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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Royal Scottish Assurance Plc v. Scottish Equitable Plc [2004] ScotCS 248 (19 November 2004)
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Cite as: [2004] ScotCS 248
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Royal Scottish Assurance Plc v. Scottish Equitable Plc [2004] ScotCS 248 (19 November 2004)
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OUTER HOUSE, COURT OF SESSION |
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A2613/01
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OPINION OF LORD BRACADALE in the cause ROYAL SCOTTISH ASSURANCE PLC Pursuers; against SCOTTISH EQUITABLE PLC Defenders:
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Pursuers: R Keen Q.C. et A Young; Brodies, W.S.
Defenders: C Tyre Q.C., et R Clancy Q.C.; Burness, W.S.
19 November 2004
Introduction
[1] This case came before me on the procedure roll on the third plea-in-law for the defenders. The case is one of two associated cases between the parties. The second case, in which I also heard a procedure roll debate, relates to a product known as the Lifetime Security Plan and is known as "the LSP action". In both cases the pursuers were represented by Mr Keen QC and Mr Young, and the defenders by Mr Tyre QC and Mr Clancy QC. In the present case the defenders moved me to dismiss the action or, in any event, to exclude certain averments from probation. The pursuers moved for a proof before answer. [2] The defenders are the successors to the Scottish Equitable Life Assurance Society ("the Society"). The pursuers were created as a joint venture between The Royal Bank of Scotland Group plc ("RBS") and the Society. In 1989 the pursuers were created in order to launch a range of life insurance and pension products. The intention was that these products, some of which were adapted from existing policies or products being sold by the Society, would be sold primarily to the customer base of RBS. One of these products was called the Flexible Mortgage Plan ("FMP"). FMP was modelled on an existing policy provided by the Society called the Mortgage Link. [3] With the establishment of the pursuers there were three interested parties: the pursuers, RBS and the Society. The parties entered into written agreements in connection with the new venture. There were two main agreements. The first of these, the Master Agreement, was primarily concerned with the allocation of shares in the new company and does not feature in the present case. The second agreement was the Reinsurance Agreement which was entered into in July 1990. This agreement features significantly in the present case.The Reinsurance Agreement
[4] The Reinsurance Agreement is production 6/1. The terms which are of significance for the purposes of the present case are those which relate to the services which the Society undertook to provide to the pursuers. Clause 3 deals with the appointment of the Society to provide specified services and is in the following terms:"(A) The Company hereby appoints the Society to provide the Specified Services during the continuance of this agreement and for so long as may be required to comply with Clause 10(F) of the Master Agreement all on the terms and conditions hereinafter set out.
(B) The Society hereby accepts the foregoing appointment.
(C) The Society shall take all reasonable steps to provide the Specified Services to the Company in the same quantity, quality and calibre as the Society provides the services comprised therein to its own policyholders.
(D) The Company shall provide such information to and co-operate fully with the Society to enable it to provide the specified services including (without prejudice to the foregoing generality) the prompt provision by the Company of such information to the Society as it shall request to enable it to carry out any of the specified services and the Company shall give its prompt and accurate attention to such instructions as the Society shall give it in connection with the performance of any of the specified services".
The Specified Services are defined in considerable detail in Clause 1.
The Flexible Mortgage Plan
[5] The FMP was a species of endowment policy which was designed to be sold in conjunction with mortgage loans. The borrower obtained a loan from RBS. During the period of the loan the borrower repaid interest. He took out an endowment policy over the period equivalent to the term of the loan. Premiums were paid monthly. At the end of the period the policy matured and the proceeds were intended to be sufficient to repay the amount of the loan. There was an expectation that the proceeds would be sufficient to do so. [6] The FMP was a unit-linked policy. The policy had two main features: first, it was an investment vehicle to generate the capital fund necessary to pay off the amount of the mortgage loan on maturity; second, it provided life assurance for the policyholder during the term of the loan. The life assurance cover would be for a sum equivalent to the amount that the policyholder borrowed from the mortgage lender. Thus, in the case of a policy holder who died during the term of the loan the life assurance element provided a guaranteed minimum death benefit which was the amount of the mortgage loan taken out. In the case of the policyholder who lived to the end of the term, there was no legal guarantee that the value of funds would be sufficient to pay off the mortgage loan on maturity. Whether the fund would be sufficient depended in part on the investment performance of the funds underlying the policy over the period. A third possible resolution of policy was that it could be terminated by surrender. [7] The Society was responsible for the production of tables of premium rates for use by sales staff of the pursuers in selling the FMP policies. These tables were installed on laptops for use by the pursuers' sales staff. This enabled the sales representative to give a quote for the premium in dealing with prospective policyholders. The tables took account of the sex and age of the customer and whether he or she smoked. Other variables included the duration of the policy. [8] An essential element in the process of setting the premium rate was the assumption to be made about the rate of growth for the Unit Fund during the period of the loan. The higher the assumed rate of growth, the lower the resultant premium would be. [9] The contract involved certain charges being made from the units held by a policyholder. The first of these was the annual management charge of 1%. This charge was made at a daily rate of the total value of the Fund in question. The daily rate set was of 1/365 of 1 percent of the total value of the fund. The second charge was the policy charge which was designed to cover the administrative costs associated with the policy incurred by the pursuers. In addition, there was a death benefit funding charge to pay for the life assurance cover in place throughout the life of the policy. [10] After an initial period of months the monthly premiums paid by a policyholder were used to purchase on behalf of that policyholder units in unit funds on a month to month basis. Various funds were available and the policyholder could choose a particular fund. In practice most FMP policyholders invested in the Growth Managed Fund. The total value of the fund depended in part on the investment performance of that fund. As time went on the policyholder accumulated units in the fund. The value or price of the individual units within the fund was fixed on a daily basis and published in the Financial Press. Thus, the policyholder could see what the total value of his units was. [11] While there was an expectation that on maturity of the policy there would be sufficient to pay the capital sum of the loan, there was a recognition that that might not happen. There was provision for review at various points throughout the life of the policy. At such a review the value of the units held by the policyholder at the date of review was considered and an assessment made as to whether the policy was on course to repay the loan in full. If there was a problem the policyholder could be given the option of increasing the premiums by an amount estimated as the amount necessary to put the policy back on course to produce at maturity a sum sufficient to repay the loan.Subsequent events
[12] The pursuers aver that in 1995 the Life Assurance and Unit Trust Regulatory Organisation ("LAUTRO") introduced new disclosure rules known as "hard disclosure". These rules placed a requirement on insurance companies to provide policyholders with certain information, including illustrations of the expected performance of their products. When, as part of the preparation for hard disclosure, the computer system relating to FMP was checked, it was found that in the vast majority of FMP policies the premiums then in force would not be sufficient at maturity to repay the related loans. The pursuers aver that investigation disclosed that there had been a number of failures in the calculation of the premium rates. In particular, they aver that the Society made three separate errors in connection with the calculation of the premiums. The pursuers aver that as a result of these errors on the part of the Society the pursuers sustained the losses which are set out in articles 13 and 14 of condescendence. The pursuers aver that these errors give rise to breach of contract and delictual liability on the part of the Society. [13] The successor to LAUTRO was the Personal Investment Authority ("PIA"). The pursuers aver that they were subject to regulation by PIA and were bound to obey its rules. In or about June 1997 the pursuers notified the PIA about the miscalculation of FMP premium levels. The PIA wrote to the pursuers on the 19 June 1998 stating that there appeared to be evidence to suggest that the pursuers had failed to comply with their obligation to ensure that all information given to investors was fair, clear and not misleading. The PIA took the view that the pursuers appeared to have failed to ensure that their business was conducted with due skill, care and diligence in compliance with Financial Services Authority ("FSA") Statement of Principle 2. The PIA set out its proposals as to how the pursuers should compensate policyholders for the miscalculation. Thereafter the FSA became involved. The FSA became the principal regulatory authority and incorporated the functions of the PIA. In due course the pursuers recognised that they were required to compensate policyholders in respect of past and future losses on each policy.The first alleged error: the "assumed rate of unit growth rate"
[14] In article 6 of condescendence the pursuers aver that they were requested by the Society to specify the assumed growth rate of the fund which would then be used by the Society in designing the actuarial basis for the calculation of the FMP premium rates. They go on to aver that the Society were well aware that growth rates assumed for endowment policies were normally determined by the attitude of the lenders, in this case, RBS. On that basis the pursuers aver that they advised the Society that the investment growth rate for FMP should be 9%. It is averred that in specifying that figure both RBS and the pursuers understood that they were quoting a figure for a gross rate of return before the deduction of any management charges. It is averred that this was in line with the basis on which rates were calculated by LAUTRO. The pursuers go on to aver that on being advised that the assumed growth rate was to be 9% the Society's actuaries introduced the phrase "assumed rate of unit growth". The pursuers aver that this phrase has a specific technical meaning. They say that it would be understood by an actuary to refer to a net growth rate after deduction of management charges. However, they say that this would not necessarily be understood by others working in the insurance industry and that the staff of RBS and the pursuers had no reason to believe that the FMP product specification was inconsistent with RBS's objective of assuming a 9% gross investment growth rate. The FMP included the 1% annual management charge. The pursuers aver that in designing the actuarial basis for the premium rate calculations the Society did not deduct the 1% annual management charge from the specified growth rate. It is averred that in assuming a net rate of 9% the Society were assuming a gross rate of 10% or more. The result of this was that premiums for FMP were among the very lowest on the market in October 1990. The pursuers aver that had they been aware of the approach being adopted by the Society they would have instructed that the actuarial basis for the calculation should assume a net growth rate of 8% per annum.The second alleged error: "the compound error"
[15] In article 7 the pursuers aver that the Society incorrectly applied the figure of 9% per annum. They failed to take into account the effect of compounding. The premium rates were calculated on the assumption that the funds would grow at 1/12th of 9% each month. It is averred that, as a result of compounding, that growth level equated to an actual growth figure of 9.38% per annum. The effect of that was to make the premiums lower than they would otherwise have been.The third alleged error: "the policy charge error"
[16] In article 8 the pursuers aver that the FMP included a policy charge to cover the costs associated with the administration of the policy including the collection of premiums. This was to increase with the Index of National Earnings and in due course did so on a number of occasions. The pursuers aver that in designing the actuarial basis for the premium rates for FMP the Society failed to take account of future increases in policy charge to reflect earnings inflation.The contract case: general duty
Introduction
[17] In article 11 of condescendence the pursuers aver that the Society were in breach of clause 3(C) of the Reinsurance Agreement. They aver that clause 3(C) gives rise to a general duty in which the Society have failed and go on to aver that there are eight separate failures on the part of the Society to meet the required standard. The first part of article 11 is in the following terms:"Under and in terms of Clause 3(C) of the agreement it was the duty of the Society to take all reasonable steps to provide the specified services to the pursuers in the same quantity, quality and calibre as the Society provides to its own policyholders. The Society is obliged to exercise reasonable skill and care in providing such services to its own policyholders. Such skill and care includes the taking of such reasonable steps to avoid the regulatory authorities holding that the policyholders' reasonable expectations have been breached or that they have been given misleading information. In providing the specified services to the pursuers the Society was obliged to exercise reasonable skill and care such that the pursuers would not be found liable by the regulatory authorities to pay compensation to their policyholders in respect of or as a consequence of work carried out by the Society."
The defenders submissions
[18] It is clear from the pleadings that there are many factual issues in dispute. These include matters relating to the understanding of various members of the staff and management of the pursuers, RBS and the Society as to the rate of growth to be assumed. Counsel for the defenders recognised that the defenders could not expect the court to resolve the factual issues in the procedure roll discussion. However, Mr Clancy submitted that when the legal basis of the pursuers' claim was analysed it was not necessary to explore the full range of factual issues about which there was dispute. He submitted that even at its highest the pursuers were not entitled as a matter of law to have their case considered; or, alternatively, they had failed to make sufficient specification of the essential averments. [19] Counsel for the defenders submitted that the averments as to the standard required of the Society in performance of the their obligations under and in terms of clause 3(C) of the Reinsurance Agreement were irrelevant. These averments did not accurately describe, and were inconsistent with, the standard actually imposed by clause 3(C). [20] Counsel for the defenders contended that the interpretation of clause 3(C) was a matter of the plain and obvious meaning of the words in the clause. Mr Tyre described the terms of Clause 3(C) as simple, straightforward and crystal clear. Assuming that the service that was provided by the Society fell within the definition of Specified Services, the obligation imposed by clause 3(C) was simply to take reasonable steps to render to the pursuers the particular service in the same quantity, quality and calibre as provided to the Society's own policyholders. The clause uses the words "provides to its own policy holders" and not "is obliged to provide to its own policy holders". The pursuers had substituted a different duty from the one contracted for. In article 11 the pursuers were effectively averring that the Society was under a duty to do what a regulatory authority said it ought to do for its own policyholders. That, said the defenders, is quite a different duty from a duty to do what the Society actually did for its own policyholders. [21] Mr Tyre submitted that if Clause 3(C) did not exist the relationship would be that for which the pursuers contended, but the parties had chosen the wording of clause 3(C) and these did not admit of ambiguity. They have expressly chosen not to contract by an objective standard. Had it been the intention of the parties it would have been simple to have imposed an objective standard in the contract. [22] Counsel for the defenders submitted that the duty which the pursuers sought to place on the Society at page 46C-D amounted to a form of guarantee. The reference to "the pursuers would not be found liable" implied a very high standard of duty and not the one for which the parties contracted. The Society would effectively be guaranteeing to the pursuers that nothing in the provision of the service would fall foul of the Regulator, giving rise to claims by policyholders. [23] Mr Tyre rejected the proposition that the interpretation for which the defenders contended did not make business sense. The new company wanted the same service as the existing policyholders of the Society, and for that the clause provided. The Society had a financial interest in the pursuers. There was a sound commercial reason why it would not be in the Society's interests to supply an inadequate service. [24] Counsel for the defenders submitted that any relevantly alleged breach of clause 3(C) in relation to the provision of the FMP would require to aver that the Society had by act or omission rendered a service to the pursuers which was actually inferior in quantity, quality or calibre to a comparable service which they had rendered to their own Mortgage Link policyholders. The pursuers were not offering to prove that that was the case. None of the three errors was presented as giving rise to a service which was actually inferior in quantity, quality or calibre to a comparable service which they have rendered to their own Mortgage Link policyholders. In the absence of averments along those lines there could not be a relevant case for breach of clause 3(C). [25] Counsel for the defenders submitted that it was not necessary to proceed to proof before answer. The wording of the Clause was sufficiently clear that nothing would be gained by delaying its interpretation by proof of the factual matrix. There was nothing on record to suggest that Clause 3(C) should be interpreted because of a particular factual peculiarity.The pursuers' submissions
[26] Counsel for the pursuers submitted that the defenders' argument was based on an incorrect construction of clause 3(C). Mr Young submitted that the correct interpretation of clause 3(C) was that it set out an objective standard of care. The phrase "all reasonable steps" indicated a degree of objectivity. The question arose as to the standard of care which the Society was obliged to exhibit to its own policyholders. It was that standard of care that it was required to exhibit to the pursuers. It was what the Society was obliged to do not what it actually did. The standard of care which the Society was obliged to exhibit to its own policyholders would normally be the contractual standard of exercising reasonable skill and care. [27] Counsel submitted that in the context of a commercial contract it would be impossible for the pursuers to discover what standard the Society had exhibited to its own policyholders. [28] Counsel for the pursuers submitted that when dealing with a standard of care the law invariably required an objective standard. If the defenders were right, then, if the Society exhibited a poor performance towards their own policyholders, they would still be entitled to deny any failure towards the pursuers because the pursuers would only be entitled to the same standard of care as that exhibited to the defenders'own policyholders. The standard of care exhibited to its own policyholders could vary from year to year. If the Society was grossly negligent to its own policyholders and provided a service of the same level to the pursuers, the Society's own policyholders would have a remedy but the Society could argue by reference to clause 3(C) that the pursuers would have no remedy because they undertook to accept whatever level the Society chose to supply to their own policyholders. Further, if the Society dealt differently with different sections of its own policyholders the question would arise as to which standard the pursuers could look. These odd results gave rise to absurdity and demonstrated that the defenders' construction of clause 3(C) was not correct. Reference was made to the case of Schuler v Wickman Machine Tools [1974] AC 235. [29] In addition, the construction contended for by the defenders did not make business sense. It would make no business sense for the pursuers to enter into this contract for a ten year period without the protection that the standard of service would be an objective one. [30] Counsel for the pursuers rejected the proposition that the averments as to the pursuers being found liable by the regulatory authorities to pay compensation amounted to a guarantee. Mr Young submitted that a guarantee was not averred. The averments were all under reference to reasonable skill and care. [31] Counsel for the pursuers submitted that if I came to the conclusion that a final view on the construction of clause 3 could not be taken at this stage, then a proof before answer would be required and the decision made later. In this regard counsel submitted that I could have regard to the factual matrix. Reference was made to the case of Bank of Scotland v Dunedin Property Investment Co Ltd 1998 SC 657.Opinion
[32] I was invited by the defenders to dismiss the action as irrelevant. In addressing that question it is important to bear in mind the passage in the speech of Lord Normand in Jamieson v Jamieson 1952 SC (HL) 42 at page 50:"The true proposition is that an action will not be dismissed as irrelevant unless it must necessarily fail even if all the pursuers averments are proved. The onus is on the defender who moves to have the action dismissed, and there is no onus on the pursuer to show that if he proves his averments he is bound to succeed."
"A firm should act with due care, skill and diligence."
There seems to me at this stage to be considerable force in the submission of the pursuers that the objective standard of care owed by the Society to its own policyholders would become the measure of the duty owed to the pursuers rather than the subjective standard of what the Society actually did with respect to its own policyholders.
[37] The subjective construction may also give rise to difficulties in the operation of business. First, the practice of the Society could vary from year to year. This would make for an unpredictable regime throughout the life of the contract. It would be surprising if a party such as the pursuers would enter into a contract designed to run over a lengthy period of time which included a clause as to the standard at which service was to be supplied which was unpredictable and subjective. Second, it is difficult to see how, in the context of a commercial contract, the pursuers could ascertain what standard the Society was actually exhibiting to its own policyholders. [38] A further difficulty which may arise as a result of the application of a subjective standard is that it may not be an easy task to compare what the Society did with respect to its own policyholders and the service it provided to the pursuers. This was illustrated in the course of the pursuers' submissions. In article 8 the pursuers set out their averments with respect to the policy charge error. It is averred that in the FMP the policy charge was increased from time to time. In answer the defenders aver that the policy charge for their comparable product the Mortgage Link was never increased. Counsel for the pursuers' raised the question as to the point at which any comparison could be made. [39] A further way to test the construction for which the defenders contend is to explore the extent to which it may lead to unreasonable or absurd results. In Schuler v Wickman Machine Tools, to which I was referred, Lord Reid at page 251E said this:"The fact that a particular construction leads to a very unreasonable result must be a relevant consideration. The more unreasonable the result the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear."
Upon a subjective interpretation, if, in a particular case, the Society provided a poor performance to its own policyholders, the pursuers receiving the same performance would have no remedy because all they would be entitled to would be the same service as was actually provided to the Society's own policyholders. Furthermore, the Society's own policyholders would have a remedy but the pursuers would not. These would certainly seem to be odd results. Again, if the Society treated sections of its own policyholders differently, the question could arise as to which standard the pursuers could look in seeking compliance by the Society with the terms of clause 3(C). In my opinion, in the light of these considerations, the construction for which the defenders contend may give rise to unreasonable results.
[40] I should say that at a late stage in the debate Mr Keen introduced two arguments which were not canvassed either in earlier submissions or in the Note of Argument. The first of these was an argument in which he submitted that clause 3(C) would be expected to be consistent with clause 8, which was an indemnity clause and made reference to negligence. I am not persuaded that there is any force in that argument because clause 8 relates to dealings with third parties. In the second argument he submitted that clause 3(C) should be interpreted as an exclusion clause. This submission arose late in the debate; it was not foreshadowed in Note of Argument; and I did not hear full argument. I do not consider it is necessary to my decision at this stage and in these circumstances I have not taken it into account. [41] While the court would give effect to the construction for which the defenders contend if the terms of the contract made it clear that that was the intention of the parties, I am not at present satisfied that the words of clause 3(C) clearly do favour that construction. Indeed, I am inclined to the opposite view. I am, however, conscious that the contract was entered into against a background in which the pursuers, the Society and RBS brought different interests, talents and input to the venture and that the interaction between the parties was complicated. In article 10 reference is made to a paper prepared in August 1989 in which the complex arrangements between the parties were noted. The precise interpretation to be placed on the definitions of various terms in clause 1 of the Reinsurance Agreement may require evidence. There may be an issue as to what various persons understood by references to particular services. In addition, there is considerable factual dispute as to the course of events and the involvement and state of knowledge of various members of the management and staff of parties. In these circumstances I do not consider that I can reach a concluded view on the correct construction of clause 3(C) and hence the question of the relevancy of the pursuers' case until the evidence has been led (Bank of Scotland v Dunedin Property Investment Co Ltd (supra); see Lord President Rodger at 665D; Lord Kirkwood at 670D; and Lord Caplan at 677A&G).The contract case: the eight specific duties
Defenders' submissions
[42] In article 11 of condescendence eight individual breaches of duty are averred.Mr Clancy submitted that the pursuers had failed to specify to which of the Specified Services each of the alleged breaches was said to relate. Accordingly, as a matter of pleading, they were irrelevant. In any event, even if the point of pleading were ignored, in each case the duties averred were not concerned with matters which fell within the scope of Specified Services as defined in clause 1. These averments were, therefore, irrelevant.
The pursuers' submissions
[43] Mr Young pointed to the scheme of article 11. The opening words at page 46B-C set out the general duty by reference to the Specific Services. The specific duties flowed from that. Each specific duty linked back to the general duty. Thus, the pursuers were offering to prove that each duty fell within the Specific Services. All the errors were made within the actuarial calculations from which the tables and the software were devised. The defenders had admitted on record at page 16C-D that the premium rates had been calculated using an actuarial basis which had been designed by the Society's employees. In addition, in article 9 and answer 9 certain averments were made in connection with calculation rates. Against that background the pursuers had averred that errors were made in the calculations. This was technical actuarial input which was part of the specified services. [44] Each of duties 1 to 7 related to technical actuarial input into the illustrations and calculations. While some of the duties were framed in terms of a duty to check or clarify what the pursuers wanted, the factual background was set out in the averments in article 6. In particular, Mr Young drew attention to the following averments: this was an area in which lenders often appear to be confused (page 22B-C); LAUTRO rates all used gross rates (page 23B-C); illustration provided to RBS also appeared to be misleading (page 23D-E); and the gross rate of 9% was consistent with the pursuers' pricing policy (23E-24A and 25A-B). Thus, there were factual averments which indicated that this was a difficult area and gave rise to the obligation to check or clarify. [45] Duty 8 which related to the third error was an alternative duty. Either the Society had to comply with duty 7 or at least should have told the pursuers that they had not done so. The pursuer has offered to prove that each of these duties are part of the Specified Services.Opinion
[46] I do not consider that the pleading point advanced by Mr Clancy is well founded. Each of the specific duties is linked back to the general duty. It is not in my opinion, as a matter of pleading, necessary to specify the particular aspect of the Specified Services to which the duty relates. When the averments in article 6 are taken along with the factual averments in the earlier articles of condescendence, there is some basis for saying that these duties do relate to the Specified Services. In my opinion it is not possible to say with certainty at this stage that each of these duties is not related to the Specified Services. Accordingly, applying the test in Jamieson it cannot be said that the defenders have shown that the pursuers must necessarily fail even if they prove all their averments. I am unable to say at this stage that these averments are irrelevant. I shall allow them to proceed to probation.Specification
Defenders' submissions
[47] Mr Clancy introduced the attack on lack of specification in the pursuers' pleadings by submitting that there was a certain lack of candour in the pursuers' pleadings in response to positive averments of fact made by the defenders in answer. While he recognised that a lack of candour on the part of the pursuers in responding to averments made by the defenders did not in itself make the pursuers' pleadings irrelevant, Mr Clancy submitted that lack of candour ought to colour my approach to the question of lack of specification and should weigh in the balance in determining whether the pursuers' averments were so deficient that they ought to be excluded from probation. [48] Mr Clancy suggested that the pursuers had presented a picture of naivety, yet in relation to the position of the chief executive of the pursuers, Mr Bill Stewart, they had been less than candid. In article 5 the pursuers made certain averments with respect to Mr Stewart, including averments as to his appointment as chief executive and his employment relationship with the Society. Reference was also made to his secondment coming to an end in September 1992. In turn the defenders had made detailed averments with respect to Mr Stewart in answer 6. This had been met with a simple denial by the pursuers, despite a call to admit or deny the averments. The position of the pursuers with respect to Mr Stewart was important because he was an actuary and the chief executive of the pursuers at the material time. [49] The second matter about which Mr Clancy complained of a lack of candour related to a product specification. The defenders had made detailed averments as to the preparation, circulation and contents of a product specification and accompanying memorandum. This had effectively been denied by the pursuers. [50] Mr Clancy pointed out that the pursuers had been put on notice that these criticisms would be made with respect to lack of specification. He referred to the calls in Answers 5 & 6. These calls were unanswered. [51] Counsel for the defenders submitted that the pursuers' pleadings were lacking in specification to such an extent that the action should be dismissed, failing which, certain passages should be excluded from probation. These submissions applied mutatis mutandis to the delictual case. This attack was directed in particular towards the pursuers' pleadings in article 6 of condescendence in relation to the issue of the growth rate of the fund. These averments provided the factual underpinning for the averments in article 11 at page 47 B to page 48 B where the allegation of breach of contractual duties was averred. Counsel submitted that the defenders were materially prejudiced by a lack of fair notice of certain critical details of the pursuers' case. The defenders were unable fully and properly to investigate and present their defence on this issue. They were not given sufficient pointers as to the vital details of the pursuers' case to enable them to respond as well as they might. Counsel drew attention to a number of passages in which it was said that there was a lack of specification. Mr Clancy referred to the averments in article 6 between page 21E and 22A. These averments are as follows:"The pursuers were requested by the Society to specify the assumed growth rate of the fund which would then be used by the Society in designing the actuarial basis for the calculation of the FMP premium rates".
He submitted that there was no specification as to whom the request was made, by whom it was made, when it was made, the manner in which it was made, or its content. These were all potentially important matters which would be capable of shedding considerable light on whether, for example, the pursuers were as ignorant of the unit growth rate as they claimed to be. It may also shed light on the suggestion that the Society should have done something more to query, warn or check.
[52] The same criticisms applied to the averments at page 22E where it is averred:"The pursuers accordingly advised the Society that the investment growth rate for the FMP should be 9%".
Again there was a lack of specification as to whom, by whom, when, and how the advice was given, and the contents of the advice. In addition it is not said whether the advice was given verbally or in written form. Unless further specification was provided the defenders could not investigate and properly prepare for proof.
[53] Mr Clancy was critical of the specification of the averments at page 24A which were as follows:"On being advised that the assumed growth rate was to be 9%, the Society's actuaries introduced the phrase 'assumed rate of unit growth' which was ultimately adopted in the FMP product specification".
Mr Clancy submitted that this was a serious contention as to the origins of the phrase "assumed rate of unit growth". It was an important part of the pursuers' case that the Society's actuaries had introduced the phrase. The pursuers should be able to provide specification as to the identity of the actuary who did this, when it was done and how it was introduced. Mr Tyre submitted that this was the nub of the case and that it was totally unsatisfactory to make such an averment without proper specification. Without specification the defenders would be going to a proof before answer not being able to investigate the veracity of that averment. This would put the defenders at a disadvantage.
[54] Next, Mr Clancy criticised the passage at page 26C-D which was in the following terms:"Admitted that Bill Stewart was an actuary under explanation that he had no involvement in the discussions between RBS, the pursuers and the Society as to the unit growth rate to be used for FMP policies".
Mr Clancy submitted that it was inherent in that averment that there had been discussions between RBS, the pursuers and the Society. Against the background in which the pursuers were claiming naivety, the defenders should be entitled to specification as to who was involved in such discussions, when they were held and the context in which they were held. Mr Tyre submitted that this was an important matter and that such vague averments should not be allowed to go to proof.
[55] Finally, Mr Clancy made brief reference to the argument advanced in paragraph 3 of the defenders' Note of Argument which is in the following terms:"With regard to specified growth rate, the pursuers do not offer to prove that the Society knew that the growth rate of 9% specified by RBS and the pursuers' was or might have been understood by the pursuer to be a gross figure before deduction of management charges. The pursuer avers (and the defender admits) that the phrase 'assumed rate of unit growth' used in the pursuers' product specification has a specific technical meaning and that it means net growth rate after deduction of management charges. In these circumstances no factual basis is pled for the existence of any of the duties set out in Articles 11 and 12 as regards specified growth rate, and this branch of the claim against the defenders should be excluded from probation".
Mr Clancy did not expand on this matter.
Pursuers submissions
[56] Mr Young pointed out that most of the issues about which the complaint of lack of candour had been advanced had been raised for the first time in the answers shortly before procedural debate. He went on to submit that the main averments in relation to Mr Stewart were admitted: he referred to passages at pages 26C; D-E; and 15A-B. The only matter of public record not admitted was the precise period during which Bill Stewart was chief executive. However, it was averred that in September 1992 his period of secondment was coming to an end (article 5 page 15A). The averments at page 20D-E about which the charge of lack of candour was advanced had to be read in the light of the passage at pages 14-15 where the pursuers averred that Bill Stewart remained an employee of the Society and acted as a representative of the Society on the pursuers' board. At proof there may be an issue as to whom Mr Stewart was responsible and for whom he was acting. [57] In response to the defenders' submission that there was lack of candour in relation to the question of product specification at page 31C-32B Mr Young pointed to three passages: at page 26D there was an admission that a product specification was attached to a particular memorandum; at page 24A-B reference was made to growth rate in the product specification; and at page 27B there was further reference to a product specification. The pursuers had made it clear in their pleadings that they fully accepted that there was a specification containing these words. [58] With respect to the question of the effect of a call by the defenders in their answers Mr Young submitted that the question of fair notice was one that depended on an analysis of the pursuers' averments. The presence of a call could not make the pursuers' averments more or less specific. He referred to Bonnor v Balfour Kilpatrick 1974 SLT 187 at pages 188-189. [59] In reply to the criticisms of lack of specification Mr Young in relation to the passage at page 21E-22A said that there was no suggestion that it was the Society that chose the growth rate. That was decided by the lender, RBS. This was simply an introductory averment. The Society may be well placed to know who was involved and when. The pursuers were willing to prove that the requirement was made. Not much turned on this introductory matter. He referred to the defenders' own averments in Answer 5 at page 19C-D where the defenders averred that:"The pursuers made and gave to the Society the main assumptions used by the Society in preparing calculations of premiums".
Here the defenders were not offering to prove who had done this, when or by what means. The pursuers accepted that it was a relevant and sufficiently specific averment.
[60] In relation to the passages at page 22E and page 24A-B Mr Young submitted it was perfectly permissible for the pursuers to lead evidence on the basis of these averments that the 9% figure was passed to the Society and that someone unknown had introduced the technical phrase. If the pursuer led evidence from witnesses who said 14 years later that they could not recall when something was handed over, or who introduced it, that it was not the RBS or the pursuers, then these averments would have been proved. This demonstrated that the averments could be proved without the details which were sought by the defenders. [61] In addition it was made clear in earlier averments that the technical and actuarial matters were for the Society. At pages 12 to 13 it was averred that the pursuers had no expertise nor did the RBS. It is averred that the pursuers had no actuarial staff until 1991. It is averred at page 26E to 27A that the initial product specification was produced by the Society's actuaries. At page 27B it is averred that the final product specification was prepared by the Society. At page 24B it is averred that the phrase was a technical one with a special meaning to actuaries but not to others. [62] Mr Young submitted that the case was sufficiently specific to allow the pursuers to lead evidence which would be sufficient to prove the averments. There was no material prejudice to the defenders in preparation. They knew the case and could investigate through their own employees and documents. [63] In reply to the argument advanced in paragraph 3 of the defenders' Note of Argument, Mr Young submitted, under reference to a number of passages in the pursuers pleadings, that the Court could conclude that the Society knew or ought to have known that the pursuers and the RBS had in mind a gross figure.Opinion
[64] In Ellon Castle Estates Ltd v MacDonald 1975 SLT (N) 66 Lord Stewart observed:"Our whole system of pleading and of disposal of cases upon preliminary pleas must depend upon each party stating with candour what are the material facts upon which he relies and admitting the facts stated by his opponent which he knows to be true."
The delictual case
[68] Under reference to the cases of Tai Hing Cotton Mill v Liu Chong Hing Bank Ltd [1986] AC 80 and Henderson v Merrett Syndicates Ltd [1995] 2AC 145 counsel for the defenders advanced the proposition that where, as here, the Society had undertaken contractual obligations in respect of a particular service, namely, the calculation of premium rates, the Society could not as a matter of law, owe delictual duties in respect of the same service which were wider or more extensive than the contractual duties undertaken. I understood counsel for the pursuers to accept that general statement of the law. Mr Young explained that the pursuers were not seeking a wider liability in delict than in contract. They sought a concurrent and coextensive liability.Pursuers' first submission
[69] In his first submission Mr Clancy advanced four specific criticisms of the averments in article 12. He submitted that each of these rendered the case irrelevant or so lacking in specification as to warrant dismissal. First, he submitted that the eight particular breaches of duty averred in article 12 were wider, more extensive or greater in scope than the contractual standard of duty imposed by clause 3(C). Second, as a matter of specification, in order to make a relevant case, the pursuers would require to aver that the acts or omissions giving rise to the breach of delictual duty compared unfavourably in terms of quantity, quality and calibre to the services rendered to the Society's own policyholders. In the absence of any averments of that comparison, it was impossible to determine whether the delictual duties were wider than the contractual ones. Third, as a generality, if his submissions that no contractual case could be made out were correct, the delictual case would inevitably be wider in scope than the contractual case raising the same issue. Fourth, there was no specification as to which of the defined services the individual duties related. There was no specification as to which of the Specified Services the individual breaches of duty related. Thus, as a matter of specification, each of the eight elements in the delictual case was defective to the point of warranting dismissal.Opinion
[70] In my opinion the first, second and third of these criticisms ride or fall on the view which I take of the construction of clause 3(C) in the contractual case. In the light of the tentative conclusion to which I have come on that matter and the need to be fully apprised of the factual matrix before forming a concluded view, I am inclined to the view that the first three of these criticisms are not well founded but could not reach a concluded view until after the facts had been canvassed. With respect to the fourth criticism I reach the same view that I have already reached in relation to the same specification point taken in regard to the contract case in article 11. I am unable to say that these averments are irrelevant.The Hedley Byrne case
Opinion
[71] By amendment prior to the procedure roll hearing the pursuers had introduced the following averments in article 12:"The Society assumed responsibility to the pursuers in relation to the provision of actuarial advice and assistance relating to the FMP product design. They knew that the pursuers were placing reliance on such actuarial advice and assistance. Such reliance was reasonable. It was within the Society's reasonable contemplation that the pursuers would suffer loss and damage if such actuarial advice and assistance was performed negligently."
This appeared to herald the introduction of a delictual case based upon a claim for pure economic loss as reflected in the line of cases beginning with Headley Byrne & Co Ltd v Heller 1963 A.C.465. I was addressed by counsel for both sides under reference to Headley Byrne itself and to a number of other cases which reflect the development of the law in this area, including Henderson v Merrett Syndicates Ltd (supra); Caparo Industries plc v Dickman [1990] 2 AC 605; and Banque Kayser Ullman SA v Skandia (UK) Insurance Co Ltd [1990] QB 665. I did not understand there to be any real dispute as to principles to be derived from these cases. Certain features of this type of delictual liability may be noted. First, there requires to be assumption of responsibility by one party. Second, there must be reliance by the other. Third, this form of delictual liability can arise where the parties are in a contractual relationship. Fourth, it extends beyond the provision of information and advice to include the performance of other services. I am satisfied that the Hedley Byrne principle could apply in a case such as the present case. I am unable, before evidence is heard, to accept Mr Tyre's submission that the complaint here is not in relation to the provision of services. Accordingly, I am unable to say at this stage that the pursuers' case founded on the Hedley Byrne principle is irrelevant.
Pursuers' second submission
[72] Counsel for the defenders presented a further submission, namely, that the pursuers' pleadings on this aspect were inadequate to the extent that the Hedley Byrne case should not be allowed to proceed to probation. Mr Clancy submitted that the pursuers' averments did no more than recognise the significance of the concepts of assumed responsibility and reliance. There was a lack of relevant and specific averments of fact to justify conclusion that there was an assumption of responsibility and reliance. [73] In particular, the pursuers had failed to stipulate or identify the individual acts or omissions said to be the source of the duty. All the pursuers did was to aver a vague and non-specific assertion. This failure made it impossible to determine whether the necessary assumption of responsibility arose. The same point applied to the question of reliance. Setting out the eight duties did not advance the matter.Defenders' submissions
[74] Mr Young submitted that a large number of averments throughout the pleadings pointed to the assumption of responsibility. He referred to the responsibility of the Society under the contract and to the close business relationship between pursuers and defenders. There was an averment as to the special skill of the Society. There were averments that the pursuers relied on the Society's special skill. There were averments that the Society was well aware that such reliance would be placed on their special skill. In particular, he referred to page 10B-C and page 14B-D. Throughout the pleadings there were numerous averments which referred to special skill and reliance. Mr Young rejected the criticism that there was a failure by the pursuers to identify a discrete act or omission. Each of the three errors was a discrete act.Opinion
[75] The pursuers' Hedley Byrne case was added by Minute of Amendment. The way in which it is pled gives it the appearance of a late addition "bolted on" to an existing case. This has resulted in pleading which is open to criticism. However, when the pursuers' pleadings are read as a whole, I am not satisfied that it can be said that they are wholly irrelevant and I shall allow them to proceed to probation.Quantum
Introduction
[76] In article 13 the pursuers aver that they were subject to the regulatory regime of the Financial Services Act 1986 ("the 1986 Act") and the Insurance Companies Act 1982 ("the 1982 Act"). They were subject to regulation by the PIA which was the successor to LAUTRO and were bound to obey the Rules of the PIA. Under the 1982 Act the Treasury had certain functions in relation to insurance companies and could require a company to take such action as appeared to the Treasury to be appropriate to protect policyholders against the risk that the company may be unable to meet the policyholders' reasonable expectations ("PRE"). For completeness, it should be noted that the 1982 Act was repealed by the Financial Services and Markets Act 2000 and the concept of PRE has now been abandoned. The functions of the Treasury were contracted out to the FSA. The FSA became the principal regulatory authority and incorporated the functions of the PIA. [77] Article 14 sets out the history of the dealings between the pursuers and the regulatory authorities. It is averred that in 1997 the pursuers notified the PIA about the miscalculation of FMP premium levels. There then followed a dispute between the pursuers and the regulatory authorities as to the basis on which the policyholders should be compensated. The position of the PIA was that the pursuers were contractually liable to their policyholders in respect of the miscalculation of the premiums. In addition, the FSA took the view that the pursuers were liable under a statutory obligation to their policyholders under the 1982 Act. The FSA advised the pursuers that in its view the miscalculation of the premiums constituted a breach of the PRE and that action was required to restore the PRE position. The pursuers' position was that the basis of their liability to their policyholders was delictual and not contractual. The proposal of the pursuers was that each policyholder who had a shortfall due to the premium pricing errors should receive a single cash injection from the pursuers to bring their policy up to the level which would have been achieved if correct premium pricing had taken place from inception. The pursuers proposed that thereafter a premium review should take place and the policyholder would be expected to meet the full cost of reviewed premium. The effect would be that the pursuers would pay damages to the policyholders for past but not future loss. That approach was rejected by the FSA who maintained that compensation to policyholders had to cover the whole period of the policy. The FSA considered that this approach was consistent with both the contractual claim by the policyholders and the PRE. When the FSA intimated that the Notice of Requirements was to be served on the pursuers the pursuers accepted the obligation to compensate their policyholders for past and future loss. [78] In Answer 14 at pages 65D to 66A the defenders aver that the pursuers' obligation to compensate their policyholders was not contractual but was delictual and that the FSA were not entitled to insist that policyholders be compensated on the basis of breach of contract. If the obligation to compensate was delictual then it would be limited to payment for past loss. By failing to persist in challenging the FSA the pursuers failed to mitigate their loss.The defenders' submissions
[79] Counsel for the defenders submitted that the claim by the pursuers for payment by them to their policyholders for future compensation should be rejected on the ground of relevancy. They submitted that as between the pursuers and their policyholders there was no breach of warranty or any other condition of the policy. Accordingly, the policyholders were not entitled to be compensated on a contractual basis. In that event there could be no question of a claim against the defenders based on the totality of compensation paid to the policyholders on a contractual footing. Any liability to policyholders arose from misrepresentations to individual policyholders inducing them to take out policies. That would give rise to delictual liability and an obligation to put policyholders into the position which they would have been in but for the misrepresentation. There would be no obligation to compensate policyholders for any future period. The position of the FSA was that the breach of contract was a breach of contractual warranties contained in documents used in the sales process. That was a wrong analysis. The defenders counsel submitted that a policy of this kind was a single documentary contract and that therefore no question of any additional or extraneous terms arose. There was no attempt by the pursuers to set out a case that there were extraneous documents which required to be read. Reference was made the provisions of the Contract (Scotland) Act 1997. Section 1(2) came into play where a party set out to overcome the presumption that the document comprised all the express terms of the contract. [80] In any event, the pursuers were not offering to prove that individual policyholders did have a valid breach of contract case against the pursuers. There were no averments identifying any contract said to be breached. There were no averments as to specific contract terms which were said to apply between the pursuers and the individual policyholders. There were no averments to identify the extent to which any such provisions were breached or the manner in which they had been breached. Against this background counsel for the defenders invited me to exclude from probation the pursuers' case on damages with respect to all claims for future loss. [81] Next, counsel for the defenders submitted that there was a lack of specification in relation to project costs. The averments relating to project costs should not be admitted to proof on the basis of lack of specification. This was a very considerable sum. The lack of fair notice gave rise to material prejudice. The defenders would be unable to investigate the accuracy of the claim that these costs were incurred. These averments were so lacking in specification that this head of claim should not be allowed to go to proof. [82] Lastly, counsel for the defenders attacked the failure of the pursuers to deal with the question of tax relief. The defenders' averments at page 96D with respect to the question of tax relief were met by a denial by the pursuers. In any case involving payment of compensation one would expect to see reference to tax relief. Prima facie the actual loss will be a net of tax amount but the pursuers sue for a gross sum and offer to prove that as their loss. There should be a statement of reduction of tax or an explanation as to why there is no such reduction.The pursuers submissions
[83] Counsel for the pursuers took a quite different approach to the question of quantification of loss. Counsel for the pursuers submitted that the defenders' argument proceeded on a fundamental misconception. The action was concerned with loss and damage which flowed naturally from the defenders' breach of contract with the pursuers or from their delictual liability. Mr Young submitted that it was necessary to go back to basic first principles. The pursuers sued the defenders in contract and delict. The pursuers allege both breach of contract and delictual duty and set out a loss which they say they have suffered. Where a loss is suffered damages are, so far as possible, designed to put the pursuers back into the position which they would have been in if the defenders had properly carried out their contractual and delictual duties. The pursuers say that the defenders did not carry out the Specified Services properly. They say that that resulted in premium errors and because of these premium errors the FSA required the pursuers to pay compensation to their policyholders. If there had been no errors then no compensation would have been insisted on by the FSA. Accordingly, prima facie the loss is the amount of compensation that the FSA have insisted should be paid to policyholders. The pursuers offered to prove that that is the loss and that they would not have incurred it if the services had been properly supplied. [84] It is averred that a Notice of Requirements was to be served. Failure to comply with such a Notice could be a criminal offence. In addition, it would be commercial suicide for a life insurance company to fail to comply with the requirements of the FSA. In these circumstances the pursuers agreed that the package insisted upon by the FSA should be implemented. When the matter was approached in this way there was no need to aver whether the individual policyholder would have a contractual, delictual or statutory basis for compensation. The payment was made because of the FSA requirements [85] In circumstances where the Regulator was taking steps against the pursuers it was realistic to have regard to the commercial position. In this regard counsel for the pursuers relied on Banco de Portugal v Waterlow [1932] AC 452. [86] It would still be open to the defenders to aver and try to show at proof that the pursuers were wrong to capitulate. That would be a mitigation of loss argument. [87] Counsel for the pursuers rejected the criticism with respect to the lack of specification of the project costs as not being a fair criticism. They said that notice of the head of claim and the amount of claim is given and from the preceding narrative it can be seen how these costs were worked out. The defenders can investigate the claim. [88] In relation to the tax issue Mr Young submitted that it was open to the defenders to raise whether the damages were overstated. The pursuers' position is that the loss suffered is as stated. Mr Keen recognised that the pursuers had simply denied the defender's at averments p 69E. He made reference to meetings and a proposed meeting of experts. He suggested that if I were against him I should make that clear on the opinion and the matter could be addressed further.Opinion
[89] In their submissions the defenders and the pursuers took quite different approaches to the question of the relevancy of the claim by the pursuers and that the defenders should compensate them for the payments made by the pursuers to their policyholders with respect to future loss. In my opinion the approach for which the pursuers contended is to be preferred. Against the background of their dealings with the regulatory authorities the pursuers are entitled to say that prima facie their loss is the amount of compensation that the FSA insisted that they should pay to their policyholders. [90] The question arises as to what was the loss that arose naturally from the breach of contract or delict by the Society. In Banco de Portugal v Waterlow (supra) a firm of printers were employed by the Bank to print a series of bank notes known as Vasco da Gama 500 escudo notes. They delivered to the Bank 600,000 notes which were put into circulation. Subsequently, in breach of their contract of employment, the printers delivered to the head of the band of criminals 580,000 notes of the same type in the belief that he had the authority of the Bank. When the Bank discovered that the unauthorised notes were in circulation they issued notices withdrawing the whole of the issue of the notes and undertaking within a limited time to exchange all notes of this type presented to the Bank for other notes. In other words the Bank took the approach of withdrawing all the notes and giving value for both the false and genuine notes. In an action by the Bank against the printers for breach of contract the defendants maintained that the loss to the Bank was due to their own voluntary action in paying the unauthorised notes. It was held that the loss arose naturally from the breach of contract. At page 475 Viscount Sankey LC approved the conclusion of Greer LJ that it would be naturally in the usual course of things, and would be in the contemplation of the parties (1) that in circumstances like those which happened in the present case, the Bank would be compelled for their own protection to issue the public notice informing the holders of their notes that the only notes of which forgeries had been discovered were the Vasco da Gama issue; and (2) that they would also be compelled in the interest of their own credit and currency to act reasonably in the matter, and (3) that it would be reasonable to exchange any of those forged notes which were presented for payment for valid notes of an equal value. The Bank had acted reasonably. [91] In my opinion it is open to the pursuers to prove that they acted reasonably in obeying the requirements of the regulatory authority in the face of the prospect of the Notice of Requirement backed by criminal sanctions. Furthermore, it would be open to them to prove that it was reasonable for them to bear in mind that they were licensed by the regulatory authority, and that consequently there might well be risks to their commercial future if they continued to defy the regulator authority. [92] On the other hand it will be open to the defenders to establish that the approach taken by the regulatory authority was wrong and that the pursuers should have mitigated their loss by challenging, and persisting to challenge, the approach being taken by the regulatory authority. I note that the defenders make such an averment in article 14. Mitigation of loss is a question of fact and the onus is on the defenders (McGregor on Damages, 17th edition, paragraphs 7-016 and 7-019). [93] For these reasons I reject the submissions of the defenders that the averments as to future loss should be excluded from probation. [94] In my opinion the defenders' complaint of lack of specification with respect to the sum of £7.2 million for project costs in dealing with the compensation investigation and administration is well founded. As Mr Tyre pointed out, even for insurance companies, this is a large sum of money and the defenders are entitled to notice as to its make up. Accordingly, unless more specification were forthcoming I would not allow that head of claim to proceed to probation.[95] In my opinion the complaint of counsel for the defenders on the matter of tax relief is also well founded. The matter is not addressed at all by the pursuers in their pleadings. In their submissions counsel for the pursuers dealt with it but faintly. Mr Keen, perhaps recognising the difficulty, suggested that if I were against him on the issue I should make my view clear and it could be addressed. No doubt it will be.
Decision
[96] For the reasons set out above I shall repel the defenders' third plea in law and allow a proof before answer. I have, as requested, expressed my opinion on the question of loss relating to the project costs. In addition, I have, as requested, expressed my opinion on the issue of the absence of averments as to tax relief. The case will be put out by order in order to deal with these matters. I shall reserve the question of costs meantime.