyone else who might later examine the files. That seems to me to be rather far-fetched. Mr. Schaff recognised that and submitted that the real purpose of these messages was to suppress a rising tide of rather hostile enquiries from the other underwriters in the facultative department, particularly Mr. Moretti. However, if that was Mr. Kernbach's purpose, it is difficult to see why he should have raised the matter in a message to Mr. Gebauer on 21^st November marked 'private and confidential'. Having regard to the tone and contents of these messages, as well as the complete absence of any earlier documentary references to the London project, I am unable to accept the suggestion that the wording of any of these messages was chosen with a view to building a record as Mr. Gebauer suggested.
136. Mr. Schaff submitted that Mr. Gebauer's two e-mails of 7^th December made little sense if read literally, but these are business communications of a kind that are usually intended to be taken at face value. Mr. Lehnert, as I have already noted, did not think that R+V had finally committed itself to the project and it is not clear that he knew that a risk had been written on the very day that he had visited the office in London. Mr. Gebauer said that the comment in his second e-mail that 'implementation had failed due to the haste of the intended underwriter' was a reference to Mr. Rivington's unwillingness to wait for the establishment of the system that would enable slips to be transmitted to Wiesbaden for acceptance, but I do not find that convincing. The thrust of the message was not that the project was going ahead, albeit in a different form, but that it was not going ahead at all, at least for the time being.
137. This makes Mr. Gebauer's e-mail of 10^th December all the more surprising. Neither he nor Mr. Kernbach could recall any conversation late on the Friday evening or early on the Monday morning that could have led to it, but given the nature of their exchanges at the end of the previous week it seems most surprising that Mr. Gebauer should have sent this message without any further reference to Mr. Kernbach. At one point Mr. Gebauer said he thought that it might have been prompted by a conversation with Mr. Lehnert early on the Monday morning and a little later he said that he had sent the message because it was what Mr. Kernbach had asked him to do. I think it likely that following Mr. Lehnert's visit to London Mr. Kernbach decided that the underwriters who were likely to be particularly affected by any project involving an office in London ought to be told how things stood. Mr. Gebauer's choice of language ("we wish to expand our facultative reinsurance in an opportunistic manner", "RISK has set up a structure that we want to use for facultative reinsurance" (my emphasis) and his statement that "[t]his ensures that the business is underwritten in Wiesbaden not in London") was calculated to give the impression that Risk was little more than a glorified producing broker. It was inconsistent with the messages sent the previous Friday insofar as they indicated that the whole project had been abandoned, but at the same time it dispelled any notion that Risk was underwriting in London on behalf of R+V. Moreover, Mr. Gebauer stated in terms that "R+V has no capital holding in RISK". I will return to Mr. Gebauer's understanding of the addenda at a later stage, but whatever his own view, this made it clear that R+V did not have a shareholding in any of the Risk companies.
138. Despite the uncertainties introduced by the evidence of the anonymous employee, this group of messages provides strong support for the conclusion that Mr. Gebauer had not told Mr. Kernbach that binding authorities had been signed, and, more importantly, that he had not informed Mr. Kernbach or Mr. Lehnert of the contents of the addenda.
139. This brings me to the formal inauguration of the London operation in March 2002. Mr. Schaff submitted that Mr. Kernbach's presence at the meetings showed that he was aware of, and approved, the arrangements under which the underwriters in London referred risks which they had accepted to Paris to be formally underwritten on behalf of R+V. However, it is important in this context to distinguish between knowledge of the existence of the binding authorities under which Risk was already writing reinsurance on behalf of R+V and knowledge of the terms of the addenda.
140. At an early stage in the inauguration the party was taken to the box at Lloyd's where they were introduced to the underwriters. They were given a brief description of the way in which business was handled at the London end and were shown the process by which slips were transmitted electronically to Paris. Later in the morning Mr. Chalhoub gave his presentation describing the nature of the operation in general, complete with slides, and Mr. Rivington and Mr. Phipps each gave a short presentation relating to his own area of the market. Whatever he may previously have thought, therefore, I think Mr. Kernbach must have realised by the end of the morning that wherever the slip was signed, the real underwriting judgment was being exercised in London. It is interesting to see that in a letter to Mr. Henri Chalhoub of 9^th April 2002 Mr. Kernbach referred to the arrangement as an "underwriting facility", an expression which he admitted would normally suggest that Risk was entitled to underwrite on behalf of R+V .
141. Mr. Kernbach's assertion that he thought that the final underwriting decision rested in Wiesbaden would be difficult to accept were it not for the fact that it was supported by one of the slides shown at the presentation. Mr. Chalhoub described how he and Mr. Cooper had prepared the slides at the last minute by adapting some existing material. He said that the slide showing the London office referring underwriting decisions to Wiesbaden and reporting information to Paris was a mistake. He was right about that, inasmuch as underwriting was in fact being referred to Paris and reporting was to be made electronically to Wiesbaden, but no one suggested that he took effective, or indeed any, steps at the meeting to correct the false impression given by that slide. That would be a relatively trivial point, however, were it not for the fact that following his visit to London Mr. Lehnert was clearly under the impression that risks were to be referred to Wiesbaden for final approval. The picture became even more confused, therefore, when Mr. Gebauer said in evidence that it was also his understanding that risks would be referred to Wiesbaden. He said that the idea of underwriting in Wiesbaden using the electronic transmission of slips had arisen in negotiations that had taken place to develop and refine the arrangements after the first set of binders had been signed in July. When he and Mr. Chalhoub realised that R+V could not do business in London, either itself or through an agent, without obtaining authority another solution had to be found. According to Mr. Gebauer, the solution he favoured (and which he said was also favoured by Mr. Kernbach and Mr. Lehnert) was to refer risks electronically to Wiesbaden for signature. Referring them to Risk France for underwriting in Paris was nothing more than a fall-back solution. He said that it was only in March or April 2002, after the inauguration had taken place, that he finally accepted that the systems could not be put in place to enable underwriting to take place in Wiesbaden.
142. All this makes a certain amount of sense in commercial terms, but of course it is completely at odds with the terms of the binding authorities which authorise Risk France to underwrite for R+V and make no provision of any kind for business to be referred to Wiesbaden. If Mr. Gebauer is to be believed, he regarded the contracts as little more than a basis for further negotiation about how, when and on what terms Risk would obtain business for R+V. That strikes me as very odd for an underwriter as experienced as Mr. Gebauer undoubtedly was. Mr. Chalhoub accepted that Mr. Lehnert had wanted to have business referred to Wiesbaden, although it turned out not to be possible, but he also made it very clear that he would not have tolerated any attempt by R+V to exercise independent underwriting judgment.
143. If, as I find to have been the case, Mr. Kernbach had not been told that contracts had been signed, it is not surprising that in December 2001 he should have been under the impression that the London operation was still only a project and that negotiations were proceeding on the footing that the final underwriting decision would be taken in Wiesbaden. Moreover, if in March 2002 Mr. Gebauer was still hoping that systems might be put in place to enable that to occur, Mr. Kernbach might well have remained under the impression that that was what was intended. By the time of the inauguration, however, Mr. Lehnert would have known that business was currently being written without being referred to his department and I am unable to accept that he gave Mr. Kernbach any assurance to the contrary. However, if he thought that was how matters would be handled in future, he may have said as much to Mr. Kernbach.
144. Looking at this evidence as a whole, I do not think that it points strongly to the conclusion that Mr. Kernbach was already aware by March 2002 that there were in existence two contracts under which Risk was authorised to underwrite on behalf of R+V. However, the position must have become clear to him shortly thereafter because by 11^th April 2002 he was signing a letter of comfort confirming that Risk had authority to underwrite on behalf of R+V. Mr. Kernbach said that when he signed that letter he believed that R+V retained the final say and that Risk's authority was limited to introducing business to the underwriters in Wiesbaden, but I find that wholly incredible. Mr. Kernbach may have been willing to leave Mr. Gebauer very much to his own devices and may not have taken sufficient interest in what he was doing, but he was too experienced not to understand the nature of a document of this kind which in any event states its purpose quite clearly. It is significant that Mr. Kernbach did not object strongly to the fact that Risk was writing on behalf of R+V. In my view he was quite happy for R+V to grant binding authorities in what he considered to be appropriate circumstances, with or without board approval, especially where R+V was able to limit the authority to particular individuals or where it was in a position to impose strict underwriting guidelines.
145. Knowledge of the existence of the binding authorities should not, however, be confused with knowledge of the addenda and their terms. The fact that Mr. Kernbach was willing to commit R+V to binding authorities under certain circumstances does not mean that he was generally willing to commit R+V to providing start-up assistance to underwriting agents or that he was willing for R+V to accept a shareholding in an underwriting agent without the board's approval.
146. The first indication of any kind that might be taken as corroborating Mr. Gebauer's evidence that he had told Mr. Kernbach of the 40% commission and the shareholding in Risk UK is said to be Mr. Kernbach's failure to respond to the documents left on his desk by the anonymous employee. However, for the reasons I gave earlier, I am not persuaded that those documents did lead to Mr. Kernbach's becoming aware that Mr. Gebauer had agreed either of those terms with Mr. Chalhoub.
147. The matter is next said to have been raised in a conversation between Mr. Kernbach and Mr. Chalhoub which occurred sometime before the inauguration meeting. According to Mr. Chalhoub he telephoned Mr. Kernbach in order to invite him to attend the inauguration and open the box at Lloyd's. He said that he referred to the fact that R+V had taken a shareholding in Risk and gave that as the reason for inviting Mr. Kernbach to carry out the formal opening. Mr. Kernbach denied that he had received an invitation from Mr. Chalhoub, but I think it likely that there was a conversation of some kind between them. What is less clear, however, is whether Mr. Chalhoub said anything that alerted Mr. Kernbach to the fact that R+V had taken a shareholding in Risk UK. I am not satisfied about that. Whatever may be said about Mr. Kernbach's willingness to grant binding authorities despite the policy laid down by the board, there is no reason to think that he was willing to purchase shares in other companies on behalf of R+V without its approval. If Mr. Chalhoub had told him prior to the inauguration that R+V already had a shareholding in Risk UK, I think he would certainly have asked Mr. Gebauer for an explanation.
148. One comes next to the events of the inauguration meeting itself. In his affidavit sworn in opposition to R+V's application for a freezing injunction Mr. Gebauer said that in the course of the presentations the whole of the relationship was explained to Mr. Kernbach once again, including the 40% first year commission and the 30% shareholding. I am unable to accept that. It is a striking feature of the presentation made by Mr. Chalhoub, as reflected in the slides, that there is no reference of any kind to the 40% first year commission. On the contrary, one sees the statements that "dealing with us avoids expensive start up costs and the long term capital commitment that otherwise would be necessary", "all of the business development is at our expense" and "our expertise comes at no additional cost with no initial investment". If anything had been said to correct the impression given by the slides, it could not have failed to make a considerable impact on all those present, including Mr. Kernbach. Mr. Chalhoub said that he had not told his underwriters about the additional first year commission because he did not want them to write for volume rather than profit. The propriety of withholding that kind of information from the underwriters may be open to question in view of the fact that Mr. Phipps said it was something he might well have wanted to take into account when assessing risks, but this desire not to publicise the matter can scarcely provide a satisfactory explanation for failing to correct the false impression given by the slides. Even if he did not want to include an express reference to the additional commission, Mr. Chalhoub could at least have omitted the passages which stated that R+V was not making any initial investment or providing any long term capital commitment. The practical effect of the addenda, at best, was that R+V provided working capital to Risk in the form of a loan that might or might not be recovered, with or without an element of capital appreciation only after many years. To say that that did not amount to an "initial investment" or a "long term capital commitment" is little more than playing with words. In my view the form of the presentation was thoroughly misleading.
149. The matter of the shareholding and directorship came up again in the context of the inauguration. Mr. Chalhoub said in evidence that he had asked Mr. Kernbach at the inauguration whether he would become a director of Risk UK and Mr. Kernbach's response when that was put to him in cross-examination was not altogether to dismiss the suggestion. Mr. Schaff submitted that Mr. Kernbach must have realised that Mr. Chalhoub was talking about the seat on the board to which R+V was entitled in accordance with the addenda, but I do not think that necessarily follows at all. Of course, if Mr. Kernbach had been aware of the addenda, it is likely that he would have made the connection, but if he were not, an invitation to join the board of Risk UK might have been seen as no more than an attempt on the part of Mr. Chalhoub to strengthen the links between R+V and Risk.
150. Mr. Schaff suggested, as another possibility, that Mr. Kernbach, like Mr. Gebauer, may not have understood the addenda as involving the purchase of shares in Risk UK. This brings me to another curious and rather surprising aspect of Mr. Gebauer's evidence. When he was asked about the terms of the addenda, and in particular the provision for the "cession" of a 30% shareholding in Risk UK, he said that it did not in his view involve any purchase of shares but something more in the nature of a pledge.
151. The addenda were drafted by Risk following what, according to Mr. Gebauer, were detailed negotiations about the circumstances in which Risk was to be entitled, or bound, to repurchase the shares. That the project was discussed between Mr. Gebauer and Mr. Chalhoub on several occasions is a matter of commonsense, but was confirmed by Mr. Chalhoub. He also confirmed that agreement in principle had largely been reached by the time Risk sent the draft agreement to R+V on 14^th June 2001. Having regard to the subject matter of the addenda generally and the nature of those negotiations, I think it most likely that the wording of the addenda was chosen by Mr. Chalhoub himself to reflect what he understood had been agreed with Mr. Gebauer. It is important to remember as well that, although they both speak English fluently, neither of them speaks it as his first language. The word "cession" is not one that a native English speaker would be likely to use in this context: he would be more likely to choose "transfer" or "deposit", if he wanted to be precise about the nature of the transaction (sale or pledge), or perhaps "security" if he were more concerned to describe its commercial purpose. If he only had the word "cession" to go on, therefore, Mr. Gebauer might be forgiven for being a little confused about exactly what sort of transaction was meant, although even then one would have thought that his negotiations with Mr. Chalhoub would have left him reasonably clear about what was intended. However, the word "cession" does not appear in isolation; what follows, in particular the provisions for the repurchase of the shares by Risk and for the reinsurer to have a seat on the board "for as long as [it] holds said shares in Risk", makes it abundantly clear that what is contemplated is a transfer to R+V of shares in Risk UK. Mr. Kernbach had no difficulty in understanding the effect of the addendum when it was shown to him by Mr. Hoffmann and I find it difficult to believe that Mr. Gebauer was under any illusion as to its true meaning either.
152. It follows from Mr. Gebauer's own account of his understanding of the addenda that he did not make it clear to Mr. Kernbach that the agreement provided for R+V to become a shareholder in Risk UK. In my view, however, he was well aware of what was involved and deliberately concealed this aspect of the agreement from Mr. Kernbach. It does not necessarily follow that he also concealed the agreement for the 40% first year's commission, but since the two were intimately connected, it makes it much more likely.
153. In my view all this evidence points firmly to the following conclusions. By December 2001 the existence of a project involving facultative underwriting through an office in London was known to just a few people within R+V. Mr. Gebauer obviously knew about it and so did Mr. Lehnert, but Mr. Lehnert's assistant, Mrs. Jung, did not. The first hint she received came in the form of enquiries from brokers in London. Apart from Mr. Gebauer, no one appears to have known that agreements had been signed giving Risk France authority to underwrite on behalf of R+V. On the contrary, the clear picture that one gets from the exchanges that took place in late November and early December is that what was going on in London was understood to be no more than a project in respect of which no final decision had yet been made. I am satisfied that Mr. Gebauer did discuss with Mr. Kernbach at quite an early stage the idea of underwriting facultative business in London through Risk, but only in the most general terms. I am equally satisfied, however, that he did not at any stage make it clear to Mr. Kernbach that R+V was expected to provide Risk with funding in the form of a 40% commission on the first year's premiums or that R+V would obtain a holding, or, for that matter, an interest of any kind, in the share capital of Risk UK. I am also satisfied that Mr. Gebauer failed to inform Mr. Kernbach of the final terms agreed with Mr. Chalhoub and did not inform him that contracts had been signed, either in July or September.

(b) The circumstances surrounding the signing of the binders

154. The circumstances in which the binders were signed and the way in which they were entered in R+V's records was said by R+V to lend further support to the conclusion that Mr. Gebauer and Mr. Chalhoub were engaged in a dishonest conspiracy.
155. The first question for consideration is whether any inference can be drawn from the fact that the terms relating to the 40% first year commission and the 30% shareholding in Risk were put in addenda rather than in the body of the agreements. The business plan was based on the assumption that there would be an additional first year commission of 40% of gross premiums, so it is clear that that was an essential part of the proposal from the outset (as was indeed confirmed by both Mr. Gebauer and Mr. Chalhoub). Mr. Chalhoub also confirmed that one of the main reasons for signing an addendum at the same time as the main contract is to conceal its contents. In the present case he suggested that the purpose was to conceal the contents from his own underwriters and from the market, but neither of these provides an entirely satisfactory explanation given the fact that versions of the binders which excluded any reference to Risk's commission were produced and signed for showing to the market. Another explanation suggested by Mr. Gebauer was that the terms were put in a separate document because they were a special addition to the standard form of contract. I can see some force in that, but if it were the true explanation I should have expected Mr. Chalhoub to have put it forward since the documents were drafted by Risk. He did not do so, however. The fact that terms of this kind were put into addenda undoubtedly did enable them to be concealed for a long time from R+V and does itself suggest that it was one of the reasons for putting the documents in that form.
156. Mr. Edelman sought to attach some significance to the fact that when the time came to sign the binders Mr. Gebauer obtained the signatures of two relatively junior underwriters in the treaty department, Mr. Plotka and Mr. Peter, neither of whom had experience of this kind of contract. In July 2001 when the first agreements were signed Mr. Plotka was an assistant underwriter in Mr. Gebauer's department reporting to Mr. Diesing. As such he was quite a junior employee. He could not remember having been asked by Mr. Gebauer to co-sign documents on any previous occasion and did not think that it was his place to ask any questions. He signed the agreements and the addenda at Mr. Gebauer's request without paying any attention to their contents.
157. Mr. Edelman submitted that Mr. Gebauer chose Mr. Plotka to co-sign the agreements precisely because he was a junior member of the department and could be expected to do his bidding without asking any questions. I think that is largely correct. I have no doubt that Mr. Gebauer simply wanted a second signature and did not intend to spend time explaining what the agreements involved. He chose a junior employee since he was less likely to insist on examining the documents or to ask questions. Any junior employee with signing powers would have done; Mr. Plotka was working in his department and happened to be available when a signature was required.
158. The position was a little different when the second agreements were signed on 28^th September. As Mr. Gebauer pointed out, most of the documents that Mr. Tannous had brought to Wiesbaden for signature related to the Inaya contract, so it made sense to ask Mr. Peter to be the co-signatory because he was market manager for the Middle East and had had some previous involvement with the Inaya business. Mr. Peter was more senior than Mr. Plotka, but still considerably junior to Mr. Gebauer. He expressed some reservations about signing the documents because he was not conversant with medical insurance, but Mr. Gebauer assured him that he would take responsibility for them. Mr. Peter had no distinct recollection of signing the binders themselves or the addenda, but his signature is there on the documents. I am satisfied that he signed them without giving any considered thought to their contents.
159. There were a very large number of documents to be signed on 28^th September and I doubt whether anyone who was not already familiar with the business would have had time to consider the implications of these particular addenda. I am not persuaded that Mr. Gebauer chose Mr. Peter as a co-signatory because he thought he was less likely than anyone else to understand what he was signing. Again, he was a junior employee who was present and capable of signing, though I do think that Mr. Gebauer assumed that he would be unlikely to question what he was signing.
160. After each set of binders had been signed by R+V copies of the documents, including the addenda, should have been retained for R+V and placed on a contract file where they would have been available to anyone who needed to consult them. However, although copies of both the July and September versions of the binders were to be found in the contract files, no copies of any of the addenda have been found anywhere at R+V. One possibility, of course, is that they were originally placed on the files but were later removed and lost. Another possibility is that they were not put on the files in the first place.
161. Mr. Schaff sought to persuade me that documents missing from R+V's files (of which these are but one example) could have been misplaced or lost altogether in the course of the various investigations which began in October 2002 and continued for many months thereafter. It is clear that people went to the files on many occasions and that there has been a certain amount of confusion over the location of certain documents. However, there is no reason to think that any of those who were involved in the investigations or in the subsequent preparation of the case for trial were unaware of the importance of keeping original contractual documents safe. Moreover, given that there were four separate addenda (two signed in July and two signed in September), I find it very hard to accept that muddle and incompetence are a likely explanation for the disappearance of them all. The fact that the documents Mr. Gebauer sent to Dr. Förterer on 1^st November 2002 included copies of the July contracts but not the addenda suggests that the addenda were not on the file at that time. Mr. Gebauer said that he had asked one of his assistants to copy the documents to be sent to Dr. Förterer and suggested that he or she had simply overlooked the addenda. However, there are difficulties with that explanation. Contract documents were attached to the files by metal pins and would have to have been removed in order to make copies. Having removed a contract, it would be difficult to overlook its addendum. The most likely explanation in my view is that none of the addenda were put on the contract files in the first place and it is difficult to see who apart from Mr. Gebauer would have wanted to keep them off the files.
162. As I have already explained, both binders must have been entered on the CIG system on 25^th July in order for them to be allocated the reference numbers that were written on them when the signed copies were returned to Risk that day. No details were entered in respect of the property binder, nor is there any evidence to show what information was entered into the 'A' screen in relation to it. The personal accident binder was described as a proportional quota share treaty and a code was included identifying Risk as the cedant. This suggests either that the person making the entry (if it was not Mr. Gebauer himself) did not properly understand the contract or that he or she was given some misleading instructions. The same might be said in relation to the description of the 40% commission as a deposit, but on the other hand one finds in the "Remarks" field the reference to the 30% share in Risk. If Mr. Gebauer was doing his best to suppress information about the existence of the addenda, it seems surprising that he should have allowed this information to be put onto the system in any form.
163. It is against that background that one has to consider the implications of the missing share certificate. There is no room for doubt that it reached R+V and no reason to think that it was delivered to anyone other than Mr. Gebauer. The only possibilities are that it was lost somewhere between the post room and Mr. Gebauer's office, or that he received it and disposed of it in some way. It is not unheard of for post to go missing within a large organisation, of course, but it is not a common occurrence and in the ordinary course of things it is more likely than not that the envelope did reach Mr. Gebauer's office. There is no positive evidence that he removed it, but it is fair to say that its disappearance is consistent with a systematic attempt on his part to suppress information that would expose the existence of the addenda.

(c) Opening the bank accounts

164. Mr. Edelman submitted that further evidence of an intention to conceal the existence of the binders from R+V is to be found in the way in which Risk handled the opening of bank accounts in connection with the London operation.
165. Each of the binders called for an escrow account to be opened in the name of R+V into which premiums were to be paid and from which funds were to be withdrawn to pay claims. Risk UK itself also needed to operate bank accounts in connection with its business. On 30^th October 2001 Mr. Wyatt and Mr. Chalhoub met one of the managers of HSBC Bank to discuss opening the necessary accounts. Mr. Chalhoub wanted to open an account in the joint names of R+V and Risk but was told that in order to do that the bank would need a resolution of the board of R+V. According to Mr. Wyatt, Mr. Chalhoub said that he would discuss the matter with R+V. Later he told Mr. Wyatt that R+V was concerned about appearing to be carrying on business in the United Kingdom and no longer wanted an account to be opened in its name. Mr. Wyatt therefore did not pursue the matter. He did, however, open a number of accounts for Risk UK, including a separate account for the receipt of premiums which would enable them to be kept segregated from Risk's own funds. To that extent they were, as Mr. Wyatt put it, 'ring fenced', although, as he accepted, Risk had unfettered access to them.
166. Mr. Chalhoub and Mr. Cooper both gave evidence to a broadly similar effect. Mr. Chalhoub said that the bank had told him that Risk could not open an account on behalf of R+V, by which I think he meant that it was necessary for R+V itself to make the application. He said that Mr. Gebauer was concerned that R+V might appear to be carrying on business in London if its name appeared on an account into which premiums were paid and so they agreed to dispense with that requirement. He was not very clear about when that had been agreed, but thought that it might have been in about February 2002. Mr. Cooper thought it had been a little later.
167. When he gave evidence Mr. Gebauer gave the impression that he had attached little importance to the provision for an escrow account. Indeed, he said in cross-examination that he was not sure what an escrow account was. I find that surprising since even if he had not come across the expression before, the "Settlements" clause was self-explanatory and ought to have been of some value to R+V. Certainly it was given some prominence in Mr. Chalhoub's presentation at the inauguration. In a statement made in March 2004 Mr. Gebauer set out to explain how it came about that he and Mr. Chalhoub had agreed to dispense with that part of the agreement. He said that he was concerned that R+V might appear to be carrying on business in London if premiums were paid into an account in its name and that there might also be adverse tax implications. He said that he had voiced these concerns to Mr. Chalhoub at the inauguration of the box in March 2002 and that they had agreed to vary the terms of the binders, though neither of them thought it necessary to produce written confirmation of any kind. In cross-examination he said that when the matter had been raised by Mr. Chalhoub he had seen no need for an escrow account and had decided to do without it, but again without taking the trouble to record the agreement in any way.
168. On any view of the matter, if Mr. Gebauer's evidence is to be accepted, his attitude to the contract might be described as cavalier at best. In fact, however, I find it difficult to accept that he did not understand perfectly well what part the escrow account was intended to play in the operation of the binders. Moreover, his account of the circumstances in which he and Mr. Chalhoub decided to dispense with an escrow account leaves some questions unanswered. According to both Mr. Chalhoub and Mr. Gebauer, it was the realisation that R+V might be seen as carrying on business in London if it opened an account in for the receipt of premiums and payment of claims that led them to abandon the escrow account altogether. However, these concerns had already led to the signing of the second pair of binders back in September 2001 and it is difficult to believe that some thought was not given to the question of the bank account at that time. However that may be, the decision not to open an escrow account was certainly not left until after the inauguration in March 2002 as Mr. Gebauer and Mr. Cooper suggested, or even until February as Mr. Chalhoub said. It must have been taken before the end of 2001, probably at around the time when Mr. Chalhoub and Mr. Wyatt were opening accounts for Risk UK. The evidence relating to this issue was in such disarray as to suggest that other reasons lay behind the decision.
169. Mr. Edelman submitted that this particular change of plan was caused by a realisation on the part of Mr. Gebauer and Mr. Chalhoub that the board of R+V would have to be approached for authority if an account were to be opened in its name. I am satisfied that, contrary to Mr. Gebauer's recollection, there was a discussion between him and Mr. Chalhoub in early November 2001 at which they decided not to open an escrow account. I think it possible that Mr. Gebauer had concerns over R+V's position, but there is no evidence that he discussed the matter with anyone else at R+V or took advice about it. I think it likely, therefore, that he was content to drop the escrow account in order to avoid going to the board for its approval. That would almost certainly have provoked questions that he did not want to answer at that stage.

(d) The Accounts

170. Once premium started to flow and Risk began to account to R+V it was inevitable that questions would be asked about the 40% deduction, if only because R+V's accountants would need to record the details of payments received from Risk.
171. On 3^rd July 2002 R+V received remittances of US$251,833.60, €268,267.78 and £83,455.12 from Risk France. In accordance with ordinary practice the book-keeping department notified the technical accounting department, one of whose functions is to reconcile payments with contracts. In this case the payments were initially referred to Mrs. Angelika Creter, the accountant who dealt with facultative business, because it was thought that they might relate to an earlier contract with Risk. Mrs. Creter realised from the size of the dollar payment that it did not relate to that contract, but was unable to relate it to any other contract without further information from Risk, which she immediately requested. In response to her enquiry Risk said that the payment related to premiums paid under the property and personal accident agreements from inception up to 31^st May 2002. Mrs. Creter was still unable to identify the contracts, but a further inquiry led to her being given the R+V internal reference numbers for the two binders. Having looked at the CIG system and having seen that the underwriter of the contracts was Mr. Gebauer (whom she understood to be a treaty, not a facultative, underwriter), she referred the matter to Mr. Markus Theobald, the technical accountant responsible for treaty business written through Risk France.
172. Two days later on 12^th July Mr. Gebauer forwarded to Mr. Theobald an e-mail from Mr. Cooper confirming the remittances and allocating the amounts between the two contracts. Mr. Theobald looked up the contracts on the CIG system, but could not find the information he needed. Later the same day Mr. Cooper sent a set of statements covering the period up to 31^st May 2002. However, in the absence of a detailed breakdown it was not possible for Mr. Theobald to check how the amounts in question had been calculated and whether deductions had been made in accordance with the terms of the contracts. On 26^th September Mr. Gebauer forwarded to Mr. Theobald by e-mail a file he had received from Mr. Cooper earlier that day containing a summary of the net payment to R+V in respect of premium received in July. However, these statements, being in the same form, did not provide the information needed to enable the payments to be properly checked. On 27^th September Mr. Gebauer had a meeting with Mr. Theobald to clarify the position. According to Mr. Theobald, Mr. Gebauer was unable to explain how he should account for the two contracts, although he did suggest that when he received the necessary documents he should ignore the fact that a small amount of business had been written in 2001 and for accounting purposes treat everything as having been written in 2002. That removed the immediate pressure to finalise the accounts for the 2001 underwriting year.
173. On 30^th September 2002 Mr. Gebauer replied to Mr. Cooper thanking him for the schedules but pointing out that R+V desperately needed statements of account showing gross premiums and deductions. However, the precise form in which R+V wished to receive statements was not settled at that stage. Mr. Gebauer discussed the form of the statements with Mr. Chalhoub while they were at the Baden-Baden conference in October and sent Mr. Cooper a proposal for discussion with Risks' accountants. On 6th November Mr. Cooper sent R+V the statements for August, but these were in the same form as before because Mr. Cooper had apparently not had time to discuss the proposed new form with Risk's accountants. However, on 12^th November he sent Mr. Gebauer by courier copies of accounts for May to August inclusive in a new form that had been agreed with Mr. Chalhoub. The documents were delivered to R+V's offices in Wiesbaden on 15^th November, as the date stamp confirms. Meanwhile, on 14^th November at Mr. Gebauer's request Mr. Cooper sent him the same material by e-mail.
174. The new statements contained much more information than the old ones. A number of separate sheets were provided in respect of each month showing the net sum due to R+V in each currency under each contract and how it had been calculated based on the gross premium payable under the contract of reinsurance. Deductions in respect of brokers' commissions and the underwriting and policy issuing fees due to Risk were shown separately. These amounted to 8% of the net premium and 2% of the gross premium respectively. Also shown was a deduction for "security" which in each case amounted to 40% of the gross premium. The new statements thus identified the 40% deduction, although they did not describe it as "commission".
175. Mr. Gebauer said that as soon as he received the hard copies of the statements he took them to Mr. Theobald's office and handed them to him personally. Mr. Theobald, however, said that he had never seen them and knew nothing about them. I prefer Mr. Theobald's evidence on this point, partly because over a fortnight later on 2^nd December 2002 he sent an e-mail to Mr. Chalhoub saying that R+V still did not have the accounts for the period up to and including August. Not surprisingly, perhaps, Mr. Chalhoub replied that they had been sent to Mr. Gebauer a long time ago.
176. On 5^th December 2002 Mr. Cooper sent the accounts for September to Mr. Gebauer by e-mail and hard copies by courier the next day. By that time Mr. Gebauer had left R+V and his secretary was directing his mail to whoever she thought was best able to deal with it. The person to whom she would normally have referred accounting correspondence relating to Risk was Mr. Theobald, but he was adamant that he had not seen the new form statements for September, either in electronic or paper form, and when he handed over his files to Mrs. Schwärzel about a fortnight later they did not include these documents.
177. Mrs. Schwärzel took over responsibility for the accounts relating to the binders on 19^th December 2002. The Christmas and New Year holidays then intervened and on 10^th January 2003 she sent an e-mail to Mr. Chalhoub asking for new form accounts for the period prior to September which she said still had not reached R+V. Later on Mr. Hoff discovered electronic copies of those accounts on Mr. Gebauer's computer and a copy was sent to Mrs. Schwärzel. In the meantime, however, Mrs. Schwärzel had obtained the September accounts and had begun to reconcile them with the contracts. She was able to calculate the amount of the deductions without any difficulty and on one sheet wrote the word "deposit" against the 40% figure.
178. On 22^nd January Mrs. Schwärzel sent an e-mail to Mr. Cooper enquiring about the deduction for "security". He responded on 5^th February saying

"The "security" deduction (40% GP) relates to the securitisation arrangement between Risk and R+V as laid down in the reinsurance agreements. There are a number of people at R+V who will be able to explain further details of this to you if you need. In particular, I would suggest Markus [Theobald] or Michael [Peter]."

However, neither Mr. Theobald nor Mr. Peter was able to explain what the deduction represented.

179. Mr. Edelman submitted that the manner in which the accounts were handled was further evidence of a desire on the part of Mr. Gebauer and Mr. Chalhoub to conceal the existence of the 40% commission. Although Mr. Chalhoub could not remember the discussions in any detail, I am satisfied that the form in which the accounts were drawn up from mid-November 2002 onwards was that agreed between him and Mr. Gebauer in Baden-Baden the previous month. It is, I think, rather surprising that this should have occupied the time of two such senior men at a very busy time of year. The information included in the new statements is nothing more than a breakdown of the figures which one would normally expect to be handled by the respective accounts departments. I have no doubt that the problem lay with the 40% deduction. Mr. Gebauer knew that R+V's accounts department would have to be provided with the detailed calculations, but I think he was reluctant to see it described too clearly for what it was. On the other side, not only the underwriters but also members of the accounts department were unsure of the real nature of the deduction. Maxine Reeves, for example, was unable to provide Mr. Brown with an explanation when he conducted the audit in London in March 2003.
180. Mr. Chalhoub said in an affidavit sworn on 19^th May 2003 in opposition to the application for a freezing injunction that he knew that the 40% commission was not security in the strict sense, but that "as a non-lawyer" it did not seem to him to be an inappropriate word to describe the arrangements between R+V and Risk for the purposes of the statements of account. Mr. Gebauer said that he and Mr. Chalhoub had not discussed the use of the word "security" while they were in Baden-Baden and that Mr. Chalhoub had adopted that word because for different reasons they had both become accustomed to use it. Mr. Cooper said that he had provided Mr. Chalhoub with an outline format of the new accounts to take to Baden-Baden to discuss with Mr. Gebauer. He denied having introduced the word "security" himself, but admitted that he had noticed it in the final form. That tends to support the conclusion that the final form of the statement did result from the discussions in Baden-Baden.
181. I do not find Mr. Gebauer's or Mr. Chalhoub's evidence on this point very convincing. I am satisfied that they chose the word "security" quite carefully to give the impression that the deduction was a premium deposit, that is, security against payments due in settlement of claims, rather than what it really was, namely, additional commission. For reasons which I will explain later I am unable to accept that Mr. Gebauer regarded the deduction as some kind of security, even if he regarded the shares in Risk in that light. Similarly, I think that Mr. Cooper was being equally canny in his e-mail to Mrs. Schwärzel of 22^nd January 2003 when he described the deduction as relating to "the securitisation arrangement between Risk and R+V". He could have given her a straightforward answer, but instead chose to use language which suggested that R+V was providing some kind of security to Risk.
182. In the light of the evidence of Mr. Theobald and Mrs. Schwärzel, as well as the persistent requests for detailed statements of account for the months preceding September 2002, I am satisfied that Mr. Gebauer did not give the accounts he received from Risk on 15^th November 2002 to Mr. Theobald, either in hard copy or electronic form. The fact that the documents are nowhere to be found in R+V's files is certainly consistent with their having been removed and it is difficult to see how otherwise they could have gone missing. Moreover, the fact that a full copy of the accounts has been disclosed by Risk together with the covering letter bearing R+V's stamped receipt lends some support to Mr. Edelman's submission that Mr. Gebauer took them from the office and handed them to Risk. Mr. Cooper said that he had asked his secretary to obtain confirmation for his files that the accounts had been delivered to R+V and that she had asked Mr. Gebauer's secretary to send a copy of the covering letter with the stamp showing that it had been received. This seems a rather surprising thing to do, however, especially since the courier had obtained a signed receipt for the documents. If Mr. Gebauer wanted to suppress the accounts by removing them from the office, it would obviously make sense to remove the covering letter as well and that could, of course, explain why neither the letter nor the accounts were to be found on R+V's files.
183. The evidence relating to the accounting arrangements all points to the conclusion that Mr. Gebauer and Mr. Chalhoub were seeking to conceal both the existence and, more importantly, the true nature of the deduction from R+V for as long as possible and that they made concerted efforts to do so. I think that the most likely explanation for the fact that the new accounts for May to August 2001 were missing from R+V's files is that they were retained by Mr. Gebauer together with their covering letter and handed back to Risk at some later date after he had left R+V.
184. In my view the evidence from all these different sources points clearly to the conclusion that Mr. Gebauer and Mr. Chalhoub set out to conceal from R+V for as long as possible the existence of the addenda and their terms.

(2) Manifestly disadvantageous contracts

185. Mr. Edelman submitted that the terms of the binders themselves were so obviously disadvantageous to R+V that Mr. Gebauer and Mr. Chalhoub could not have entered into them honestly.
186. At this point it is necessary to return for a moment to the business plan. The "realistic" forecast suggested that R+V could expect to write premium income of US$10.5 million in the first year giving rise to what was described as "sunk cost support" (i.e. the 40% commission) of US$4.2 million (about £2.8 million). Sunk costs are shown in the business plan as amounting to US$4.86 million in all, but the accompanying breakdown of costs shows that that figure included the cost of the first year's operations. This forecast, which was prepared on a revenue basis and assumed a somewhat optimistic loss ratio of 60%, shows R+V making a net payment to Risk of US$1.89 million at the end of the first year. A calculation using the same assumptions but prepared on an earnings basis shows R+V making a net loss of US$2.7 million in the first year. Over the five year period covered by these projections (and still assuming a constant loss ratio of 60%) R+V was projected to make US$12.143 million and Risk US$10.9 million. If the loss ratio is increased to 80% R+V could expect to made an overall loss of US$1.17 million and Risk a profit of US$6.7million. Mr. Gebauer said that he did not take much notice of Mr. Chalhoub's figures, preferring to make his own assessment and I accept that the assumptions in the business plan were rough and ready. However, these figures do suggest that in commercial terms the agreements were fundamentally unbalanced.
187. Mr. Gebauer's description of the meeting at which Mr. Chalhoub presented him with the first version of his business plan suggests that there was little in the way of real bargaining: Mr. Chalhoub asked him if R+V would fund the start-up costs, which he estimated at over £3 million; he thought that the figure was probably exaggerated and that £2 million was nearer the mark; he estimated that the first year's premium income would be about £5 million and was prepared to agree to an additional first year commission of 40%. Mr. Gebauer said that there was a certain amount of negotiation over the start-up costs, but he also said that he paid little attention to any of the figures produced by Mr. Chalhoub. Indeed, although he had apparently asked Mr. Chalhoub to produce a clean version of the business plan, he said that he did not spend much time studying any of the figures or informing himself of the basis on which they had been prepared. He said that he had done his own calculations on a computer spreadsheet, but no trace of any such document has been found on R+V's system. It is worth pointing out in passing that this version of events given by Mr. Gebauer in cross-examination was at odds in a number of respects with the account he had given in his affidavit in which he had attributed to Mr. Chalhoub the estimate of £5 million premium income and estimated start-up costs of £2 million.
188. Had Mr. Gebauer looked at the schedule of sunk costs attached to the business plan he could not have failed to notice a number of things. First, he would have seen that the total came to just under £3.25 million (US$4.86 million). That was a significantly larger sum than the £2 million he said that he had had in mind. He would also have seen that more than half of those costs (about £1.76 million) represented the first year's operating costs rather than set-up costs. There was no obvious reason why R+V should be expected to fund those. Next he would have seen that included in the pre-start-up costs was a sum of over £200,000 to cover the cost of recruiting staff, £300,000 for computer software and £170,000 for Mr. Chalhoub's time, as well as bank interest of £200,000 on a projected bank loan of £4 million. He would also have seen that staff and staff-related costs during the first year of operation were estimated at well over £1 million. There is no evidence to suggest that the actual cost of setting up and running the London operation had reached anything like these figures by the end of the first year and I do not think that they can be regarded as a calculated estimate of what it was likely to cost to set up and run the operation for a year.
189. Since Risk was to receive both a commission on premium and a profit commission, the costs of running the London office, including the salaries of the underwriters and other employees, ought to have been covered by that remuneration, but there would inevitably have been a need for working capital until the flow of premium was established. One way of providing support to Risk, therefore, would have been to pay an additional commission in the first year sufficient to cover the cost of borrowing the necessary funds with a provision for repayment within a specified period. That would have reduced the burden on R+V and would also have given it a valuable measure of protection since the risk of failure would have lain with Risk. Mr. Gebauer said that he had discussed that possibility with Mr. Kernbach, but decided not to pursue it. He gave no reason for that decision and for the reasons I have already given I am unable to accept that he did discuss the matter with Mr. Kernbach in this detail. Another way of providing support to Risk while protecting R+V's position would have been to place an overall limit on the amount of the additional commission. (The dangers of failing to do so are obvious, but are well illustrated by the fact that the premium written in the first year amounted to over £20 million, or US$30 million at the rate of exchange used by Mr. Chalhoub, on which the 40% additional commission amounted to something in excess of £8 million or US$12 million.) Mr. Gebauer agreed that a limit could have been placed on the commission, but said that it had not occurred to him at the time. That is hardly a satisfactory explanation from an underwriter with his experience. In my view there is no escaping the fact that there was no attempt on Mr. Gebauer's part to impose any limit on the amount that Risk could take by this means.
190. That is all the more striking when one comes to consider the nature of the payment. When giving evidence Mr. Gebauer constantly sought to equate the 40% commission with a premium deposit, but neither he nor anyone at Risk was in any doubt that the additional commission was a straightforward payment to Risk. Moreover, it was not even a loan. Although Risk France was entitled to repurchase the shares of Risk UK at a price equal to 40% of the premium written for the account of R+V during the preceding 12 months, R+V had no corresponding right to require Risk France to buy the shares back if it wanted to leave the venture. Although at one stage he tried to suggest otherwise, Mr. Gebauer did eventually accept that and Mr. Chalhoub himself explained why Risk might well not be willing to buy them back if R+V decided (for whatever reason) to withdraw from the venture. Moreover, even if Risk France did repurchase the shares, it was by no means certain that the premium income written in the last year would equal or exceed that written in the first. That depended on market factors as well as Mr. Chalhoub's instructions to his underwriters (though I accept that if he had started up a second Risk underwriting agency in London with a view to running down the premium income of Risk UK he would have been courting commercial disaster).
191. It can be seen, therefore, that the agreement was in this respect very one-sided. Mr. Gebauer sought to emphasise the practical difficulties for Risk France if it chose not to repurchase the shares, but the fact is that there was no legal obligation on it to do so and I do not think that an objective observer could have safely assumed that commercial pressures would force it to pay the amount contemplated by the agreement promptly or at all. At any rate, it would scarcely be prudent to make that assumption. (As Mr. Edelman pointed out, if the business had developed in accordance with the figures set out in the "realistic" assumption, the amount due to R+V on a repurchase of the shares at the end of 5 years would have exceeded the net profits earned by Risk. It seems highly unlikely that Risk would have wished to buy them back under those circumstances.) This imbalance between the parties' respective rights is all the more surprising in view of the fact that Mr. Gebauer apparently regarded R+V as the more powerful partner in the venture. Nonetheless, he made it clear that Mr. Chalhoub had set his face against including any obligation on Risk to repurchase the shares and that he was not prepared to confront him on this issue.
192. Mr. Gebauer said many times that he regarded the shareholding in Risk UK as security for the repayment of the investment made by R+V, but he did not really dispute that the shares themselves might well not have any significant value. The binding authorities were granted to Risk France which alone was entitled to receive the commission payable under them. Risk UK had no income and no substantial assets. In these circumstances Mr. Chalhoub's suggestion that Risk UK would be valued at 150% of its last year's written premium based simply on the goodwill attaching to the business is not one that I can accept. It is striking that Mr. Gebauer appears to have had no idea of the basis on which it was decided that a shareholding of 30% would be appropriate. I think it likely that it was thought to be a large enough holding to appear significant without threatening the control of the company.
193. Even on the assumptions made by Mr. Gebauer the extent of R+V's support of Risk was likely to be quite substantial, but in the event it turned out to be considerably greater. Mr. Chalhoub suggested that the 40% commission had to be viewed in the context of a ten year relationship, but the binders were only for three years and no one could say whether they would be renewed or not. The business plan was limited to 5 years and I think that was about as far ahead as anyone could look. I am unable to accept Mr. Chalhoub's suggestion that a relationship established to write facultative reinsurance risks in the property and personal accident fields where most contracts are likely to be of short duration can be equated with the relationship between a life insurer and its agents.
194. When one comes to examine the nature and terms of the two binders, therefore, one can see that they were indeed very favourable to Risk and very unfavourable to R+V. The fact that a contract significantly favours one party is not of itself evidence of dishonesty, of course, but if the imbalance between the parties is too great it may in conjunction with other evidence provide support for that conclusion. In the present case I think Mr. Edelman was right in saying that the terms of the binders, including the addenda, were, on the face of it, manifestly to the disadvantage of R+V and in the absence of any satisfactory explanation for them they do in my view provide support for the conclusion that Mr. Gebauer was not acting honestly when he agreed to them.

(3) Other evidence of collusion

195. Mr. Edelman submitted that the evidence of collusion to be found in the circumstances surrounding the negotiation and signature of the London binders and the concealment of the addenda from R+V was supported by evidence of a collusive relationship between Mr. Gebauer and Mr. Chalhoub starting in the early part of 2001 and persisting throughout Mr. Gebauer's remaining time at R+V and even beyond. The matters on which he relied can conveniently be considered under a number of broad headings.

(a) The explosion of business

196. In 1999 the premium income written by R+V on business emanating in one way or another from the Risk group amounted to the relatively modest amount of €243,000. By the end of 2000 that had increased to €403,000 at a time when the total premium income written by the facultative department in Wiesbaden was about €36 million. By October 2002 when the HELP project was under consideration Mr. Gebauer estimated that the premium income for that year from other contracts made with or through the Risk group would be €100 million to which the HELP project itself would add another €80 million in a full year. Mr. Gebauer said that the figure of €100 million represented two years' underwriting and he may have been right in saying that €50 million represented about ten percent of R+V's overall reinsurance premium income (treaty as well as facultative). Even so, these figures still evidence an enormous expansion in under two years in the amount of business that R+V did with Risk. Almost all of that business had been developed by Mr. Gebauer and Mr. Chalhoub which suggests that there was, to say the least, an unusual degree of rapport between them.
197. Both Dr. Förterer and Dr. Lamby were very concerned when they discovered the extent to which R+V's business with Risk had been allowed to expand, and for good reason. In many cases Chalhoub family interests were involved in more than one capacity, whether as underwriters, underwriting agents or producing brokers and in the absence of tight controls on premium volumes they benefited from an unrestricted opportunity to earn commission while R+V's exposure increased. Mr. Gebauer was a very experienced underwriter and cannot have been blind to the dangers of concentrating so much business in one group, particularly a group that on its own admission was small and depended to a large extent on one man. I think that Mr. Edelman was right in saying that such a rapid and substantial increase in the volume of business conducted with one small producer is indicative not just of a lack of judgment but of a degree of collusion.

(b) The HELP project

198. I turn next to the circumstances surrounding the signing of the agreement relating to the HELP project and its eventual cancellation. The agreement signed by Mr. Kernbach and Mr. Gebauer in August 2002 provided for IAC to "approve and confirm" reinsurance programmes "on behalf of R+V straightaway without referring to R+V" if they scored at a certain level on IAC's program. That can only mean that IAC was being given authority to bind R+V to such business without further reference or the need to obtain its approval, but Mr. Gebauer admitted that he had told Dr. Förterer, Mr. Kernbach and Dr. Lamby that final approval in the form of signing and stamping would take place in Wiesbaden. As far as Mr. Chalhoub was concerned the letter of 28^th October in which he confirmed that underwriting would take place in Wiesbaden represented a substantial revision of the terms he had agreed with Mr. Gebauer.
199. The HELP project was another case in which some of the terms agreed between the parties were put in an addendum that was executed at the same time as the main agreement. It is interesting to note that when Mr. Chalhoub came to set out for R+V's benefit the losses that Risk would suffer as a result of the cancellation of the project he used the profit commission rates in the body of the agreement rather than those in the addendum, despite the fact that he was working on a projected gross written premium of over US$70 million which would have brought the higher rates of commission for which the addendum provided into play. That inevitably raises suspicions about the purpose of this addendum, but since it was signed by Mr. Kernbach as well as Mr. Gebauer, it is difficult to conclude that its purpose was to mislead the higher management of R+V. Nonetheless, the existence of the addendum and the circumstances surrounding the attempt to obtain MPCL's agreement to the retrocession described earlier provide some further support for the conclusion that by the middle of 2002 the relationship between Mr. Gebauer and Mr. Chalhoub had indeed become collusive.
200. The way in which Mr. Gebauer and Mr. Chalhoub co-operated to produce statistics which appeared to have been obtained from R+V's own records, but which in fact emanated entirely from Risk for the purpose of assisting Mr. Chalhoub in his attempt to save the HELP project, points in the same direction. I described earlier how Mr. Gebauer had taken statistics emanating from Risk, changed their presentation in such a way as to suggest that they had been drawn from R+V's own records and returned them to Mr. Chalhoub who then made use of them in his discussions with Dr. Lamby. This in my view provides a further indication that the relationship between Mr. Gebauer and Mr. Chalhoub had ceased to be one conducted at arm's length and had become collusive.

(c) The five faxes

201. The five faxes to which I referred briefly earlier in this judgment represent one of the most curious and puzzling aspects of the whole case, not least because over the course of time both Mr. Gebauer and Mr. Chalhoub have given so many conflicting accounts, not only of when and how they were produced, but of when and how they found their way from Wiesbaden to Paris.
202. The faxes purport to have been written by Mr. Gebauer on the following dates and in relation to the following matters:

1. 18^th September 2002, confirming R+V's agreement to change the anniversary date of the various contracts under which it reinsured UFA from 31^st March to 31^st December. Its effect was to reduce the 2002 year to 9 months and to bring forward to 30^th September the date by which notice of cancellation had to be given;

2. 19^th September 2002, authorising Risk to bind R+V to take over treaties written by ING Re with effect from 1^st January 2002;

3. 16^th October 2002, confirming that there would be no deduction on a premium adjustment in respect of the Vivendi motor account;

4. 14^th November 2002, confirming R+V's participation in the reinsurance of risks relating to Mercedes Italia; and

5. 22^nd November 2002, confirming R+V's agreement not to issue notice of cancellation under the FSL contract before 1^st March 2004. For some unexplained reason this fax bears the reference of an Italian marine binder entered into between R+V and Risk S.p.A. ("Risk Italy").

203. In the ordinary way each of these faxes would have been sent out, probably by Mr. Gebauer's secretary, within a short time of being drafted and a copy would have been placed on the file. An electronic record of the transmission would normally be kept, although it appears that on isolated occasions the system failed to record all the details of a transmission and some of the records are no longer available. Although Mr. Gebauer was able to draft faxes on his laptop computer, he could not send them direct from the computer; it was necessary for him to print them and send them through the fax machines in the ordinary way. In the present case an analysis of R+V's fax transmission records carried out a few months later positively established that Mr. Gebauer did not send a fax from any of R+V's machines to Risk's Paris office on 22^nd November 2002. Although the same cannot be said of the other four faxes, the evidence available from the transmission records shows that it is very unlikely that any of them were sent from R+V to Risk on the dates they bear, or indeed on any other date. It has not been possible to find copies of any of them in R+V's files and Risk was unable to produce any evidence of their receipt. In the light of all this I am satisfied that none of the five documents was transmitted by fax from R+V to Risk.
204. Each of the documents was produced in two forms: the first an original signed by Mr. Gebauer but without a stamp and the second a photocopy of the signed document bearing an original stamp of R+V initialled for authentication by Mr. Gebauer. That in itself is curious since one would have thought that one original document bearing the R+V stamp and the signature of Mr. Gebauer would have satisfied all possible requirements, at least insofar as Mr. Gebauer could effectively commit R+V by his sole signature.
205. Mr. Edelman submitted that Mr. Gebauer and Mr. Chalhoub had persistently lied about the circumstances in which these documents had come into being and had been delivered to Risk. He concentrated his attention on the faxes of 19^th September and 22^nd November, both of which added in some way to R+V's existing obligations, and submitted that the evidence as a whole pointed to the conclusion that they were false and had been created by Mr. Gebauer solely for the benefit of Risk. I think Mr. Schaff was right to lay some emphasis, however, on the fact that there were five of these documents in all and that any explanation of their origin must necessarily take that into account.
206. It is certainly true that since the investigation into R+V's relationship with Risk began both Mr. Gebauer and Mr. Chalhoub have given many conflicting explanations of how these documents came to be produced and delivered to Risk. In the light of the evidence as a whole I am satisfied, for reasons that will appear, that Mr. Gebauer created all five pairs of documents on 22^nd November in order to be able to hand them to Mr. Chalhoub in Paris on 23^rd November. That is the background against which his subsequent accounts, and those of Mr. Chalhoub, have to be judged. I say that because the importance to be attached to these documents lies as much in the reasons that lay behind their production as in the manner in which they were produced.
207. Mr. Gebauer was interviewed by Mr. Hoff and Mr. Köhler on 9^th January 2003. When asked about the fax dated 22^nd November he said that he had written it to ensure that FLS, which had been threatening to take its business elsewhere, continued to reinsure with R+V. He assumed that he had written and sent it himself that evening, but could not explain why it did not exist on R+V's files or why there was no record of its transmission. He said that he had not given it to Mr. Chalhoub personally whom he had not seen since 22^nd November. He was told that the fax was regarded as very significant and that he should contact R+V if anything new occurred to him about it. He never did.
208. On 11^th February 2003 when he was interviewed for the first time by Mr. Hoffmann Mr. Gebauer said that he had not seen Mr. Chalhoub since the conference in Baden-Baden the previous October. When it was put to him specifically that he had been in Paris on 23^rd November he initially denied it, though he later said that he was unsure where he had been on that date. When asked about the fax of 22^nd November he said that he often drafted faxes on his computer and put them in his secretary's tray for posting, implying that it could have been sent by post. However, when it was pointed out to him that the document bore no postal address, he said that he was uncertain what he had done and that he would need to ask his wife where he had been on 22^nd and 23^rd November.
209. When he was interviewed again by Mr. Hoffman on 26^th March Mr. Gebauer admitted that he had been in Paris on 23^rd November and said that it was possible that he had handed the document to Mr. Chalhoub personally. He said he could not explain the presence of the stamp and implied that Mr. Chalhoub might have obtained one, though not from him.
210. In his affidavit of 16^th May 2003 Mr. Gebauer said for the first time that he recalled composing the fax. He said that he had no distinct recollection of sending it and implied that he might have sent it from a machine other than the one he normally used. He said, again for the first time, that he recalled taking the documents to Paris on 23^rd November at the request of Mr. Chalhoub; he also said that he recalled Mr. Chalhoub's offering to send him in return the faxes that Risk had originally received.
211. In a statement made on 3^rd June 2004 Mr. Gebauer said that he now believed, having had a chance to refresh his memory, that he did not send the fax of 22^nd November to Risk but that he had decided to give it to Mr. Chalhoub with the other four faxes when he saw him in Paris the next day. He said that he remembered Mr. Chalhoub's chasing him many times to provide stamped originals of four faxes that he had previously sent to Risk and that he had decided to take them with him to Paris. He said that since the files were not immediately to hand he must have retrieved the four earlier faxes from his computer and re-printed them for the purpose. He believed that having done that he must have signed them, made photocopies of them, stamped the photocopies and then scratched the stamps. When he delivered them to Mr. Chalhoub in Paris the next day the latter pointed out that he had not brought documents bearing both an original signature and an original stamp, so he agreed that Risk could keep both the signed and the stamped versions, thinking that there would be an electronic version on the file at R+V.
212. Mr. Chalhoub dealt with this aspect of the matter for the first time in his affidavit of 19^th May 2003. He said that following a telephone conversation with Mr. Gebauer he had received from him by fax the document dated 22^nd November. He called Mr. Gebauer and said that he would like the document in an original form and with a stamp. At the same time he asked for similar (i.e. signed and stamped) versions of the four other faxes because they were of a contractual nature. Mr. Gebauer told him that he would be visiting Paris the next day and would bring the documents with him. It is clear from his account that all these events were said to have taken place on 22^nd November.
213. In the same affidavit Mr. Chalhoub went on to say that on 23^rd November he met Mr. Gebauer in Paris. Mr. Gebauer offered him photocopies of the five faxes bearing the R+V stamp and his initials. He was disappointed because (apart from the stamps) they were not original documents, so he asked Mr. Gebauer to give him the originals which he had also brought with him. Mr. Gebauer agreed. He thus had on his files one document bearing an original signature and one bearing an original stamp. Mr. Chalhoub said he promised to return to Mr. Gebauer the faxes he had originally received and that on 25^th November he asked his assistant to arrange for their return. He did not check whether his instructions had been carried out.
214. In his second witness statement made on 2^nd June 2004 Mr. Chalhoub referred to the arrangements he and his wife had made to spend the week-end of 23^rd and 24^th November with Mr. Gebauer and his wife in Cologne. He said that on 22^nd November he felt too tired to travel but suggested that Mr. Gebauer and his wife should come to Paris. Mr. Gebauer told him that he was about to send him the fax he had been asking for confirming R+V's commitment to the FSL contract and he asked him to bring it to Paris signed and stamped. At the same time he asked for similar copies of the faxes relating to the UFA treaty, the ING account, the Vivendi motor account and the Mercedes Italia account. He thought he had been mistaken in saying that he had received the 22^nd November document by fax from Mr. Gebauer; he now thought it had been delivered by hand with the others.
215. In cross-examination Mr. Gebauer defended the account he had given in his statement in June this year. He confirmed that he had produced all the documents during the evening of 22^nd November and had taken them with him to Paris on 23^rd November where he had delivered them to Mr. Chalhoub. He sought to explain the absence from R+V's records of any electronic copies of these faxes by saying that it was his practice when drafting a fax to open the last fax he had sent to that particular person and overwrite it. Mr. Chalhoub also stuck by the account he had given in his second witness statement.
216. In some respects the accounts given by Mr. Gebauer and Mr. Chalhoub about these matters are demonstrably incorrect. For example, Mr. Gebauer cannot have retrieved the first four faxes from his computer during the evening of 22^nd November given that no trace of any of them existed either on his section of R+V's server or on the hard drive of his laptop computer when it was imaged after he left R+V. Similarly, if he did generally adopt the practice he described of using the previous fax as a template, that would have made it impossible for him to retrieve more than one previous fax to Risk and the most recent version would have remained on the computer's hard drive. In my view the analysis of R+V's fax transmission records carried out by Mr. Köhler together with the fact that none of the four "original" faxes is to be found either in Risk's files or in the files of R+V is sufficient to establish that none of them previously existed. It follows that whatever Mr. Chalhoub was pressing for, he cannot have been asking Mr. Gebauer to provide original versions of documents that he had received by fax some days or weeks earlier.
217. In other respects the accounts given by Mr. Gebauer and Mr. Chalhoub are inherently implausible. For example, the account that Mr. Chalhoub gave in his affidavit suggests that he was expecting to receive a single signed and stamped version of each document and that Mr. Gebauer agreed to leave both copies with him only when he protested that he was being offered a stamped copy version without an original signature. It is possible, of course, that there was some confusion in Mr. Gebauer's mind over exactly what sort of documents Mr. Chalhoub wanted, but if what he wanted was an original document bearing a signature and a stamp, the obvious thing for him to have done was to ask Mr. Gebauer to take back the signed document, stamp it and return it by post, not to accept two documents neither of which satisfied his requirements. Likewise, it is inherently unlikely in the ordinary course of things that Mr. Chalhoub should have offered to return the "original" faxes to R+V which could be expected to have had copies on its own files. (It is, of course, impossible to accept that he did so in this case in the light of the evidence that Risk had not received them in the first place.) In my view that part of his story was nothing more than an attempt to explain why the faxes could not be found on Risk's own files.
218. There are strong grounds for concluding that Mr. Gebauer was not telling the truth in relation to certain other aspects of this matter. For example, it is difficult to believe that when he spoke to Mr. Hoff and Mr. Köhler on 9^th January only six weeks after the event Mr. Gebauer could have forgotten that he had been in Paris during the week-end of 23^rd and 24^th November, had met Mr. Chalhoub and had given him a packet of documents. I am satisfied that he deliberately withheld the truth on that occasion. He went even further a few weeks later when he told Mr. Hoffmann in his first interview that he had not seen Mr. Chalhoub since the Baden-Baden conference. In March 2003 when he was interviewed by Mr. Hoffmann for a second time he admitted taking the documents to Paris, but lied about the stamp, even suggesting that it might have been put on by Mr. Chalhoub. In cross-examination Mr. Gebauer admitted that during his first interview with Mr. Hoffmann he had lied about the extent of his contacts with Mr. Chalhoub, but said that he did not want to reveal them to R+V in case it tried to disrupt the efforts he was making to find new employment. I can understand his reluctance to reveal to R+V his continued relationship with Mr. Chalhoub, but I do not think it adequately explains why he did not reveal that he had taken the documents with him to Paris at the end of November.
219. I am satisfied that for his part Mr. Chalhoub also lied in some respects. For example, he said that he had asked Mr. Gebauer for signed and stamped copies of documents that Risk had previously received by fax, but since none of the documents had been sent to Risk by fax, that cannot have been correct and is not the kind of statement that could have been made as a result of confusion. The account he gave in his second statement is nearer the mark, namely, that he asked Mr. Gebauer to bring with him to Paris signed and stamped documents relating to the other contracts. However, his account of having offered to return the original faxes and of having given instructions to that effect must also have been untrue. Again, it is impossible to believe that it was the result of confusion.
220. Before considering what conclusions can be drawn from all this evidence it is necessary to say something about the physical appearance of the documents themselves, the originals of which were produced for inspection during the hearing. The first thing one notices is that in the case of three of the five signed (and therefore supposedly printed) documents (documents (1), (2) and (5)) the top of the heading has been slightly cut off. That can easily happen if a page is carelessly photocopied, but Mr. Gebauer could not explain how it might have happened if the documents had been printed either on R+V's headed paper or from a template held in R+V's computer. In the other two cases, however, (documents (3) and (4)) the heading on the signed document was unaffected. A careful examination of the documents also reveals other interesting features. For example, in documents (1), (2) and (5) the lines containing the R+V logo and address are unevenly spaced to varying degrees, whereas in documents (3) and (4) they are evenly spaced, as one would expect. Similarly, in documents (1), (2) and (5) the addressee (Risk insurance and reinsurance solutions) is offset against the template and occupies two lines, whereas in documents (3) and (4) it is aligned with the template and occupies only one line. In documents (1), (2) and (5) the recipient's fax number is set out in one way, whereas in documents (3) and (4) it is set out in a different way. In documents (1), (2) and (5) the sender's fax number is written in a slightly different way from that in which it is written in documents (3) and (4). Finally, in documents (1), (2) and (5) the name of the sending department at R+V is written slightly differently from the way in which it is written in documents (3) and (4). Although by no means conclusive, these features tend to suggest that documents (1), (2) and (5) all had one common origin and that documents (3) and (4) had another. They also provide a strong indication that documents (1), (2) and (5) were not produced by the normal printing process used in R+V's offices. It may not be a coincidence that documents (1), (2) and (5) all have the effect of committing R+V to new business or the continuation of existing business at a time when Dr. Förterer and Dr. Lamby were seeking to reduce the level of facultative underwriting through Risk.
221. At 17.36 on 25^th November Risk apparently sent a copy of the signed but unstamped version of the 22^nd November document from Paris by fax to its representative in the United States, Mr. Keith Ouellette, at his office in Florida for onward transmission to FSL. For some reason the fax was forwarded to Mr. Ouellette's home address. Later on Mr. Ouellette re-transmitted it to Mr. Cooper in Paris, but no one could explain why he should have done so. The fax transmission data record that the document was sent from Mr. Ouellette's office to his home at 11.02 a.m. local time on 25^th November and from Mr. Ouellette's home to Mr. Cooper in Paris at 2.56 p.m. the same day, but the times at which the two transmissions are recorded as having been made cannot be reconciled after allowing for the time difference between France and Florida. It seems, therefore, that the clock on one or more of the machines involved cannot have been set correctly. The signed but unstamped document was deployed again by Risk on 4^th December 2002 in response to a provisional notice of cancellation given by R+V on 28^th November. That notice would have been effective unless Mr. Gebauer had undertaken not to cancel before 1^st March 2004. Mr. Edelman submitted that the failure to deploy the stamped version suggested that that version, at any rate, had not come into existence by 4^th December and that the only reason why the unstamped version was sent to Mr. Ouellette and back again was to give the impression, by altering the dates and clocks on the fax machines, that it had been in existence since 22^nd November 2002 when in fact it had not.
222. The circumstances surrounding the production of these documents are certainly confused and admit of a number of possible interpretations. I am unable to accept Mr. Gebauer's account of how the documents came into being because it is contradicted by compelling evidence from both R+V's and Risk's records, but the true explanation is not easy to find. I think that Mr. Chalhoub, having become unsettled by R+V's withdrawal from the HELP project, was anxious to ensure that Risk did not lose some of the other business to which Mr. Gebauer had agreed in principle but which he had not formally confirmed. I would agree with Mr. Schaff that under normal circumstances none of the faxes would be particularly remarkable in terms of their commercial content, but the circumstances at the time were not normal. As Mr. Gebauer was well aware, Dr. Förterer and Dr. Lamby were conducting a detailed review of R+V's business with Risk and wanted to have the final say on whether new contracts should be made or existing contracts allowed to continue. In that context documents (3) and (4) are still unexceptional, but documents (1), (2) and (5) are in a different category altogether. It may not be entirely coincidental, therefore, that those three documents all appear to be unusual in that they bear signs of having been produced in a different way and perhaps at a different time.
223. I am satisfied on the balance of probabilities that the documents were all in existence by Monday 25^th November. I am not persuaded that the fax dated 22^nd November 2002 was created at a later date and that there was an elaborate charade involving the re-setting of the dates and clocks on the fax machines to create a false impression that it had been in existence since 25^th November. Although the matter is by no means without difficulty, I think that the most likely explanation is that, having decided to provide the documents that Mr. Chalhoub wanted in a way that would not make it too obvious that he had gone behind Dr. Lamby's back, Mr. Gebauer produced them in Wiesbaden during the evening of 22^nd November (though not in the way he described), backdating documents (1) and (2) to what appeared to be appropriate dates. He produced one signed original and one stamped photocopy version of each document, because that is what he thought Mr. Chalhoub wanted, and took them all to Paris with him on 23^rd November where he handed them to Mr. Chalhoub.
224. The circumstances surrounding the production of these five faxes and their delivery to Risk coupled with the inability of Mr. Gebauer and Mr. Chalhoub over a long period of time to provide any satisfactory explanation for them does in my view provide significant further support for the submission that by November 2002 they were co-operating in ways that were intended to benefit Risk by ensuring the continuation of the business relationship between Risk and R+V contrary to the wishes of R+V's senior managers. This evidence does, therefore, support the conclusion that their relationship had by that time become collusive. However, that was some 16 months after the first London binders had been signed and much had happened during that period. In the end, therefore, this episode, intriguing as it is, provides limited assistance in deciding what the nature of their relationship was in the first half of 2001 when the binders were being put in place.

(d) Missing documents

225. From time to time I have drawn attention to the fact that various documents relating to the London binders and the business written under them which one would expect to be in R+V's files, both in original and copy form, are in fact nowhere to be found. They include the final version of the business plan which Mr. Gebauer said he received from Mr. Chalhoub in the spring of 2001, the letter of 14^th June 2001 enclosing the draft agreement and addendum, the addenda to both the July and September agreements, the share certificate recording R+V's holding in Risk UK, and the detailed statements of account for the period May to August 2002. All these documents in their different ways contained information that would alert a reader to the 40% additional first year commission and the shareholding in Risk UK. Although documents were removed from R+V's files both in the course of the internal investigation and in the course of preparing for this trial, it would be a remarkable coincidence if all those documents had not only been removed, but had been mislaid in the process. They are all documents whose significance would not have been lost on those who were conducting the investigation and even if they had been removed from the files they would surely have been copied and retained in a safe place. I am satisfied, therefore, that they were all deliberately kept off the files. It has not been suggested that anyone other than Mr. Gebauer either knew of their existence or had any reason to suppress them.

(e) Routing the FSL and MPF business through the London binders

226. In April 2002 Mr. Gebauer agreed with Mr. Chalhoub that business written under the FSL and the MPF contracts should be "routed" through the London binders, that is, that it should be treated in the accounts as if it had been written on R+V's behalf by Risk France under those contracts from inception. There was a dispute between the parties whether there was a similar agreement in relation to business written under the Italian non-marine binder which was also accounted for in that way. Mr. Gebauer and Mr. Chalhoub understood that the effect of doing so would be to allow Risk to obtain commission under the binders (including the additional 40% first year commission) in addition to the commissions that would be payable to Risk as producing broker under those contracts, although Mr. Chalhoub said that he agreed not to take the basic commission on French property business. Mr. Edelman submitted that these arrangements provided further examples of collusion between them with a view to ensuring that Risk obtained as much as possible from the additional first year commission.
227. The origin of these agreements lay in Mr. Lehnert's wish to prevent Risk from accepting property risks emanating from Germany, Austria, Switzerland and the Netherlands without prior consultation with R+V. There were good reasons for that: R+V had a strong connection with those markets which it wished to exploit itself and it was also concerned to avoid excessive accumulations as a result of the same risk being shown to underwriters in both London and Wiesbaden. However, if business from those countries was effectively excluded from the binder that was likely to affect the overall amount of business that Risk could hope to attract.
228. The territorial scope of the property binder was expressed as follows:

"UK and EEC, or so deemed and/or other territories as subsidiary locations and/or risks written in Risk offices and/or as declared by Risk

EEC not to represent less than 60% of income hereunder, but worldwide for Contingency, Pleasure Boats and Bloodstock."

Despite this rather opaque wording, Mr. Chalhoub appears to have thought that Risk was allowed to accept property and contingency business worldwide and that was confirmed by the memorandum of agreement he and Mr. Gebauer signed on 14^th March 2002. Mr. Chalhoub was concerned both that Risk would lose some of the business it had hoped to write within Europe and that a reduction in premium income from the EEC would limit the amount it could accept from other sources. Once again, Mr. Gebauer appears to have acceded to Mr. Chalhoub's request without much resistance. Mr. Chalhoub said that he was worried that Risk would not meet its premium income target for the year and might fail to cover its start-up costs if it did not receive a boost to its income. That is a legitimate argument, of course, but the latest underwriting figures sent by Mr. Rivington to R+V on 15^th April (over a week before Mr.  Gebauer agreed to the re-routing of the French business) showed that Risk had already written about £4.8 million (over US$7 million) in premium. There was by that time no significant prospect of its failing to make the £2 million in additional commission that Mr. Gebauer had thought should be adequate to cover the start-up costs. However, he does not appear to have considered the current position in any detail.

229. Mr. Gebauer said in his affidavit that he did not think it was detrimental to R+V to allow all this business to be routed through the binders because although there was an additional 40% deduction, there was a corresponding asset in R+V's balance sheet. However, given the terms of the addendum and the limited value that could be attributed to the shares of Risk UK, that asset was little more than illusory. There was also a suggestion that another reason for routing the French property business through London was that R+V had doubts about the ability of Risk's underwriter in Paris who was handling the business. However, since the re-routing was purely a matter of accounting, that cannot have been a significant factor. In my view, therefore, Mr. Edelman was right to say that the agreements to route business through the London binders were directed at maximising the amount of additional first year commission that Risk could receive and provide further evidence of a collusive relationship between Mr. Gebauer and Mr. Chalhoub

(f) The 'blackmail' e-mail

230. In February 2002 Mr. Chalhoub was involved on behalf of Risk in negotiations to acquire a shareholding in a German insurance company, Hamburger Versicherung AG ("HVAG"). Mr. Gebauer had previously been employed by Agrippina Re (now Converium), one of the companies behind HVAG, and was understood by Mr. Chalhoub to be on good terms with the family representing the other major interest. Mr. Chalhoub, no doubt for that reason, discussed the matter fully with Mr. Gebauer who appears to have been quite closely involved behind the scenes. On 18^th February 2002 Mr. Gebauer sent Mr. Chalhoub an e-mail relating to the negotiations which became known as the 'blackmail' e-mail because it contained a suggestion that certain personal information could be used against one of the managers of Converium. Both Mr. Gebauer and Mr. Chalhoub said that the comment in question was merely a joke. Perhaps it was, but the significance of the message lies not so much in the suggestion itself as in the fact that Mr. Gebauer twice used the expression "we" when referring to the way in which the negotiations might best be pursued. In other words, he wrote in a way which suggests that he had a personal interest in their outcome. Neither of them was able to give a very satisfactory explanation for the message itself or the terms in which it was written and given the fact that R+V had no direct interest of any kind in the negotiations, it does suggest that there was a close relationship between Mr. Gebauer and Mr. Chalhoub which extended beyond the business dealings between their two companies.

(g) Abuse of the binders

231. Mr. Edelman submitted that further evidence of a dishonest conspiracy can be found in the manner in which, having obtained the binders, Risk abused them for its own benefit by writing business outside their scope and by routing other business through them in addition to the FSL and French property business. He relied on two particular matters: the writing of treaty business and the routing of Italian business through the property binder.

(i) Treaty business

232. Although neither of the binders expressly stated that Risk's authority was limited to writing facultative risks, R+V contended that on their true construction they both had that effect. Risk, however, contended that its authority was not limited in that way.
233. It may appear surprising that there should be uncertainty over a question of this kind, but unfortunately the wording of both agreements is vague and leaves much to be desired. Not only are they worded more like slips than binding authorities, which is what they were intended to be, but the language is in some respects so broad that it might almost have been designed to enable any construction to be put on it at a later date as circumstances might demand. Mr. Schaff drew my attention to the wording of other agreements between R+V and Risk which expressly excluded "obligatory reinsurance treaties of any sort" and submitted that if the parties had intended to exclude treaties they would have included wording of that kind in the binders. However, the starting point must be the language of the agreements themselves, the material parts of which are in substantially the same terms.
234. In each case the type of business to which the agreement relates is described in broad terms, but both contracts provide for the original insured to be declared to R+V by Risk and the clause defining the period of the contract provides that each individual risk is to run to its natural expiry. The interest to be reinsured is described as "policies and certificates underwritten by Risk on behalf of R+V" and the limit is expressed as an amount in respect of each original insured (or, in the case of the property binder, any one risk). All this points to the conclusion that the contracts were intended to permit the facultative reinsurance of individual risks covered by policies issued to identified policyholders rather than the reinsurance of specified types of risk of the kind that would normally be undertaken by way of treaty reinsurance. Moreover, the contracts also provided for daily electronic reporting of policies, premiums and claims which again is more consistent with facultative rather than treaty underwriting. The fact that each of the binders bears a Risk identification number which begins with the letters "FACLT" is not of itself of great significance, but is certainly not inconsistent with the view that the contract was understood by Risk itself as one that was intended to provide for facultative rather than treaty business. That was certainly the understanding of Mr. Gebauer at the time the contracts were signed. The fact that he may have become aware at a later date that Risk was writing business that did not fall within the established definition of facultative risks and did not object cannot affect the question of construction. There might obviously be some room for argument about the precise limits of an agent's authority under an agreement of this kind, for example whether it extended to what is described as 'programme' and 'scheme' business, but despite the vagueness of the wording and his desire to write business in innovative ways, I am quite satisfied that Mr. Chalhoub also understood that the authority did not extend to quota share treaties. The essential requirement was that the Risk underwriter should exercise his own judgment in relation to each underlying risk, even if he did so by reference to standardised criteria. The scope of Risk's authority was never enlarged in this respect and it therefore follows in my view that Risk had no authority to write treaty business on behalf of R+V.
235. R+V contended that Risk had abused the binders by writing treaties, the most significant of which, and the only one relied on for present purposes, was the reinsurance of various companies headed by Clarendon National Insurance Company ("Clarendon") in respect of risks under pets' health insurance policies. These were written through PetsMarketing Insurance Agency Inc. and generated a gross premium of about US$1.68 million. Mr. Chalhoub was directly involved in the underwriting of this contract. The contract was originally offered to Risk as a quota share reinsurance of Clarendon, but the proposal and slip were redrafted at the request of Risk in a number of respects which included the substitution of the word "facultative" for the words "quota share" in the heading and the substitution of the words "proportional share" for "quota share" in the insuring clause. Mr. Gebauer said that he regarded the underlying insurance as a typical example of programme business, that is, the insurance of large numbers of similar risks on standard terms. He accepted that what was being offered was essentially quota share insurance, but said that in his experience it was a type of business generally written by facultative underwriters.
236. One of the purposes of altering the original proposal was to indicate the terms on which Risk was willing to consider accepting the business and to invite a revised proposal in those terms. However, although many of the alterations were substantive in nature, those to which I have referred were merely cosmetic. They can have been requested only because Mr. Chalhoub was conscious of the fact that the binder did not allow Risk to write treaty business and therefore did not want the words "quota share" to leap out of the heading, but they did not alter the essential nature of the risk being proposed. For the reasons I have already given I do not think that either of the contracts gave Risk authority to write quota share reinsurance of this kind, but in the light of Mr. Gebauer's evidence about the practice of R+V and other insurance companies, which I have no reason to reject, I can understand how Risk might have thought that this type of cover could be regarded as falling within the scope of facultative business.
237. However, a contract of this kind also fell outside the scope of Risk's authority for quite different reasons because, as Mr. Schaff accepted, neither of the binders extended to insurance against veterinary expenses arising from illness or injury to pets. The acceptance of this business would have involved a breach of the terms of the binder in any event, therefore, had it not been for the fact that Mr. Chalhoub obtained Mr. Gebauer's specific agreement to accept it on behalf of R+V. Having obtained Mr. Gebauer's agreement, however, Mr. Chalhoub cannot be accused of having demonstrated a deliberate intention to disregard the limits imposed on Risk.
238. Mr. Edelman submitted that if Mr. Gebauer did agree to allow Risk to accept the business, that was itself further evidence of collusion between him and Mr. Chalhoub designed to enable Risk to take the benefit of the 40% additional first year commission. Mr. Gebauer said that he had discussed the business with one of the other underwriters at R+V, Mr. Koob, and between them they thought it was interesting. Had it not been for the 40% additional first year commission the business would have been profitable for R+V, but on a gross premium income of about US$1.68 million Risk stood to receive something in excess of US$800,000 in commission and R+V in fact made a loss of about US$580,000 after allowing for all deductions and for claims of about US$875,000. In my view this was another example of Mr. Gebauer's willingness to accept business that could be expected to produce a significant income for Risk at the expense of R+V.

(ii) Re-routing Italian business

239. On 28^th September 2001 R+V gave Risk Italy authority to write marine hull and cargo risks on its behalf in Italy. Enquiries conducted by Chiltington on behalf of R+V disclosed that Risk Italy had purported to write property and personal accident risks on behalf of R+V, some (but not all) of which were then treated by Risk France as having been written under the London binders and accounted for accordingly. For that purpose Risk France signed and stamped slips purporting to accept the risk, but did not transmit the acceptances to the insured's broker, simply retaining them for internal administrative purposes. In some cases it appears that the risk was accepted internally in that way, but not accounted to R+V; in other cases there appears to have been no internal acceptance, but third parties have since asserted that Risk Italy agreed to provide cover on behalf of R+V.
240. In March 2001 R+V had entered into two quota share treaties with UFA in respect of property and personal accident risks emanating from the Middle East. By an addendum signed on 28^th September 2001 it was agreed that the business to be ceded under those treaties could include risks from France and Italy provided that they were underwritten and managed by Risk. In July 2002 similar treaties were signed in respect of the year beginning 1^st April 2002. As I have already mentioned, the treaties were unusual in that they not only provided that R+V would reinsure UFA, but also gave UFA authority to underwrite for R+V on the basis that it would accept an immediate retrocession to establish the agreed proportional interests. It was suggested that some of the Italian risks were written by Risk Italy on behalf of UFA, itself acting as underwriting agent for R+V under the treaty. If that was the basis on which they were written, however, the effect would be the same as in the case of the FSL and French property risks, namely, that in each case the risk was written for R+V under a different underwriting authority. One might therefore have expected them simply to have been treated in the accounts as if they had been written under the London personal binders. Some of the Italian risks were accounted for under the London binders in their first year (when the 40% commission was taken) and were then accounted for under the UFA treaty in the second year (i.e. as if they had been written by UFA and reinsured with R+V) with the result that the commission rate of 32.5% was applied rather than the 10% that would have applied in the second year under the London binder. Although difficulties in analysing the documents has prevented R+V from determining the precise number of these risks, it was accepted that a significant number of property and personal accident risks accepted by Risk Italy were accounted for under the London binders.
241. One piece of business on which much attention was focused at the trial as an example of how risks of this kind were handled was the reinsurance of Società Reale Mutua di Assicurazioni S.p.A. in respect of the insurance of the citizens of Lombardy against death or disablement arising from criminal acts written in September 2001. According to Mr. Chalhoub it was produced by Risk Italy to Risk France where the decision was taken to accept it on behalf of R+V under the UFA treaty. Risk Italy confirmed cover to the cedant, despite the fact that it had received nothing in writing by way of confirmation from Paris. Several months later in April 2002 when, according to Mr. Chalhoub, R+V agreed to route Italian business through the London binders, documents were produced to reflect the production of business by Risk Italy to Risk UK and the acceptance of the business by Risk France under the London binders. Mr. Chalhoub said that staff at Risk chose to handle it in that way simply as a matter of administrative convenience within the Risk organisation.
242. Mr. Chalhoub said that an agreement had been made with Mr. Gebauer in April 2002 that the Italian property and personal accident business should be routed through the London binders as part and parcel of the same arrangements that led to the FSL and French property business being accounted for in that way. That was supported by Mr. Gebauer in his witness statement, but in cross-examination his evidence became rather confused. He said that he had thought that the Italian business had been written through the London binders from the time of their inception and that the UFA treaty had only been used until the London binders came into force. If that were correct, however, there would have been no need for an agreement to alter the way in which the business was administered. A little later he said that he had agreed that Italian business written under the UFA treaties between September 2001 and April 2002 was to be transferred to the London binders. Then he said that he had thought Mr. Chalhoub wanted to switch the business from the UFA treaty to the London binders at renewal with Risk Italy simply "pre-selecting" business for submission to London. However, that would not have required any special arrangements either, since the London binders allowed Risk France to accept property and personal accident risks emanating from Italy in any event. Mr. Gebauer's evidence on this part of the case was very muddled and I was left with the distinct impression that he was not entirely clear in his own mind exactly how the transfer of business from the UFA treaties to the London binders was to be effected. I think that was partly because he was not particularly concerned about the formalities. However, looking at this part of his evidence as a whole I think it does generally confirm that he had agreed to treat the Italian non-marine business written after September 2001 as if it had been written under the London binders in the same way as the FSL and French property business. Once again, the purpose of this agreement was to enable Risk to obtain the benefit of the 40% first year commission.
243. However, none of this explains why documents were created many months after the risks had been written which gave a misleading impression of the underwriting process. The explanation given by Mr. Chalhoub was that they were brought into existence in order to generate records, in particular London contract references, that would make it easier to administer them as business written under the binders, but that strikes me as an unnecessarily laborious process. The documents certainly give a false impression about the underwriting process and to that extent, if no more, I think that Mr. Edelman was justified in describing what went on as a charade.
244. Mr. Chalhoub sought to explain the transfer of the business back to the UFA treaty as having been prompted by personality clashes between Mr. Matricardi, Risk's underwriter in Rome, and Mr. Rivington and Mr. Phipps in London, but this is not the kind of problem that one would expect to lead to a change of policy of that kind. Mr. Phipps denied that there had been any serious disagreements or breakdowns in communications between London and Rome and gave the clear impression that he did not regard himself as having any responsibility for reviewing business that Mr. Matricardi had approved. I have little doubt that the opportunity to obtain the higher rate of commission payable under the UFA treaty is what primarily motivated the decision to revert to the use of that contract.

(4) Conclusions

245. Although the relationship between Mr. Gebauer and Mr. Chalhoub was very close, there is, as I have said, no direct evidence that Mr. Gebauer was bribed or that his primary motive for entering into the London binders was a desire to defraud R+V. Mr. Gebauer was an experienced underwriter who had little respect for the way in which reinsurance had been managed at R+V prior to his arrival. He wanted to set the reinsurance department on a different course and was confident in his own judgment, even if his views did not fit in with the current attitude within R+V. I think he was probably frustrated by the board's reluctance to make funds available to expand the reinsurance business. For his part Mr. Chalhoub, who I have no doubt is constantly on the look-out for new business opportunities, saw a chance to set up an underwriting agency in London with a highly-rated continental reinsurer. It is not very surprising therefore that he should have proposed a plan of this kind to Mr. Gebauer or that Mr. Gebauer should have been attracted by it.
246. Although his motives may not ultimately be of great importance, I think that the explanation for Mr. Gebauer's actions lies to a large extent in a desire to obtain a foothold for R+V in the London market as a means of reinvigorating its reinsurance operations generally. On his own admission, however, it is clear that he was well aware that he did not have authority to enter into a three-year contract of any kind without the express approval of Mr. Kernbach. He was also well aware that he had no authority to conclude a contract which involved the purchase by R+V of shares in another company. For the reasons given earlier I am satisfied that Mr. Gebauer did mention his discussions with Mr. Chalhoub to Mr. Kernbach in a general way at an early stage, but thereafter I am satisfied that he was determined to pursue it without further reference to Mr. Kernbach or anyone else at R+V. He did not obtain Mr. Kernbach's approval to the terms finally agreed with Mr. Chalhoub, nor did he obtain Mr. Kernbach's agreement before he signed the binders, either in July or September 2001. It follows that he must have known when he signed them that he was exceeding his authority, even if one disregards the terms contained in the addenda.
247. Although the agreements contemplated the possibility that Risk might obtain underwriting authorities from other reinsurers, no other companies appear to have been approached. In effect, the arrangement was exclusive to R+V, though I am sure Mr. Chalhoub wanted to keep his options open as far as possible. Setting up an underwriting office was likely to require a significant investment. The figures produced by Mr. Chalhoub were no doubt exaggerated, but Mr. Gebauer's estimate of around £2 million for set-up costs may not have been very wide of the mark if one includes the amount needed to finance the first year's operations. It appears that Mr. Chalhoub was not willing for Risk to fund the whole operation itself. He said that there was a significant chance that it would not succeed and perhaps that is how it looked at the time, although there were good grounds for thinking that there was plenty of business in the London market for a reinsurer with R+V's credit rating. At any rate, he made it clear that he expected R+V to make a contribution to the start-up costs.
248. In the event, however, Mr. Gebauer was prepared to agree that R+V should provide the whole of the funding that he thought would be needed to set up the project and carry it through to the end of its first year. Indeed, he was willing to go beyond that and agree terms that might result in Risk's receiving much more than was needed for that purpose if the first year's premium exceeded his estimate, as turned out to be the case. On top of that he did not insist on obtaining any clear undertaking from Risk that would ensure that R+V had a right to recover the whole or even a share of that funding at a later date. The only security R+V obtained was a shareholding in Risk UK which was of doubtful value, to say the least. In effect, therefore, the agreement committed R+V to making a significant payment to Risk to fund the operation with no clear entitlement to recover it. Mr. Gebauer knew that he did not have authority to make a contract of that kind without Mr. Kernbach's approval and I am satisfied that he was also well aware that neither Mr. Kernbach nor the board would have approved an arrangement of that kind. Indeed I think he must have been aware that the board would not have approved such an arrangement with any prospective partner, even with proper safeguards, in view of the tight financial restrictions it had imposed.
249. If, as I think, Mr. Gebauer understood very well that the terms agreed with Mr. Chalhoub involved the acquisition by R+V of a shareholding in Risk UK, there were at least two reasons as far as he was concerned for putting part of the agreement into an addendum, thereby making it easier to conceal both its existence and the true nature of its contents: first, the deduction in respect of the additional 40% commission (which was bound to come to the attention of the accountants as soon as detailed statements of account were supplied) could be passed off as a premium deposit; secondly, the acquisition of shares could be passed off (if anyone asked, which was not very likely) as a security arrangement in the nature of a pledge. The entries on the CIG system reflect that approach. The 40% commission was entered as a premium reserve deposit and a reference to the shareholding was entered in terms that were consistent with security in the form of a deposit or pledge of shares. I think it likely that Mr. Gebauer personally entered the data into the CIG system. He originally suggested that one of his assistants, Miss Tourmousoglou, might have been responsible, but she was on holiday at the relevant time and could not have done so. However, whether he entered the data personally or not, he must have been responsible for the information that was entered in the 'B' screens for the personal accident binder on 26^th July 2001. It is most unlikely that he would have entrusted the agreements and their addenda to someone else for that purpose, and, if he had done so, it is difficult to imagine that anyone else reading the addenda would have described the 40% commission as an ordinary premium deposit. Mr. Schaff submitted that Mr. Gebauer would not have put any reference to the shares in the CIG system at all if it had been his intention to conceal the addenda, but I think that overlooks the fact that it would be difficult to explain away the failure to make a reference of any kind to the shareholding if, or when, the addenda finally came to light. It is difficult to know why details were entered in the system for the personal accident binder but not for the property binder. It is possible that Mr. Gebauer thought that one entry was safer than two and that he could pass off the failure to enter details for the property binder as a simple oversight if asked about it later. Another possibility is that having entered the details for contract No. X84449, he simply forgot to enter the corresponding details for contract No. X84450. I tend to favour the former explanation, but nothing turns on it.
250. My conclusions about what was going through Mr. Gebauer's mind at the time is reinforced by much of the other evidence. The fact that no copies of the business plan or any of the addenda were to be found in R+V's files and that no one at R+V was aware of the true nature of the 40% deduction until copies of the addenda were provided to Mr. Brown during the Paris audit is striking, especially in the light of the earlier attempts by Mr. Theobald and Mrs. Schwärzel to obtain an explanation for it. It suggests strongly that there was a determined attempt to suppress the information for as long as possible. As I have already said, confusion and incompetence on the part of those who carried out the various investigations within R+V does not begin to explain the absence of these and other important documents. I am satisfied that Mr. Gebauer took steps to ensure that copies of the addenda did not find their way onto the files. Similarly, the disappearance of the share certificates which were addressed personally to Mr. Gebauer and undoubtedly reached R+V's offices in Wiesbaden cannot be dismissed as a coincidence. If, as he asserted, Mr. Gebauer had understood that there was to be a deposit of shares by way of security, he would surely have taken steps to see that the deposit was made. However, he did nothing. The description of the deduction as "security" in the revised version of the accounts can only have been intended to conceal its true nature. Even if the shareholding could be described as security in a broad sense, it is impossible to understand how the 40% commission could be described as security for anything. I am satisfied that the form of wording was intended to conceal for as long as possible the true nature of the deduction.
251. Financial support of some kind was an essential part of the arrangement since without it Mr. Chalhoub would not have been willing to undertake the London operation at all, but the terms of the addenda went far beyond anything that could be justified, as did Mr. Gebauer's later agreements to allow business written under other contracts to be routed through the London binders in order to enable Risk to obtain the additional 40% commission. In my view there is no escaping the conclusion that in entering into, and subsequently implementing, the London binders Mr. Gebauer deliberately participated in a scheme that was designed to enable Risk to obtain as much as possible by way of commission during the first year of underwriting contrary to the interests of R+V. In doing so he acted dishonestly and in disregard of his duty to the company.
252. In early 2001 Mr. Chalhoub knew that Mr. Gebauer was head of one of the treaty departments at R+V and had no reason to think that he had any responsibility for facultative reinsurance. He must also have realised that to start facultative underwriting in London in a joint venture with Risk would be a significant step for R+V which would normally require the decision of a more senior manager or director responsible for that area of business, if not of the board itself. The obvious people to be involved in making a decision of that kind were Mr. Lehnert, as head of the facultative department, and Mr. Kernbach, whom he already knew, but he made no attempt to contact either of them until some months after the agreements had been signed. That is a powerful indication that he knew that the arrangements did not have Mr. Kernbach's approval. If he had thought otherwise, his instinct for publicity would surely have led him to make much more use of the developing relationship between Risk and R+V during the summer and autumn of 2001. In fact Mr. Chalhoub did have a brief meeting with Mr. Kernbach in Monte Carlo in September 2001, but neither of them suggested that there had been any mention of the London operation on that occasion, even though the first binders had been signed some weeks earlier. That is difficult to explain except on the basis that Mr. Kernbach did not know that the agreements had been signed and Mr. Chalhoub was aware of the fact.
253. The first time Mr. Chalhoub made contact with Mr. Kernbach in relation to the London binders appears to have been in connection with the inauguration meeting. I have already commented on the fact that the presentation itself was at odds with the true nature of the arrangements in a number of respects, in particular in giving the clear impression that R+V made no initial investment or contribution to the start-up costs. That could hardly have been retained without comment as part of the presentation if Mr. Chalhoub had thought that Mr. Kernbach knew of the 40% commission. Finally, Mr. Chalhoub's agreement to the use of the word "security" in the revised form of accounts to describe the 40% deduction is a further indication that he knew that the accountants at R+V were ignorant of its true nature.
254. In the light of all the evidence I am satisfied that the addenda to the London binders were the result of a dishonest conspiracy between Mr. Gebauer and Mr. Chalhoub which began in the spring of 2001, led to the signing of the binders and their addenda in July and September 2001 and was pursued throughout the remainder of 2001 and 2002 in the ways described earlier in this judgment. Having proposed a form of close co-operation between their two organisations, Mr. Chalhoub was able to take advantage of Mr. Gebauer's obvious enthusiasm for the London operation by persuading him to agree to terms that were very advantageous to Risk and manifestly disadvantageous to R+V. Since Mr. Gebauer was willing to co-operate, they were able to agree without any serious negotiation on the terms that were subsequently put into the addenda in order that their existence and true nature could be concealed. The effectiveness of that step is apparent from the fact that between them Mr. Gebauer and Mr. Chalhoub were able to suppress the existence of the addenda until the audit in March 2003 made it impossible to do so any longer. If the relationship between R+V and Risk had not broken down for other reasons and if Mr. Gebauer had taken over Mr. Kernbach's position in May 2003, it is quite possible that the addenda would not have come to light until very much later, if at all. I am satisfied that Mr. Chalhoub was well aware that Mr. Gebauer had no authority to commit R+V to agreements on these terms and that he was in breach of his duty to R+V in purporting to do so.
255. In those circumstances when R+V discovered the existence of the addenda it was in my view fully justified in treating both agreements as terminated with immediate effect and is entitled to recover damages for conspiracy. The precise nature and scope of the remedies to which it is entitled will be the subject of argument on a later occasion.
256. Conduct of the kind I have described inevitably strikes at the heart of any relationship. Once the position had come to light R+V could not be expected to allow Risk to continue to act as its agent since it could no longer command the degree of trust and confidence that such a position requires. Accordingly, R+V was also entitled to terminate immediately any other binding authorities it had granted to Risk.

6. Repudiation by abuse of the binders

257. R+V contended that, even if it was not entitled to terminate the binding authorities on the grounds that they were the product of a dishonest conspiracy, Risk had abused them in ways that demonstrated that it was unwilling to abide by their terms and that it was entitled to treat them as discharged on that ground. In view of the decision I have reached on the issue of conspiracy this question does not arise, but since it was fully argued I think it right to express my conclusions on it briefly.
258. Although R+V originally relied for this purpose on a number of different breaches, only three were ultimately put forward in argument as justifying the termination of the binders. They were the failure to establish an escrow account, the acceptance of the Clarendon PetsMarketing reinsurance and the routing of Italian risks through the London binders.

(1) Failure to establish an escrow account

259. It was a term of each of the binders that premiums were to be paid directly into an escrow account in the name of R+V. The purpose of that account, as the agreements themselves make clear, was to put the premiums in the hands of R+V from the moment they were paid, thereby providing it with security and the right to receive any interest that might be paid from time to time on the funds standing to the credit of the account. However, since claims and commissions were also to be paid from the account (in which R+V was required to maintain a minimum balance), it also provided a measure of security to Risk and it was necessary for Risk also to have a right to draw on the account. It was an implied term of the agreement that R+V would provide whatever co-operation was required to enable the account to be opened in its name, but in the event Risk did not persist in its attempt to do so.
260. It is necessary for the purposes of this argument to assume, contrary to my earlier findings, that there was no conspiracy between Mr. Gebauer and Mr. Chalhoub and that Mr. Gebauer had, or at least that Mr. Chalhoub thought he had, authority to speak for R+V in relation to all aspects of the London operation. For the reasons I have already given, I am satisfied that Mr. Gebauer agreed in November 2001 that the requirement for an escrow account should be quietly ignored and took no steps to obtain the authorisation that was needed for it to be done. In those circumstances I find it difficult to see how Risk can have repudiated the binders by failing to open such an account.
261. Quite apart from that, however, I am unable to accept that any breach of that obligation went to the root of the contract. I accept that it is of real benefit to an insurer to have immediate control over premiums as they are paid both because it provides security and because it allows immediate use to be made of the funds. No doubt that was why the escrow account featured so prominently in the inauguration presentation. However, the obligation is not expressed to be a condition of the contract, nor is it referred to in terms that suggest that it was regarded by the parties as a matter of fundamental importance. Moreover, the existence of such an account is not essential to the way in which these binders were intended to operate, as subsequent events have shown. The amount of interest that was likely to be earned was not so large as to make a great difference to the commercial benefit of the contract, nor is there any evidence that delay in the transmission of funds to R+V significantly affected it either.
262. In different circumstances it might be argued that an unexplained failure to comply with an obligation of this kind was sufficiently serious to undermine fatally the relationship of trust and confidence that ought to exist between principal and agent, but there is no basis for doing so on the facts of this case.
263. For these reasons I do not think that R+V could have justified the termination of the binders on this ground.

(2) Writing non-facultative business – the Clarendon treaty

264. In its particulars of claim R+V identified a number of instances in which it alleged that Risk had committed repudiatory breaches of the binders by writing treaty rather than facultative risks. In the event, however, although it still contended that in each case Risk acted in breach of the binders, the case on repudiation was pursued only by reference to the Clarendon PetsMarketing treaty to which I have already referred.
265. Mr. Edelman submitted that the manner in which Mr. Chalhoub went about writing this business demonstrated a clear intention not to be bound by the terms of the binders. For the reasons given earlier, however, I am satisfied that although this reinsurance fell outside the scope of the personal accident binder, being neither facultative business nor a reinsurance of personal accident risks, Mr. Chalhoub obtained Mr. Gebauer's consent to writing it. It is impossible, therefore to regard his conduct as evincing an intention on the part of Risk not to be bound by the terms of the relevant binding authority. If the acceptance of this risk can be criticised on any grounds it must be on the grounds that it is an example of Mr. Gebauer and Mr. Chalhoub furthering their conspiracy by accepting business that was likely to provide Risk with a substantial benefit in the form of the additional commission.

(3) Routing Italian business through the binders

266. I described earlier how various Italian risks originally written under the UFA treaties were subsequently routed through the London binders during their first year. Since I have come to the conclusion that Mr. Chalhoub had obtained Mr. Gebauer's agreement to handling the business in that way, it cannot be said that in doing so Risk demonstrated an intention to disregard the terms of the binders.
267. It follows that in my view none of these matters provided R+V with separate grounds for treating the binding authorities as discharged.

7. The ING Quota Share Treaty

268. A separate issue arises in relation to the quota share treaty by which R+V reinsured a proportion of ING's 2002 book with retrospective effect. This was the subject of a slip signed by Risk on 14^th January 2003 and a treaty signed on 6^th March 2003. R+V contended that Risk had no authority to enter into this treaty on its behalf and that it is therefore not bound by it. ING itself is not a party to this action and I am therefore reluctant to say more about matters that might impinge directly on its relationship with R+V than is strictly necessary. However, I think it appropriate to deal with the question whether Risk had actual authority to enter into the treaty on behalf of R+V since it is very closely bound up with the other issues in this action.
269. When he wrote to Mr. Gebauer in August 1992 with the suggestion that R+V should take over the ING business Mr. Chalhoub does not seem to have had in mind the possibility of reinsuring risks currently written by ING. His letter made it clear that although it was necessary for commercial reasons to make a decision in relation to the book as a whole, the proposal was for individual contracts to be taken over by R+V from renewal. In other words, R+V would take the place of ING under each contract for the future. The agreement signed by Mr. Gebauer and Mrs. Plass on 27^th August 2002 accordingly authorised Risk to accept accounts previously written by ING and offered to R+V at their individual anniversary dates.
270. Risk relied on the conversations said to have taken place between Mr. Chalhoub and Mr. Kernbach and Mr. Gebauer about this matter in August and September 2002 and on the fax of 19^th September 2002 as giving it authority to accept the retrocession of ING's existing book of business on behalf of R+V. As I have already said, however, I am unable to accept that Mr. Kernbach gave his approval to this further treaty. The proposal to accept a retrocession of the business already written by ING was no doubt a logical extension of the original idea and it may be that the commercial considerations were broadly the same, but the fact is that it did not fall within the scope of the authority granted on 27^th August and additional authority was required for that purpose. Despite what Mr. Gebauer said in his witness statement, I think the documents make it impossible to accept that a retrocession of that kind was in his mind or that of Mr. Kernbach when the ING business was being discussed. Had that been the case, the agreement that was signed would surely have been worded in different terms.
271. However, even if Mr. Kernbach did give approval in principle to the proposed retrocession, I do not think that it was, or could reasonably have been understood as being, sufficient to authorise Risk to negotiate and enter into a contract on behalf of R+V. I do not think that anyone would expect a binding authority of that kind to be granted orally - at the very least one would expect to see a scratch on a slip of some kind – and it is significant that whenever Risk had previously obtained authority to contract on behalf of R+V it had produced a document for signature which in due course was signed by two persons on behalf of R+V to render it binding. In those circumstances I do not think that Mr. Chalhoub could reasonably have thought that Mr. Kernbach had authorised Risk to negotiate a retrocession treaty with ING on behalf of R+V. That is no doubt why reliance was placed on the fax of 19^th September 2002.
272. I have already considered the origin of that document at some length. For the reasons given earlier I am satisfied that it was not produced in the ordinary course of business on the date it bears and to that extent at least is false. It was in my view produced by Mr. Gebauer at a time when the relationship between R+V and Risk was coming under strain in order to give Mr. Chalhoub something in writing that would apparently confirm R+V's agreement to authorise Risk to accept the ING retrocession on its behalf. However, Mr. Gebauer could not by himself authorise Risk to negotiate for and accept on behalf of R+V a retrocession of ING's existing 2002 book of business; that required a document signed by two authorised persons, or at least the informed approval of Mr. Kernbach in addition to his own signature. In this case neither of those requirements was satisfied. I am satisfied, therefore, that Risk did not have authority to enter into the ING retrocession on behalf of R+V. For what it is worth I am satisfied that Mr. Chalhoub was aware from his previous dealings with R+V that a document giving authority of that kind had to be signed by two authorised persons in order to be binding on R+V. However, if he was in any doubt about that, his attention was drawn to it by a letter from the head of R+V's legal department, Dr. Bark, sent on 6^th December 2002 in the context of R+V's attempt to give notice of cancellation of the FSL contract.
273. It is uncertain at present whether R+V will ultimately suffer any loss as a result of being bound to this retrocession. In those circumstances it is common ground that all remaining questions relating to this treaty should be left over for determination at a later date.