England and Wales High Court (Queen's Bench Division) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION LONDON MERCANTILE COURT

		13/06/08

Nature of proceedings

1. The Claimants ("Ramco" and "RIL") are companies in the same ownership which trade in surplus stock, principally of army origin. Ramco was formed (in 1997) to deal specifically in stock which the Ministry of Defence ("MoD") wished to sell via its Disposal Sales Agency and has dealt exclusively with such stock, entrusted to it under large bulk contracts. By contrast, RIL (formed earlier in 1991) has acquired its stock from a variety of sources. At all times relevant to these proceedings, both companies were under the day-to-day control and management of Mr Neil Sanderson, their managing director and a shareholder in both companies. The stock was held in storage at agricultural premises at Croft, near Skegness in Lincolnshire, owned by related parties.
2. The action concerns an insurance policy on the stock of both companies obtained through the Defendant, an insurance broker run by Mr Charles Russell. The stock was destroyed by fire on 16 May 2001: neither Claimant was at fault. Faced by claims from the two companies, underwriters refused payment in large part, contending that most of the stock was not covered by the policy, and the Claimants commenced proceedings against them in the Commercial Court. Following the determination of a preliminary issue by Andrew Smith J underwriters accepted liability in respect of the entirety of Ramco's claim, but continued its rejection of RIL's claim, save for a small part irrelevant to the present action. That remained the position after an appeal by RIL to the Court of Appeal, following which RIL discontinued its claim. The Claimants's case in the present action is, in brief, that the policy obtained by the Defendant was inappropriate for their purposes and the Defendant was in breach of its obligation of skill and care in this regard.

The Claimants' business and stock

The Ramco stock

3. The latest contract setting out the basis on which Ramco dealt with the MOD surplus stock was dated 9 December 1999. It provided, in essence, that (a) the stock was to remain the property of the MoD until Ramco had agreed to sell it on behalf of the MoD, until such time holding it "on a fiduciary basis as bailee for MoD" with title passing to Ramco when it agreed onward sale of any item of stock; (b) the proceeds of sale were to be divided between Ramco and MoD according to a specified formula; (c) any stock losses for which Ramco was deemed liable would be at "the assessed market value of the items", its liability for other losses being "2% of the MoD Basic Material Price of stock".

The RIL stock

4. RIL's stock, which came from various sources, fell into two categories. The first, of small amount, was its own property and is irrelevant to the present action. The second, which is at the centre of RIL's claim, was a large quantity of South African army surplus hand tools held under a written agreement dated 21st May 1999 between RIL and Mr Neville Murray, a South African businessman ("the Murray Agreement"). A first consignment of 20 containers held under this agreement arrived from South Africa in May 1999, followed by a further consignment of 4 containers in December 1999. Significant terms of the Murray Agreement were:

a. RIL was to market and sell the tools for the mutual benefit of RIL
and Mr Murray (Clause 4.1).

b. Such sales were to be at the "RIL sell price" with a permissible
discount of 30% (Clause 4.2).

c. RIL was to account to Mr Murray for 50% of the sale proceeds of
each tool (taking credit for minimum payments of £5,000 per month
for the first year of the agreement) (Clause 4.5).

d. Title in each tool was to remain with Mr Murray until RIL had
sold it and Mr Murray had received his share of the sales proceeds,
until which time RIL was to hold the tool as "the Vendor's fiduciary
agent and bailee" (Clause 5).

e. RIL was required to insure the tools for a sum equal to 50% of
their total "RIL Stock Value" (Clause 7), that value being initially
around £2 million.

Insurance cover

5. Until mid-1999 the Claimants' insurance had been placed with Cornhill Insurance plc using Oughtred & Harrison (Insurance) Ltd as brokers. The insured under the Cornhill policy were not only the two Claimants but also associated entities of the Sanderson family including the Sanderson pension fund, and the policy covered in addition to the stock the premises owned by these other entities (including the warehouses where the stock was stored) and their employers', public and products liability. In early 1999, Mr Russell contacted Mr Sanderson in the hope of obtaining the business for the Defendant, which in fact occurred. The result was that the Defendant procured a new policy for the Claimants with Norwich Union with effect from 28 July 1999 covering the remainder of that calendar year and renewed on 1 January 2000. As the renewal for 2001 approached, however, Mr Russell was quoted a significantly higher premium by Norwich Union and (having obtained a short extension of the existing cover) sought a quotation through Lloyds brokers, Heath Lambert, who obtained one from Admiral Underwriting Agencies. On receipt of this, the Defendant asked Heath Lambert to hold covered as from 1st February 2001, and the policy was eventually issued in April 2001.
6. The policy was a Combined "All Risks" Policy incorporating standard
   Admiral wording. The material damage section undertook to pay the
   insured "the value of the property at the time of its loss or destruction" and, so
   far as applicable to stock, covered

"Stock ... the property of the Insured or held by the Insured in trust for which the Insured is responsible."

The sum insured in respect of stock was £2 million.

The claim against underwriters

7. On 16 May 2001 the premises were severely damaged and the stock destroyed by fire. It has never been suggested that this was anything other than an accident, probably due to an electrical fault.
8. Claims were submitted to underwriters by Ramco and RIL for the entirety of the stock. Underwriters accepted those claims unconditionally (save as to quantum) only as regards that small portion of the stock which was the property of the Claimants, held by RIL. Otherwise, underwriters adopted the position that the cover was limited to an indemnity against any liability of the Claimants to the actual owners of the goods, namely the MoD and Mr Murray. In the case of Ramco this meant that underwriters were willing to pay the 2% of value specified in the MoD contract; in the case of RIL, whose contract with Mr Murray did not render it liable at all in respect of accidental loss, there would be no recovery at all. This was said to be the result of the words "Stock ... held by the Insured in trust for which the Insured is responsible." In face of underwriters' stance the Claimant issued proceedings against them in 2003.
9. The proper construction of the policy was argued as a preliminary issue before Andrew Smith J. On 15 October 2003 he ruled that stock not owned by the insured was covered only if it was liable to the owner of the stock, but if that was established the insured could recover the full value of the goods. On that basis, since the MoD contract imposed liability, albeit severely limited, on Ramco, underwriters agreed that it could recover the full value of the stock held by it, and after negotiations on value paid an agreed sum in settlement of its claim. Since, however, the Murray Agreement imposed no liability at all on RIL, underwriters continued their refusal to pay. RIL appealed the decision of Andrew Smith J, contending that the words "for which the Insured is responsible" did not require legal liability for loss. The Court of Appeal held that, though first impression might support RIL's argument, the words had been glossed to the contrary by a series of decisions going back to the middle of the nineteenth century, from which - though probably not binding on the Court of Appeal - it would be inappropriate to depart. A petition to the House of Lords for leave to appeal was rejected.
10. In these circumstances the two Claimants claim in the present action against the Defendant the following losses:

a. Ramco seeks its legal costs of the action against underwriters, in so far
as not recovered as taxed costs.

b. RIL seeks damages under two heads:

(1) the value of the South African tools, put at £1,147,104, which should have been recoverable against underwriters if an effective insurance cover had been obtained; and

(2) the legal costs incurred in the action against underwriters and the costs payable to underwriters by RIL under orders made in that action.

Insurance by a bailee

11. It is clear law that a bailee may insure the goods of the bailor and recover the full value of the goods and is not restricted to the part attributable to his own interest, though he is accountable to the bailor for the excess: see Tomlinson v Hepburn, [1966] AC 451. This rule, recognised as early as the mid-nineteenth century in Waters v Monarch Fire and Life Assurance Company, (1856) 5 E&B 970, applies regardless of whether the bailee is liable or potentially liable to the bailor in respect of the goods.
12. Within a short time of the Waters decision it was also recognised that the position could be altered by the wording of the policy. In North British and Mercantile Insurance Company v Moffatt, (1871) LR 7 CP 25 the policies covered "merchandise ... the assured's own, in trust or on commission for which they are responsible". It was held that the addition of the italicised words ("the Moffatt wording") produced a different result from that in the Waters case. While the policy remained a cover on goods rather than against liability to the owner, it only covered goods in respect of which such liability existed. This decision, interpreting "responsible" to mean "legally liable", was followed by Roche J in Engel v Lancashire & General Assurance Co. Ltd, (1925) 21 LL LR 327 and (1925) 30 Com. Cas 202.
13. The Claimants' complaint is in essence that Mr Russell procured them a Moffat policy rather than a Hepburn policy.

The obligation of a broker

14. It is common ground that a broker in the position of the Defendant owed his clients a duty in both contract and tort to exercise all reasonable care and skill in advising them and obtaining appropriate insurance cover.
15. More specifically, that duty required the broker

"so far as possible, to obtain insurance coverage which clearly and indisputably meets its clients' requirements",

as it was put by Cooke J in Talbot Underwriting v Nausch Hogan [2006] 2 Lloyds Rep 195 at paras 104-106. He cited in particular Morritt LJ in FNCB Ltd v Barnet Devanney (Harrow) Ltd [1999] Lloyd's Rep IR 459 at para 21:

"...it is not the function of an insurance broker to take a view on undetermined points of law. The protection to be afforded to the client should, if reasonably possible, be such that the client does not become involved in legal disputes at all. As in the case of a solicitor the insurance broker should protect his client from unnecessary risks including the risk of litigation."

Cooke J continued:

"Reference was then made to Dixey & Sons v Parsons (1964) 192 EG 197 which was, like Levy v Spyers (1856) 1 F & F 3, an action involving a negligent solicitor who had failed to secure the clients' position with consequent expense in argument and litigation. Whether or not the argument advanced by the broker or solicitor is ultimately found to be correct, the fact remains that, by not doing what a competent professional person would do to avoid such argument, cost and expense can be incurred. In those circumstances liability for loss and damage which flows from that negligence and is not too remote must be recoverable."

16. These principles were not contentious between the parties in the present
    case. The evidence and submissions also agreed that the broker was
    required to explore with the client the nature of his business so as to be
    able to advise properly what cover was or might be appropriate and,
    where relevant, permit the client to make a choice between various
    possibilities.

Events leading up to the conclusion of the cover

17. At the outset, when he was still trying to obtain the insurance portfolio of the Sanderson family, Mr Russell prepared a report dated 29 March 1999 based on preliminary discussions with Mr Sanderson. At that date, he was unaware of the tools, and indeed Mr Sanderson had not yet concluded the deal with Mr Murray. The document referred simply to "Stock situate at Church Lane, Croft" with a value of £750,000. However, at some point in the following weeks - and before the proposal form was completed and submitted to Norwich Union at the end of July 1999 - he made a number of amendments and annotations in manuscript on a copy of the Report, as did Mr Sanderson on another copy of the Report - both were almost certainly made during a discussion between the two men. On Mr Russell's copy the stock figure was shown first as £1.8 million, that figure being then struck through and replaced by £2 million. Under that figure Mr Russell noted that the valuations were for Ramco "Purchase Price" and for RIL "Purchase Price plus". On Mr Sanderson's copy the existing £750,000 was annotated as being Ramco stock, a further £150,000 as being "RIL Normal" and a further £1 million as being "RIL Tools" with the annotation "Say £2m total declared quarterly". Manuscript figures of £1.150 million (equal to the aggregate of Mr Sanderson's RIL stock figures) and £750,000 - making in total £1.9 million - also appear on Mr Russell's copy. Mr Russell also noted "50/50", which recorded Mr Sanderson's wish that the premium, so far as it related to the stock should be split equally between the two companies.
18. It is clear from this material that Mr Russell was told that a large quantity of tools were being added to the stock by RIL, and, though apparently in issue at the start of the hearing before me, this was accepted by Mr Russell in the course of the evidence. Dispute remained, however, as to what Mr Russell was told about the basis on which the tools were to be held by RIL.
19. Mr Sanderson testified that in the course of meetings with Mr Russell he told the latter that

(a) Ramco's stock came almost entirely from the MoD, was held by Ramco as a selling agent, and the stock remained the property of the MoD until Ramco had concluded a sale;

(b) there was a large quantity of hand-tools originating from South Africa which were being stored and marketed by RIL;

(c) property in the tools remained with the vendor until RIL had concluded a sale;

(d) the proceeds of sale would be divided between RIL and the vendor;

(e) RIL was obliged by the agreement with the vendor to insure the tools.

20. Mr Russell accepts having been told that Ramco's stock came from the MoD and was held by Ramco as a bailee pending sale. According to him, however, he was not made aware that the tools came from South Africa nor the basis on which they were held by RIL. Not having been told to the contrary, he assumed that they also came from the MoD and were held on the same basis as bailee as Ramco held its stock.
21. Both men agreed that an obligation to insure was mentioned by Mr Sanderson. Since there was no such obligation as regards the MoD stock, the reference can only have been in the context of the RIL tools. This speaks in favour of Mr Sanderson' account that he told Mr Russell of the basic features of the Murray agreement. Whether or not that was indeed the case, it is clear that Mr Russell knew that the tools were not the property of RIL and understood that there was an obligation to insure them.
22. Mr Russell also accepted that the Claimants would want a policy which enabled them to recover in respect of their own interest in the goods and not just for the true owner. Indeed, as both men told me, they considered and rejected as unnecessary cover against loss of profit precisely because they considered that the profit element was already included in the value of the stock.
23. Cover for both the owner's and the bailee's interest could fail if it was made contingent on the bailee being liable to the owner for the loss, which would turn on the terms on which the bailee held the goods. These would therefore need to be investigated by the broker before he could recommend his client to accept a policy with the Moffatt wording. Had Mr Russell done so, he would have ascertained that while the MoD contract imposed at least some liability for the goods, the Murray agreement had no similar provision. Mr Russell told me, however, that he had believed that the obligation to insure the goods in itself was a liability which satisfied the wording. I have serious doubts whether he in fact adverted to the point at all at the time. But even if he did do so, it would not end the question whether he properly discharged his duty as a broker to the Claimants.
24. In the course of RIL's appeal against the ruling of Andrew Smith J in the
    proceedings against underwriters, Waller LJ (at paragraph 25),
    commenting on a passage in the Opinion of Lord Wright in the Privy
    Council case of Maurice v Goldsborough Mort and Company Ltd [1939] AC
    452 said that:

"The brokers in that case had undertaken to insure the goods, and that rendered the brokers liable or "responsible" if they did not insure."

The statement in Maurice on which he was commenting was:

"A warehouseman who has assumed an obligation to insure the goods while in his possession has an insurable interest in the goods, because he will be bound to answer in damages to the bailor if he has not insured and the goods have been destroyed or damaged."

Uninstructed by Waller LJ's observation, many would in my view have read that statement, both in isolation and in the larger context of the issues in the case, as addressing solely the question whether the insurance obligation created an insurable interest in the bailee. No question arose of whether the policy wording precluded recovery: underwriters had in fact paid out the full value of the goods, and the case concerned only the division of that recovery between the brokers and the owners. Many would, in my view, also have struggled with the apparently circular proposition that an insurance of goods could be rendered effective by the fulfilment of a condition that no such insurance had been effected, and experienced difficulty in equating breach of a contractual undertaking to insure with a liability for loss of the goods which should have been insured.

25. In short, I do not consider that at the time the cover was broked the law on this point could have been stated with any semblance of confidence to be as indicated by Waller LJ some years later. Indeed, the question does not seem to have been even identified, let alone addressed, either judicially or in text-books. The belief which Mr Russell claimed to have held on the subject would have been speculative, if not adventurous. As such it could not have been a proper basis for action, given the Defendant's obligation to obtain for the Claimants a policy which, in the words of Cooke J quoted earlier, "clearly and indisputably" met their requirements. A plain-vanilla Hepburn policy would have done so. Inclusion of the Moffat wording introduced complications which were possibly fatal.
26. Nor was it necessary to accept the Moffatt wording. It was not suggested, let alone established, by the Defendant that a Hepburn policy could not have been obtained, or even that underwriters would have required a higher premium for a policy without the Moffatt wording. (In the latter case, moreover, Mr Russell would have been obliged to present and explain the options to Mr Sanderson, who would probably have been prepared to pay the extra.)
27. I therefore find that the Defendant was in breach of its duty to the Claimants in not obtaining a Hepburn policy without the Moffat wording.

Quantum

The RIL claim

Accounting to the true owner

28. If the Defendant had obtained a Hepburn policy, RIL would, while entitled to recover the full value of the stock, have had to account to Mr Murray for the proportion of the payment relevant to the latter's interest. The Defendant points out that to that extent RIL has suffered no loss, and contends that the damages recoverable against the Defendant are to be reduced accordingly.
29. That contention is undoubtedly good, unless a bailee in the position of RIL has the same obligation to account to the owner in respect of damages recovered from a broker who fails to obtain an effective insurance of the goods as he would have had in respect of a recovery under the insurance. Whether or not that is the case is the essential point at issue between the parties. It is unaddressed by authority, and can only be approached by reference to principle.
30. The starting-point is the right of a bailee to sue a tortfeasor for the full value of the goods and his concomitant obligation to account to the bailor in respect of the latter's interest. As the survey in The Winkfield [1902] P 42 demonstrates, this goes far back in legal history, preceding the development of English insurance law. It can also in my view be seen as providing a foundation and justification for the rule as to insurance recorded in Waters, both as to the right to recover the full value and the obligation to account. It would have been incongruous if the person entitled to sue for the full value of the goods, without regard to the extent of his interest, could not also insure for the full value, or if, being entitled so to insure, he did not have the same obligation to account. Ultimately, the same right and obligation emerge from the fact that the insurance proceeds are the surrogate of the goods.
31. The proceeds of a claim against a broker for failing to obtain an effective insurance can similarly be viewed as replacing the insurance (and by extension the goods). If the legal system did not treat them in the same way as it would the proceeds of the insurance claim, it would to that extent lose sensible coherence. Counsel for the Defendant was unable to advance any serious argument of principle or convenience to the contrary, and I can see none.
32. This analysis leads me to conclude that RIL will be liable to account to Mr Murray for that proportion of the damages which is referable to the latter's interest. In consequence, recovery of the full value will not over-compensate RIL.
33. It is therefore unnecessary for me to rule on an alternative argument that the result for which RIL contends can also be reached by more general reasoning to be found in Linden Gardens Ltd v Lenesta Ltd [1984] 1 AC 85, and which I discussed in And So To Bed Ltd v Dixon [2001] FSR 47. Linden Gardens founded on a number of cases and situations where the separation of privity and loss have been addressed and a purist approach to privity rejected, and which can be seen at least in part as related to the principle recognised in The Winkfield. Though they are all tied to property interests, I do not consider that the underlying principle is necessarily so limited. Their transposition to a brokerage contract may not however be entirely straightforward.

What if the damages were restricted to RIL's own interest ?

34. Under the Murray contract RIL purchased the goods from Mr Murray for an amount equal to 50% of the amount invoiced to the customer by RIL (plus VAT) but with a reservation of title until Mr Murray had received the relevant 50% in respect of each tool. RIL contends that it would be entitled to recover that percentage in respect of the tools destroyed by the fire, even if - contrary to my earlier ruling - it could not recover the full value.
35. The hypothetical Hepburn cover is a policy on goods. The proceeds would therefore have been apportioned between RIL and Mr Murray according to their respective interests in the goods. The Defendant disputes that the Murray contract gave RIL any such interest in the tools, arguing that there was a mere hope or expectation of profit (if it were to achieve a sale).
36. In Maurice the insured brokers warehoused their clients's wool pending sale on which the insured would receive commission from the growers. The Privy Council held that the contingent right to commission was not an interest covered by a policy on goods (and indeed the cover expressly stated that the insured value was to exclude any profits of any kind), and could not therefore be reflected in the apportionment of the insurance proceeds between the insured and their clients. In the present case, however, RIL was not a mere bailee. Under the terms of the Murray Agreement it was a buyer in possession of the tools. Though legal title remained with Murray, his rights in respect of the tools were restricted by those which the agreement accorded to RIL. Both seller and buyer had therefore in my view an interest in the goods protected by the policy.
37. It is also to the agreement between them that one must look to determine the relative values of these two interests. The agreement provides for an equal split of the proceeds of sale. That being the measure of respective value in the case of a sale, I can see no basis for concluding that prior to sale the interests of the two parties were different.
38. Accordingly, if (contrary to my ruling above) it were right to reduce RIL's recovery from the Defendant by the amount of Mr Murray's interest, the appropriate reduction would be 50%. This needs to be qualified to the extent that the parties had agreed a split more favourable to Mr Murray in respect of possible sales to particular parties, but it is in the circumstances unnecessary for me to enter into the detail on this.

Value of the insurance claim The correct approach in law

39. If a Hepburn policy had been obtained, underwriters would have had no basis for disputing liability, and the Defendant does not suggest that they would have sought to do so. No discount for this contingency is therefore called for.
40. The entitlement under the policy was to be paid the value of the tools. Understandably, considerable evidence and submissions were therefore devoted to this subject. As with many questions of valuation, there is room for substantial and rational differences not only as to the ultimate figure or range of figures but as to the methodology to be adopted. A single "correct" figure is a chimera. Moreover, in assessing the loss suffered by RIL, the court is charged with a different task, namely to determine what the amount of the recovery would have been. And that amount would have been fixed either by negotiation on quantum between RIL and underwriters or, if that failed, by the judgment of a court not necessarily faced by the same evidence as that presented to me.
41. Moreover, that process could have produced a myriad outcomes over a range of figures, each with its own percentage probability. Use of the higher calculus to sum all these is, however, beyond the scope of the law of damages, even if the individual percentages could realistically be determined. Faced with this problem (in the context of a claim for solicitor's negligence), Jack J held in Browning v Messrs Brachers [2004] EWHC 16 (QB) at paragraphs 20 and 21 that the court should determine the figure which "it is most probable that the claimant would have recovered", by which he meant "the figure more probable than any other figure". The Court of Appeal in the same case, [2005] EWCA Civ 753 at paragraphs 204 to 212, approved this formula provided it was supplemented to take into account of the presumption originating in the case of Armory v Delamine (1722) 1 Stra 505. In essence, this requires the court to resolve uncertainties in favour of the claimant, where they have been created by the wrongdoing of the defendant.

Valuation approaches and material

42. Under the Murray Agreement a so-called RIL sell price was fixed at the outset for each category of tool, of which there were a large number. This was the price at which it was hoped to sell the tool, though RIL was authorised to conclude a sale at no less than 70% of that price. The RIL sell price was intended to represent about 30% of the price which the parties, on the basis of limited research by Mr Sanderson, considered would be charged by a retailer in the United Kingdom for the same article supplied brand new from the manufacturer. The aggregate of the RIL sell prices was £2,096,770.
43. The stock was either new or in good second-hand (but unused) condition, often in original wrappers, and of good quality and often established brand names. In October 2000, however, part of the second consignment suffered water damage from rain ingress into the warehouse leading to some rusting.
44. By the time of the fire, there had been very limited sales of the tools, totalling £48,832. 43. Some of these sales were at prices well below 70% of the RIL sale price. There had been negotiations, which might have ripened into something harder, for larger bulk sales, but which would not have achieved anything like 70% of the RIL sell price.
45. The expert instructed by RIL, Mr Fitzgerald, took as his starting-point an aggregate RIL sell price of £2.05 million (the original aggregate RIL sell price less the modest sales actually made). In his opinion, the likely sales were bulk rather than sales to the public or small traders, meriting a reduction of 30%. To this he made a further reduction of 15% to take into account (a) the likelihood that some of the stock would never be sold; (b) the rusted condition of "a very small quantity"of the tools; and (c) that future purchasers might well have negotiated a discount in excess of the 30%. He accepted in oral evidence that he had assumed a smaller quantity of rusted or damaged tools than might have been the case, and would therefore have increased the 15% additional discount.
46. Unsatisfactory aspects of this calculation are not hard to identify.
47. The starting-point of the exercise, the RIL sell prices, lacked any secure underpinning. Despite certain limited efforts made by Mr Fitzgerald, it was at this distance in time close to impossible to confirm the accuracy of the estimates made in 1999 of current retail sale prices in the United Kingdom for comparable tools. In addition, it is not clear to what extent these estimates would have retained validity two years later at the time of the fire. Finally, there is no obvious basis for placing the RIL sell prices at 30% (rather than some other percentage of current retail price). It has of course to be observed that these factors might equally serve to increase as to decrease the RIL sell prices.
48. In the event, Mr Fitzgerald departed significantly from the aggregate RIL sell price, on the ground that bulk purchases would be at a lesser price. The discount of 30% which he applied on this ground has also no particular basis, other than perhaps "feel" - but the latter consideration can have little role in the present case, since neither expert had experience referable to surplus tools, let alone at the time.
49. The figure of 15% (subsequently increased) also appeared to have no particular basis. In so far as it was attributable to damage to the goods, the extent of that damage was a matter of uncertainty, not only in the (limited) evidence but in its implications, and its quantification in terms of value no less so.
50. The Defendant's expert, Mr Hanson-James, approached the matter from a different angle, based on the fact that RIL had made very limited sales by the time of the fire. The Defendant's more extreme contention was that this proved that the tools were unsaleable, at least in the hands of RIL. Mr Sanderson's answer fell into a number of parts. Firstly, his sales efforts had been concentrated on keeping good and active commercial relations with the MoD by moving the Ramco stock. I am inclined to accept this evidence, though inevitably it is a question of degree and at least some marketing efforts had been made in relation to the RIL tools. Secondly, he was ready to hold stock of this sort for perhaps a number of years until the right deal or deals came along. He had very little capital invested in it, and his storage costs were minimal. I found this evidence entirely convincing and rational, though it might dictate some discount to the recovery to reflect the fact that the sales could be some considerable time away. Moreover, absence of sales would not in itself in my view demonstrate that the tools were unsaleable, but merely that they had not attracted purchasers at the prices demanded. Ultimately, one would expect a trade-off between price and timing.
51. A less extreme conclusion made by Mr Hanson-James was that the small amount of sales meant that there was no evidence on which to arrive at a market value. On that basis, he opted for an approach based on acquisition costs as an indication of value This led, however, into some difficulty.
52. If one looked at the cost to RIL, this turned on the Murray Agreement, which fixed the purchase price by reference to the sale price (as yet unknown) to the ultimate customer. Mr Hanson-James therefore accepted that one should proceed on the basis of the acquisition costs in South Africa, but that had its own difficulties. The tools were initially bought by Zimbi Trucks (Pty) Ltd ("Zimbi"), represented by Mr Murray, for R 1.5 million (+VAT) ex warehouse on 29 May 1998. That same day Mr Murray paid the same sum to the sole shareholder of Zimbi, and it was treated as the payment for 49% of his shareholding under an Agreement which granted an option, exercisable - and in fact exercised - by 30 June 1998, to purchase the remaining 51% for R 2.5 million (payable by three payments between November 1998 and November 1999). An annex to the Agreement suggests that the only assets of the company were the tools. That leaves for debate whether the value of the tools in South African was R 1.5 million (= ca. £178,000), paid by Zimbi, or R 4 million (= ca. £476,000), paid by Murray to Zimbi. The costs of transportation and importation into the United Kingdom would have added about £50,000.
53. Plainly, the assistance provided by this approach must turn in large part on the degree of interdependence between the markets (to the extent that they exist) for such stock in the two countries. Neither party sought to explore that important question before me.
54. In addition to the approaches which I have just outlined, both parties made some appeal to (a) the limited sales which were made and (b) the unconsummated or aborted negotiations.
55. As to (a), they all had special features and circumstances, and were of such modest size as to provide little basis for extrapolation. So far as they went, they suggested prices at a very large discount to RIL sale prices.
56. As to (b), RIL produced letters from certain potential purchasers, one of whom suggested that he might have paid £600,000 to £700,000 if he had been offered the entire parcel. There was also evidence as to the proposed sale of a large consignment to a firm called Wipers, which had been packed ready for despatch when the fire intervened. Negotiations on price had not been concluded, but might have ended with a discount of more than 30% to the RIL sale price.
57. Though the litigation before me was at times conducted as if I were to decide the value of the stock on the basis of the evidence and submissions made to me, that is not my role. My task is the different, but no less difficult, one of determining the most probable sum which RIL would have obtained from underwriters, if the Moffatt wording had not been included in the policy. One would expect some light to be thrown on this by such negotiations as did take place with underwriters on quantum before halted by their definitive denial of liability and the commencement of legal proceedings, though the parties addressed very little time to that topic in the oral evidence and submissions.
58. The claim as advanced to underwriters was presented by Dr Tony Sowter, a consultant apparently retained by and reporting primarily to Mr Murray. While I was not asked to consider the detail of Dr Sowter's calculations, it is evident that his methodology was different from that adopted by Mr Fitzgerald. Though Dr Sowter's approach and calculations were subjected to substantial criticism by Mr Hanson-James in his expert report (because he had anticipated that Dr Sowter would be the Claimants' expert), in view of the changed approach by the Claimants that was explored before me only to a very limited degree. Reference was also made in the negotiations to the cost to Mr Murray of acquiring the goods.
59. It is clear that the debate before me as to the proper valuation of the stock was far from a repetition of the exchanges which took place in the negotiations between the parties in the months after the fire. One cannot know how the arguments might have changed or developed if those negotiations had proceeded further or, in the event of deadlock, the matter had switched into litigation (limited to quantum). But I cannot proceed on the basis that either the negotiations or the litigation or any judgment would have been informed, or informed exclusively, by the same arguments and materials on valuation as were presented to me.
60. In common with the submissions of both parties, I doubt if the matter would have proceeded to litigation, or at least to an active trial. On this basis, I must form a view as to the most likely level at which the parties would have compromised, against the backdrop of potential and uncertain decision by a court if they did not do so.
61. I start with the fact that the claim had been advanced by Dr Sowter at £1,147,104 . This therefore fixed the upper limit of RIL's negotiating position. No doubt underwriters would have regarded as unsatisfactory the fact that the limited amount of actual sales meant that there was no helpful bench-mark for establishing what RIL could have sold the tools for. But that did not mean that the tools had no value, merely that the basis for assessing it was more uncertain. The total RIL sell price of around £2 million was 30% of the estimated retail price based on Mr Sanderson's brief survey of the market in 1999, indicating a retail value well in excess of £6 million. In 2007 Mr Fitzgerald was not realistically able to ascertain retail prices in the UK market as at 2001. Five years earlier, that is likely to have been possible at least to a tolerable level of approximation. It might have been discovered that Mr Sanderson's estimates had been systematically too high or that retail prices had generally declined between 1999 and 2001, but I have no reason to assume either of these things, still less that any such tendency would have been of great significance.
62. RIL's claim of £1.147 million was therefore to be seen against this backdrop. It valued the stock at some 15% of likely retail value of new tools. Opinions could no doubt have differed as to whether this figure adequately reflected the uncertainties and contingencies of selling the stock as surplus (and partly water-damaged), on a wholesale, probably bulk basis, and perhaps with considerable delay, but it was in my view within the ball-park for good faith negotiation rather than to be dismissed as opportunistic gold-digging on the part of RIL/Murray.
63. Underwriters would in my view also have had regard to the acquisition costs, and probably at the end of the day have been prepared to base them on the higher R 4 million figure. This approach would have produced a much lower figure than that claimed by RIL/Murray.
64. These are likely to have been the two major parameters which would have constrained and informed any compromise. Otherwise the determination of what figure would have emerged is subject to the speculative uncertainties involved in any hypothetical scenario. These uncertainties exist because an agreement on quantum was prevented by the absence of liability under the policy due to the Defendant's negligence. The principle in Armory v Delamine therefore entitles RIL - within the bounds of realism and common sense - to a generous attitude on the part of the court in this area.
65. On this basis, I find that the most probable figure that would have been agreed would have been £850,000.

Damages other than lost insurance recovery

66. Both Claimants seek compensation for the costs involved in the litigation
    against underwriters.

Ramco

67. In the event, Ramco succeeded against underwriters and obtained an
    order for payment of its costs. It claims £7,500 as the difference between its actual costs and those recovered from underwriters, and the Defendant accepts liability in this amount.

RIL

68. RIL claims £35,000 in respect of its own costs of the preliminary issue before Andrew Smith J, and a further £35,000 in respect of the costs of underwriters which it was ordered to pay.
69. RIL further claims for £49,341.20 and £15,000 in respect of its own costs and its liability to underwriters in the Court of Appeal. It is accepted by the Defendant that RIL acted reasonably in taking the matter to appeal, and that these costs are therefore also recoverable as damages.
70. RIL also seeks £4,799. 57 in respect of the costs of its petition to the House of Lords for leave to appeal. The Defendant, while taking no point on the amount, argues that this was an unreasonable step too far and for which it should not have to pay. I disagree. The point was as arguable before the House of Lords as in the Court of Appeal, and was undoubtedly one of general public importance. Given the sums in issue, the costs of presenting a petition for leave to appeal were a small investment. Indeed, RIL might otherwise have been vulnerable to an argument by the Defendant in the present action that it had failed to mitigate its loss.

Conclusion

71. I therefore propose to order that judgment be entered:

a. in favour of the First Claimant for £7,500

b. In favour of the Second Claimant for (1) £850,000 and (2) £139,140.77.

Ruling on application for leave to amend
72. Perhaps inspired by the observation of Waller LJ which I quoted earlier as to the requirement of liability being satisfied by the obligation to insure imposed by Clause 7 of the Murray Agreement, the Defendant contended as a defence of causation in the present action that RIL had failed properly to advance this argument against underwriters.
73. Though the Defendant was probably unaware of it, the argument had, in fact, been advanced in Clause 29 of the Claimants' skeleton argument served for the purpose of the hearing before Andrew Smith J in connection with a second preliminary issue which in the event was never heard. Underwriters responded robustly in their skeleton argument that "RIL's breach of Cl.7 does not give rise to a claim under the Policy. Murray's claim against RIL is not for loss destruction or damage to the stock, but for damages for RIL's failure to insure." The parties then agreed to restrict the hearing to the first preliminary issue actually determined by Andrew Smith J, with RIL accepting that if that issue was decided (as it was) against it, it would concede that it had no claim under the policy.
74. In his closing submissions before me Counsel for the Defendant formally conceded that the course taken by the Claimants before Andrew Smith J in abandoning the point was reasonable, because at that time there was no authority to support it.
75. However, he sought to take a further point connected with Clause 7, based on developments in the Court of Appeal and subsequently. Following the words which I quoted in the judgment Waller LJ added:

" ... indeed Mr Tozzi has conceded that if the appellants were under an enforceable obligation to insure the goods bailed to them in this case, the insurers will be liable."

This appeared to be the reverse of the position adopted by the same Counsel below, and which had been conceded by the Claimants.

76. After handing down the judgment the Court of Appeal, following some written debate, made an order stating that the appeal was dismissed "save that the answer to preliminary issue (1) be varied as set out". This formula was announced in a email from Waller LJ following an intimation in the same email that in the light of Mr Tozzi's concession the correct answer to preliminary issue (1) should be:

"Save to the extent of the concession recorded in paragraph 25 of the reasons for judgment, section 1 of the insurance policy responds to claims in respect of stock and materials in trade on the Claimants' premises only where liable to a third party in respect of loss of or damages to such stock and materials in trade."

The email was produced before me in the course of closing submissions by the claimants not directed to this point.

77. I was told that despite the concession and order underwriters continued to refuse liability. It is unclear why, but may be connected with an argument (developed in Paragraphs 43 ff of underwriters' skeleton before Andrew Smith J) that Mr Murray was not the owner of the goods and that the Murray Agreement was for this reason unenforceable. At all events, RIL was not prepared to litigate further.
78. In these circumstances, the Defendant sought leave to amend to contend that RIL should have continued the proceedings against underwriters on the basis of the concession. This would, as I understand it, have been presented as an argument of causation or of mitigation. I reserved my ruling on this application for decision in writing.
79. The fact that Mr Tozzi had made the concession was known to the Defendant, having been recorded in the judgment of Waller LJ, even if the formal order did not spell out the intended variation in the answer to the preliminary issue. It is not clear why this line of enquiry was not pursued further, and an adjournment would have been necessary to enable evidence to be adduced from the Defendant's legal advisers as to why the point had not been taken earlier.
80. As regards the substance of the matter, even if I had been minded to permit the amendment, the trial would have had to be adjourned to permit RIL to adduce evidence (possibly from their legal advisers) as to the nature of the discussions with underwriters and the reasons for not seeking to litigate further on the basis of the concession. In advance of such evidence it is not possible to form any reliable view as to the likely outcome, but it appears to me far from obvious that RIL would be shown to be in breach of a duty to mitigate its loss or to fail on the grounds of causation.
81. The most important consideration is however to my mind that the application is made at the very end of a six-day hearing. That is compounded, from RIL's point of view, by the fact that this is the second action which it has had to bring. Finality is in itself an aspect of justice. Its demands are in the circumstances of the present case not remotely outweighed in my view by any other consideration and in my view irresistible.
82. I therefore reject the application for an amendment.