IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM AN ARBITRATION AWARD MADE BY
LORD JUSTICE FLAUX
SITTING AS A JUDGE-ARBITRATOR
PURSUANT TO SECTION 93 OF THE ARBITRATION ACT 1996

Lord Justice Males :

Introduction

1. 1. In 2002 the House of Lords created a special rule of causation in the law of tort to enable claimants suffering from mesothelioma as a result of exposure to asbestos to recover damages even though it was not possible to prove on the balance of probabilities which of two or more employers was responsible for the exposure which caused the claimant’s disease: Fairchild v Glenhaven Funeral Services Ltd [2002] UKHL 22, [2003] 1 AC 32. This decision together with the subsequent intervention of Parliament in the Compensation Act 2006 gave rise to what has become known as “the Fairchild enclave”, an area of law within which conventional principles have had to be adjusted to take account of the implications of this decision and to ensure that the anomalies which it has thrown up do not result in injustice – or, as Lord Sumption, taking a less sanguine view, was to describe the process, in which the law has moved from “each one-off expedient to the next”, generating “knock-on consequences which we are not in a position to predict or take into account”: see his dissenting judgment in International Energy Group Ltd v Zurich Insurance Plc UK Branch [2015] UKSC 33, [2016] AC 509 (“IEG“) at [114].
   2. The initial challenge posed by Fairchild was to determine whether and how liability should be apportioned between employers when there could be many employers over a period of years, any one of whom might have been responsible for the critical exposure. The solution eventually adopted, that each of the employers was liable in full, no matter how short the period of exposure for which it was responsible, created a different problem. If an employer had a series of annual Employers’ Liability (“EL”) policies, perhaps with different insurers, and perhaps some years when there was no insurance in place, which policy responded to the loss and how should the loss be apportioned between the various insurers on risk or (in cases where there was a period during which an employer had no insurance) between the insurers and the employer?
   3. The present appeal raises similar questions, but in the context of reinsurance. They fall to be decided within the Fairchild enclave and potentially require the adaptation of conventional principles of causation, double insurance, self-insurance and (perhaps) subrogation in order to achieve a just solution to the problems raised as between the EL insurer which has paid a claim without allocating it to any particular policy year and its reinsurers.
   4. These novel and difficult questions arise on an appeal pursuant to section 69 of the Arbitration Act 1996 from an award made by Flaux LJ sitting as a judge-arbitrator in accordance with section 93 of the Act. Leave to appeal was given by a previous decision of this court on the basis that they are questions of general public importance ([2018] EWCA Civ 991). I will come in due course to their precise formulation, but in broad terms the question is whether an insurer which settles a claim for liability for mesothelioma arising under EL insurance policies which span several years of exposure to asbestos can claim an indemnity for its full loss under whichever annual reinsurance within this period it chooses in order to maximise its reinsurance recovery, or whether it is limited to claiming under each annual reinsurance policy a pro rata share of the settlement sum; and, if the former, what rights of contribution and recoupment are available to the reinsurer(s) against which the claim is made.
   5. It is apparent that the decision in Fairchild itself and the subsequent developments within the Fairchild enclave have been heavily driven by the policy that victims of mesothelioma should be fully compensated, without having to make multiple claims and without bearing the risk that one or more of the potential defendants is insolvent. The position which the law has reached so far is that any employer who has exposed a victim to asbestos in breach of duty, for however short a period, is liable in full to a victim of mesothelioma, while any EL insurer of such an employer is liable in full to indemnify the employer, again regardless of the period for which it has provided insurance and received premium. Provided, therefore, that there is at least one solvent employer or solvent EL insurer who can be identified as having provided cover at some time during the period of wrongful exposure, the victim will have a remedy against a defendant who is good for the money.
   6. This policy driven outcome has resulted in some significant anomalies when judged by reference to fundamental principles of tort and liability insurance law. This has been regarded as necessary and acceptable in order to ensure that victims of mesothelioma are fully compensated. So far, the law has devised novel principles and solutions within the Fairchild enclave to accommodate these anomalies. Viewed broadly, the issue in the present case is whether it can now be said, at the reinsurance level, that the policy of ensuring compensation to victims has successfully worked itself out so that, as between reinsured and reinsurer, the law can return in a principled way to a more orthodox approach.

The facts

1. 1. I begin by summarising the facts found by the judge-arbitrator.
   2. The respondent, Municipal Mutual Insurance Ltd (“MMI”), was established in 1903 as a mutual insurance company providing insurance, including EL insurance, to local authorities and other public bodies. During the period between 1 January 1950 and 31 December 1981 MMI provided EL policies to numerous insured entities. Although the wording varied in immaterial respects over the years, its policies provided cover in the event of the insured employer’s liability for an employee sustaining bodily injury or disease arising out of or in the course of his employment. Each policy was an annual policy. It appears that the cover provided by MMI was without limit and without any deductible.
   3. MMI reinsured its liability under these policies with Lloyd’s syndicates whose liabilities have since been transferred to the appellant (“Equitas”). These were annual excess of loss policies, although the retention varied. In the early years the retention was only £1,000 each and every accident, but it increased over the years and eventually by 1981 the retention was £150,000. There were various layers of reinsurance with Lloyd’s syndicates and in some cases with other reinsurers. One higher level reinsurer, for example, was Mercantile & General Reinsurance Company Ltd (“M & G”), but that company ceased to provide cover in 1969 and, in 2005, entered into a Solvent Scheme of Arrangement.
   4. The layers also changed over time. In 1950 the first layer was £50,000 excess of £1000, while by 1981 it was £100,000 excess of £150,000. After 1974 Lloyd’s did not participate in the first layer of the programme, but only in higher layers. Other reinsurers also participated on some layers in later years.
   5. The wording of the reinsurance provided by the Lloyd’s syndicates varied from time to time, but not in material respects for present purposes. Taking the figures from the earlier policies, the reinsurers agreed to pay MMI:

“the excess of loss of £1,000 … up to but not exceeding £51,000 … ultimate net loss on account of each and every accident but unlimited as to the number of accidents during the period of this Agreement which the Company may be called to pay under any one or more of their policies which may be involved in any one accident. Underwriters’ liability hereon being limited to £50,000 … ultimate net loss on account of each and every accident”.

1. 1. The term “ultimate net loss” (or “UNL”) was defined to mean “the sum actually paid by the Company in settlement of their liability …”. It is common ground that this does not refer to actual payment by MMI but to the sum which was payable by it when its liability was finally ascertained either by judgment or agreement: Charter Reinsurance Co Ltd v Fagan [1997] AC 313.
   2. The reinsurance policies provided also (in a clause not set out in the award but which we were shown without objection) that:

“The Liability of the Reinsurers hereon shall follow the liability of the Company to their respective Policyholders and the Reinsurers shall not be entitled to object to any of the terms and conditions either general or special of any of the original Policies.”

1. 1. MMI’s employer insureds have faced a large number of claims from employees who were exposed to asbestos during their periods of employment and who have contracted mesothelioma. As a result of the Compensation Act 2006, an insured employer who has tortiously exposed an employee to asbestos is liable in respect of the whole of the damage caused to the victim by the disease irrespective of whether the victim was also exposed to asbestos by another employer. So far as the employee claimant is concerned, there is no need to prove which employer caused the critical exposure. Moreover, it is unnecessary and irrelevant for the employee, in a case where the employment extended over more than one year, to identify the year in which the critical exposure occurred.
   2. In handling and paying claims by its insureds, MMI did not need to wrestle with these questions either and did not do so, despite the fact that its policies were written on an annual basis. Provided that MMI provided cover for some of the period of the alleged exposure and the underlying claim could be proved, each MMI policy providing such cover was 100% liable for the claim. MMI made no attempt to apportion claims to individual policies or periods. In cases where it was on risk for more than one policy year, the claim was not settled with reference to any particular policy year and there was no apportionment between particular policies or years. As the judge-arbitrator put it at [33] of his award:

“… the amount being claimed against MMI by the insured and for which MMI was liable, was always treated by MMI for all purposes as a claim for one amount under all the responding MMI policies without any apportionment to individual policies or periods. There was no reason for such apportionment, on the basis that each policy was liable in full.”

1. 1. Thus, where the insured was the only employer to have exposed the underlying claimant to asbestos and was insured by MMI for the whole period of such exposure (so that there was only one employer and one insurer involved), MMI simply paid the whole claim. The judge-arbitrator found that it did so without regard to the precise start or finish date of the exposure in question, although it does not appear that there was anything to prevent it from ascertaining these dates if it had wished to do so. This was the position in 66 of the 178 claims with which the arbitration was concerned.
   2. If other employers had exposed the underlying claimant to asbestos or if there were other insurers who had issued relevant policies, MMI would seek to obtain a contribution from them or (if there were periods when the employer had not taken out insurance) from its insured, generally by reference to time on risk, that is to say the proportion which the self-insured employer’s or other insurer’s time on risk bore to the whole period of culpable exposure. This was in accordance with Guidelines issued by the Association of British Insurers in 2003 following the decision in Fairchild. Such a contribution was sometimes but not always achieved.
   3. Initially MMI presented claims to Equitas under its reinsurances on the basis of a time on risk allocation, so that each loss was divided pro rata between the years of reinsurance in which each employee claimant was exposed to asbestos. That is the method for which Equitas contends.
   4. Mr Alistair Schaff QC for MMI pointed out that in the cases where the inwards insurance claims had been settled without regard to the precise start or finish date of the exposure period, a precise time on risk allocation could not have been achieved. For example, if the exposure period began and ended part way through the policy year in question as would generally be the case, but the precise dates were not known, it would be impossible to say what the period of exposure was. Unless it happened to have begun at the beginning of January and ended at the end of December, it would be inaccurate to count the full year and impossible to say how much of the year should be counted. No doubt that is true, but in practice it does not seem to have troubled the parties and the judge-arbitrator found as a fact that claims had been presented on the basis of a time on risk allocation.
   5. However, a time came when MMI changed its method of presentation so that it presented the whole claim to one year of reinsurance. It did so on the basis that its inwards claims had been settled without apportionment to particular years or policies and that, because each insurance policy was liable in full, so too each reinsurance policy was liable in full and it was entitled to present its reinsurance claim to any policy year of its choice in which the underlying claimant had been exposed by its insured to asbestos. This has been described as “spiking”.
   6. In practice MMI would claim either against the reinsurance in force in the first year in which it was exposed to an inwards claim (which happened in all but 33 of the 178 claims with which the arbitration was concerned) or (if that would not provide a full recovery) against the reinsurance in force in the year which would give MMI the fullest recovery. That year was often 1969, the year after M & G ceased to participate in its reinsurance programme. Thus MMI avoided any need to present a claim to a year in which one of its reinsurers was insolvent.

The questions of law

1. 1. It was that revised method of presenting claims which gave rise to the parties’ dispute. MMI contends that it is entitled to present claims by spiking in this way. Equitas disputes this, contending that MMI is only entitled to claim against each applicable reinsurance contract a pro rataproportion of the loss attributable to the underlying claim, calculated on a time on risk basis. If MMI is correct, further issues arise as to the calculation of the rights of contribution and recoupment acquired by the reinsurer of the “spiked” year.
   2. The judge-arbitrator decided these issues in favour of MMI (together with a further issue relating to defence costs which no longer arises) and Equitas now appeals. The questions arising on this appeal for which leave has been given are as follows:

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

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

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

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

The Fairchild jurisprudence

1. 1. In order to explain how these issues arise it is necessary to summarise the effect of what is now a substantial body of case law which applies within the Fairchild enclave. As this is well trodden ground, I shall do so as briefly as possible.

Fairchild

1. 1. In Fairchild itself the House of Lords held that where a mesothelioma victim was tortiously exposed to asbestos by two or more employers but due to the limitations of medical science could not prove on the balance of probabilities which of them had caused his mesothelioma, both (or all) employers were jointly and severally liable for the loss. It is important in the light of subsequent debate to emphasise two points as to precisely what Fairchild must be taken to have decided. The first is that the employers’ liability was for causing the disease (which might not be suffered for many years or even decades after the critical exposure) and not merely for exposing the employee to the risk of doing so. Thus an employee who was exposed to risk but had not (or had not yet) developed the disease had no claim. The second was that, because it was impossible to prove which exposure or exposures had actually caused the disease to develop, a modified rule of causation would be applied, whereby any employer who made a material contribution to the risk of mesothelioma being contracted was treated as having caused the disease. In later cases this was referred to as a “weak” or “broad” test of causation.

Barker

1. 1. Although Fairchild decided that each of two or more employers would be liable, it did not decide for what damages they would be liable. That was decided by Barker v Corus UK Ltd [2006] UKHL 20, [2006] 2 AC 572, in which the House of Lords held that the liability of each employer was several and should be calculated according to each defendant’s relative degree of contribution to the risk, usually measured by the duration and intensity of the exposure involved. To take a simple example, therefore, if an employee who contracted mesothelioma had been exposed to asbestos for 10 years, but had worked for one employer for only four of those years, that employer would (in the absence of some good reason for a different allocation) be liable for 40% of the employee’s damages. That would be so regardless of whether, during the other six years, the employee was working for other employers who were similarly liable for their proportionate share or (as might be the case) was exposed to asbestos in ways which did not give rise to liability on the part of anyone.
   2. Good reason for a different allocation might exist if it was possible to say, for example, that the exposure to asbestos by one employer was more intense or that the asbestos encountered in one employment was more aggressive than in other cases. Absent some such feature, however, the duration of the exposure was the fairest measure of an employer’s share of liability.
   3. It is apparent from the speeches that the House of Lords recognised explicitly that Fairchild had created an exception to the normal rules of liability in negligence and was seeking to find the fairest way of applying this exception in the special circumstances where conventional proof of causation was not possible. Lord Hoffmann put it this way, in a section of his speech under the heading of “Fairness”:

“40. So far I have been concerned to demonstrate that characterising the damage as the risk of contracting mesothelioma would be in accordance with the basis upon which liability is imposed and would not be inconsistent with the concept of damage in the law of torts. In the end, however, the important question is whether such a characterisation would be fair. The Fairchild exception was created because the alternative of leaving the claimant with no remedy was thought to be unfair. But does fairness require that he should recover in full from any defendant liable under the exception?

…

43. In my opinion, the attribution of liability according to the relative degree of contribution to the chance of the disease being contracted would smooth the roughness of the justice which a rule of joint and several liability creates. The defendant was a wrongdoer, it is true, and should not be allowed to escape liability altogether, but he should not be liable for more than the damage which he caused and, since this is a case in which science can deal only in probabilities, the law should accept that position and attribute liability according to probabilities. The justification for the joint and several liability rule is that if you caused harm, there is no reason why your liability should be reduced because someone else also caused the same harm. But when liability is exceptionally imposed because you may have caused harm, the same considerations do not apply and fairness suggests that if more than one person may have been responsible, liability should be divided according to the probability that one or other caused the harm.”

1. 1. Lord Scott and Lord Walker expressed their full agreement with Lord Hoffmann. Lady Hale also emphasised the need to find the right balance of fairness between claimant and defendant in determining the boundaries within which the Fairchild principle should be applied.
   2. Thus Barker decided that, within what later came to be called the Fairchild enclave, the common law rule was that liability between defendants should be apportioned according to relative contribution to risk and that this was what fairness demanded.

The Compensation Act 2006

1. 1. If Barker had stood, the problems relating to insurance and reinsurance with which we are now concerned would not have arisen, but it was promptly reversed by the Compensation Act 2006. Section 3 provided, in short, that where a person was liable to a victim of mesothelioma as a result of tortiously causing or permitting him to be exposed to asbestos, he would be liable in respect of the whole of the damage caused to the victim irrespective of whether there were in addition other exposures to asbestos and irrespective of whether those other exposures gave rise to any other liability.
   2. The section therefore assumed, but did not create, liability in tort in accordance with Fairchild but, as between the employer (“the responsible person”) and employee (“the victim”) it reversed Barker by allowing the employee to recover damages for the whole of the damage caused by the mesothelioma from any one of the employers which Fairchild had made liable. Parliament thereby made clear that, as between employer and employee, it took a different view of what fairness required from the view taken by the House of Lords in Barker, its priority being to ensure full compensation to victims of mesothelioma as a result of exposure to asbestos dust.
   3. Section 3 went on to say that it did not prevent one employer from claiming a contribution from another. Typically such a claim for contribution would be made under the Civil Liability (Contribution) Act 1978 as the effect of Fairchild was that, even though the employers had exposed the victim to asbestos in different periods of time, they were each liable for “the same damage”. Section 3(4) provided that:

“In determining the extent of contributions of different responsible persons … a court shall have regard to the relative lengths of the periods of exposure for which each was responsible; but this subsection shall not apply –

a) if or to the extent responsible persons agree to apportion responsibility amongst themselves on some other basis, or

b) if or to the extent that the court thinks that another basis for determining contribution is more appropriate in the circumstances of the particular case.”

1. 1. Once the victim had received full compensation, therefore, Parliament recognised that as between employers or other responsible persons it would be fair, in accordance with Barker, for liability to be apportioned according to each employer’s contribution to the risk and that this contribution was to be determined on a time basis unless there was some good reason for adopting another method of apportionment.

“Trigger“

1. 1. The impact of the Fairchild rule of causation on EL insurance was considered in Durham v BAI (Run off) Ltd [2012] UKSC, [2012] 1 WLR 867, generally referred to as the “Trigger” litigation. The Supreme Court held that conventional policy wordings (including MMI’s) which referred to injury or disease “contracted” or “sustained” during the policy period responded in the event that an employee was exposed to asbestos during the policy period even though the mesothelioma did not develop or was not manifest until many years later and as a matter of ordinary language the disease would not generally be regarded as having been contracted or sustained until the mesothelioma had developed. On the basis that terms such as “contracted” or “sustained” were construed as referring to causation, the concept of a disease being “caused” during the policy period had to be interpreted flexibly in the light of the special rule of causation established by Fairchild. This was an application of the “weak” or “broad” causal link which exists within the Fairchild enclave. Lord Mance summarised this reasoning in IEG at [22] as being that:

“If causation is given a weak or broad meaning as against the person tortiously responsible, the same weak or broad meaning should be treated as carrying through into a liability insurance covering an insured on a causation basis.”

1. 1. The alternative would have been to say that the insurer was liable merely for making a material contribution to the risk (which was not what Fairchild had decided) or that the EL insurance did not respond at all in mesothelioma cases, which as a matter of policy was clearly unacceptable. It was essential that EL policies should respond in order to ensure compensation to victims in the event that employers were insolvent.

IEG

1. 1. However, the “Trigger” litigation was not concerned with and did not need to examine the extent of the liability which arose under each EL policy. That question arose in IEG. It is necessary to look closely at what that case decided.
   2. In IEG the question was whether an EL insurer who had provided cover for only part of the period during which the victim was exposed to asbestos was required to bear the whole of the employer’s liability in the same way that each employer was liable in full. If it was, the further question arose whether it was entitled to a proportionate contribution from other insurers who had provided cover in other years of exposure or to recoup a proportionate share of its loss from the employer in respect of years when there was no insurance in place or no identifiable insurer who had provided cover.
   3. A complication of the case was that it was decided in accordance with Guernsey law and that the Compensation Act 2006 did not apply in Guernsey. Rather, Guernsey law was in all relevant respects the same as English common law. Accordingly the first question was whether the proportionate recovery rule in Barker remained part of the English common law or whether (as the insured employer contended) it had been fatally undermined and in effect overruled by the 2006 Act and the decision in the “Trigger” litigation. The Supreme Court held unanimously that Barker remained a correct statement of the common law: see Lord Mance at [31], Lord Hodge at [100] and Lord Sumption at [179] and [180].
   4. Applying the common law set out in Barker, the Court held that the insurer’s liability to the employer was limited to a proportionate part of the damage suffered by the employee victim, the proportion being measured by reference to the time which the insurer had been on risk. On the facts, the insurer had provided cover for six out of the 27 years during which the employee had been employed by the employer and exposed to asbestos. Accordingly the insurer was obliged to indemnify the employer for only 6/27 of the damages which the employer had paid to the employee.
   5. However, the Court was divided as to the route by which this result was achieved. In the majority Lord Mance and Lord Hodge (with whom Lord Clarke and Lord Carnwath agreed) held that this was an application of the indemnity principle. As the Compensation Act 2006 did not apply in Guernsey and the common law position established by Barker remained, the employer’s liability to its employee during the six years in which it had insurance cover was limited to a proportionate part of the full compensation to which the employee was entitled and the fundamental principle of indemnity which governs liability insurance meant that it could not recover more than this from its insurer: see Lord Mance at [25] and [26]. Leaving aside the distinct issue of the employer’s defence costs, this was sufficient for the majority to decide the appeal, as Lord Mance recognised at [35].
   6. In the minority, however, Lord Sumption (with whom Lord Neuberger and Lord Reed agreed) held that the same result would be reached regardless of whether Barker remained good law: see [178]. This was because, as a matter of construction of the insurance policy, the insurer’s liability must be prorated between every policy year during which the insured employer exposed the victim to asbestos:

“160. The theory that an insurer is liable in respect of any year of insurance when the employee was exposed to the risk of contracting mesothelioma is a perfectly satisfactory answer to the question whether the insurer is liable at all, which was the only relevant question at issue in the ‘Trigger‘ litigation. But it cannot be applied without modification when the question is how much of the loss is attributable to particular years. If, as ‘Trigger‘ teaches, the insurer’s liability is triggered in each policy year, the rational response of the law is not to assign the whole of that loss to a policy year of the insured’s choice. That would be to assume that the whole loss was caused in that year, whereas the law proceeds from the premise that we cannot know that. The rational response is that the loss must be prorated between every policy year during which the insured employer exposed the victim to asbestos. In my opinion, once one rejects the conclusion that the insurer is not liable at all, proration on that basis is the only way of giving effect to the overriding requirement of each annual policy that the liability should be assigned to policy years. If exposure to the risk of contracting mesothelioma is equated with causation, the natural consequence is that the resultant liability falls to be apportioned to policy years according to the duration and intensity of the exposure. What is being prorated as between the insurer and the employer is the employer’s liability, not the indivisible harm of the mesothelioma itself. The chances of contracting mesothelioma, as Lord Hoffmann observed in Barker [2006] 2 AC 572, para 35, are infinitely divisible, even if mesothelioma itself is not.”

1. 1. The majority firmly rejected this analysis and considered at some length what the position would be in the event that the Compensation Act 2006 applied. Although strictly speaking this part of Lord Mance’s judgment was obiter, it was clearly intended as a definitive statement of English law which would guide the insurance market in dealing with mesothelioma claims on EL policies. Mr Colin Edelman QC for Equitas did not suggest, either before the judge-arbitrator or on appeal before us, that Lord Mance’s judgment should not be followed. On the contrary his submission was that it was an accurate statement of the law as it applies at the insurance level, but that a different solution to the problems thrown up by the Fairchild jurisprudence is needed at the reinsurance level.
   2. Lord Mance began by emphasising at [40] the novelty of the situation created by Fairchild and “Trigger” in an insurance context where the period of insurance is fundamental to the insurer’s liability and insurance is placed on the basis that liability or loss will fall into a particular period. He continued, describing features of conventional liability insurance as follows:

“In short, insurance would have been and was placed on the basis that a particular liability for loss would fall into one, not a series of separate periods. If an insured wanted complete cover, it would have to maintain it for all such periods. The relevant period would also be ascertained by objective criteria, which meant that insureds could not select it at will or to obtain the advantage of the cover most favourable from their viewpoint. Thus: (i) Under a liability insurance where the trigger is causation in its traditional sense based on probability, no problem exists about allocating tortious liability to one and only one policy period. (ii) Under a claims made policy, claims must be notified and will attach at latest when they arise, while specific clauses dealing with the notification of circumstances likely to give rise to a claim may attach a claim to an earlier policy than that during which it actually arises. (iii) An insured may, for one reason or another, have double insurance. In that context, it may elect which to invoke, but well established principles exist for the two insurers to share liability equally up to the common limit. (iv) An insured may also agree to carry an excess or franchise, in which case it will have to bear that amount before looking to its insurer, and will as a self-insurer rank last in any recoveries made by way of subrogation from any third party: Lord Napier & Ettrick v Hunter [1993] AC 713.”

1. 1. In contrast, the special features existing within the Fairchild enclave had thrown up a series of anomalies. To permit an insured employer to spike an insurance claim to the policy year of its choice, leaving that insurer to bear the whole liability, would run counter to fundamental principles of insurance law:

“43. If matters stop there, and the insurer ends up carrying the whole liability, the anomalies are self-evident. (a) It is contrary to principle for insurance to operate on a basis which allows an insured to select the period and policy to which the loss attaches. This is elementary. If insureds could select against insurers in this way, the risks undertaken by insurers would be entirely unpredictable. (b) It is anomalous for a liability insurance underwritten for a premium covering losses arising from risks created during its particular period to cover losses about which all that can be said is that they arise from risks extending over a much longer period, in respect of which no premium has, or could have, been assessed or received by the insurer. (c) An insured is able to ignore long periods in respect of which he himself has chosen not to insure, or has not kept any record of any insurance which he may have taken out, or has chosen to entrust his insurance to an insurer who has become insolvent. (d) An insured has no incentive to take out or maintain continuous insurance cover. On the contrary, it is sufficient to take out one year’s cover, or even to arrange to be held covered for only one day, during whatever happens subsequently to prove to have been the overall exposure period – whether this is done at the very start of the overall exposure period, or later after many decades of exposure, perhaps due to a sudden appreciation of the virtues of insurance under the special rule.”

1. 1. Despite these anomalies, Lord Mance concluded at [45] to [51], rejecting Lord Sumption’s analysis, that the reasoning in “Trigger” bound the court to hold that mesothelioma was caused in each and every period of any overall period of exposure, with the consequence that any insurer on risk during that overall period was liable for the full extent of the damage:

“51. An insurer, whether for the whole or part of the period for which the insured employer has negligently exposed the victim to asbestos, is on the face of it liable for the victim’s full loss.”

1. 1. Nevertheless, said Lord Mance, the analysis could not stop there:

“51. … The court is faced with an unprecedented situation, arising from its own decisions affecting both tort and insurance law. A principled solution must be found, even if it involves striking new ground. The courts cannot simply step back from an issue which is of their own making, by which I do not mean to suggest that it was in any way wrong for the courts, from Fairchild onwards, to have been solicitous of the needs of both victims and insureds. But by introducing into tort and liability insurance law an entirely new form of causation in ‘Trigger‘, the courts have made it incumbent upon themselves to reach a solution representing a fair balance of the interests of victims, insureds and insurers.”

1. 1. The solution adopted was to accept the insurer’s liability in full, even if it had provided cover for only a part of the period of exposure, but to temper the consequences of this by invoking by analogy the concepts of co-insurance (or double insurance) and self-insurance. Although not precisely applicable, these concepts could be adapted and developed to meet the special requirements of the Fairchild enclave and to eliminate or reduce the anomalies to which it gave rise:

“52. In my view the law has existing rules which can be adapted to meet this unique situation. The concepts of co-insurance and self-insurance are both at hand. Co-insurance is relevant in so far as the insured has other insurance to which it could also have resorted on the basis that it had also exposed the victim during the period of that insurance. Self-insurance is relevant, because an insured who has not (i) taken out or (ii) kept records of or (iii) been able to recover under such other insurance must be regarded as being its own insurer in respect of the period in question for which it has no cover. A sensible overall result is only achieved if an insurer held liable under a policy like the Midland policy is able to have recourse for an appropriate proportion of its liability to any co-insurers and to the insured as a self insurer in respect of periods of exposure of the victim by the insured for which the insurer has not covered the insured.”

1. 1. Lord Mance recognised that this was not strictly a case of co-insurance because that exists when there are two policies covering the same period. That was not the position in IEG, where in the usual way each policy was written for a separate year and covered only risks occurring during that year. Nor was it really a case of self-insurance as that concept had previously been deployed. Nevertheless, the court had to do something:

“53. … the court would be abrogating its role to achieve a just solution consistently with what any sensible commercial party would have contemplated if it does not adapt and develop conventional principles to meet an unconventional, indeed unique, challenge. … To say (as Lord Sumption JSC does: para 185) that there has here been a ‘contractual allocation of risks’ which precludes the court taking steps to avoid evident absurdity which no contracting party can sensibly have contemplated or intended appears to me unrealistic. …”

1. 1. Ultimately Lord Mance held that the principles which underlay rights of contribution were flexible principles of equity and justice which could be invoked when there was more than one insurer, each covering a separate period of exposure to asbestos:

“63. In my view, the principles recognised and applied in Fairchild [2003] 1 AC 32 and ‘Trigger’ [2012] 1 WLR 867 do require a broad equitable approach to be taken to contribution, to meet the unique anomalies to which they give rise. … If a broad equitable approach is taken in the present unique circumstances, then it should no doubt also be possible in the present context to overcome the presumption with double insurance that loss should be shared equally. Contribution between insurers covering liability on the basis of exposure should take account of differing lengths of insured exposure. Conventional rules need to be adapted to meet unconventional problems arising from the principles recognised and applied in Fairchild and ‘Trigger‘.”

1. 1. As to self-insurance, resort to this concept was necessary because there would be some periods of exposure to asbestos when there was no insurance in place or none which was available to provide contribution. (Indeed, in IEG itself there were two insurers, who between them had provided cover for eight years, and 19 years when the employer was uninsured). The insured should therefore be treated as its own insurer in respect of such periods. There was no inconsistency between recognising that the terms of the policy meant that the insurer was liable in full for the damage suffered by the victim and requiring the insured to contribute towards the insurer’s cost of meeting that liability:

“77. In the present case, an insured who insures for a limited period necessarily accepts that it is only liability incurred during that period for which he has cover. The unique feature of the present situation is that the whole substratum of the relevant insurance policies has changed fundamentally since they were underwritten, and the law has, for the first time ever, imposed liability on the basis of risk, rather than the probability, that negligence during the insurance period led or contributed to the illness complained of. The concomitant of insurance liability in this situation must be a recognition that the law can and should address the unjust and wholly anomalous burden which would otherwise fall on any particular insurer with whom insurance was only taken out for part of the total period of exposure by the insured, by recognising an obligation on the part of the insured to contribute pro tanto to such liability as a self-insurer.”

1. 1. In a concurring judgment with which the other judges in the majority also agreed, Lord Hodge at [104] and [105] expressed his agreement that the effect of the “Trigger” litigation was that an insurer which had provided cover for only part of the period of the employee’s exposure must meet the entirety of the employer’s liability, recognising that this would enable the insured employer to select the insurer against which to claim. He recognised also that this created anomalies which had to be addressed, and agreed with Lord Mance’s proposed solution. One reason for doing so was his understanding that it would not create major practical difficulties:

“110. Finally, the practical solution which Lord Mance JSC offers appears to be consistent with the way in which the London insurance market has operated in handling mesothelioma claims. That may suggest that the solution will not give rise to major practical difficulties.”

1. 1. Although the solution adopted by the majority was to say that each insurer was liable in full and (in effect) that spiking was permitted, but that the spiked insurer would then have rights of contribution from other insurers and recoupment from the insured, Lord Mance’s understanding was that (save in cases of insolvency) this would lead to the same ultimate financial outcome as the construction adopted by the minority:

“78. … I believe that this leads in practice, at least in the case of a solvent insured, to substantially the same result as that at which Lord Sumption JSC arrives, but by a different route, which in my opinion reflects the reasoning and result in ‘Trigger‘ [2012] 1 WLR 867. The difference between the two routes may however be important in the context of an insured who is not solvent.”

1. 1. If the practical difference between the two rival approaches in IEG is limited to cases of insolvency, the view of the majority can be seen to be consistent with the policy of ensuring that victims of mesothelioma receive full compensation. This was explicit in Lord Hodge’s judgment, where one of his reasons for agreeing with Lord Mance was that:

“106. … it is consistent with the policy of the United Kingdom Parliament that the employee-victim should be able to obtain damages for his loss in a straightforward way.”

1. 1. In contrast the approach of the minority would mean that in the case of an insolvent employer, a victim would be left with no recourse against an EL insurer which had provided cover for only part of the period during which he was exposed to asbestos. Lord Neuberger recognised this at [203] (“unlike Lord Sumption JSC’s solution, [Lord Mance’s] ensures that every employee whose employer was insured for any period of his employment, can look to any such insurer who is still solvent for full compensation”).
   2. As commentators on IEG have recognised, it was only a matter of time before the issues raised by reference to EL insurance contracts recurred at the reinsurance level. That time has now arrived.

The award

1. 1. The judge-arbitrator stated the issues for decision in the present case in the following terms:

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

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

(3) If issues (1) and (2) are determined in favour of MMI, on the proper construction of the reinsurance contracts, is MMI contractually entitled to recover the full amount it has paid in respect of each inwards claim from any reinsurance contracts of its choice which provided cover for any part of the exposure period for which it was on risk, subject to the limits and retentions for those reinsurance contracts and subject to the paying reinsurers’ rights of contribution and recoupment?

(4) If so, what rights of contribution and recoupment do the reinsurers which are called upon to pay the claim acquire against any other reinsurers who were also on risk for the claim, and against MMI in respect of any deemed “self-reinsurance”, and how do those rights fall to be calculated? In particular, should they be calculated using:

a. the “from the ground up” pro rata method of apportionment, taking into account the first layer retention in every year of reinsurance exposure, as Equitas contends; or

b. the “independent liability” method as MMI contends?

1. 1. The judge-arbitrator decided all of these issues in favour of MMI. What follows can be no more than a summary of a detailed and carefully reasoned award.
   2. In relation to the first issue he held, in accordance with “Trigger” and IEG, that each year’s insurance policy was 100% liable for the insured employer’s loss and that the settlement of each claim without allocating the loss to any particular year settled in full MMI’s 100% liability under each and every EL policy on risk. That settlement ascertained MMI’s liability under each policy, from which it followed that MMI was contractually entitled to present its reinsurance claim to any given year of reinsurance on the basis that that year was 100% liable in the same way as the insurance on that year which it was reinsuring. This was a matter of absolute contractual entitlement. As a matter of fact it was impossible to say that any of the settlements had been concluded on a pro rata basis and there was nothing in law to require them to be treated as if they had been.
   3. Thus there was no justification for any implied term requiring the loss to be divided up and allocated to different years of reinsurance on a time basis. There was no justification for saying that the “real basis” on which MMI had settled its liability was that each year had made a contribution to the risk and bore a proportionate responsibility for the loss. The argument that Barker continued to apply as between reinsured and reinsurer provided no greater support for allocating loss to each policy on a time on risk basis than had been the case as between insured and insurer, but that argument was ruled out by the decision of the majority in IEG.
   4. As to the second issue, the judge-arbitrator concluded that it was no part of the function of an arbitral tribunal to extend the scope of the post contractual duty of good faith in insurance contracts, particularly as that duty had been held by the House of Lords in The Star Sea [2001] UKHL 1, [2003] 1 AC 469 to be limited, in a claims context, to a duty not to act dishonestly in connection with the making of a claim, a decision which had recently been confirmed by the majority of the Supreme Court in Versloot Dredging BV v HDI Gerling Industrie Versicherung AG [2016] UKSC 45, [2017] AC 1. He derived no real assistance from the New York cases on which Equitas relied where a wider concept of good faith had been adopted than applies in English law and regarded the English cases involving the exercise of a discretion or power (e.g. Socimer International Bank v Standard Bank London Ltd [2008] EWCA Civ 116, [2008] 1 Lloyd’s Rep 558) as irrelevant in circumstances where MMI had an absolute contractual right to present the whole of its loss to any reinsurance policy of its choice, a distinction recognised by Mid Essex Hospital Services NHS Trust v Compass Group UK & Ireland Ltd [2013] EWCA Civ 200, [2013] BLR 265.
   5. Moreover, the judge-arbitrator found that even if there were a duty of good faith in relation to the allocation of the settlements to particular reinsurances or an implied term that a decision to allocate should be Wednesbury reasonable, there was no want of good faith or irrationality in circumstances where MMI expressly acknowledged that there was a need for equitable recoupment and contribution to redress any anomalies.
   6. Having reached these conclusions on the first two issues, the judge-arbitrator said that the third issue answered itself. MMI was contractually entitled to recover the full amount of its inwards settlement from any reinsurance contract or contracts of its choice which provided cover for any part of the period at risk. In other words it was entitled to spike. This was subject to the retention under the contract for the spiked year and to the reinsurers’ rights of contribution and recoupment, but how these were to be dealt with arose for decision under the fourth issue. The judge-arbitrator noted that his conclusion was “entirely in accordance with the well-established principle in the law of reinsurance that the reinsurance is on the original subject-matter so that insurance and reinsurance are to be treated in the same way and each year of reinsurance is 100% liable in the same way as each year of insurance is 100% liable”.
   7. Finally, the judge-arbitrator dealt with the issues concerning contribution and recoupment. As already noted, it was common ground that those concepts had a role to play if (as the arbitrator had held) MMI had been successful so far. The issue was how they should be applied. Equitas contended for a pro rata method of apportionment with two related aspects: (1) that MMI had to give credit in full for its retentions in each year of reinsurance even though the claim was “spiked” into one year and (2) that, by analogy with principles of subrogation, the higher layers of reinsurance in subsequent years should be made good first in any contribution and recoupment process (the so-called “top-down” approach).
   8. The judge-arbitrator rejected both submissions. He said that there was nothing in the existing authorities which assisted on the issue of retentions. He concluded that MMI need only give credit for a single retention, namely that applicable in the year into which the claim was spiked. He held that MMI was to be regarded as a self-insurer as regards the retention in each policy year, and therefore that Equitas should have no right of recoupment as regards the retentions in years before or after the year to which the 100% claim was presented as it had never provided an indemnity for that part of the loss. It would be unfair if MMI had to give credit for retentions in each and every year. Rather, he said, the approach should be that which applied in cases of double insurance where only one retention would be borne by the insured.
   9. As to the “top-down” approach to contribution, the judge-arbitrator concluded that the proposed justification for the proposition that the higher layers of reinsurance were more remote from the loss and should therefore get the first benefit of contribution and recoupment was a proposition derived from principles of subrogation and that the doctrine of subrogation had no place in the apportionment exercise.

The scope of review

1. 1. For MMI as the respondent, Mr Schaff emphasised that this is an appeal under section 69 of the Arbitration Act 1996 in which the court’s task is confined to deciding the questions of law for which permission to appeal has been given. He submitted that on some issues, particularly those concerned with good faith and with equitable contribution and recoupment, the judge-arbitrator’s conclusions depended on his view of what was fair and equitable and that these were an exercise of arbitral judgment which we could not go behind.
   2. I accept entirely that the role of the court is limited to determining the questions of law and that we are bound by the facts found in the award and only those facts. This is basic. However, the questions of how principles of good faith (if applicable) and of contribution and recoupment should be applied at the reinsurance level within the Fairchild enclave are questions of law on which ultimately we must reach our own decision, albeit giving proper weight to the view of the judge-arbitrator. That is what I shall seek to do.

Equitas’s submissions in outline

1. 1. Mr Colin Edelman QC for Equitas began by emphasising the novelty of the Fairchild jurisprudence and the anomalies which it has created as a result of the courts having cast off into uncharted waters. In consequence it had already been necessary to devise novel solutions, for example the new rights of contribution and recoupment created by the majority in IEG, and the courts remained under a responsibility to face up to the consequences of Fairchild which they themselves had created, if necessary by further innovation. While IEG had provided a solution at the insurance level, in a way which was necessary to ensure full compensation to victims of mesothelioma, that objective had now been achieved for all practical purposes and the same policy considerations did not apply at the reinsurance level. At that level, the victim having received his compensation from his employer or its insurer, it was possible and desirable to revert to the principles of the common law whereby liability should be apportioned in accordance with Barker by reference to time on risk. Thus each reinsurance policy should bear its proportionate share of liability calculated from the ground up.
   2. Mr Edelman recognised that this would need to be achieved in a principled way and submitted that there were three routes by which this might be done.

Deemed allocation/implied term

1. 1. The first was to say that MMI must be deemed to have settled its inwards insurance claims on a time on risk basis, such that the value represented by the settlement consideration should be regarded as implicitly allocated in pro rata shares across all triggered policies in proportion to the contribution to the overall risk made during the period of each policy. This could be regarded as the “real basis” of the settlement of the inwards claims, by analogy with cases where courts had been prepared to investigate the true or real basis of the settlement of insurance claims (Assicurazioni Generali SpA v CGU International Insurance Plc [2003] EWHC 1073 (Comm), [2003] 2 All ER (Comm) 425 at [40]; and Enterprise Oil Ltd v Strand Insurance Co Ltd [2006] EWHC 58 (Comm), [2007] Lloyd’s Rep IR 186 at [170] and [171]). Mr Edelman did not suggest that these cases were directly applicable, recognising as the judge-arbitrator had held that they were concerned only with a factual investigation which does not arise here. He submitted, however, that they illustrate a willingness to look beyond the terms of any settlement to the underlying reality and can usefully be adopted within the Fairchild enclave where for policy reasons liability has been imposed on an insurer on an artificial and unconventional basis and the reality is that the settlement discharges the insurer’s liability under each and every triggered EL policy.
   2. Adopting this approach, Mr Edelman submitted that pro rata allocation is necessarily implicit in an unallocated settlement of a mesothelioma EL claim by virtue of the special legal features of the liabilities being settled, so that spiking to a single year of reinsurance would be inconsistent with the basis on which the claims had been (or must be deemed to have been) settled. Alternatively, he submitted that the same result may be achieved by implying a term to the effect that the reinsured’s UNL must be formulated by reference to the contribution to risk made in the period of each reinsurance in accordance with the Barker principles. Whichever of these two possible courses was adopted would restore the “elementary” principle that insurance cannot “operate on a basis which allows an insured to select the period and policy to which a loss attaches” (IEG at [43]).

Duty of good faith

1. 1. Alternatively Mr Edelman invoked what he described as a duty of good faith requiring the presentation of reinsurance claims to be made on a pro rata basis in accordance with the Barker principles unless there was some rational basis (which would not include a desire to maximise reinsurance recoveries) for presenting them in some other way. He recognised that the concept of good faith has not previously been applied in this manner and that to do so would involve a development of existing legal doctrine in order to address the special problems raised within the Fairchild enclave, in particular the ability of the insurer to select the policy to which a loss should be attached which is contrary to elementary principles of liability insurance.
   2. For this purpose Mr Edelman drew upon three sources, namely (1) the nature of an insurance or reinsurance contract as a contract of the utmost good faith, (2) cases which have held that contractual discretions must be exercised in good faith (or, more fully, in a manner which is not irrational, arbitrary or capricious: see e.g. Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116, [2008] Bus LR 1304; and Braganza v BP Shipping Ltd [2015] UKSC 17, [2015] 1 WLR 1661); and (3) New York authority where a wider concept of good faith in insurance contracts applies (e.g. United States Fidelity & Guaranty Co v American Re-Insurance Company 20 N.Y. 3d 407 (2013)). Mr Edelman did not suggest that any of these sources mandated the development for which he contended. He relied upon them as illustrations of principles which might be invoked by analogy in much the same way as the majority of the Supreme Court had drawn upon a number of principles, none of which applied directly, in order to develop the rights of contribution and recoupment established in IEG as a response to the anomalies thrown up by Fairchild.

Contribution and recoupment

1. 1. The third and final route relied on to achieve a result whereby each reinsurance policy would bear its proportionate share of liability by reference to time on risk was by means of contribution and recoupment just as in IEG at the insurance level. As it was common ground that the spiked reinsurer would have rights of contribution and recoupment, the issue here was how those rights should be calculated. Equitas’s case is that they should be calculated in each year from the ground up, applying the Barker approach just as if a proportionate part of the claim had been presented under each reinsurance policy, in a manner explicitly intended to achieve the same ultimate outcome as would be achieved by the first or second route – or as would have been achieved if the minority view in IEG had prevailed. In this regard Mr Edelman relied on Lord Mance’s comment at [78] in IEG that the rights of contribution and recoupment favoured by the majority would lead “in practice, at least in the case of a solvent insured, to substantially the same result as that at which Lord Sumption JSC arrives, but by a different route”.
   2. For practical purposes the disagreement between the parties as to the method of calculating rights of contribution and recoupment was significant in three respects. First, under the Equitas method, MMI would have to bear a retention in each policy year whereas, under the MMI method, there would only be a single retention. Second, under the Equitas method higher layers of reinsurance would not contribute until the lower layers had been exhausted whereas, under the MMI method, each layer would be liable to contribute to the equivalent layer in the spiked year. Third, under the MMI method, MMI would be treated as a self-insurer of the retentions and of any gaps in the cover and would have the same rights of contribution as a reinsurer of an equivalent layer would have had. That would not be so under the Equitas method. We were told that the treatment of retentions is likely to be the most significant issue in financial terms.
   3. Although this third route was intended, if Equitas’s approach to contribution and recoupment was adopted, to achieve in principle the same financial outcome as either of the first two routes, Mr Edelman submitted that it would in practice lead to severe difficulties due to the complexities of the reinsurance programmes existing from year to year and the fact that the reinsurers in the spiked year who were left to claim contribution would have no knowledge of MMI’s reinsurance arrangements in other years. For this reason, he submitted that, if legally possible, either of the first two routes was to be preferred as a solution to the anomalies thrown up by Fairchild at the reinsurance level. Indeed he used words like “chaos” and “mayhem” to describe the situation with which the market would be faced in circumstances where each year’s reinsurance might have multiple excess layers, some of which would have multiple participants, in ways which would not correspond to the arrangements in other years.

MMI’s submissions in outline

1. 1. Mr Schaff for MMI supported the reasoning and conclusions of the judge-arbitrator.
   2. He pointed out that it is authoritatively established by the Supreme Court in IEG that spiking to a single year of cover is permitted at the insurance level despite the anomalies which it creates. That is so despite Barker, which in reality has little or nothing to do with the current issue. Those anomalies were expressly recognised by the Supreme Court, but were to be dealt with by resort to principles of contribution and recoupment.
   3. Mr Schaff submitted next that there is no principled basis on which to distinguish insurance and reinsurance in this respect. The market operates on the basis that reinsurance is simply a form of insurance on the original subject matter insured (e.g. Wasa International Insurance Co Ltd v Lexington Insurance Co [2009] UKHL 40, [2010] 1 AC 180 at [33] where Lord Mance described this as “an accepted analysis with business significance” which should not be unnecessarily thrown into doubt). As a matter of construction, the reinsurance contracts are triggered in the same way as the insurance contracts, so that exposure to asbestos is an “accident or occurrence” occurring during the policy period to which (within the Fairchild enclave) a weak test of causation must be applied. It was not suggested by Equitas that a process of construction could lead to a conclusion whereby the insurance and reinsurance contracts respond differently. For example, Equitas did not suggest that Lord Sumption’s construction of the insurance contracts in IEG can be applied to the reinsurance contracts here. That being so, consistency and principle require that the same approach be adopted at the insurance and the reinsurance level, and any distinction would be artificial, unprincipled and liable to make the situation worse rather than better. That would be so in any event, but was reinforced by the follow settlements clause in the reinsurance policies which demonstrates that the insurance and reinsurance were intended to operate in the same way.
   4. Accordingly, just as at the insurance level, at the reinsurance level also the anomalies should be dealt with by means of contribution and recoupment principles. This was a principled solution to the anomalies created by Fairchild which can equally operate at the reinsurance level.

Deemed allocation/implied term

1. 1. Against this background Mr Schaff submitted that when the employer settled with the victim there would be no attempt to allocate any part of the employer’s liability to different periods of time as it would be irrelevant to do so. That would be so regardless of whether the victim should be regarded as having multiple causes of action against the employer or a single cause of action. In this respect the position as between victim and employer was exactly the same as between employer and insurer. So far as the settlement by MMI of the insured claims was concerned, the judge-arbitrator’s findings were unreviewable. Each triggered policy was liable in full and that was the basis on which claims were settled.
   2. Mr Schaff submitted that in these circumstances there was no scope for any argument that the “real basis” of the inwards settlements was something different. Having settled each inwards claim on the correct basis that each triggered policy was liable in full, MMI was entitled to present its reinsurance claim to any one of its reinsurance policies (e.g. for 1969) on the basis that its UNL on the underlying contract of insurance for 1969 was 100% liability. This was not a case like Assicurazioni Generali SpA v CGU International Insurance Plc or Enterprise Oil Ltd v Strand Insurance Co Ltd where the argument was that the terms of a settlement had artificially concealed what was actually happening. The principle applied in those cases had no application here. The fact that the settlement had also discharged MMI’s liability under each and every policy on risk in other years did not mean that any part of the settlement consideration had to be allocated to the settlement of liability in those other years. Nor was there any basis for implying an obligation to allocate in this way. Such an implication was unnecessary, not least in circumstances where principles of contribution and recoupment (however they fall to be applied) were available.

Duty of good faith

1. 1. Mr Schaff submitted that the judge-arbitrator could not be criticised for having declined an invitation to develop the law in a novel way and that his decision was therefore unassailable. He submitted further that none of the sources prayed in aid by Mr Edelman provided a sound basis for any such development; that if any analogy is appropriate, the closest analogy is double insurance where the insured is entitled to choose under which policy to present its claim; that it would be wrong to introduce a fetter on what was, ex hypothesi, the exercise of an absolute contractual right; that if spiking is permitted (as it is) at the insurance level, it cannot be contrary to a duty of good faith at the reinsurance level; and that such a duty should not be introduced when principles of contribution and recoupment are available. Those principles would either yield the result for which Equitas contended, in which case the duty of good faith was not needed, or they would not, in which case its application was an unprincipled way of arriving at the minority approach in IEG which the majority had rejected. Contribution and recoupment were the principles which the majority in IEG had invoked, not a duty of good faith, and there was no basis for any different approach at the reinsurance level.
   2. Finally on this point, Mr Schaff relied on the judge-arbitrator’s statement that even if there were some duty of good faith or some implied term that a decision to allocate should be Wednesbury reasonable, he was “quite satisfied that there was no breach of duty or of any such implied term in this case … presentation of the claim to one reinsurance year in circumstances where it is expressly acknowledged by MMI that there is a need for equitable recoupment and contribution to redress any anomalies cannot conceivably be said to be in bad faith or Wednesburyunreasonable”.

Contribution and recoupment

1. 1. As already noted, Mr Schaff accepted and indeed asserts that the reinsurers in the spiked year will have rights of contribution and recoupment, although it appears that this was not MMI’s position when it first began to present claims on a spiked basis. The issue is how those rights should be calculated, as already explained.
   2. Mr Schaff submitted that by this stage of the argument it has been established as between insurer and reinsurer that the insurer is entitled to present its reinsurance claim to the policy year of its choice, bearing whatever is the retention applicable to that year but otherwise recovering in full. That, he submitted, was the contractual analysis under the reinsurance policy. In contrast, as explained by Lord Mance in IEG, rights of contribution and recoupment were not dependent on contract but on broad equitable principles drawing on an analogy with principles of double insurance in order to enable a sharing of the burden between reinsurers of the same loss in different years. Following this logic through, the way that contribution should work was to enable the reinsurer who was liable for one layer in the spiked year to obtain contribution from reinsurers who would have been liable for the equivalent layer in other years. Thus, to take a simple example, if there were three years of exposure to asbestos and three years of reinsurance, each with a retention of £10,000, a primary layer of £40,000 XS £10,000, and a higher layer of £50,000 XS £50,000, the reinsurers’ total outlay would be £90,000. It is therefore that £90,000 which needs to be distributed across other years. The primary layer reinsurer in the spiked year who had paid out £40,000 would recover one third of that amount (£13,333.33) from each of the primary layer reinsurers in the other two years, while the higher layer reinsurer who had paid out £50,000 would recover one third of that amount (£16,666) from each of the higher layer reinsurers in the other two years. That example is concerned only with contribution, but recoupment would arise if (for example) in one year MMI had chosen not to obtain reinsurance for one of the layers. In such a case MMI would be liable to contribute in the same way that a reinsurer of that layer would have done.
   3. As already indicated, the MMI method of contribution produces the practical effect that MMI bears only a single retention, that higher layer reinsurers in non-spiked years must contribute even though the lower layers in that year are not exhausted, and that in some circumstances MMI may itself have rights of contribution to exercise even where it has accepted a higher retention or chosen to be uninsured for some layers.
   4. In response to Mr Edelman’s apocalyptic warnings of chaos and mayhem, Mr Schaff pointed out that there are no findings in the award that the working out of the principles of contribution and recoupment, however that needs to be done, would give rise to any practical difficulty.

Overview

1. 1. There is no doubt that the Fairchild decision together with the Compensation Act 2006 and the cases which have applied these principles have created significant anomalies in the law. That jurisprudence, intended as it was to ensure a remedy for victims of negligent exposure to asbestos, has extended into liability insurance and (now) reinsurance in ways which seem unlikely to have been intended or predicted.
   2. I would accept that, once the courts can be confident that the objective of ensuring victim protection has been achieved, it is desirable that the anomalies should be corrected and that the law should return to the fundamental principles of the common law. Put shortly, once unorthodoxy has served its purpose, we should revert to orthodoxy. That does not preclude development of the law to meet new challenges, but does serve the interests of business where certainty and predictability are paramount if commercial entities including the reinsurance market are to conduct business and settle claims when they arise as efficiently as possible. It serves also the interests of those who ultimately have to pay the premiums if unpredictable liabilities to which in reality insurers and reinsurers never agreed are confined as closely as is possible consistent with the policy that victims should be compensated.
   3. The result of the jurisprudence so far, culminating in IEG, is that a victim of mesothelioma as a result of negligent exposure to asbestos is assured of a remedy. That will be either a solvent employer or a solvent insurer or, in cases where the insurer is insolvent, a statutory or industry compensation scheme. While the anomalies described by Lord Mance in IEG served a purpose at the insurance level, it is unnecessary to perpetuate them at the reinsurance level.
   4. I would therefore accept Mr Edelman’s submission that it is desirable, if possible, to revert to the principles of the common law whereby liability should be apportioned in accordance with Barker by reference to contribution to the risk. That is the closest approximation to what the parties actually agreed at a time when the weak causal link introduced by Fairchild, section 3 of the Compensation Act 2006 and the application of these rules to insurance contracts in “Trigger” could not have been anticipated. It reflects also the common law’s view of fairness which, as between insurer and reinsurer, is unaffected by section 3 of the Compensation Act. However, reversion to the approach of the common law must be principled. We cannot just do whatever we like. Nor should we introduce new distortions which may themselves have unpredictable consequences in order to patch over the existing ones. That said, however, there is in my judgment some scope to respond to Lord Mance’s call at [51] in IEG that “a principled solution must be found, even if it involves striking new ground” and that “the courts have made it incumbent on themselves to reach a solution representing a fair balance of the interests of victims, insureds and insurers”, to which I would add “reinsurers”.
   5. I would accept also that it would be preferable, again if possible, to achieve a solution by one or other of Mr Edelman’s first two routes (deemed allocation/good faith) rather than the third (contribution and recoupment). In the absence of findings in the award I would not go so far as to accept that confining the spiked reinsurers’ rights to equitable contribution and recoupment would lead inevitably to chaos in the market, but it would undoubtedly mean significantly greater complexity and expense. The judge-arbitrator referred to helpful examples produced by the parties to show how their respective methods of contribution would work in what he described as “factual situations of increasing complexity”. These examples, which were also before us, were greatly simplified for illustrative purposes, but even so gave a flavour of some of the complexities which would arise. In addition there is the practical problem for any reinsurer seeking to exercise a right of contribution that only MMI has knowledge of the detail of its reinsurance arrangements in each of the relevant years.
   6. I acknowledge that it is unusual explicitly to begin at the end by stating the objective which the law ought to achieve as distinct from applying the law to the facts found to see where that takes us. However, in the unprecedented and unique situation which the courts have now created within the Fairchild enclave, I consider that this is a legitimate approach.

Analysis

1. 1. I come now to examine the three routes for which Mr Edelman contended.

Deemed allocation/implied term

1. 1. In circumstances where the employee was exposed to asbestos over a period of several years, where the critical exposure(s) may have occurred in any one or more of those years, where it is impossible to say in which year(s) that did occur, and where the law has determined that each EL policy year is liable in full, it seems to me that the fairest way for an EL insurer’s inwards claims to be settled would be by allocating a share of liability to each policy year, the allocation to be determined by reference to time on risk unless there is some rational basis (such as intensity of exposure in any particular year(s)) for a different allocation. That would apply with even greater force if an employer faced claims from a number of employees, where it would appear to be statistically improbable, all other things being equal, that the critical exposures for each employee all occurred in the same year. Such a proportionate allocation would accord with that underlying reality, with the annual nature of EL insurance and reinsurance, and with the common law view of fairness as reflected in Barker. It would also avoid running foul of the elementary principle referred to by Lord Mance at [43] in IEG that insurance does not operate on a basis which allows the insured to select the period and policy to which a loss attaches, a basis which would render (and has rendered) entirely unpredictable the risks undertaken by insurers and reinsurers and has thereby falsified many years after the event the basis on which the premium to be charged was calculated.
   2. However, while it would have been fair for MMI to allocate its inward risks in this way, that is not what happened. Mr Edelman proposes that it should be deemed to have happened in order to produce a fair result. Tempting as it is to impose a deemed allocation on the parties by reference to time on risk, I do not think that this is permissible. It would involve a significant extension of the “real basis of settlement” cases which it would be difficult to confine within the Fairchild enclave. So far those cases have been concerned with investigating as a matter of fact what it is that the parties actually did. To apply them here would be a different exercise, when there was no doubt about what the parties actually did but the law was imposing on them its view of what they ought to have done. That is a very different thing. It seems to me that there would be a danger in seeking to counteract what is effectively one deeming provision (the weak causal link in Fairchild) with another (a principle of deemed inwards allocation).
   3. More fundamentally, while the imposition of a deemed allocation would remove one anomaly (the elementary principle referred to by Lord Mance that the insured cannot select the period and policy to which a loss attaches), it would collide headlong with other fundamental principles as there is no valid basis on which to distinguish insurance and reinsurance contracts in this respect. If, as the majority of the Supreme Court has held in IEG, spiking is permissible at the insurance level, there is simply no room for a principle of deemed allocation to avoid spiking at the reinsurance level. That follows from the nature of reinsurance as a form of insurance on the original subject matter insured (cf. Wasa International Insurance Co Ltd v Lexington Insurance Co at [33]) and from the absence of any valid basis on which to distinguish the insurance and reinsurance contracts as a matter of construction. If we were to avoid one set of problems by imposing a principle of deemed allocation, there is a real risk that we would be introducing other distortions into insurance and reinsurance law. Again it might be difficult to ensure on any principled basis that any distortions were confined within the Fairchild enclave.
   4. For the same reasons is not possible to achieve the desired result by way of an implied term. The implied term would be contrary to the proper construction of the reinsurance contracts.
   5. In these circumstances the analysis must be, consistently with the decision in IEG and in the absence of any valid basis on which to distinguish insurance and reinsurance, that MMI’s inwards claims were settled on an unallocated basis by which each and every relevant policy year was 100% liable and those liabilities were discharged; that there was a 100% liability ascertained under each and every policy year; that there was an undivided UNL for each year; and that as a matter of construction of the reinsurance contracts MMI was prima facie entitled to present the whole of its UNL to any reinsurance year of its choice.
   6. Accordingly I agree with the judge-arbitrator that MMI had a contractual right to present its reinsurance claims to the policy year of its choice, but I would not describe this as an “absolute” contractual right. Whether that is a valid description depends on whether there exists any constraint on the exercise of that right. That is the issue to which I now turn.

Duty of good faith

1. 1. As already noted, Mr Edelman did not suggest that any of the sources on which he drew in support of finding a duty of good faith operating within the Fairchild enclave was directly applicable. He relied on them rather as analogies which might usefully be invoked. That being so, it is unlikely to be fruitful to consider at any length why (for example) the insurance duty of utmost good faith or the concept of good faith in New York law does not apply here.
   2. As to the former, it is sufficient to say that I agree with the judge-arbitrator that the post-contractual duty of good faith in insurance contracts, which in any event gives rise to a remedy of avoidance of the contract rather than a constraint on the exercise of prima facie contractual rights, has been confined by cases such as The Star Sea and Versloot Dredging BV and that it has no part to play in the current context. It is true that Rix LJ may have left the door open, or at least ajar, to further development of the doctrine of good faith so as to equate it to “a concept of proportionality implicit in fair dealing” (see Drake Insurance Plc v Provident Insurance Plc [2003] EWCA Civ 1834, [2004] QB 601 [89]). However although this latter case was referred to in the parties’ written submissions, it was not the subject of oral argument, nor were there any submissions addressed to us as to how the doctrine should be developed. It seems to me that it would be difficult to confine any such development within the Fairchild enclave and that if such a development is to be made, it should be in another case.
   3. As to New York law, it is unnecessary to explore the detail of what was decided by the New York Court of Appeals in the United States Fidelity & Guaranty Co case. The case illustrates that in New York there is a wider concept of good faith in insurance contracts, which extends, at least in some contexts, to a requirement of reasonableness in the making of contractual choices, although that concept does not go so far as to require an insured to disregard its own interests or to put the reinsurer’s interests ahead of its own. However, I agree with the judge-arbitrator that this wider concept does not represent English law. Moreover, there is a risk that any borrowing of this wider concept of good faith in the present case would be difficult to confine within the Fairchild enclave.
   4. However, the line of cases which have imposed a constraint upon the exercise of contractual choices merits further consideration. The leading case is now Braganza in the Supreme Court, where Lady Hale said at [18]:

“Contractual terms in which one party to the contract is given the power to exercise a discretion, or to form an opinion as to relevant facts, are extremely common. It is not for the courts to rewrite the parties’ bargain for them, still less to substitute themselves for the contractually agreed decision-maker. Nevertheless, the party who is charged with making decisions which affect the rights of both parties to the contract has a clear conflict of interest. That conflict is heightened when there is a significant imbalance of power between the contracting parties as there often will be in an employment contract. The courts have therefore sought to ensure that such contractual powers are not abused. They have done so by implying a term as to the manner in which such powers may be exercised, a term which may vary according to the terms of the contract and the context in which the decision-making power is given.”

1. 1. Lady Hale went on to approve Rix LJ’s summary in Socimer at [66] of the position which the authorities had reached:

“It is plain from these authorities that a decision-maker’s discretion will be limited, as a matter of necessary implication, by concepts of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality. The concern is that the discretion should not be abused. Reasonableness and unreasonableness are also concepts deployed in this context, but only in a sense analogous to Wednesbury unreasonableness, not in the sense in which that expression is used when speaking of the duty to take reasonable care, or when otherwise deploying entirely objective criteria: as for instance when there might be an implication of a term requiring the fixing of a reasonable price, or a reasonable time. In the latter class of case, the concept of reasonableness is intended to be entirely mutual and thus guided by objective criteria … Laws LJ in the course of argument put the matter accurately, if I may respectfully agree, when he said that pursuant to the Wednesbury irrationality test, the decision remains that of the decision-maker, whereas on entirely objective criteria of reasonableness the decision-maker becomes the court itself.”

1. 1. The same passage was also approved in the minority opinion of Lord Neuberger at [102].
   2. One of the earlier decisions was Gan Insurance Company Ltd v Tai Ping Insurance Company Ltd (Nos 2 & 3) [2001] Lloyd’s IR 667, a reinsurance case where a Claims Co-operation Clause prohibited the reinsured from concluding a settlement or making an admission without the prior approval of the reinsurer. The Court of Appeal held that there were constraints, necessarily implicit from the circumstances, on the reinsurer’s right to withhold such approval. Approval could only be withheld “in good faith after consideration of and on the basis of the facts giving rise to the particular claim and not with reference to considerations wholly extraneous to the subject matter of the particular reinsurance” and not “arbitrarily, or … in circumstances so extreme that no reasonable company in its position could possibly withhold approval” (see in particular [67] and [70]). Mance LJ emphasised that this constraint was not derived from the insurance duty of utmost good faith but from the nature and purpose of the particular contractual provisions, and was therefore not inconsistent with cases such as The Star Sea:

“68. Contrary to Mr Edelman’s submission, this conclusion does not involve an inadmissible extension of the duty of good faith in insurance law or of the consequences of breach of any such duty. The qualification that I have identified does not arise from any principles or considerations special to the law of insurance. It arises from the nature and purpose of the relevant contractual provisions.”

1. 1. The case illustrates also that although this line of authority often refers to contractual discretions, its application is not limited to cases where the contract in question speaks in terms of one party having a discretion to exercise.
   2. On the other hand, not all contractual choices are constrained in this way. In Mid Essex Hospital Services NHS Trust v Compass Group UK & Ireland Ltd the contractual term in question was a right to award service failure points in a contract to provide catering and cleaning services in the event of a failure to meet performance standards. These points formed part of contractual machinery to determine the payments to which the contractor was entitled and the circumstances in which the contract might be terminated. The Court of Appeal distinguished the Socimer line of cases, but nevertheless acknowledged that when a party has a right to choose from a range of options, a term will often be implied to preclude an arbitrary, capricious or irrational choice. Jackson LJ said at [83]:

“An important feature of the above line of authorities is that in each case the discretion did not involve a simple decision whether or not to exercise an absolute contractual right. The discretion involved making an assessment or choosing from a range of options, taking into account the interests of both parties. In any contract under which one party is committed to exercise such a discretion, there is an implied term. The precise formulation of that term has been variously expressed in the authorities. In essence, however, it is that the relevant party will not exercise its discretion in an arbitrary, capricious or irrational manner. Such a term is extremely difficult to exclude, although I would not say it is utterly impossible to do so. …”

1. 1. In Mid Essex the term was excluded, in part because of the nature of the contract as a contract with a public authority which was entitled to exercise its rights to ensure the highest standards in a vital service and in part because the contract contained its own remedy in the event that the NHS trust awarded more than the correct number of points. As Jackson LJ explained:

“91. The discretion which is entrusted to the Trust in relation to service failure points and deductions in the present case is very different from the discretion which existed in the authorities discussed above. The Trust is a public authority delivering a vital service to vulnerable members of the public. It rightly demands high standards from all those with whom it contracts. There may, of course, be circumstances in which the Trust decides to award less than the full amount of service failure points or to deduct less than it is entitled to deduct from a monthly payment. Nevertheless the Trust could not be criticised if it awards the full number of service failure points or if it makes the full amount of any deduction which it is entitled to make. The discretion conferred by clause 5.8 simply permits the Trust to decide whether or not to exercise an absolute contractual right.

92. There is no justification for implying into clause 5.8 a term that the Trust will not act in an arbitrary, irrational or capricious manner. If the Trust awards more than the correct number of service failure points or deducts more than the correct amount from any monthly payment, then there is a breach of the express provisions of clause 5.8. There is no need for any implied term to regulate the operation of clause 5.8.”

1. 1. The judge-arbitrator appears to have regarded the Mid Essex case as drawing a sharp distinction between cases of absolute contractual rights and cases where the duty not to act in an arbitrary, irrational or capricious manner could be implied. In my judgment, however, the position is more nuanced. Although the Mid Essex case uses the expression “absolute contractual right” that is the result of a process of construction which takes account of the characteristics of the parties, the terms of the contract as a whole and the contractual context, not a starting point intrinsic to the term itself. It is only possible to say whether a term conferring a contractual choice on one party represents an absolute contractual right after that process of construction has been undertaken. To say that a term provides for an absolute contractual right and therefore no term can be implied puts the matter the wrong way round.
   2. In my judgment there are powerful reasons to support the implication of a term in the very specific reinsurance context existing within the Fairchild enclave that the insurer’s right to present its reinsurance claims must be exercised in a manner which is not arbitrary, irrational or capricious, and that in that context rationality requires that they be presented by reference to each year’s contribution to the risk, which will normally be measured by reference to time on risk unless in the particular circumstances there is a good reason (such as differing intensity of exposure) for some other basis of presentation. That is because spiking is inconsistent with the presumed intentions and reasonable expectations of the parties at the time when the contracts were concluded. On that basis the insurer remains the decision maker, so that a rational view that (for example) the intensity of exposure had been greater in one year than another could not be challenged, but the decision must be made by reference to each year’s contribution to the risk.
   3. In summary, the Fairchild jurisprudence has presented the insurer with the opportunity to make a choice of the year to which a claim should be presented, but that choice is entirely fortuitous so far as the parties are concerned, was not something which they could have contemplated at the time of contracting or taken into account in setting the premium to be paid, and is moreover inconsistent with fundamental (or “elementary”) principles of liability insurance law, as already explained. It results in a situation, spiking, which does not accord with common law notions of fairness as explained in Barker and is contrary to the underlying statistical reality that in fact the critical exposure(s) of employees to asbestos will not all have occurred in the same year. It is a situation in which there is a clear conflict of interest between the parties and a significant imbalance of power between them. That imbalance is not the result of a relationship such as employer and employee which existed in Braganza, but arises out of the control which the insurer can exercise in allocating its inwards claims and its exclusive knowledge of its reinsurance arrangements over an extensive period.
   4. In an area of the law in which considerations of fairness and policy have explicitly loomed larger than usual, and bearing in mind the willingness of the Supreme Court to “strike new ground” if necessary to achieve a fair balance of all the interests concerned, I would hold that such a term should be implied. The term can conveniently be described as requiring “good faith”, but this is merely a label. Its content and rationale are as I have described. Such a term achieves an outcome which is as close as possible to what the parties can be taken to have intended if they had foreseen the development of the Fairchild jurisprudence. (Although in general parties must take the risk of future developments in the law, to invoke that principle here would be extreme: Fairchild and its progeny represented a unique and unprecedented development which could not have been foreseen, and it would be harsh to impose on a reinsurer who wrote an annual policy for (say) 1969 the risk of developments in the law affecting his liability which did not take place for another third of a century). It is a solution which is specific within the Fairchild enclave and will not have wider ramifications. Although it may be objected that it is contrary to principle to imply such a term at the reinsurance level but not at the insurance level, there is a material distinction. At the insurance level, as already explained, such a term would risk subverting the policy of ensuring full compensation to victims, but that risk no longer exists or at any rate is minimal at the reinsurance level.
   5. If a term is to be implied as I have formulated it, the judge-arbitrator’s statement that there was no breach of duty or of any implied term does not stand in the way of allowing the appeal. Plainly that statement was not directed to a situation where the insurer is under an obligation to make its allocation decision by reference to each year’s contribution to the risk. It is in effect no more than a statement that an insurer seeking to maximise its reinsurance recovery by exercising a contractual right cannot be said to be acting with a want of good faith, but that as I have sought to explain begs the question.
   6. On this ground, therefore, I would provisionally allow the appeal. At this stage I say “provisionally” because it remains to evaluate Mr Schaff’s submission that there is no scope for any duty of good faith when principles of contribution and recoupment are available. That submission is best considered after I have dealt with the contribution and recoupment issues.

Contribution and recoupment

1. 1. The question how principles of contribution and recoupment should operate must be addressed on the basis that MMI is entitled to present its reinsurance claim to the policy year of its choice and that the reinsurers of this spiked year, having paid MMI, seek to recover from other policy years a proportion of what they have paid.
   2. The starting point in considering how these principles should operate in the reinsurance context must be Lord Mance’s exposition of their sources and nature in IEG. In summary, he drew upon doctrines of double insurance and suretyship, including “a more relaxed view of double insurance” taken in Australian cases, in order to fashion a novel remedy. He concluded that “the root principles” were “principles of equity and justice which lie behind the law’s recognition of rights of contribution”, that these must be applied with “breadth and flexibility”, requiring “a broad equitable approach to be taken to contribution, to meet the unique anomalies to which [Fairchild and ‘Trigger‘] give rise” (see in particular at [59] to [63]).
   3. So far as the sources are concerned, Lord Mance expressly recognised that concepts of double insurance and suretyship could not be directly applied. In the present case the reinsurance policies on different years were not an instance of double insurance which exists only when there are two or more different policies in respect of the same interest and covering the same risk in the same period (see [56] to [58], citing National Farmers Union Mutual Insurance Society v HSBC Insurance (UK) Ltd [2010] EWHC 773 (Comm), [2010] 1 CLC 557 at [15]). However, it was a doctrine whose broad principles could be adapted to meet the unconventional problems arising from Fairchild. Similarly with suretyship, the conventional rule was equality between sureties so that “it should not rest with the creditor by his selection of remedies open to him to determine where ultimately the burden was to fall”, but this too could be adapted to give effect to an allocation of liability by reference to the insurer’s contribution to the risk.
   4. I would accept there is no specific guidance in IEG to enable us to choose between the rival methods advanced by the parties in the present case. The Supreme Court was not focusing on this issue. Nevertheless, the guiding principle is clear, which is that the objective must be to achieve a just solution. That solution will eliminate so far as possible the anomalies resulting from the Fairchild jurisprudence and will take account of the reality of the underlying claims, that is to say that nobody can know in which year the critical exposure occurred in the case of any given victim and that considering the position of victims as a group, such exposures will have occurred in a variety of years. The best available measure of such exposures is by reference to each policy year’s contribution to the risk. That is not to revert to the now discredited theory of liability for making a material contribution to risk but recognises the artificiality of saying that an exposure which in fact occurred only once, even if we do not know when, is regarded in law as having occurred in each and every year.
   5. Viewed in this light, in my judgment the Equitas method of contribution is to be preferred. It reflects three fundamental considerations which the MMI method avoids. First, the reality is that critical exposures to a group of victims will have occurred in a number of years, in each of which MMI agreed to bear a retention, so that it is unjust that under the MMI method only a single retention applies. Second, the basis on which higher layer reinsurers agreed to participate was that they would not be liable until the retention and any lower layers had been exhausted. No doubt their premium was calculated accordingly. The MMI method subverts that principle. Third, I see no reason why MMI should have rights of contribution in respect of years or layers where it chose not to insure. That was its choice.
   6. In my judgment the broad equitable principles which we must apply are sufficiently flexible in these circumstances to enable effect to be given to the Equitas method of calculation. I would hold accordingly.
   7. The judge-arbitrator recognised that “the process of contribution and recoupment is to be carried out in practice in order to iron out any anomalies or unfairness which arise from the presentation of the entire claim to one reinsurance year”, but in my judgment the MMI method which he adopted does not achieve this. I would respectfully suggest that there are two errors in his reasoning.
   8. The first was to exclude as totally irrelevant the doctrine of subrogation which, as expounded in Lord Napier & Ettrick v Hunter [1993] AC 713, a case to which Lord Mance referred in IEG, illustrates how an insurer of a higher layer is entitled to be fully indemnified out of any recoveries before those recoveries are available to the insured or to insurers of lower layers. Although it is not suggested that subrogation operates in this case when equitable rights of contribution are applied between reinsurers of different years, the principle is nevertheless one which needs to be borne in mind in determining how those rights should be applied in order to achieve a just outcome.
   9. The second was to apply too closely the concept of double insurance in which only one retention would be applied. The judge-arbitrator recognised that the present case is “not strictly speaking” a case of double insurance, but his view was that “the only difference is that, whereas double insurance is two insurances covering the same loss in the same period, the present case and IEG involved (re)insurances in successive years covering the same loss, because of the special rules derived from Fairchild and developed in the insurance context in ‘Trigger‘ and IEG“. It was largely for this reason that the judge-arbitrator thought that it would be unprincipled and anomalous if MMI had to bear multiple retentions. However, while double insurance is a helpful broad analogy, when focusing on the issue of retentions this difference is critical.
   10. The judge-arbitrator also thought that the Equitas method was anomalous and unfair because, as Equitas accepted, if there had been one continuous reinsurance contract covering a number of years, MMI would only have to give credit for one retention. However, with respect that is only part of the picture. If there had been one continuous reinsurance contract, it is highly probable that the reinsurers would have insisted either on a higher retention than applicable to a single policy year or a higher premium. No conclusion about any unfairness of the Equitas approach can be reached without taking this into account.

The duty of good faith revisited

1. 1. In the light of my conclusion that the Equitas method of calculating the rights of contribution and recoupment is correct, there is no conflict between the application of those principles and the existence of a duty of good faith. There is therefore no obstacle, such as any such conflict might have created, to what I regard as the preferred solution which is that such a duty should be implied. There remains the alternative argument that the implication of such a duty is unnecessary if principles of contribution and recoupment are available to the reinsurers, but for the reasons already given I do not regard that objection as well founded.

Conclusion

1. 1. I would therefore allow the appeal, answering the questions of law for which leave has been given as follows:

Questions

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

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

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

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

Answers: (1) No; (2) Yes, unless there is some other rational basis for ascertaining the contribution to the risk in each triggered policy year; (3) Does not arise unless the answer to question 2 is held to be wrong, in which case the Equitas method should be applied.

Lord Justice Leggatt :

1. 1. I agree entirely with the judgment of Males LJ but wish to add further reasons of my own to explain why I consider that the doctrine of good faith requires the reinsurance claims at issue in this case to be presented on a basis which apportions the insurer’s ultimate net loss between each policy year in respect of which the insurer was liable to indemnify the insured employer for the damage caused to a victim by mesothelioma.

IEG and the nature of insurance

1. 1. The basic nature of an insurance contract is that the insurer, in return for a sum of money (the insurance premium), takes the risk of an event occurring during the period covered by the policy and promises to provide a benefit to the insured (often an indemnity against loss) if the event occurs. The event insured against may be a loss occurring or a liability incurred or a claim made against the insured. But in each case it is fundamental that the event is one which happens during the period of risk and not during any earlier or later period. As Lord Mance said in the IEGcase, at para 40, referring to the EL policies in issue in that case:

“In short, insurance would have been and was placed on the basis that a particular liability or loss would fall into one, not a series of separate periods. If an insured wanted complete cover, it would have to maintain it for all such periods. The relevant period would also be ascertained by objective criteria, which meant that insureds could not select it at will or to obtain the advantage of the cover most favourable from their viewpoint.”

1. 1. In IEG it was recognised by all the members of the Supreme Court that the extension to insurance law of the special rule of causation (or, more accurately, proof of causation) developed in Fairchild to govern liability in tort within what has become known as the ‘Fairchild enclave’ threatens to confound this fundamental principle of insurance. The difficulties derive from dispensing with the requirement that the victim – or, in the context of liability insurance, an insured employer who is liable to the victim in tort – must prove that the employer’s wrongful act or omission caused the victim to contract mesothelioma. Under the special Fairchild rule it is sufficient to show that the employer negligently or in breach of statutory duty exposed the victim to asbestos and that the victim later developed mesothelioma which may have been (but cannot be shown on the balance of probabilities to have been) caused by this exposure. In Barker the House of Lords mitigated this departure from principle by holding that the liability founded on the Fairchild rule is proportionate to the defendant’s contribution to the risk of developing mesothelioma measured by the duration and intensity of the exposure to asbestos for which the defendant was responsible. Parliament immediately legislated, however, to displace this holding in relation to employers (and any other persons) liable in tort to mesothelioma victims. Pursuant to section 3 of the Compensation Act 2006, every person who is liable in tort as a result of exposing to asbestos a victim who later contracts mesothelioma is liable to the victim for the whole of the damage caused by the disease.
   2. All the Supreme Court Justices in the IEG case were agreed that applying the special rules applicable as between employee-victims and their employers to the relationships between the employers and their insurers produces results which are unacceptable. In particular, as Lord Mance observed at para 43:

“(a) It is contrary to principle for insurance to operate on a basis which allows an insured to select the period and policy to which a loss attaches. This is elementary. If insureds could select against insurers in this way, the risks undertaken by insurers would be entirely unpredictable. (b) It is anomalous for a liability insurance underwritten for a premium covering losses arising from risks created during its particular period to cover losses about which all that can be said is that they arise from risks extending over a much longer period, in respect of which no premium has, or could have, been assessed or received by the insurer.”

Lord Sumption, who gave the main minority judgment, agreed at para 156 that these consequences “are not just remarkable in themselves, but are directly inconsistent with the language of the … policies and the fundamental characteristics of insurance.”

1. 1. Lord Sumption considered that the rational response of the law to the situation in which the insurer’s liability is triggered in more than one policy year is not to assign the whole of the loss to a policy year of the insured’s choice. Rather, it is to prorate the loss between every policy year during which the insured employer exposed the victim to asbestos: para 160. Lord Sumption reached that result through a contextual interpretation of the words “caused during any period of insurance” used in the EL policies when applied to an insured liability with the unusual legal incidents of an employer’s liability for mesothelioma: para 161.
   2. The majority of the Supreme Court did not accept this approach. Lord Mance, who gave the lead judgment, observed, at para 46, that it involved interpreting the insurance policy wording in a way which none of the parties or interveners before the court had suggested. He also regarded the interpretation proposed by Lord Sumption as inconsistent with the earlier decision of the Supreme Court in the “Trigger” litigation, which treated proof of exposure to asbestos during any period of insurance as sufficient to prove that the victim’s mesothelioma had been “caused” during the relevant period: ibid. Lord Mance nevertheless shared the view that, at least ultimately and in so far as employers and their insurers are good for the money, fairness requires the loss to be apportioned across years in a way which reflects the contribution to risk of each year of exposure to asbestos which is treated as having caused the employee’s disease. Thus, he said at para 52:

“A sensible overall result is only achieved if an insurer held liable under [an EL] policy is able to have recourse for an appropriate proportion of its liability to any co-insurers and to the insured as a self-insurer in respect of periods of exposure of the victim by the insured for which the insurer has not covered the insured.”

1. 1. To achieve this overall result, Lord Mance considered that a “broad equitable approach” should be taken to contribution between insurers so as to allow an insurer who is liable as a result of exposure to asbestos during one period of insurance to recover contribution from insurers who are liable in respect of other periods during which exposure occurred which under the Fairchild rule is treated as having caused the same loss: para 63. He further held, at para 77, that:

“The concomitant of insurance liability in this situation must be a recognition that the law can and should redress the unjust and wholly anomalous burden which would otherwise fall on any particular insurer with whom insurance was only taken out for part of the total period of exposure by the insured, by recognising an obligation on the part of the insured to contribute pro tanto to such liability as a self-insurer.”

Lord Mance believed that this approach would lead in practice, albeit by a different route, to substantially the same result as that at which Lord Sumption arrived, except where an insured is insolvent: para 78.

1. 1. Lord Hodge (with whose judgment the other Justices in the majority, including Lord Mance, also agreed) gave several reasons for concluding that Lord Sumption’s approach was “not an option” and that “the anomalies must be addressed in some other way”: para 108. First, like Lord Mance, he thought that the interpretation of the insurance policy wording proposed by Lord Sumption was inconsistent with the decision of the Supreme Court in Trigger. Second, Lord Hodge was influenced by the fact that allowing an insured employer to recover its whole loss from any insurer who was on risk for any part of the period of exposure to asbestos, despite the “heavy burden” imposed on the insurer selected, was a result for which all the parties to the proceedings, including the defendant insurers and the interveners, had contended. One of the interveners was the Association of British Insurers, which represents the interests of the insurance industry. Lord Hodge found it “striking that the insurance industry in this appeal has shown no enthusiasm for the elegant and less complex idea of construing the insurance contract to restrict the insurer’s liability to a proportionate part of the loss”: para 105.
   2. Thirdly, Lord Hodge said, at para 106, that allowing the employer to select the insurer from which to claim its full indemnity is “consistent with the policy of the United Kingdom Parliament that the employee-victim should be able to obtain damages for his loss in a straightforward way”. By contrast:

“Confining the insurer’s liability to a time-related proportion of the employer’s liability would not be in line with this policy of the legislature and would probably engender further legislation.”

1. 1. A further reason given by Lord Hodge, at para 110, was that:

“the practical solution which Lord Mance proffers appears to be consistent with the way in which the London insurance market has operated in handling mesothelioma claims. That may suggest that the solution will not give rise to major practical difficulties.”

1. 1. Lord Neuberger and Lord Reed, while agreeing with Lord Sumption, nevertheless expressed the view, at para 203, that Lord Mance’s solution had “a number of attractions”:

“First, it is more in line with the parliamentary approach as demonstrated by section 3 of the 2006 Act, because, unlike Lord Sumption’s solution, it ensures that every employee whose employer was insured for any period of his employment, can look to any such insurer who is still solvent for full compensation. Secondly, unlike Lord Sumption’s solution, it has been supported by one of the parties to this appeal: despite being raised by the court at a reconvened hearing, Lord Sumption’s solution has not been adopted by either party.”

Lord Neuberger and Lord Reed suspected that these two points were connected, in that the insurance market might fear that, if Lord Sumption’s solution were adopted, Parliament would intervene to reverse the court’s decision, as had happened following Barker.

1. 1. For Lord Neuberger and Lord Reed, further attractions of Lord Mance’s approach were that it was far closer to the approach which the London insurance market had worked out in practice and did not clash with the court’s reasoning in the Trigger litigation, as Lord Sumption’s solution arguably did. However, they regarded these considerations as outweighed by the fact that the construction of the insurance contract on which Lord Mance’s conclusion was based “is inconsistent with the link between risk and premium which lies at the heart of a contract of insurance”: para 205. They were also concerned that the legal innovations introduced by Lord Mance to mitigate this result might have “unfortunate wider ramifications”: para 207. In particular, it might well be argued that:

“this court is invoking a new and wide general equitable power, which is, to put it at its lowest, close to inconsistent with an express contractual term, in order to reconstitute a contractual relationship so as to achieve what it regards as a fair result in a purely commercial context.”

1. 1. Without seeking to question the necessity of adopting Lord Mance’s approach in the IEG case, I respectfully share this last concern. While recognising a “broad equitable right” of contribution between insurers may be regarded as an extension of existing principle, giving an insurer an equitable right to recoup part of the insured loss from its insured is not just close to inconsistent, but is clearly inconsistent, with the contract between the parties as it was interpreted by the majority in IEG. As Lord Sumption observed, at para 183:

“If the insured is contractually entitled to the whole amount, there cannot be a parallel right of recoupment in equity on the footing that it is inequitable for the insured to have more than part of it.”

1. 1. Although Lord Mance sought to rely on a thesis of Professor Andrew Burrows to suggest that there are exceptions to the general rule that a claimant will not be entitled to restitution where the defendant is legally entitled to the enrichment, commentators have convincingly argued that the authorities relied on do not support this thesis and that there is no legal principle which allows a claim to recoup money based on equity or unjust enrichment to override an unconditional contractual right to be paid the sum in question: see R Merkin “Insurance and reinsurance in the Fairchild enclave” (2016) 36 Legal Studies 302; KV Krishnaprasad, “Unjust enrichment in the ‘Fairchild enclave’: International Energy Group Ltd v Zurich Insurance Plc” (2017) 80 MLR 1150; R Stevens, “The Unjust Enrichment Disaster” (2018) 134 LQR 574, 597-8. As Lord Sumption put it at para 183:

“The basis of the suggested right of recoupment is that it is unjust for the insurer to have to bear the whole loss. But I do not understand by what standard it is said to be unjust when the parties have agreed that it should be so.”

1. 1. The response of allowing an equitable principle or restitutionary claim to override a valid and binding contract should in my view be regarded as an absolutely last resort, if not a counsel of despair.

The reinsurance level

1. 1. The thrust of MMI’s arguments in the present case, which the judge-arbitrator accepted, is that, within the Fairchild enclave, the analysis of the relationship between an insured employer and its liability insurers adopted by the majority of the Supreme Court in IEG must apply equally to the relationship between a liability insurer and its reinsurers. As Mr Alistair Schaff QC for MMI emphasised, a contract of reinsurance is simply an insurance of the same subject-matter as the underlying insurance contract where the interest insured is the original insurer’s liability under the underlying contract. There is in these circumstances, Mr Schaff submitted, no principled distinction between insurance and reinsurance of the risk of an employer being held liable in tort for causing an employee to contract mesothelioma through exposure to asbestos, and the legal approach which applies to the settlement of mesothelioma claims at the insurance level must also operate at the reinsurance level.
   2. Compelling as the logic of this argument at first sight seems, it in my view overlooks the reasons which drove the majority of the Supreme Court in IEG to adopt a solution to the problem confronting the court which created a result that Lord Mance himself described as “contrary to principle” and then to seek to mitigate that result by devising yet further new special rules of law. I am satisfied that those reasons do not compel the courts to resort to a similar expedient at the reinsurance level. To the contrary, a principled solution has been proposed by Equitas which does not allow the reinsured to select the period and policy to which the whole of its loss attaches – contrary to the basis on which the reinsurance was placed. The proffered solution also does not allow the reinsured to obtain under a contract to provide cover for one year an indemnity for the whole of a loss which arises from risks extending over a number of years – a result which, as Lord Sumption put it, “entirely severs the functional connection between premium and risk”: see IEG at para 155. The solution which avoids subverting the basis of the reinsurance contracts in these ways rests on the now well established and orthodox principles developed by the common law to control the exercise of contractual powers.

Implied constraints on the exercise of contractual powers

1. 1. An important development in the English law of contract which has gathered momentum in recent years is the readiness of courts to imply a term as to the manner in which a contractual power may be exercised so as to ensure that the power is not abused and is exercised in good faith. The doctrine of good faith in this context requires a contractual power to be exercised in a way which is consistent with the justified expectations of the parties arising from their agreement, construed in its relevant context.
   2. The conceptual basis for this approach appears most clearly from the decision of the House of Lords in Equitable Life Assurance Society v Hyman [2000] UKHL 39; [2002] 1 AC 408. In that case with profits policies of life insurance issued by a mutual society provided for the payment when the policies matured on the policyholder’s retirement of a guaranteed rate annuity. The contractual relationship between the policyholder and the Society was also governed by the Society’s articles of association under which the directors had the power to award a financial bonus when the policy matured. The relevant article of association (article 65) stated that the amount of this bonus was in the “absolute discretion” of the directors. The House of Lords held that it was necessary to imply a term into article 65 which precluded the directors from exercising their discretion in a way which depended on whether the policyholder would be receiving an annuity at a guaranteed rate. In approaching the question whether a term was to be implied, Lord Steyn (with whom the rest of the appellate committee agreed) identified the inquiry as:

“entirely constructional in nature: proceeding from the express terms of article 65, viewed against its objective setting, the question is whether the implication is strictly necessary.”

Lord Steyn concluded that the implication of a term which precluded the directors from exercising their discretion so as to pay different (and lower) bonuses to policyholders entitled to guaranteed rate annuities was strictly necessary, as it was “essential to give effect to the reasonable expectations of the parties”: [2002] 1 AC 408 at 459.

1. 1. I agree with the analysis of Sir Kim Lewison in his book on The Interpretation of Contracts (6^th Edn, 2015) at para 6.08 that Lord Steyn was here applying the test of whether the implication was necessary to give business efficacy to the contract by asking whether, without the implied term, the contract would work in the way the parties would reasonably have expected it to work. This accords with the original statement of the business efficacy test in The Moorcock (1889) 14 PD 64 at 68 as seeking to give to the transaction “such efficacy as both parties must have intended that at all events it should have.” That included, in Bowen LJ’s classic statement, making each party promise in law to bear such perils or chances as it must have been in the contemplation of both parties that he should be responsible for: ibid.
   2. In identifying the scope of any term which it is necessary to imply for the contract to work in the way that the parties must have intended or reasonably expected it to work, the courts recognise that, where the contract permits a party to make a choice or requires it to make an evaluative judgment, it is for that party and not the court to make the relevant choice or evaluation. Consequently, the term implied often imports a standard of review similar to that applied in judicial review of administrative action whereby the decision-maker is required only to act honestly and reasonably in the Wednesbury sense: see Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116; [2008] 1 Lloyd’s Rep 558, para 66; Braganza v BP Shipping Ltd [2015] UKSC 17; [2015] 1 WLR 1661, paras 19-30. What is honest and reasonable is judged by reference to the purpose(s) which the contract requires or permits the party exercising the relevant power to pursue.
   3. There is now a large body of case law in which this approach has been applied. An early but pertinent example is Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (Nos 2 & 3) [2001] EWCA Civ 1047; [2001] Lloyd’s Rep IR 612. In that case a contract of reinsurance contained a claims cooperation clause which provided that, in relation to any claim made under the underlying insurance policy, “no settlement and/or compromise shall be made [by the insurer] and liability admitted without the prior approval of reinsurers.” The Court of Appeal held that the power of the reinsurers to withhold approval to a proposed settlement was not an absolute right but was subject to an implied limitation that it must “be exercised in good faith after consideration of and on the basis of the facts giving rise to the particular claim, and not with reference to considerations wholly extraneous to the subject-matter of the particular reinsurance or arbitrarily”: para 76. By “arbitrarily” was meant not “in circumstances so extreme that no reasonable company in its position could possibly withhold approval”: para 73.
   4. Mance LJ (who gave the lead judgment) derived this implication from the context in which and purpose for which the claims cooperation clause gave reinsurers the right to withhold approval. The context included the fact that the reinsured was the company through which the financial burden of liability passed to the reinsurers, while the purpose was to protect the reinsurers’ interests in relation to the claim: para 67. He gave as one possible example of an unreasonable exercise of the contractual power a refusal to approve the settlement of a claim because the reinsurer had decided, for reasons unrelated to the particular claim, that it wished to prolong payment of any claims for as long as possible, however obvious it might be that they would have to be met in full and should as claims be settled on the best terms possible: para 68.
   5. The context in which the contract conferring the relevant power has to be construed may include a relevant legal regime. For example, in British Telecommunications plc v Telefónica O2 UK Ltd [2014] UKSC 42; [2014] Bus LR 765 an “interconnection” agreement under which BT gave various mobile network operators access to certain landlines with associated numbers conferred on BT a power unilaterally to fix or vary its charges. The Supreme Court held that the exercise of this power was impliedly limited by reference to objectives set out in an EU Directive (referred to as “the Framework Directive”) which regulated the arrangements made between telephone network operators. Lord Sumption (with whose judgment the other Justices agreed) said, at para 37:

“As a general rule, the scope of a contractual discretion will depend on the nature of the discretion and the construction of the language conferring it. But it is well established that in the absence of very clear language to the contrary, a contractual discretion must be exercised in good faith and not arbitrarily or capriciously. This will normally mean that it must be exercised consistently with its contractual purpose.” (citations omitted)

Construing the interconnection agreement in the context of the legal environment in which the parties were operating, Lord Sumption considered that “the intention of the parties must be to comply with the [regulatory] scheme as it stands from time to time so far as the contract permits” and that this intention necessarily informed the scope and operation of BT’s power under the contract to set its own charges. It followed that BT was only entitled to vary its charges if the variation was consistent with the purposes set out in the Framework Directive.

1. 1. There are occasions when no term will be implied to fetter the exercise of a contractual power. But that conclusion, when reached, is also the result of a process of construction. The language in which the power is expressed is not decisive. For example, in the Equitable Life case the discretion of the directors to decide what final bonus should be paid was held to be limited, even though the discretion was expressed to be “absolute”. An example of a case in which a contractual power was found, on analysis, to be unfettered is Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (t/a Medirest) [2013] EWCA Civ 200; [2013] BLR 265. In that case a contract for the provision by a private contractor of catering and cleaning services to a hospital trust contained very detailed rules for measuring the contractor’s performance through a system of awarding “service failure points” for specified “performance failures” and deducting sums from the price paid to the contractor each month according to the number of service failure points incurred.
   2. The Court of Appeal found that the award of service failure points and calculation of deductions did not involve the exercise of any discretion. In relation to any question whether points had been correctly awarded, there was only one right answer determined by the rules set out in the contract. In the event of disagreement about the answer, the contract provided for a dispute resolution procedure. The hospital trust was not contractually obliged to award the number of service failure points stipulated by the contract or to make the deduction from a monthly payment stipulated by the contract, and in that sense had a discretion whether or not to do so. But the trust could not be criticised if it chose to award the full number of points and levy the full deduction provided for in the contract. Thus, the only discretion which the trust had was to decide whether or not to exercise an absolute contractual right.

The term implied in this case

1. 1. Applying the principles illustrated by these authorities, the relevant contractual power in the present case is the power of MMI under each of its policies of reinsurance with Equitas to claim an indemnity for its “ultimate net loss” (so far as it falls within the policy limits) resulting from an accident that occurred during the policy year. Without doubt, the ordinary expectation is that the exercise of this power is completely unfettered such that MMI has an absolute right to claim and be indemnified for the whole of this sum. That expectation, however, rests on the assumption – which, as discussed earlier, is a fundamental feature of an insurance contract – that MMI has no choice about the policy period to which a loss attaches and that, if a loss falls within one period, it cannot also fall within another. The ordinary expectation also assumes that the amount of the loss falling within a particular policy year does not depend on what risks the reinsured has underwritten in any other policy year. Again, this simply reflects the basic nature of insurance and reinsurance.
   2. As discussed, within the Fairchild enclave, these assumptions no longer hold good. The same indivisible loss is treated as having been caused in multiple policy years, thus giving an insurer which provided EL cover to the employer for two or more of those years the ability to choose the policy year (or years) to which it will attribute the loss for the purpose of making a reinsurance claim. The amount of the insurer’s ultimate net loss also depends, entirely anomalously, on whether or to what extent the insurer provided EL cover for other years in which the insured employer wrongfully exposed its employee to asbestos. In this topsy-turvy world it is impossible for the applicable contracts of reinsurance to work exactly as the parties intended and reasonably expected them to work. To make the contracts work as consistently as is possible with the parties’ presumed intention and reasonable expectations, it is necessary to imply a term which restricts the exercise of the reinsured’s power to select how it will present its claim as between policy years.
   3. True it is that the question whether a term must be implied is to be judged at the date when the contract was made (see Marks & Spencer plc v BNP Paribas Securities Services [2015] UKSC 72; [2016] AC 742, para 23) and that when the relevant reinsurance contracts were made the parties could not have foreseen the situation that has arisen as a result of the law’s response to mesothelioma claims. The court’s task is nevertheless to consider how reasonable parties should be taken to have intended the contract to work in the circumstances which have in fact arisen. As Chadwick LJ explained in Bromarin AB v IMD Investments Ltd [1999] STC 301 at 310, in this type of case:

“The task of the court is to decide, in the light of the agreement that the parties made, what they must have been taken to have intended in relation to the event … which they did not contemplate. That is, of course, an artificial exercise, because it requires there to be attributed to the parties an intention which they did not have (as a matter of fact) because they did not appreciate the problem which needed to be addressed. But it is an exercise which the courts have been willing to undertake for as long as commercial contracts have come before them for construction.”

See also Lloyds TSB Foundation for Scotland v Lloyds Banking Group plc [2013] UKSC 3; [2013] 1 WLR 366, para 1, where the legal and accounting context in which a contract had to be construed by the Supreme Court was “unthinkable” when the contract was entered into.

1. 1. I think it clear that the way in which reasonable parties would have intended the reinsurance contracts at issue in this case to work if they had contemplated the legal regime which now applies within the Fairchild enclave, is by requiring the insurer / reinsured to present its claims in a way which spreads its ultimate net loss across the period covered by the EL policies under which it is liable to indemnify its insured. Such an apportionment matches the claim as closely as possible to the underlying risk (of wrongful exposure to asbestos) which is treated as having caused the loss and provides the closest achievable approximation to how the reinsurance contracts were justifiably expected to operate. It also reflects the common law principle of apportionment established by Barker, which has been displaced by legislation only in relation to the liability of employers (and other wrongdoers) to mesothelioma victims in UK law and not in relation to insurers and reinsurers.
   2. The way in which I would formulate the term implied is to say that MMI may claim under reinsurance policies covering a particular year only such share of its ultimate net loss as reflects the extent to which exposure to asbestos in that year contributed to the risk which arose during periods covered by MMI’s policies of the victim contracting mesothelioma as a result of the insured employer’s wrongdoing. In accordance with the common law, the default method of assessing this contribution is simply by reference to time on risk; but there could be facts (for example, more intense or frequent exposure to asbestos or exposure to a particularly dangerous type of asbestos) which would justify treating one year’s contribution to the risk as greater than that of another. Where the insurer’s apportionment of the loss is based on such an evaluative judgment, the insurer’s judgment will only be open to challenge if it has not been honestly and reasonably made.
   3. At a higher level of abstraction, the justification for implying this term is that the implication is necessary to prevent the insurer’s power to allocate its loss among policy years from being abused. The power to ‘spike’ a loss to a particular year is not one for which the reinsured can reasonably be said to have bargained since it was not within the reasonable contemplation of the parties when the reinsurance contracts were made that the reinsured might be able to choose the year to which a loss will attach. Nor was it within the reasonable contemplation of the parties that the reinsured might be able to claim under a policy providing one year of cover loss that results from risks that arose in other policy years. Both these possibilities are inconsistent with the essential nature and purpose of the parties’ agreement. In these circumstances good faith requires that the reinsured should not exploit this power which it was not intended to have for its own commercial advantage but should exercise it in a way which is as consistent as possible with the assumption of risk for which the reinsurance premium was paid.

The grounds for distinguishing IEG

1. 1. MMI contends that this analysis proves too much because, if correct, it would similarly require an insured employer to limit its claim under an EL policy, by reason of an implied term in the insurance contract, in a similar way. It is argued that such a conclusion would be inconsistent with the approach taken by the majority of the Supreme Court in IEG.
   2. In my view, there are at least five answers to this argument which provide solid grounds for distinguishing the reasoning of the majority in IEG.
   3. First (although I would be reluctant to rely on this ground alone), the solution proposed by Equitas based on the doctrine of good faith, which in my opinion is well founded, was not proposed or considered in IEG. It therefore cannot be said that it is a solution which did not commend itself to the Supreme Court or which the Supreme Court has rejected.
   4. Second, the fact that no such solution was proposed in IEG is a reflection of the position taken by insurers and the Association of British Insurers in that case who, as mentioned earlier, supported an approach that allows the insured employer to select the insurer from which to claim a full indemnity. The insurance industry took this position even though Lord Sumption had proposed an alternative solution and even though the position taken was on its face contrary to insurers’ own interests. The majority of the Supreme Court was clearly influenced by this “striking” feature of the case. By contrast, in the present case reinsurers are not arguing for such an approach and are pressing for a different solution (which is not the solution suggested by Lord Sumption).
   5. Third, I have little doubt that the stance taken by the insurance industry in IEG was, as Lord Neuberger and Lord Reed deduced, driven by a fear that, if the courts did not allow an insured employer to recover its full loss from any insurer which had provided cover for any part of the period of exposure to asbestos, Parliament would intervene to procure that result. Such a fear was plainly rational given the policy of the legislature, demonstrated by its enactment of section 3 of the Compensation Act 2006, that an employee-victim should be able to recover full compensation for asbestos-related mesothelioma. The practical difference between the approach of the majority and that of the minority in IEG, as Lord Mance identified, arises where the insured employer is insolvent. In such a situation, which seems likely to be common given that decades may pass between exposure to asbestos and the development of the disease and given the potential number and size of claims, Lord Mance’s approach enables the victim to recover full compensation even if his former employer is insolvent, provided the employer had insurance for any part of the relevant period with a solvent insurer. It is the insurer which, in such circumstances, will suffer the consequences of the insured’s insolvency, as its right of recoupment will be worthless.
   6. This policy reason for allowing the insured to recover its full loss from any solvent insurer does not exist at the reinsurance level. It has not been – and could not realistically be – suggested that, unless the insurer is allowed to recover its entire loss from those reinsurers who provided cover for any one year during the relevant period, there is a significant risk that the employee-victim will not be fully compensated. Accordingly, and in my view most importantly, the policy reason which justified the approach taken by the majority in IEG does not apply at the reinsurance level.
   7. Fourth, the implication of a term which requires the reinsured to confine its claim under its reinsurance for each year to an appropriate proportion of its loss is not inconsistent with the decision of the Supreme Court in the Trigger litigation. This solution therefore does not suffer from the defect which the majority in IEG considered fatal to Lord Sumption’s approach.
   8. Fifth, the solution proffered in the present case has the same merit at the reinsurance level as the solution adopted by the majority in IEG has at the insurance level of being consistent with the way in which the market has operated in handling mesothelioma claims. As Males LJ has noted at para 18 above, MMI initially presented claims under its reinsurance policies on the basis of a time on risk allocation. This changed, we were told, after the decision of the Supreme Court of Appeal in the Trigger litigation.
   9. Furthermore, even the simplified examples used in these proceedings to illustrate the parties’ rival cases as to how contribution and recoupment should operate at the reinsurance level show the very real practical difficulties that would be likely to arise whatever precise method of contribution and recoupment is adopted. At the insurance level, an insurer who pays the insured employer’s full loss and wishes to exercise rights of contribution and recoupment only needs to find out what insurance, if any, the employer had in other years in which the employee was exposed to asbestos and then to calculate each insurer’s proportion of the risk along with any proportion to be borne by the employer if it was uninsured for part of the exposure period. That is likely to be a relatively straightforward task. At the reinsurance level the position is far more complex. Where, as may well be the case, an insurer has multiple layers of excess of loss reinsurance in each relevant year, many different reinsurers may potentially be involved. Moreover, there may be no direct correspondence between the limits of layers of reinsurance placed in different years. A solution which avoids the need to calculate and settle what may be a large number of contribution and recoupment claims (for what may be quite small amounts of money) arising from any one loss has obvious practical advantages.
   10. The short of the matter is that the courts need not and should not impose a complicated, burdensome and, to put it charitably, unconventional solution on the reinsurance market when a simple, principled and orthodox solution is at hand.

Conclusion

1. 1. For these reasons, as well as those given by Males LJ, I would allow the appeal and answer the questions of law raised on the appeal in the terms that he has indicated.

Lord Justice Patten :

1. I agree with both judgments.

IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS IN WALES
PROPERTY, TRUSTS AND PROBATE LIST (ChD)

Between:

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Christopher McNall (instructed by Burges Salmon LLP) for the Claimants
Stephen Jourdan Q.C. (instructed by Michelmores LLP) for the Defendants

Hearing date: 3 April 2019
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HTML VERSION OF JUDGMENT APPROVED
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Crown Copyright ©

JUDGE KEYSER QC:

Introduction

1. 1. The claimants, as trustees of The St Fagans No. 1 and No. 2 Trusts, are the registered proprietors of land comprising Maesllech Farm, Radyr, Cardiff (“the Farm”). The first defendant is the tenant of the Farm, which he farms in partnership with his son, the second defendant. By this Part 8 claim, commenced on 22 September 2016, the claimants seek a permanent injunction restraining the defendants from interfering with their exercise of certain rights of access to the Farm.
   2. On 29 September 2016 His Honour Judge Jarman QC, sitting as a Judge of the High Court, granted an interim injunction restraining the defendants from interfering with the exercise of the claimed rights of access until trial or further order. For reasons that need not be stated here, the proceedings went into abeyance thereafter; the interim injunction remained in place but no steps were taken to progress the matter to trial. Eventually, on 3 January 2019 the case came before me on an application by the defendants. I continued the interim injunction until trial and gave directions for this hearing.
   3. The evidence adduced in support of the claim comprised an affidavit dated 26 September 2016 from Roderick Carew Perons, a director of Cooke & Arkwright and land agent for the claimants, and two statements from him dated respectively 21 September 2016 and 22 February 2019. The evidence in response consisted of one statement by each defendant, both dated 25 January 2019. There was no direction for oral evidence from the witnesses and none was received. I have regard to all of the written evidence, but I do not consider it necessary to recite in this judgment all the matters it covers.
   4. For convenient ease of reference, and without meaning to indicate any disrespect, I shall from now on refer to the first defendant as Jenkin and to the second defendant as Phillip.
   5. I am grateful to Mr McNall, counsel for the claimants, and Mr Jourdan QC, counsel for the defendants, for their helpful submissions.

The Farm and the Lettings

1. 1. The Farm comprises a total of about 240 acres of mainly arable land. The buildings on the Farm include a farmhouse and two cottages. Jenkin lives in the farmhouse with his wife. Phillip’s home has been in one of the cottages, although he is currently living in the farmhouse with his parents because, he says, the cottage is uninhabitable owing to the claimants’ failure to repair it. The other cottage is currently vacant.
   2. The Farm is on the western outskirts of Cardiff. It lies close to, and to the south of, the suburb of Radyr, adjacent to Llantrisant Road, which is the main local route into and out of Cardiff. Radyr was a developed settlement long before the 1960s, although of course it has undergone expansion in more recent years. A little way to the east of the Farm lies the settlement of Llandaff North, and to the south-east lies Llandaff; these also pre-date the 1960s. Fairwater lies to the south/south-east; although much expanded latterly, it was an established settlement in the 1960s. The land to the west of the Farm has remained largely undeveloped green field land.
   3. In the Cardiff local development plan 2006-2026, the Farm was identified as a strategic site for development. It is now intended to be part of the site of the new Plasdwr “garden city”. On 24 September 2014 two applications for outline planning permission were made to the local planning authority in respect of a larger area of land that included the Farm. One application (“the First Application”) was for 630 dwellings, a primary school, a community centre, public open spaces, vehicular and pedestrian access, drainage and associated infrastructure and engineering works. The other application (“the Second Application”) was for residential-led mixed-use phased development involving several thousand dwellings. The dispute between the parties arises out of the plans for development of the Farm pursuant to these planning applications.
   4. Although the land at the Farm is farmed as a single agricultural unit, different parts of it were let separately by agreements made between Earl of Plymouth Estates, the claimants’ predecessor, and Jenkin.
   5. First, by a written agreement dated 8 January 1965 (“the 1965 Tenancy Agreement”), 187.568 acres or thereabouts (“the 1965 Land”) were demised to Jenkin on a yearly tenancy commencing on 2 February 1964 at an initial rent of £1,496 p.a.
   6. Second, according to Jenkin’s evidence, shortly after the making of the 1965 Tenancy Agreement, sometime in 1966 or 1967, he made an oral agreement (“the Oral Tenancy Agreement”) with the agent of Earl of Plymouth Estates, for a tenancy of an additional 3.5 acres of land (“the Additional Land”) comprising two small areas adjacent to but slightly separated from each other; the larger area was to the north and was not contiguous to the 1965 Land; the smaller area was directly opposite the larger area and was contiguous to the 1965 Land. Jenkin says that it was never suggested that the letting of the Additional Land was to be treated as an addition to the 1965 Tenancy Agreement or the 1965 Land; it remained subject of a separate agreement that was never reduced to writing. On 7 February 2017, after the commencement of the present dispute, Jenkin executed an assignment of the Additional Land to JBG Rees Ltd, a non-trading company of which he, his wife and Phillip are the directors. He and Phillip continue to farm the Additional Land as part of the Farm. The claimants do not accept that the Additional Land constitutes a separate demise; they say that it has always been treated and invoiced as part of the demise under the 1965 Tenancy Agreement.
   7. Third, by a written agreement dated 20 March 1968 (“the 1968 Tenancy Agreement”), a further 51.439 acres or thereabouts (“the 1968 Land”) were demised to Jenkin on a yearly tenancy from 1 October 1967 at an initial rent of £350 p.a.

The 1965 Tenancy Agreement

1. 1. The 1965 Tenancy Agreement contained the following five clauses under the heading “RESERVATIONS BY THE LANDLORD”; clause 7 is particularly relevant to this claim:

“3. All mines minerals substances of every description stones flints chalk gravel sand peat earth and clay whatsoever in upon or under the premises with full and free liberty and power (including power and right to let down the surface without compensation) to enter upon the farm or authorise others to enter upon the farm in order to search for win dress make merchantable and carry away the same and to execute all work incidental thereto doing as little damage as the nature of the case may admit making the Tenant reasonable compensation for loss of crops (if any) for the current year and allowing the Tenant a proportionate reduction in rent for all land so permanently taken or damaged.

4. All timber and other trees pollards heirs saplings underwoods and woodlands with right of entry for himself and others authorised by him to plant mark fell cut and carry away the same over any part of the holding or lands hereby demised making the Tenant reasonable compensation for any loss or damage sustained thereby any claim for loss or damage to be rendered within two calendar months of the date of the occurrence of such damage.

5. Subject to the provisions of the Ground Game Acts of 1880 and 1906 all game ground or otherwise (including nests and eggs) fish wild fowl snipe landrail and plover together with a right for the Landlord and all persons authorised by him to preserve hunt shoot fish course and sport and the Tenant undertakes to assist in the preservation of game and the prosecution of poachers on the premises.

6. Power to take possession at any time of any portion of the holding (except house buildings or gardens) for building development or any purpose mentioned in Section 31 of the Agricultural Holdings Act 1948 on giving the Tenant three months’ notice in writing paying the Tenant compensation for his interest therein and allowing a proportionate reduction in the rent of the Farm.

7. Right for the Landlord and his Consultant and all others authorised by him with or without horses carriages and other vehicles to enter on any part of the Farm lands and premises at all reasonable times for all reasonable purposes.”

1. 1. Clauses 8 and 9 contained covenants by the landlord to repair the structure and exterior of the farmhouse and farm buildings. Clause 15 contained a covenant by the tenant against assignment or subletting of the premises or any part thereof without the landlord’s written consent. Clause 17 contained a covenant by the tenant to maintain and repair fences, gates, roads, walls, hedges and so forth. I do not need to refer to the other extensive provisions.

The 1968 Tenancy Agreement

1. 1. The 1968 Tenancy Agreement was a much shorter document. It contained a landlord’s covenant for quiet enjoyment and tenant’s covenants to keep the land in proper order and condition and all fences, hedges, roads, gates and so forth in good order and repair and not to assign, sublet or part with possession of any of the land without the landlord’s written consent. The following provisions in particular are relevant; for ease of reference I shall designate them as clause X and clause Y:

“PROVIDED ALWAYS AND IT IS HEREBY AGREED [X] that the Landlord shall have the right and power to resume possession of the land hereby let or any part thereof on the expiration of three calendar months’ notice in writing … if the said land is required for any of the following purposes namely Building, the addition ot [sic] [?] the said land to any Building leasehold plot, Mining, Quarrying, Sewering, Draining, Road Making, Planting or other Estate Development, the laying of Gas, Water or Electric Mains or for any other easement approved by the Landlord or required by a Local Authority.

AND FURTHER [Y] that the Landlord may at any time and at all times during the said tenancy enter upon the said premises with Agents Servants Workmen and others for the purpose of inspecting the same or for making roads sewers or drains or for any other purpose connected with his estate”.

1. 1. It is common ground that the demises under the 1965 Tenancy Agreement and the 1968 Tenancy Agreement both created agricultural tenancies governed at the time by the Agricultural Holdings Act 1948 and latterly by the Agricultural Holdings Act 1986.

The Facts

1. 1. Discord first arose at the end of April 2014, when Jenkin encountered two ecologists who were carrying out a habitat survey at the Farm on the instructions of the claimants and asked them to leave. On 1 May 2014 Burges Salmon wrote to Jenkin on behalf of the claimants, stating that the ecologists were entitled to access pursuant to the terms of the 1965 and 1968 Tenancy Agreements and demanding written confirmation that further access would not be obstructed; the letter said that, if written confirmation were not received by 6 May 2014, the claimants would apply for an injunction. On 6 May Mr Barry Meade of Davis Meade Agricultural, the agricultural consultant retained by the defendants, gave the confirmation sought. During the following years a significant number of persons visited the Farm on the instructions or with the permission of the claimants, for purposes that included the digging of boreholes. Access was largely without incident. But by the summer of 2016 Jenkin was aggrieved with the claimants over, in particular, an issue concerning payment for fencing and the claimants’ failure to pay compensation that he believed had been promised in respect of the boreholes. These matters form the backdrop of the events that led to these proceedings.
   2. By notice dated 9 August 2016, the local planning authority granted outline planning permission (“the First Planning Permission”) for development in accordance with the First Application.
   3. On 16 August 2016 the claimants served on Jenkin a notice to quit in respect of 21 acres comprising part of the Farm pursuant to Case B in Schedule 3 to the Agricultural Holdings Act 1986, on the ground that the land which was the subject of the notice was required for a use other than agriculture, namely development in accordance with the First Planning Permission. On 5 September 2016, Barry Meade served a counter-notice disputing the notice to quit and requiring that the dispute be referred to arbitration under the Agricultural Holdings Act 1986.
   4. On Tuesday 13 September 2016, Mr Chris Hyde of Cooke & Arkwright spoke to Phillip by telephone on two occasions, once at around 1 p.m. and once at around 6 p.m. The written evidence regarding the conversations is not entirely clear and not wholly consistent. Mr Hyde told Phillip that ecological surveyors would need to visit parts of the Farm on 14 and 15 September 2016; at some point in the conversations he mentioned that these were to be carried out by personnel of The Environmental Dimension Partnership (EDP). There were two different kinds of survey, a landscape survey and a habitat survey, though it is unclear to what extent they were distinguished in the conversations. The defendants’ evidence is that in the first telephone conversation Mr Hyde assured Phillip in this conversation that the surveyors would stay on public footpaths and not otherwise enter the Farm; that Phillip reported the conversation to Jenkin, who told him to tell Mr Hyde that the surveyors were to stay on the footpaths as promised and not stray onto the Farm; and that in the second conversation Mr Hyde assured Phillip that the surveyors would not leave the public footpaths. That appears to be at odds with an email that Mr Hyde sent to Jenkin at 3.22 p.m. that day:

“I spoke briefly with Phillip earlier today to let him know that surveyors will be conducting a walk over survey of parts of Maesllech tomorrow and on Thursday (14^th and 15^th September). The survey will be conducted on foot only, and will primarily use public rights of way. However, they also wish to skirt along the margins of some fields so as to gain a better view of the farm. I attach a plan showing the routes marked in yellow, not all of them affecting Maesllech.”

This made it clear that the surveyors, though largely staying on public footpaths, would also enter the margins of some fields. It is possible that Jenkin did not see that email; it was sent to a different email address from that generally used by Jenkin at the time. But the fact that it was sent at all makes it likely that Mr Hyde told the defendants that the surveyors would want to leave the footpaths. The defendants correctly acknowledge that they made clear to Mr Hyde that the surveyors were to remain on the public footpaths and not enter onto any other part of the Farm. Mr Perons made a file note of the report he received from Mr Hyde:

“Chris Hyde has reported to me that he has sought to arrange access for a walkover inspection by EDP tomorrow (14^th September). In response to the latest request, Phillip Rees has told Chris Hyde today that he will deny access, unless conducted from the public footpath.”

1. 1. Mr Perons sent an email to Barry Meade, asking him to speak to the defendants and confirm that the surveys would not be opposed “so that we don’t have to involve lawyers again.” Mr Meade replied simply that he was abroad on holiday until 23 September. For some reason, Mr Perons nevertheless sent a further email later that day: “Please can you come back to me as soon as possible on access for the survey works? My clients have instructed Burges Salmon to apply for an injunction on Monday [19 September] otherwise.” Mr Meade did not reply further. In the event, on 14 and 15 September the landscape survey was completed from the public footpaths without incident.
   2. There remained the habitat survey, which could not be carried out from public footpaths. The habitat survey was arranged for Thursday 22 and Friday 23 September. On 16 September Mr Perons spoke to Phillip by telephone and told him when the habitat survey would take place. It was clear that the habitat survey would involve inspecting buildings, because it was concerned with the bat population at the Farm. Mr Perons states, “I … was left with the impression that they [the family] would not obstruct access for the ecological/habitat survey by EDP”. At Phillip’s request, Mr Perons wrote to Jenkin, formally notifying him of the habitat survey. The letter said, “I would be grateful if you could allow EDP access for this purpose or contact me if you wish to discuss the matter further.”
   3. In his statement, Jenkin states that he was concerned that the habitat survey was likely to prove very intrusive. He says that an earlier such survey in 2014 had been very intrusive and that the refusal of the ecologist to move when Phillip was working, in the dark, had been dangerous. He also refers to a previous incident where the claimants’ representatives had been given access to the Farm and had left a mess, potentially dangerous for humans and animals; he does not, though, suggest that those representatives had anything to do with a habitat survey or that an ecologist was likely to create such a mess.
   4. On the evening of 20 September, Mr Perons attended at the Farm by prior arrangement and met there with Jenkin and Phillip. The conversation included, though was not limited to, discussion about access for the habitat survey. Mr Perons’ file note records the meeting in the following terms:

“I went to Maesllech today to seek confirmation that Jenkin Rees would allow EDP access for the walkover surveys.

Philip Rees, speaking for his father, tried to claim that he understood that as his father had applied for arbitration, they didn’t have to allow access for surveys.

I told him that wasn’t the case at all. Philip Rees said that they wanted to [seek] advice from Barry Meade. I said that Barry Meade was away until 23^rd September. I said that they needed to take advice because, should they not permit access, I was required to refer the matter to Burges Salmon.

Philip Rees said that they might speak to Barry Meade’s son, Philip Meade. I said that I thought that would be a good idea.”

There is some dispute as to who raised the possibility of speaking to Philip Meade, but in all other respects the note seems to be a reasonably accurate summary of the essential parts of the conversation.

1. 1. However, there is something of a conflict as to where matters were left at the end of the meeting. Jenkin’s evidence is as follows:

“My recollection of the outcome of that meeting was that it was left that we would think about it. Phillip or I might speak to Philip Meade and then contact Mr Perons. Although Mr Perons had suggested that the survey should take place on 22 and 23 September, that was plainly not going to be the case because of the need for advice. More importantly in the context of what then happened, Mr Perons did not give any indication that there was any urgency about proceeding with this.”

(That evidence largely reflects the contents of a letter that Phillip wrote to Mr Perons on 23 September.) Mr Perons’ evidence was that his understanding remained that the defendants were denying access (see paragraphs 61 and 62 of his second statement) but that they would seek advice and revert to him. He states that he told the defendants the date for the habitat survey; he does not state that he told them the date was critical, but he does not describe any discussion concerning changing the date.

1. 1. That there was a degree of urgency concerning the habitat survey is shown by the email that James Bird of EDP sent to Mr Perons on the evening of 20 September, after Mr Perons had met with the defendants:

“Let’s touch base in the morning and discuss further. We certainly need to resolve this as a matter of urgency.

It is of paramount importance to the Plasdwr application that we update the ecology surveys. To put it bluntly (and I hope not to appear rude, but just so we are aware of the ramifications of not doing the survey), the Plasdwr application will be refused on ecology grounds if we do not update the ecological surveys. …

We have 8 working days left to revise the Environmental Statement of which 2 of those days will be spent in the field doing the survey work. We simply must try to avoid changing the survey date, particularly as our ecology team is now fully booked for September.

If access cannot be granted I will need to update Redrow on this and explain the repercussions, but will of course liaise with you further before doing so.”

Jenkin states that Mr Perons did not tell him the contents or tenor of Mr Bird’s email and that at no point did he tell him that the matter was urgent or that legal action would be commenced if access were not given for the bat survey.

1. 1. At around midday on 21 September 2016 Jenkin sent an email to Mr Perons: “As you are aware our agent Barry Meade is out of the country on holiday from 14^th to 28^th September. We are concerned not to prejudice ourselves, so we request that the survey be postponed to enable us to seek advice from Barry to clarify the situation.” Having tried and failed to speak by telephone to Philip Meade and to Jenkin and Phillip, Mr Perons left telephone messages for the defendants and sent an email to Jenkin on the evening of 21 September: “In the light of our meeting and your email, it is my understanding that you will obstruct access for the walkover surveys programmed by EDP for Thursday 22^nd and Friday 23^rd September. My clients have instructed their solicitors, Burges Salmon, to apply for an injunction without delay.” The defendants did not reply to that email.
   2. On 22 September, the claimants issued the Part 8 claim and an application for an interim injunction. The claim form as originally issued sought an injunction “prohibiting the Defendants from obstructing the landlords’ or his authorised agents’ access to Maesllech Farm”. The application came before Judge Jarman QC on 23 September.
   3. Shortly before the hearing on 23 September, Phillip sent to Mr Perons a long letter by email (as mentioned above). He questioned why he had been included as a defendant in the proceedings, as he was not a tenant of the Farm. He complained that Mr Perons had not expressed any urgency regarding the habitat survey or said that the preferred dates of 22 and 23 September were critical or warned that court proceedings would be commenced if access were not granted immediately. He raised concerns about the disruption, mess and danger that would be occasioned by a habitat survey. He wrote: “We will obviously now think about the position. As we have not chosen to have a row and certainly not chosen to have Court proceedings we want to give the overall position careful thought. We want to speak to Barry Meade about that. Obviously it is not going to be possible for us to meet with you and Barry Meade for several days.”
   4. Also on the morning of 23 September, Philip Meade sent a letter by email to Mr Perons. He referred to two authorities, to which I also have been referred by Mr Jourdan, which he suggested raised a question whether the claimants’ rights under the tenancy agreements were as broad as they claimed. However, he said that he would not become involved in the matter.
   5. At the hearing on 23 September, Judge Jarman Q.C. adjourned the application for an injunction until 29 September and directed the claimants to file and serve a further affidavit in support.
   6. On 26 September Mr Perons sent an email to Barry Meade, who had returned from holiday. He wrote: “If your clients will now consent to access, please let me know but this will have to be endorsed by the Court.” Mr Meade replied that he would take instructions.
   7. That same evening, Phillip sent a letter by email to Mr Perons, setting out a proposal on behalf of himself and Jenkin: that they would permit access for an ecological survey only, while reserving their position regarding the claimants’ entitlement to access; that the proceedings would be stayed, with liberty to either side to restore them on notice; and that costs be reserved. Burges Salmon replied to the proposal on the following day, requiring general agreement not to obstruct access in accordance with the tenancy agreements and payment of half of the claimants’ costs. I was referred to all of this correspondence in the course of the hearing.
   8. On 28 September 2016 Phillip sent a letter to the court for the attention of the judge, explaining that he and his father would not be present at the hearing on the following day. He attached copies of recent correspondence, including the letters of 26 September, and wrote:

“We hope it is clear that we accept that the Landlords must have access for the ecological survey. If there are to be arguments about the rights and wrongs of that it should be in the future. …

I do not think that I should be involved in this at all because I am not a tenant of the farm. However, we agree that we will accept whatever the Judge thinks is the proper way to deal with this. …”

Phillip also sent a further letter by email to Mr Perons, to broadly similar effect. He wrote: “The sad thing is that these Court proceedings started without proper communication from you and without my Father even opposing access.”

1. 1. On 29 September 2016 Judge Jarman Q.C. granted an interim injunction restraining the defendants from “(a) interfering with or otherwise restricting the Right of Access and the use thereof by the Claimants their employees, agents and licensees; (b) interfering with or otherwise restricting the access to and egress from Maesllech Farm by the Claimants their employees, agents and licensees”. The second limb of the injunction must be construed by reference to the Right of Access mentioned in the first limb; and that in turn refers back to the third recital to the order, which recited that the trusts of which the claimants are trustees enjoyed “a right of entry (the ‘Right of Entry’) into Maesllech Farm under the 1965 Tenancy and the 1968 Tenancy”. Accordingly, the interim injunction was simply an injunction restraining interference with the exercise of the rights in clause 7 of the 1965 Tenancy Agreement and clause Y of the 1968 Tenancy Agreement. That, indeed, is precisely the relief now claimed in the amended claim form.
   2. Since the injunction was granted, access to the Farm has been exercised on numerous occasions by persons acting on the instructions or with the permission of the claimants. The defendants have not obstructed access.
   3. Events since September 2016 are of limited if any relevance to the issues before me. I refer to only a few of them.
   4. By notice dated 27 March 2017, the local planning authority granted outline planning permission (“the Second Planning Permission”) for development in accordance with the Second Application.
   5. As already mentioned, on 7 February 2017 Jenkin purported to assign the Additional Land to JBG Rees Ltd.
   6. On 1 June 2017 an arbitration award upheld the validity and effectiveness of the notice to quit dated 16 August 2016. As a result of that award, on 29 June 2017 Jenkin delivered up vacant possession of the 21 acres to which the notice to quit related.
   7. The claimants served on Jenkin five Case B notices to quit in January 2018 and a further three Case B notices to quit in August 2018. All of these have been referred to arbitration. The arbitration in respect of the January notices has been heard and an award is awaited. There has not yet been a hearing of the arbitration in respect of the August notices.

Summary of the parties’ cases

1. 1. I shall summarise very briefly how the respective cases were put by counsel. For the claimants, Mr McNall submitted that there was no proper reason to cut down the breadth of the wording of the rights of entry in clause 7 and clause Y. In the 1965 Tenancy Agreement, the only limitation in clause 7 was that the entry must be for the “reasonable” purposes of the landlord. The clause was to be read in the context of the very wide reservations in clauses 3, 4 and 5 and the power of resumption, reflecting section 31 of the 1948 Act, in clause 6; it was, however, an independent right, not to be read as merely ancillary to those in the preceding clauses. In the 1968 Tenancy Agreement, similarly, clause Y was to be read in the context of the reservation of a right of resumption in clause X. The words “his estate” at the end of clause Y were to be taken as a reference to the landlord’s reversionary estate, not to the landlord’s nearby land, and the words “or for making roads sewers or drains or for any other purpose connected with his estate” picked up the reference to easements in clause X. If the meaning of clause 7 or clause Y was ambiguous, it was to be construed against the tenant and in favour of the landlord because, for the purpose of the rule of construction contra proferentem, a reservation to the landlord was considered to be a re-grant by the tenant and, accordingly, the tenant was the proferens in respect of such a right. An injunction was required because the defendants had shown that they would obstruct the access to which the claimants were entitled.
   2. For the defendants, Mr Jourdan submitted that a right of access limited only by a requirement of reasonableness would be inconsistent with a grant of exclusive possession, the very essence of a tenancy, and with the implied covenant for quiet enjoyment and the implied obligation not to derogate from the grant; thus it would be repugnant to the relationship of landlord and tenant. A clause giving a landlord a right of entry was to be construed narrowly. In clause 7, the permitted activity was simply “to enter on” the Farm; it did not extend to digging holes or trenches, constructing anything, or leaving things on the land. The purpose for which entry could be effected must be limited to purposes pertaining to the relationship of landlord and tenant; an unrelated purpose would not be included within the clause simply because it was reasonable for the landlord’s extraneous interests. In clause Y, similarly, the right was to “enter upon” the Farm. The words “for the purpose of inspecting … with his estate” stated the permitted purposes of entry but did not give a right to do more than enter. The words “or for making roads sewers or drains” were to be understood from the concluding reference to “his estate”; that must refer to land retained by the landlord adjacent to the Farm, because the power to make roads, sewers or drains on the demised land was contained in the power of resumption in clause X and there was no reservation of any relevant easement over the demised land. In any event, no injunction ought to be granted, because there was no good reason to suppose that the defendants would deny access for proper purposes, especially once those were determined by the court, or that any infringement of the claimants’ rights would cause them any loss that could not be averted or remedied by the prompt grant of an interim injunction and, if necessary, an award of damages.

Discussion

The approach to construction

1. 1. The principal issue concerns the proper construction of clause 7 of the 1965 Tenancy Agreement and clause Y of the 1968 Tenancy Agreement. The general principles of construction of written agreements are not in doubt. They were summarised pithily by Lord Bingham of Cornhill in Dairy Containers Ltd v Tasman Orient CV [2005] 1 WLR 215 at [12]:

“The contract should be given the meaning it would convey to a reasonable person having all the background knowledge which is reasonably available to the person or class of persons to whom the document is addressed.”

The ramifications of that approach have been discussed in detail in many cases. I refer in particular to Rainy Sky S.A. v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900; Arnold v Britton [2015] UKSC 36, [2015] AC 1619, esp. per Lord Neuberger PSC at [15]-[22]; and Wood v Capita Insurance Services Limited [2017] UKSC 24, [2017] AC 1173, esp. per Lord Hodge at [10]-[13].

1. 1. There was one point of disagreement between the parties as to the application of these general principles to the present case. Mr McNall submitted that, as the written tenancy agreements created tenancies from year to year, the relevant background knowledge would change on a yearly basis. He cited no authority in support of that submission and I reject it. The relevant date is clearly when the respective agreements were made. Accordingly, neither the First Planning Permission nor the Second Planning Permission is relevant to the construction of the written tenancy agreements. The background knowledge of the parties in 1965 and 1968 would have included the fact that there had been some westward expansion of Cardiff, particularly in the Fairwater area, and that there was a possibility that the Farm would become earmarked for development in the future. It would also, I think, have included the fact that Earl of Plymouth Estates were significant landowners in and around the west of Cardiff. There is no evidence before me as to precisely what other land they owned in the vicinity of the Farm, save that Jenkin must be supposed to have known in 1965 that they owned the further land subsequently demised to him and to have known in 1965 and in 1968 that they owned the two areas of woodland that are now surrounded by the land demised by the 1965 Tenancy Agreement and the 1968 Tenancy Agreement. (The terms of Mr Hyde’s email to Jenkin at 3.22 p.m. on 13 September 2016, which refer to the surveyors’ intended walking routes, “not all of them affecting Maesllech”, seems quite likely to indicate that the claimants had other landholdings near the Farm; however, the inference is uncertain.) Finally, the legislative scheme under the Agricultural Holdings Act 1948 forms part of the potentially relevant background material.
   2. There was a dispute between the parties as to the particular approach to the construction of a reservation in favour of a landlord: Mr Jourdan submitted that such a reservation ought to be construed restrictively, while Mr McNall submitted that the only particular rule was that, in the case of genuine ambiguity, the reservation ought to be construed in favour of the landlord in accordance with the maxim contra praesumuntur contra proferentem. I shall consider this dispute by reference to some of the authorities cited to me.
   3. In Street v Mountford [1985] AC 809, the House of Lords reaffirmed the traditional doctrine that, in the case of a grant for a fixed or periodic term at a rent, “If the effect of the instrument is to give the holder an exclusive right of occupation of the land, though subject to certain reservations or to a restriction of the purposes for which it may be used, it is in law a demise of the land itself” (per Lord Davey, sitting in the Judicial Committee of the Privy Council, in Glenwood Lumber Co Ltd v Phillips [1904] AC 405 at 408). As Lord Templeman observed at 816, it might not always be clear whether exclusive possession was in fact granted. However, in the present case it is not in issue that the tenancy agreements granted Jenkin exclusive possession of the Farm, subject only to the reservations in the tenancy agreements, and that he is tenant to the claimants. It follows, further, that Jenkin is entitled to quiet enjoyment of the Farm, subject only to reservations made by the tenancy agreements.
   4. Not every reservation of rights is consistent with exclusive possession or quiet enjoyment of the demised premises. A reservation of rights to the landlord will, if possible, be construed so as to be consistent with the irreducible minimum consistent with the grant itself; but, if it cannot be so construed, it will be rejected as being repugnant to the demise. Some relevant principles were set out by Neuberger J in Platt v London Underground Ltd [2001] 2 EGLR 121:

“1.  It is well established that a landlord, like any grantor, cannot derogate from his grant. To put it in more normal language, as has been said in a number of cases, a landlord cannot take away with one hand that which he has given with the other …

2.  In order to determine whether a specific act or omission on the part of the landlord constitutes derogation from grant, it is self-evidently necessary to establish the nature and extent of the grant …

3.  ‘The exercise of determining the extent of the implied obligation not to derogate from grant involves identifying what obligations, if any, on the part of the grantor can fairly be regarded as necessarily implicit, having regard to the particular purpose of the transaction when considered in the light of the circumstances subsisting at the time the transaction was entered into’: per Sir Donald Nicholls VC in Johnson & Son Ltd v. Holland [1988] 1 EGLR 264 at 268A.

4.  There is a close connection, indeed a very substantial degree of overlap, between the obligation not to derogate from grant, the covenant for quiet enjoyment, and a normal implied term in a contract. Thus, in words which apply equally to an implied term in a contract, Bowen LJ said in Myers v. Catteson (1889) 42 ChD 470 at 481, in relation to the derogation from grant principle, that one should give effect to what he called ‘the obvious intention of the parties, so as to give the transaction between them a minimum of efficacy and value which upon any view of the case it must have been their common intention that it should have.’ In Southwark Borough Council v. Mills (1999) 4 AER 449 at 467F Lord Millett explained that, to a large extent, the covenant for quiet enjoyment, and the obligation of a landlord not to derogate from his grant amounted to much the same thing.

5.  The terms of the lease will inevitably impinge on the extent of the obligation not to derogate. Express terms will obviously play a part, possibly a decisive part, in determining whether a particular act or omission constitutes a derogation. An express term should, if possible, be construed so as to be consistent with what Hart J called ‘the irreducible minimum’ implicit in the grant itself. However, as he went on to say, a covenant relied on by the landlord ‘if construed as ousting the doctrine in its entirety is repugnant … and should itself be rejected in its entirety’ — see Petra Investments Ltd. v. Jeffrey Rogers plc (2000) Landlord and Tenant Reports 451 at 471.”

I need not refer to the other principles mentioned in that case; the facts did not concern derogation from grant by way of derogation from exclusive possession.

1. 1. What happens if more than one construction of the reservation is consistent with the irreducible minimum implicit in the grant? There are dicta that suggest that the reservation is to be construed restrictively against the landlord. However, if there were a principle of construction to that effect, the law would be incoherent, because the principle would conflict with the contra proferentem rule that, in cases of ambiguity, a reservation is to be construed in favour of the landlord. I think that, although there is some tension in the cases, they permit of a consistent explanation.
   2. In Timothy Taylor Ltd v Mayfair House Corpn [2016] 4 WLR 100, in a passage on which Mr Jourdan especially relies, the deputy judge, Mr Alan Steinfeld QC, said at [114]:

“Rights reserved to a landlord under the terms of a lease are to be construed narrowly against the landlord – see William Hill (Southern) Limited v Cabras (1986) 54 P & CR 42.”

The claimant was tenant of the ground floor and basement of a building owned by the defendant landlord. The lease reserved a number of rights to the landlord. One such right was to carry out construction works to the building itself and to erect new buildings on adjoining property of the landlord. Another such right was a right of entry, as follows: “The right to enter … the Premises at any time during the term at reasonable times and on reasonable notice … to inspect them, to take schedules or inventories of fixtures and other items to be yielded up at the end of the term, and to exercise any of the rights granted to the Landlord elsewhere in this Lease …” The deputy judge rejected the submission that the right of entry included the right to build. After the remark quoted above, he continued:

“In my judgment, what is described by clause 1-1 as the ‘Right of entry to Inspect’ does not extend to coming on to the Premises and, indeed, occupying them for a significant period of time, for the purpose of carrying out building works on adjoining property belonging to the Landlord. That, it seems to me, would be to give to the clause an extravagant rather than a narrow meaning. The rights that it seems to me clause 1-1 is referring to are rights that entitle the Landlord to come on to the Premises for the sort of matters which are already referred to in that clause.”

1. 1. This narrow construction of general and seemingly broad words in a reservation by reference to the context in which they are found is similar to the approach of Lord Templeman in Street v Mountford. Clause 3 of the agreement in that case provided: “The owner (or his agent) has the right at all times to enter the room to inspect its condition, read and collect money from meters, carry out maintenance works, install or replace furniture or for any other reasonable purpose.” As in the present case with clause 7 and clause Y, so in Street v Mountford the landlord did not seek to argue that clause 3 was inconsistent with exclusive possession; indeed, the landlord in that case did not point to clause 3 as a particular indication that the rights granted to the occupier were purely personal: see 816F. Lord Templeman observed that the landlord had “only reserved the limited rights of inspection and maintenance and the like set forth in clause 3 of the agreement”: see 818D. Thus, despite their apparent breadth, the final words of clause 3 (“or for any other reasonable purpose”) did not indicate that the rights were more than merely “limited”. Lord Templeman’s use of the words “and the like” indicates that he read the concluding words of the clause in the context of the preceding words. That is the same approach as was taken by the deputy judge in the Timothy Taylor case.
   2. Mr Steinfeld QC in the Timothy Taylor case relied on the decision of the Court of Appeal in William Hill (Southern) Limited v Cabras (1986) 54 P & CR 42 as establishing that a reservation was to be construed restrictively against a landlord. In the William Hill case, the tenant had during the term of the lease maintained illuminated advertising signs that had been in place since before the lease had been granted. The lease made no mention of a right to maintain the signs, and the landlord, the assignee of the original lessor, contended that the tenant had no more than a revocable licence to maintain them. The landlord relied on clause 3 of the lease, which provided that the demise should not be deemed to include or confer “any right of light or air liberties privileges easements or advantages (except such as are specifically granted by this Lease) in through over and upon any land or premises adjoining or near to the demised premises.” Having referred to the two general rules mentioned by Thesiger LJ in Wheeldon v Burrows (1879) 12 ChD 31, 49, Nourse LJ, with whose reasoning on this point Stocker LJ agreed, accepted at 48 the submission “that the court will not construe a general provision in a lease, particularly an exception and most of all an exception couched in very general terms such as those in clause 3, so as to take away with the other hand that which has already been granted by the one hand in the dispositive provisions of the lease.”
   3. Mr McNall submitted that Nourse LJ overlooked contrary binding authority in Johnstone v Holdway [1963] 1 QB 601, as mentioned and explained by the Court of Appeal in St Edmundsbury and Ipswich Diocesan Board of Finance v Clark (No. 2) [1975] 1 WLR 468, that “an exception and reservation of a right of way in fact operates by way of regrant by the purchaser to his vendor …” (per Upjohn LJ in Johnstone v Holdway at 612) and that accordingly section 65(1) of the Law of Property Act 1925 had not altered the existing law, which treated the language of reservation as having the same effect as would the language of regrant, and in those circumstances regarded the purchaser as the proferens for the purpose of the maxim contra praesumuntur contra proferentem.
   4. I accept that the contra proferentem rule, which operates only where the normal canons of construction cannot resolve an ambiguity in the document, operates in the manner contended for by Mr McNall. A reservation in a lease operates as a re-grant by the tenant: Johnstone v Holdway at 612-613; this is part of the ratio of the case. Therefore the reservation falls to be construed against the tenant, who is considered to be the proferens: the St Edmundsbury case at 477-480; the remarks are obiter but are a straightforward application of the ratio of Johnstone v Holdway and represent the current state of the law.
   5. I also accept that, if there were a principle of construction that a reservation was to be construed restrictively against a landlord, the law would be incoherent. Even though such a principle would operate at a stage of interpretation before the court had recourse to the contra proferentem rule, it cannot be right to say that the court must construe a reservation restrictively against the landlord unless it cannot decide between alternative constructions, in which case it must choose on the basis of an expansive interpretation in favour of the landlord.
   6. However, I think that conflict and incoherence can be avoided, though some tension does remain. In my judgment, the correct position is not that there is a rule of interpretation, as such, that a reservation is construed restrictively against the landlord. Rather, as part of the normal method of construing written instruments, the court will have regard to the entirety of the text and to the main subject matter of the agreement and, in the normal course of things, is likely to suppose that the intention of the parties is to advance the main purpose of the agreement as shown by its subject matter. Thus in the case of a lease, which necessarily grants exclusive possession and the right to quiet enjoyment, the court will naturally be inclined to suppose that qualifications on these rights will emerge clearly from the lease. This is not a matter of applying a special rule that a certain kind of provision must be construed against a particular party. It is simply a matter of applying the normal approach to construction. Accordingly, if, having regard to all relevant matters, the court finds that the normal approach to construction results in ambiguity, there is nothing irrational in resorting to the contra proferentem rule.
   7. This understanding gains support from the authorities. The decision in the William Hill case rested not on some principle of restrictive construction in the abstract but on the conclusion that the landlord’s proposed construction would “take away with the other hand that which has already been granted by the one hand in the dispositive provisions of the lease”; that is, it would be inconsistent with the grant. I think that the understanding set out above also gains support from the two authorities relied on by Mr Jourdan (and mentioned by Philip Meade in his email of 23 September 2016; see paragraph 30 above), namely Heronslea (Mill Hill) Ltd v Kwik-Fit Properties Ltd [2009] EWHC 295 (QB), [2009] Env LR 28, and the Scottish case of Possfund Custodial Trustee Ltd v Kwik-Fit Properties Ltd [2008] CSOH 65.
   8. In the Heronslea case, the landlord wanted to enter the demised land and undertake an environmental investigation survey, including the drilling of a number of boreholes, in order to assess possible land and groundwater contamination from the current and historic uses of the site. It was said that the survey would take two days to complete and that the boreholes could be located in an area convenient to the tenant. The tenant objected to entry for the intended purpose and refused access. The landlord relied in particular on paragraph 13 of the lease, which was in the following terms:

“Upon reasonable prior written notice … the tenant shall permit the Landlord and those authorized by it at all times to enter (and remain unobstructed on) the Premises for the purpose of:

13.1.1 inspecting the Premises for any purpose, or

13.1.2 making surveys or drawings of the Premises, or

13.1.3 complying with the Landlord’s obligations under this Lease or with any other Legal Obligations of the Landlord

Provided that the Landlord shall cause as little interference and disturbance as is practicable and shall make good any damage caused forthwith and to the reasonable satisfaction of the Tenant.”

Sharp J held that paragraph 13 of the lease did not permit the activity intended by the landlord. She considered that the usual meaning of the word “survey” was not such as to include the drilling of boreholes. She also, at paragraph 39, considered the immediate context in which the word “survey” occurred in the lease:

“As to immediate context, the use of the preposition ‘on’ together with the words which follow the word survey itself (and drawings) suggest that the word survey, in the context, means a survey of (rather than under) the land and of the buildings on the land (in contrast with the clause dealing with Hazardous Waste, where the parties provide specifically for what is or is not to be placed ‘under’ the Premises). Interpreting the words in paragraph 13.1.2 in the way in which a reasonable commercial person would construe them, I do not think one can detach the word survey from its immediate context which in my view, the argument advanced by [counsel for the landlord] seeks to do.”

Sharp J also considered the question whether the degree of interference with the tenant’s quiet enjoyment that would be permitted on the landlord’s construction of paragraph 13 was consistent with the language used:

“41. When endeavouring to ascertain the presumed intention of the parties and whether the parties would have intended the word survey to encompass every activity which could possibly be so described, it is also material in my view to consider the interaction between paragraph 13.1.2 and the Tenant’s right to quiet enjoyment. The covenant to quiet enjoyment would be significantly undermined in my view if the Landlord has the right (as it is contended it does) to enter the Premises, and conduct whatever could be described as a survey, including a geological survey for example, no matter how intrusive, no matter what disruption was caused to the Tenant’s business and however long such activities might take; even allowing it – on [the landlord’s] interpretation so it seems to me – to demolish part of any building with the only proviso that it should cause as little damage and disturbance as is practicable and make good any damage forthwith to the reasonable satisfaction of the Tenant.

42. Such significant inroads into the Tenant’s right to enjoy the Premises free from interference is not a result it seems to me that the parties would have contemplated when executing the Lease. If such had been the intention of the parties to a commercial lease, one would expect to find much clearer words or indication to that effect within it.”

1. 1. A very similar approach was taken by an Extra Division of the Inner House of the Court of Session in the Possfund case. The dispute was substantially the same as in the Heronslea case. The landlord relied in particular on clause 3.11 of the lease, which required the tenant:

“To permit the Landlord and its agents at all reasonable times with or without workmen on giving forty eight hours written notice (except in emergency) to the Tenant to enter upon the Premises generally to inspect and examine the same to view the state of repair and condition thereof and to take a schedule of the Landlord’s fixtures and of any wants of compliance by the Tenant with its obligations hereunder.”

The parties did not put forward any background matter as bearing on construction; they relied simply on the provisions of the lease. Delivering the opinion of the Court, Lord Reed said:

“12. A lease, like any other contract, must be construed as a whole, and so as to give proper effect if possible to all of its provisions. In the present case, it is necessary in particular to achieve a fit, if possible, between the landlord’s right to inspect and examine, by virtue of clause 3.11, and the tenant’s right to be maintained in possession, reflected in clause 4.1.

13. Since a lease is essentially a grant of possession of the subjects of the lease for the period of the lease, it is implicit, if not expressed, that the landlord is precluded from any action which encroaches materially upon the tenant’s possession of those subjects during that period. The landlord’s obligation to maintain the tenant in exclusive possession may however be qualified by the terms of the lease. [Lord Reed then referred to provisions in the lease that did qualify the tenant’s possession, which however imposed requirements for minimising disturbance and making good any damage caused; and he continued:]

14. There is a striking difference between the wording of the provisions which we have just discussed and that of clause 3.11. Although clause 3.11 entitles the landlord to enter the premises ‘to inspect and examine the same to view the state of repair and condition thereof…’, there is no express obligation to do so in such a way as to cause the least practicable disturbance to the tenant; nor is there any obligation to make good any damage caused. In a professionally drafted lease, the omission of such obligations, when they are specified in several other provisions, is unlikely to have been unintended. While not necessarily conclusive in itself, it strongly suggests that it was not envisaged or intended that the exercise of the landlord’s right of inspection under clause 3.11 would cause any material disturbance to the tenant, or would result in any material damage to the premises.

…

16. More generally, it appears to us that if it had been the intention of the parties to the lease that the landlord should be entitled under clause 3.11 to interfere with the tenant’s possession of the premises to the extent contended for by the pursuers (which, as we have explained, would involve intrusive investigations lasting several days and the cordoning off of parts of the forecourt of the premises), one would expect to find a much clearer indication to that effect in the lease.”

1. 1. In summary, therefore, the position is as follows.

1) An exception or reservation will, if possible, be construed in such a manner as to preserve its validity.

2) Therefore the court will, where it is possible to do so, construe an exception or reservation as restrictively as is required to avoid a derogation from grant or a conflict with the covenant for quiet enjoyment. In the words of Neuberger J in Platt v London Underground Ltd (supra): “An express term should, if possible, be construed so as to be consistent with what Hart J called ‘the irreducible minimum’ implicit in the grant itself.”

3) There is no further rule that a reservation is to be construed restrictively against a landlord.

4) However, the application of the standard principles of construction, including the requirement to have regard to all of the provisions of the instrument and to the principal purpose and subject matter of the instrument, will tend to lead the court to expect that substantial qualifications of the rights to exclusive possession and quiet enjoyment of the demised premises will appear clearly from the lease. Further, apparently broad and unqualified words in reservations may, on closer examination, be found to have a more restricted meaning when read in their immediate or wider textual context.

5) If it is not possible to construe an exception or reservation in a manner consistent with the ‘the irreducible minimum’ implicit in the grant itself, it will be struck down as being repugnant to the lease.

6) The contra proferentem rule operates only if the exception or reservation is ambiguous, in the sense that the court is unable to decide on its meaning by the use of the materials usually available for interpretation.

7) By reason of the principles of construction set out above, the contra proferentem rule can only apply if the court cannot otherwise decide among two or more constructions, all of which are consistent with the irreducible minimum consistent with the grant itself. This is because: (a) if any possible construction of the reservation would be inconsistent with the irreducible minimum implicit in the grant itself, the reservation will have been struck down as repugnant to the grant; and (b) if, of two possible constructions of the reservation, one would be consistent with the irreducible minimum implicit in the grant itself and one would not, the court will have chosen the former in accordance with the principles set out above.

8) Once the court is forced to have recourse to the rule, the correct position is that the reservation operates as a re-grant by the tenant and therefore the reservation falls to be construed against the tenant, who is considered to be the proferens.

The 1965 Tenancy Agreement

1. 1. The right in clause 7 relates to “any part of” the land and premises demised. This must include buildings on the land demised by the 1965 Tenancy Agreement, although in such cases entry could of course not reasonably be exercised with vehicles. The right is to be exercised “at all reasonable times”, which shows an intention that the entry should not derogate from the irreducible minimum consistent with the grant itself and accordingly provides encouragement to find a construction in accordance with that intention. The critical and related questions are, first, what “for all reasonable purposes” means and, second, what things are permitted in pursuance of those purposes.
   2. The purposes in question are necessarily those of the persons exercising the right, namely the claimants. Obviously, however, “reasonable purposes” cannot extend to all purposes that are reasonable merely in the landlord’s interests. The two possibilities are, therefore, (a) that any purposes are permissible if they are reasonable in the landlord’s interests and do not derogate from the irreducible minimum consistent with the grant itself and (b) that the “reasonable purposes” are reasonable purposes concerned with the parties’ rights and obligations under the 1965 Tenancy Agreement, including purposes concerned with the landlord’s reversionary interest in the demised land. The latter interpretation is suggested by the wording of the clause. The reference is simply to “all reasonable purposes”, not to all purposes that are reasonable in the interests of the landlord. In the context of a lease, the obvious canon of reasonableness is the relationship of landlord and tenant. Whereas in the abstract reasonableness may have no connection with the tenant at all, in a reservation of rights in a lease the obvious way to assess reasonableness is by reference to that relationship. In my view, this interpretation of the purposes is supported by consideration of the scope of the acts permitted by the right reserved in clause 7.
   3. The right is expressly a right of entry. The fact that entry is to be for a (reasonable) purpose shows that entry is not an end in itself but is to be in order to achieve something beyond the simple fact of entry. However, clause 7 does not mention any particular acts that may be performed once entry has been gained and to which the right of entry is ancillary. In this respect it differs from other express or implied rights of entry, provided for by the tenancy agreement, that are ancillary to substantive rights to do things: clause 3 (entry to get minerals), clause 4 (entry to take wood) and clause 5 (entry to hunt). This suggests that under clause 7 the reasonable purposes are to be achieved by either the mere fact of entry and presence on the land (notably, inspection and observation) or the performance of specific obligations under the tenancy agreement (such as repair of buildings). As the right of entry in clause 7 is not tied to a specific right or obligation (such as, the obligation to repair and the right to enter for the purpose of effecting repairs), it is reasonably construed as being wide enough to cover both instances. Thus, for example, entry for the purpose of inspection or observation to assist in deciding whether to exercise, or for facilitating the future exercise of, the power of resumption in clause 6 would be within the scope of clause 7.
   4. The present case is concerned with the exercise of the right of entry for purposes other than the discharge of duties or exercise of rights specifically mentioned in the 1965 Tenancy Agreement. It follows from what I have said already that such purposes ought to be construed as relating to inspection and observation. The extent of the activities thus permitted cannot be properly considered in the abstract and without regard to particular cases. However, in my judgment, the permissible activities do not extend to those which cause damage to the land or involve cordoning off parts of the land or significant interference with the operation of the working farm. First, the right is stated to be a right to enter; no other right is mentioned. Second, if the intention were to permit specific activities, not otherwise mentioned in the tenancy agreement, such as would tend to interfere with possession or quiet enjoyment, one would have expected that to have been stated rather than left for inference. Third, if intrusive activities were envisaged, the tenancy agreement would probably have mentioned the need to minimise disruption (see for example clause 3). Fourth, if the permitted activities were liable to cause damage, the tenancy agreement would probably have provided for the possibility of compensation (see for example clauses 3 and 4) or for the exclusion of compensation (see clause 3). I consider, accordingly, that the digging of excavations, the sinking of boreholes and the erection of structures all fall outside the limited rights in clause 7. The installation of monitoring devices, being a form of extended inspection, would I think be capable of falling within the scope of the rights in clause 7; much would depend on the position, nature and effect of the devices. I should consider that, absent special circumstances that I cannot now envisage, the installation of remote bat detectors would be permitted. I do not know enough about other kinds of device to speculate. Similarly, I consider that it would be permissible under the terms of clause 7 for a surveyor to place discreet reference points on the land in order to assist in conducting a visual survey and inspection; on the other hand, anything that involved significant interference with use of areas of the land or intrusion below its surface, or activities such as trial pegging out of intended development sites, would not be within the scope of the reserved rights.

The 1968 Tenancy Agreement

1. 1. Counsel’s submissions were directed primarily to clause 7 in the 1965 Tenancy Agreement. Yet it is perhaps clause Y of the 1968 Tenancy Agreement that gives rise to the greater difficulty. Clause Y reserves a right that may be exercised at any time, although it would have to be exercised reasonably. The right is again one of entry. However, three specific purposes for which it may be exercised are set out: “inspecting” the demised premises; “making roads sewers or drains”; and “any other purpose connected with [the landlord’s] estate.” The clause gives rise to two particular questions. First, where are the “roads sewers or drains” to be made: on the demised land (as Mr McNall contends) or on the landlord’s adjacent land (as Mr Jourdan contends)? Second, what is meant by the landlord’s “estate”: its reversionary interest in the demised land (so Mr McNall) or its other landholdings in the vicinity (so Mr Jourdan)? The connection between these two questions is obvious. The answer to them is less obvious.
   2. In my judgment, the wording of clause Y, both by itself and when read in its textual and factual context, shows that the “roads sewers or drains” were not on land forming part of the demised premises at the time of entry and that the landlord’s “estate” refers to all the landlord’s land in the vicinity. I shall explain my reasons for this conclusion, what precisely it means and what its implications are.
   3. First, the context in which the 1968 Tenancy Agreement was made is relevant. The parties knew that the landlord owned both the reversion of the 1965 Land and of the Additional Land and also the two pieces of woodland that were now to be landlocked by the Farm. They also knew the provisions of the 1965 Tenancy Agreement. Accordingly, the parties were aware of the possibility of future development not only on the 1968 Land but also on the 1965 Land, the Additional Land and any other land held by the landlord in the vicinity.
   4. Second, the wording of clause Y contains certain indications, albeit in themselves inconclusive, as to how the two questions mentioned above are to be answered. The first permitted purpose of entry is to inspect “the same”; those words refer to “the said [demised] premises”, namely the 1968 Land. However, the second permitted purpose, “making roads sewers or drains”, does not specify “on the same”, as it could easily have done. The wording of the third permitted purpose (“any other purpose connected with his estate”: my emphasis) tends to suggest that “making roads sewers or drains” is itself a purpose “connected with [the landlord’s] estate”. Further, the use of the words “his estate” rather than “the said premises” suggests that there is a distinction between the two. The distinction could conceivably be no more than the distinction between physical land and legal interest, but this seems improbable and it is far from clear what useful reason could have existed for introducing such a distinction into the clause. Accordingly, these considerations tend to indicate that the final words of the clause (“or for any other purpose connected with his estate”) mean simply that the landlord may enter the demised land for the purpose of doing anything he may otherwise be entitled to do on the demised land or on any other land of the landlord adjacent to it. The same considerations would also tend to indicate that the “roads sewers or drains” were not necessarily on the demised premises, but it would not indicate whether they could be on it.
   5. Third, one must consider the wider textual context of the clause. The “roads sewers or drains” mentioned in clause Y could not themselves be for the use of land tenanted by the tenant; they could only be for the use of a development on land that was not part of the Farm, whether because it was not demised by the tenancy agreements or because, although it had been demised by one or other of the tenancy agreements, the landlord had resumed possession (that is, under clause X of the 1968 Tenancy Agreement or under clause 6 of the 1965 Tenancy Agreement or, perhaps, in the case of the Additional Land under section 31 of the Agricultural Holdings Act 1948). Mr McNall submitted that the “roads sewers or drains” could nevertheless be built on the retained 1968 Land (that is, such parts of the 1968 Land as had not been subject of a resumption of possession under clause X), because the landlord need not rely on clause X but could instead rely on an easement. However, the 1968 Tenancy Agreement contains no easement that would permit use of such roads, sewers and drains. Neither clause X nor clause Y nor any other provision of the 1968 Tenancy Agreement provides for an easement of drainage or a right of way to be taken over land still forming part of the demise. The reference in clause X to mains supplies and other easements is to rights over land of which the landlord is resuming possession: possession is taken in order that the necessary rights can be granted. If the making of roads, sewers and drains mentioned in clause Y is on retained 1968 Land, this can only be in anticipation of the resumption of possession under clause X. Yet the right is exercisable “at any and at all times”, not merely pursuant to a notice under clause X. Further, it is improbable that the “roads sewers or drains” mentioned in clause Y were to be on retained 1968 Land, because clause X made provision for resumption of possession for that purpose and because the making of roads, sewers and drains on the demised land would involve not merely entry but the taking of possession. Therefore it is probable that the entry envisaged was for the purpose of making roads, sewers and drains on other land of the landlord; that is, the right was a right to enter the demised land for that purpose, not a right to make sewers and drains on the demised land.
   6. For these reasons, I conclude that clause Y gave to the landlord a right to enter the 1968 Land for three purposes: first, to inspect the 1968 Land; second, to make “roads sewers or drains” on land other than the retained 1968 Land; third, to do anything that he is lawfully obliged or permitted to do on the 1968 Land or the 1965 Land or the Additional Land or any other adjacent land he may own. However, the third purpose is simply that, namely a purpose for which entry may be effected; it does not give further rights to do things on the land that are not otherwise permitted. The result is that clause Y permits to be done on the 1968 Land no more and no less than clause 7 permits to be done on the 1965 Land, save that the second purpose may permit some additional activity near the boundary, ancillary to the making of roads, sewers and drains on adjacent land.

Remedy

1. 1. I propose to make declarations reflecting the foregoing conclusions, with a view to assisting the parties and avoiding future strife. If counsel can agree suitable terms of declaration, I shall consider it. If not, I shall hear them further on the matter.
   2. However, I have come to the conclusion that no injunction ought to be granted as final relief, for reasons appearing below.
   3. The injunction sought is for the purpose of restraining the defendants from future infringement of the claimants’ rights. It is thus a quia timet injunction. In Lloyd v Symonds [1998] EWCA Civ 511, Chadwick LJ, with whom Millett and Waller LJJ agreed, said:

“Such an injunction [that is, a quia timet injunction] should not, ordinarily, be granted unless the plaintiff can show a strong probability that, unless restrained, the defendant will do something which will cause the plaintiff irreparable harm—that is to say, harm which, if it occurs, cannot be reversed or restrained by an immediate interlocutory injunction and cannot be adequately compensated by an award for damages. There will be cases in which the court can be satisfied that, if the defendant does what he is threatening to do, there is so strong a probability of an actionable nuisance that it is proper to restrain the act in advance rather than leave the plaintiff to seek an immediate injunction once the nuisance has commenced. ‘Preventing justice excelleth punishing justice’—see Graigola Merthyr Co Ltd v Swansea Corporation [1928] Ch 235 at page 242. But, short of that, the court ought not to interfere to restrain a threatened action in circumstances in which it is satisfied that it can do complete justice by appropriate orders made if and when the threat of nuisance materialises into actual nuisance (see Attorney-General v Nottingham Corporation [1904] 1 Ch 673 at page 677).”

In Vastint Leeds BV v Persons Unknown [2018] EWHC 2456 (Ch), [2019] 4 WLR 2, Marcus Smith J considered the authorities relating to the grant of quia timet injunctions and at [31] set out the principles that he derived from them; the following principles are relevant:

“(3) When considering whether to grant a quia timet injunction, the court follows a two-stage test: (a) First, is there a strong probability that, unless restrained by injunction, the defendant will act in breach of the claimant’s rights? (b) Secondly, if the defendant did an act in contravention of the claimant’s rights, would the harm resulting be so grave and irreparable that, notwithstanding the grant of an immediate interlocutory injunction (at the time of actual infringement of the claimant’s rights) to restrain further occurrence of the acts complained of, a remedy of damages would be inadequate?

(4) There will be multiple factors relevant to an assessment of each of these two stages, and there is some overlap between what is material to each. Beginning with the first stage—the strong possibility that there will be an infringement of the claimant’s rights—and without seeking to be comprehensive, the following factors are relevant: (a) If the anticipated infringement of the claimant’s rights is entirely anticipatory—as here—it will be relevant to ask what other steps the claimant might take to ensure that the infringement does not occur. … (b) The attitude of the defendant or anticipated defendant in the case of an anticipated infringement is significant. As Spry, Equitable Remedies, 9^th ed (2013) notes at p. 393, ‘[o]ne of the most important indications of the defendant’s intentions is ordinarily found in his own statements and actions’. (c) Of course, where acts that may lead to an infringement have already been committed, it may be that the defendant’s intentions are less significant than the natural and probable consequences of his or her act. (d) The time-frame between the application for relief and the threatened infringement may be relevant. The courts often use the language of imminence, meaning that the remedy sought must not be premature (Hooper v Rogers [1975] Ch 43, 50).

(5) Turning to the second stage, it is necessary to ask the counterfactual question: assuming no quia timet injunction, but an infringement of the claimant’s rights, how effective will a more-or-less immediate interim injunction plus damages in due course be as a remedy for that infringement? Essentially, the question is how easily the harm of the infringement can be undone by an ex post rather than an ex ante intervention, but the following other factors are material: (a) The gravity of the anticipated harm. It seems to me that if the some of the consequences of an infringement are potentially very serious and incapable of ex post remedy, albeit only one of many types of harm capable of occurring, the seriousness of these irremediable harms is a factor that must be borne in mind; (b) The distinction between mandatory and prohibitory injunctions.”

1. It is clear enough that the defendants have not sought to make life easy for the claimants. I do not think it unfair to say that they were, at times, positively difficult in August and September 2016; see, for example, the rather obstructive suggestion that the reference to arbitration meant that access did not have to be given (paragraph 24 above). On the other hand, matters have to be viewed in context. In furtherance of their perfectly proper intentions to benefit from development of the Farm, the claimants have asserted a claim to the widest rights of entry onto the Farm. The defendants have, quite reasonably, sought to ensure that they are not taken advantage of. They were, indeed, slow to acknowledge in September 2016 that an ecological survey should take place. But the evidence does not demonstrate that the urgency of the ecological survey was made clear to them before proceedings were commenced. What is plain is that the defendants were unwilling to permit, without receiving, compensation what they did not have to permit at all, and that they were concerned not to prejudice their own rights by conceding what they did not need to concede. The nub of the dispute, indeed, concerned the extent of the claimants’ rights. I am not persuaded that the defendants are likely to deny access to the claimants for purposes that are established as being lawful. If this judgment and the accompanying declaratory relief leave any measure of uncertainty as to precisely what activities are or are not within the scope of the claimants’ rights of entry, that uncertainty will not constitute a reason to grant an injunction in more general terms (see further below).
2. Accordingly, I do not consider that the first condition of the grant of a final quia timet injunction (a strong probability that, unless restrained by injunction, the defendants will infringe the claimants’ rights) is satisfied. I also see no evidence that the second condition (the risk of irremediable damage) is satisfied, though I need say nothing further in that regard.
3. For completeness, I add the following. First, if I had granted an injunction it would not have been in the terms of the interim injunction granted in September 2016 by Judge Jarman Q.C. and continued in January 2019 by me. The terms of the interim injunction amounted to an order not to infringe the claimants’ rights. That left it uncertain what acts would infringe those rights. An injunction must make it clear to the respondent what he must or must not do. To identify the prohibited or mandated acts merely by reference to legal conclusions is insufficient. Second, if I had granted an injunction, I would have excluded from its scope the Additional Land but given to the claimants permission to apply later for a variation so as to include it. The oral tenancy in respect of the Additional Land was apparently subject of evidence and cross-examination in recent arbitration proceedings between the parties arising out of the most recent Case B notices. The arbitrator’s decision is awaited. I am unclear precisely what the issue concerning the Additional Land was in the arbitration and would have thought it best to await the arbitrator’s decision before extending the injunction to the Additional Land.
4. In the course of the hearing, submissions were made concerning the proper incidence of the costs of the application for the interim injunction. It seems to me preferable to defer consideration of that issue until the costs of the claim as a whole are dealt with. The parties have been unable to agree very much in this litigation, but I am not entirely without hope that they might be able to reach some agreement as to costs.
5. This judgment is being handed down in the absence of the parties. I shall adjourn consideration of the appropriate terms of order and of any consequential matters, including costs and any application for permission to appeal, to a further hearing and shall extend the time for filing an appellant’s notice until 14 days after that further hearing.