Tradigrain SA & Ors v Intertek Testing Services (ITS) Canada Ltd & Anor [2007] EWCA Civ 154

[2007] EWCA Civ 154Case No A3/2006/1112
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISION (COMMERCIAL COURT)
(Mr. Justice Langley)
2003 Folio 356
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 28 February 2007
Before
LORD JUSTICE LAWSLORD JUSTICE CARNWATHLORD JUSTICE MOORE-BICK
Between
(1) TRADIGRAIN S.A.Claimants/(2)-(30) SOCIETA ITALIANA ASSICURAZIONI e RIASSICURAZIONI (SIAT) S.p.A.Appellantsand OthersAppellant(1) INTERTEK TESTING SERVICES (ITS) CANADADefendants/LIMITEDRespondents(2) CALEB BRETT INDIA PVT LIMITEDRespondent
(Transcript of the Handed Down Judgment ofWordWave International LtdA Merrill Communications Company190 Fleet Street, London EC4A 2AGTel No: 020 7421 4040 Fax No: 020 7831 8838Official Shorthand Writers to the Court)
Mr. Iain Milligan Q.C. and Mr. Guy Morpuss (instructed by Clyde & Co) for appellantsMr. Michael Swainston Q.C. and Mr. David Scorey (instructed by Barlow Lyde & Gilbert) for respondentsHearing Hearing dates: 5 th& 6 th February 2007
JudgmentLord Justice Moore-Bick :Background
[1]This is an appeal from the judgment of Langley J. dismissing the claim of Tradigrain S.A. and its insurers, Societa Italiana Assicurazioni e Riassicurazioni (SIAT) S.p.A. (“SIAT”) and others, against Intertek Testing Services (ITS) Canada Ltd (“Intertek”) and Caleb Brett India Pvt Ltd (“CBI”) in respect of the loss between November 1999 and May 2000 of a number of parcels of vegetable oil from storage facilities in Mumbai. Under a contract described as a Collateral Management Agreement (“CMA”) Intertek had undertaken responsibility for ensuring the safe keeping of the oil and its delivery to third parties in accordance with instructions received from Tradigrain. It had delegated the performance of that contract to its Indian subsidiary, CBI, one of whose employees, Mr. Sadanand (“Sashi”) Nair, allowed two purchasers from Tradigrain, Lanyard Foods Ltd (“Lanyard”) and Shweta International Ltd (“Shweta”), to remove various parcels of oil amounting in all to 15,697.7 metric tons before they had paid for them and without instructions from Tradigrain to do so. Lanyard and Shweta did not pay for the oil and Tradigrain therefore suffered a loss agreed to have been US$5.25 million in respect of which it was indemnified by its insurers. On paying Tradigrain the insurers became entitled to pursue any claims that it may have had against third parties in respect of the loss.[2]Intertek’s business in India was conducted through CBI, a company originally incorporated in India under the name of Seascan Services Pvt Ltd (“Seascan”) which already had an established business of cargo surveyors and inspectors and was acquired by Intertek in 1998 for the purpose of extending its operations into Indian ports. Following the acquisition the company’s name was changed, first to Caleb Brett Seascan Pvt Ltd and later to Caleb Brett India Pvt Ltd, and new directors were appointed to the board. The new board continued to function as such and carried out all the formal business of the company, but the practical management of the business and day to day control of operations were taken over by Intertek itself. Intertek appointed one of its own employees, Mr. Christopher Rackham, to manage the business in India on its behalf and for that purpose he was granted a power of attorney by CBI in very wide terms to enable him to act, in effect, as the company’s chief executive. Mr. Rackham reported to Mr. John Notman-Watt, Intertek’s manager in charge of operations in the Middle East and the Indian sub-continent, whose offices were in Dubai.[3]One of Mr. Rackham’s responsibilities following his appointment was to establish effective operating procedures for the different aspects of business in which Intertek was or intended to become involved. These included, but were by no means limited to, what is known as ‘collateral management’, that is, the provision to banks and other financial institutions a range of services required to manage and ensure the integrity of goods in transit over which they hold security interests. Such services involved controlling the physical movement of goods following their discharge from ocean-going vessels, their safe storage in warehouses or shore tanks operated by third parties and their eventual disposal in accordance with the client’s instructions. Mr. Rackham inherited a substantial staff, among whom was Mr. Nair whose dishonest conduct and falsification of records led to the loss of the goods in this case. The CMA[4]The CMA, as its name suggests, was a contract designed primarily for the purposes of providing collateral management service. In the case of Tradigrain, however, it was a means of providing services of a similar kind to an owner of goods who retained an interest in them as seller pending payment by its buyers. The contract took the form of a set of terms signed by both parties to which were attached three schedules: Schedule I contained a brief description of the services to be provided; Schedule II set out more detailed terms relating to the provision of those services; Schedule III contained Intertek’s general conditions of contract.

(i) of Schedule III which provided as follows:

“. . . . . the total liability of ITS, its officers, employees, agents, and sub-contractors, for any loss or damage caused by or resulting from improper or negligent performance, purported performance of [sic] non-performance of such work shall not exceed a sum equal to fifteen times the fee payable for the work.”
The insurance

The insurance

[5]Intertek effected two policies of insurance with various continental insurers led by SIAT: a primary policy covering Intertek and its subsidiary and associated companies worldwide in respect of marine and ‘Full Outturn Guarantee’ risks and a subsidiary policy covering marine and collateral management risks. Apparently it was thought desirable to obtain a separate policy in respect of CMA business because of the different nature of the risks involved. Tradigrain was insured in respect of its interests in goods in respect of which Intertek was providing services under the CMA under the latter policy. Neither policy was itself in evidence at the trial, but it was common ground that their terms were correctly set out in two cover notes issued by the Hamburg brokers Aon Jauch & Hübener GmbH. Although both policies were placed through German brokers in the German insurance market and were governed by German law, they appear to have been drafted in English. At any rate, the cover notes, which are the only record we have of the relevant terms, are entirely in English.[6]The insured under the principal policy was described as Intertek and its subsidiaries and associated companies, including, therefore, CBI. The named insured under the subsidiary policy was Intertek, but it was common ground that it also extended to CBI. The subsidiary policy, like the primary policy, takes the form of an insurance on goods, but it contained certain provisions which it was agreed provided cover to CBI against any liabilities it might incur in relation to goods covered by it. It was necessary that it should do so since neither Intertek nor CBI had an insurable interest in the goods they were managing under CMA agreements. This provides one part of the explanation for the fact these proceedings involve a claim by one insured (Tradigrain) against another (CBI) in relation to a loss of goods covered by the same insurers. The other part is to be found in the fact that under the principles applicable to marine insurance policies under German law the policyholder is not entitled to be indemnified in respect of a loss resulting from his own wrongful act, unless otherwise agreed. Broadly speaking, if the policyholder is a company or other organisation, the principle applies to the acts or omissions of anyone who has a significant degree of independent authority to act on behalf of the organisation. It was common ground that in this case CBI is to be regarded as one of the policyholders. Accordingly, the insurers, having indemnified Tradigrain in respect of the loss of its goods, seek to recover from CBI on the grounds that, although CBI was liable to Tradigrain for the misdelivery of the goods, the loss was caused by the wrongful acts or omissions of one or more persons for whom CBI is responsible, with the result that it is not entitled to be indemnified under the policy in respect of that liability.[7]In the case of a policy which provides cover to a group such as Intertek which has subsidiary and associated companies around the world this principle of German law makes it particularly important from a commercial point of view to know who can be taken to represent the policyholders for this purpose. Moreover, in order not to restrict the scope of cover more than necessary it is obviously desirable from the insured’s point of view to limit as far as possible the range of people who fall into that category. Considerations of this nature may have been responsible for the term of the policy which lies at the heart of the present case. It is described as a ‘waiver of recourse’ clause and provides as follows:
“A waiver of recourse/recovery action against ITS Caleb Brett employees is agreed. However, excluding wilful misconduct and gross negligence of ITS Caleb Brett representatives. Representatives are members of board of executives, directors, general partners, proprietors or the equivalent category of persons in case of foreign firms.”
The issues

The issues

[8]The claimants contend that the misdelivery of the goods amounted to a conversion and seek to recover damages against CBI accordingly. At an earlier stage in the proceedings they identified a number of different people who were said to fall within the scope of the ‘waiver of recourse’ clause and to have been responsible for the loss, but in the end the only person who was said to fall within the scope of the clause and whose acts and omissions were said to be relevant was Mr. Rackham. The loss, they said, resulted from two serious and culpable failures on his part: a failure to put in place effective procedures for ensuring that goods for which Intertek had assumed responsibility under the CMA were kept safe and released only in accordance with its instructions; and a failure to ensure that Mr. Nair was properly supervised. The claimants contend that these failures amounted to gross negligence on his part. They also contend that as chief executive officer of CBI Mr. Rackham was a representative of the company and that accordingly his negligence is to be imputed to it. Intertek and CBI take issue on both of these points, but, in the event that CBI is held liable to Tradigrain, they seek to rely on clause (i) of Schedule III to limit their liability. It is common ground that, if they are entitled to do so, liability is limited to $2,310,196.90.[9]The dispute in this case therefore turns on the following three questions:(i) whether Mr. Rackham was a representative of CBI within the meaning of the ‘waiver of recourse’ clause;(ii) if so, whether the loss was caused by gross negligence on his part;(iii) if so, whether CBI is entitled to limit its liability in accordance with clause (i) of Schedule III to the CMA. Application to set aside permission to appeal[10]Before dealing with the issues, however, I wish to mention one preliminary matter. The appellants’ notice of appeal raised as grounds of appeal all three of the issues just mentioned. Permission to appeal was refused by the single Lord Justice on paper, but the application was renewed orally before Waller and Leveson L.JJ. It is clear from the judgment of Waller L.J., with whom Leveson L.J. agreed, that the court was initially reluctant to grant permission on any of the three grounds but was persuaded by Mr. Iain Milligan Q.C. that the prospects of success in relation to the construction of the ‘waiver of recourse’ clause were sufficient to grant permission to appeal on that issue. In relation to the issue of gross negligence Waller L.J. expressed the view that the key issue was probably the effect of Mr. Rackham’s illness and said that “. . . . . having regard to the fact that the first point is one on which I am inclined to give permission now, it would seem to me wrong to keep this other point away from the Court of Appeal and I would grant permission to appeal on that aspect also.” Nothing was said in relation to the limitation issue. When the order came to be drawn up, however, it directed that the claimants’ application for permission to appeal be granted generally.[11]When the appeal was called on Mr. Michael Swainston Q.C. on behalf of Intertek asked the court to set aside permission to appeal on the second and third grounds on the footing that neither of the tests set out in CPR Part 52.3(6) (“a real prospect of success” or “some other compelling reason”) had been satisfied in relation to them. In the alternative he asked us to restrict the appeal on the second ground to the effect of Mr. Rackham’s illness. These were not merely technical objections, he submitted, because the appeal could not succeed at all unless the appellants could overturn the judge’s decision on the second issue as well as the first.[12]In my view that application should not have been made at all, but, if it was going to be made, it should have been made as soon as possible after the order granting permission had been drawn up. The Court has jurisdiction under rule 52.9(1)(b) to set aside permission to appeal in whole or in part, but it is a jurisdiction to be exercised very sparingly and only in exceptional cases: see the commentary in Civil Procedure 2006, vol. 1, paragraph 52.9.2 and the decisions to which reference is made. The fact that the court may appear to have been unduly generous to the applicant when giving permission to appeal is not a ground for seeking to have the order set aside. The test for granting permission to appeal is necessarily flexible and the court’s decision, once made, must be accepted. If it is thought that the order as drawn does not accurately reflect the order pronounced, an application to have it corrected must be made at the earliest opportunity. It is not appropriate in my view for an application of either kind to be made at the hearing of the substantive appeal when the parties have spent time and incurred costs in preparing to argue the merits of the appeal as a whole and the court itself has devoted to the papers the time necessary to familiarise itself with the issues. ‘Representative’[13]The meaning to be attached to the word “representative” depends on the true construction of the contract. The policy was made in the German market, incorporated German insurance clauses and contained a choice of jurisdiction clause in favour of Hamburg. It is clearly governed by German law. However, it is now well-established, and was not in dispute before the judge, that when an English court is required to construe a contract governed by foreign law the proper course is for the court to construe the contract itself applying the principles of construction applicable under the relevant law: see Dicey & Morris, The Conflict of Laws, 14th ed., paragraphs 9-019 and 32-191. A recent application of the principle may be found in the judgment of this court in Svenska Petroleum Exploration AB v Government of the Republic of Lithuania [2006] EWCA Civ 1529. In the present case, therefore, it was entirely appropriate for expert evidence to be called to prove the principles of construction applicable under German law and appropriate also for the experts to give evidence of any principles of German law (such as the one referred to earlier) which could properly be regarded as forming part of the background against which the policy was made. It was not appropriate, however, for the experts to be asked their opinions of what the clause meant or of how, in their opinion, it would be construed by a German court.[14]One of the difficulties that arises in this case is that, although it is governed by German law, the contract is expressed in English. It follows that none of the words used is itself a term of art in German law; the most that can be said is that in some cases a particular English word may have been chosen in the belief that it corresponds to a German word which bears an established meaning. However, in the absence of any background evidence to support that conclusion, it is at best uncertain. I mention this both because there was a tendency in the course of argument to approach the clause on the assumption that the words had been chosen to reflect particular terms or concepts familiar to German lawyers and businessmen and because Mr. Milligan in particular relied quite heavily on the proposition that the clause had been drafted very much from a German perspective. There are undoubtedly indications that the draftsman may have drawn on some German concepts, but to assume that the language was chosen with the specific intention of importing such concepts into the clause gives rise to a danger of treating it as if it contained words other than those which have actually been used. The fact of the matter, for better or worse, is that parties of different nationalities chose to express their intentions in English and the document must be construed for what it is. I should add that it was not suggested that the principles of construction applicable under German law are materially different, so far as concerns this case, from those applicable under English law.[15]In paragraphs 66-71 of his judgment the judge summarised the evidence of the German law experts, Dr. Thomas Remé and Dr. Jost Kienzle, each of whom expressed views about the construction of the waiver of recourse clause as well as giving evidence about various principles of German law which might properly be regarded as forming part of the background to the contract. Ultimately, as the judge said in paragraph 72 of his judgment, he preferred the views and reasoning of Dr. Kienzle, the expert called by Intertek. He expressed his conclusion as follows in paragraph 77:
“In my judgment, the “directors” and “executives” referred to in the waiver of rights clause are and are only those formally appointed as such in an AG or GmbH and their equivalents in CBI or Intertek. This conclusion does not depend in any way on the documents to which I have referred in paragraphs 14 to 16. Those documents do, however, support and add further justification to the conclusion. Intertek was concerned not only to limit the circumstances in which it could lose the cover but also to do so by avoiding exposure to the conduct of those who could generally be described as “management”.”
The documents to which he had referred in paragraphs 14 to 16 of the judgment were certain exchanges which had taken place between Intertek and the brokers relating to the waiver of recourse clause prior to the conclusion of the policy.[16]Mr. Milligan submitted that the relevance of German law in this case was extremely limited, being confined mainly to proving the applicable principles of construction, and that the judge was therefore wrong to approach the question of construction by reference to the competing views of Dr. Kienzle and Dr. Remé. I think he was right about that for the reasons given earlier. The experts agreed that the word Repräsentant [“representative”] is a term of art in German insurance law to which I have already briefly referred. However, I agree with Mr. Milligan that it is unnecessary for present purposes to discuss its meaning in any greater detail because it was common ground that the parties were free to define its scope for themselves. The question therefore turns on the correct construction of the final sentence of the ‘waiver of recourse’ clause in which representatives are defined for these purposes.[17]The argument on construction revolved mainly around the word “directors”. Dr. Kienzle and Dr. Remé agreed that the English word “director” as used in the context of joint stock companies has no equivalent in German corporate law. Mr. Milligan therefore submitted that no particular significance could be attached to it in the context of this clause and that its use did not support the judge’s conclusion that the clause was directed to those who had been formally appointed to a position of that kind. He submitted that the term was apt to cover anyone who had practical control of an organisation’s operations, whether or not he had been formally appointed to a position within its constitutional structure. It therefore included a person in the position of Mr. Rackham who held the position of chief executive officer of CBI and had full power to control its operations under a wide-ranging power of attorney.[18]In my view the judge was right to hold that as a matter of construction the word “director” in this clause refers only to those who have been formally appointed as directors of companies or to a comparable position in the constitution of the relevant organisation. Although worded in a somewhat cumbrous manner, the purpose of the clause is to limit the range of persons whose conduct can be attributed to the insured and thereby lead to a loss of cover. That has been achieved by a general waiver of recourse from which are excluded various classes of persons who can properly be regarded as representing the insured, not simply by virtue of being its agent, but by virtue of holding a position which makes it appropriate to identify them with the insured itself. No doubt some of the expressions used in the clause reflect positions recognised in German corporate law – for example, “members of board of executives” is an expression which is apt to include the Vorstand (executive board) of an Aktiengesellschaft (public company, or “A.G.”), a corporation broadly equivalent to a public company (“PLC”) in English law, which has both an executive and a supervisory board. However, both that and other expressions, such as “directors”, “general partners” and “proprietors”, are capable of applying to formal positions in various forms of organisations established under a variety of legal systems, including that of Germany. For example, a private limited liability company (Gesellschaft mit beschränkter Haftung, usually abbreviated to “G.m.b.H.”) established under German law must have at least one Geschäftsführer, a formal position which enables him to represent the company and which is sometimes translated as “managing director”. The word “director”, while not corresponding precisely to the position of Geschäftsführer, is in my view clearly capable of encompassing it as well as that of a director of an English, Indian or Canadian company. It is important when construing this clause to bear in mind that the policyholder, Intertek, is a Canadian company with subsidiaries and associates in many parts of the world, no doubt established under many different legal systems. It was obviously desirable, therefore, from the point of view of both insurers and insured to employ a range of expressions that would suit a variety of circumstances. The expressions the parties chose to use have at least one thing in common: they are all capable of referring to the person or body of persons that can be identified in a formal way with the organisation itself.[19]Mr. Milligan submitted that the use of the expression “or the equivalent category of persons in cases of foreign firms” shows that the parties were seeking to determine the scope of the clause by reference to purely German concepts, with which the brokers, at any rate, were familiar, and to extend those concepts by analogy to organisations established under other systems of law. If follows, he submitted, that by using the word “directors”, which in German usage does not refer to a formal position of any recognised kind, they must have intended to refer to something other than the members of the executive board of an AG and thus to extend the scope of the clause to anyone who in fact occupied the role of chief executive. That would include a person appointed to act as Geschäftsführer in a German G.m.b.H. and also the chief executive of a company such as CBI, whether or not he was also a director.[20]I can see some force in the argument that the clause distinguishes between what might be called ‘domestic’ (i.e. German) and ‘foreign’ organisations, but I do not think that provides a great deal of assistance to the insurers since, with the possible exception of “board of executives”, the expressions used are all capable of being given a broader or narrower meaning. The essential question, to which one is always driven back, is whether the expressions are to be construed broadly or narrowly and in particular whether they extend only to persons holding a formal position or whether they are directed to persons performing a certain kind of function. In my view it would have been quite possible for the parties to devise a form of words which included any person who exercises the most senior management role in an organisation (whether or not formally appointed to a constitutional position), but they did not attempt to do so. There is no evidence that the word “director” approximates to some established concept of that kind in German commercial circles. One is left, therefore, with a clause which identifies as ‘representatives’ persons who occupy certain well-defined formal positions in commercial organisations of one kind or another by reason of which they can be readily identified as embodying the organisation in question. Moreover, if Mr. Milligan’s submission were correct and the word “director” were construed as encompassing any senior manager empowered to represent the organisation for certain purposes, the scope of the clause would be very uncertain, since it would be open to debate in each case whether the particular person responsible for the loss did or did not fall within it. I think it unlikely that that is what either party intended; if they had intended to extend to a category of senior managers, I think they would almost certainly have worded the clause quite differently.[21]Mr. Milligan submitted that any construction which led to the conclusion that Mr. Rackham was not a representative of CBI for these purposes should be rejected because it would produce an absurd result, but in this case I do not find that very persuasive. Clauses of this kind do sometimes produce what appear to be strange results simply because the parties have not thought about the more extreme situations in which they might operate or because they do not consider it necessary to provide for them. By way of illustrating his submissions Mr Milligan postulated the position that would arise if Intertek had purported to appoint Mr. Rackham as a director of CBI and he had purported to act in that capacity, but his appointment had been invalid for some technical reason. In those circumstances how could it sensibly be said that he was not a representative of the company within the meaning of the clause? I am afraid I do not find that a very persuasive argument. It is an example of just the kind of situation that the parties are unlikely to have had in mind and so provides little assistance in construing the language which they have in fact chosen to use.[22]In my view the language of this clause read fairly as a whole in the context of the relevant rules of German marine insurance point clearly to the conclusion that its scope is restricted to those persons who by virtue of the formal positions which they occupy within the relevant organisation can be regarded as embodying the organisation and for that reason capable of representing it to the world at large. Although Mr. Rackham enjoyed a wide power to act on behalf of CBI, he was not such a person and it therefore follows that I would dismiss the appeal on this ground. Gross Negligence[23]The term “gross negligence”, although often found in commercial documents, has never been accepted by English civil law as a concept distinct from simple negligence, witness the assent of several judges to the assertion that gross negligence is “ordinary negligence with a vituperative epithet” (per Willes J. in Grill v General Iron Screw Collier Co. (1866) L.R. 1 C.P. 600, 612 referring to a dictum of Rolfe B. in Wilson v Brett (1843) 11 M. & W. 113; see also Armitage v Nurse [1998] Ch. 241, 254 per Millett L.J.). It is a concept recognised by German law, however, and it was common ground between the parties that the expression “gross negligence” in the ‘waiver of recourse’ clause should be construed as importing that concept.[24]The concept of gross negligence in German law has two elements:(a) an objective element involving a failure to exercise ordinary care in circumstances where the risk of harm was plain for all to see (the kind of situation which, in Dr. Kienzle’s picturesque expression, “makes one clap one’s hand to one’s head and ask ‘How can it happen?’”);(b) a subjective element in the form of an absence of anything which renders the act or omission in question excusable from the point of view of the person concerned. Both elements were in issue in this case and thus call for separate consideration.

(a) The objective element

[25]In paragraphs 88 and 89 of his judgment

the judge made the following findings about the cause of the loss:

“88. The unauthorised releases were the result of dishonest conduct by Mr Nair, no doubt (as Mrs Lehocky concluded) under pressure from Lanyard/Shweta. They were the result of a deliberate failure to follow the systems which had been established for the receipt of instructions from Tradigrain and issue of matching release orders. What had happened was concealed by false stock reports prepared by Mr Nair. It was discovered only when Tradigrain sought confirmation of the stock at Kandla which itself led to the investigation by Captain Suvarna which was able to identify reasonably promptly what had occurred at Mumbai. 89. . . . . . Mr Nair was given a responsibility for which he was not suited and that he needed but did not in fact receive supervision. He was in a position to carry out a significant fraud which CBI’s systems did not prevent and which went undetected for some 6 months and gave rise to substantial losses.”
[26]In the light of those findings Mr. Milligan submitted that the loss of oil was the result of two serious omissions on the part of Mr. Rackham, each of which, viewed objectively, involved a failure to take steps that were plainly and obviously necessary to ensure the safety of goods for which CBI was responsible.[27]The first concerned the development and introduction throughout CBI of operational procedures of a kind that would, so far as reasonably practicable, prevent the unauthorised removal of goods from storage, whether as a result of mistakes, isolated instances of theft or dishonest practices of a more systematic nature. Mr. Milligan drew attention to the fact that following his appointment in July 1998 one of the formal objectives Mr. Rackham was set for completion by the end of the year was to develop satisfactory quality assurance procedures. An essential element of any such procedures in the case of CMA business, it was said, was the performance of regular stock checks by someone other than the person responsible for the day-to-day management of that business. Mr. Milligan submitted that not only had Mr. Rackham failed to put any procedures of that kind in place by the end of 1998, he still had not done so at the time when the losses occurred.[28]The second omission related to an incident at Kandla in May 2000 involving the misdelivery of a parcel of vegetable oil (the so-called “Kandla incident”). On about 14th May 2000 Mr. Rackham learnt that Lanyard had wrongly taken delivery from storage of 3,000 tons of vegetable oil owned by Tradigrain. In the course of the subsequent investigation Mr. Nair admitted to having falsified stock records in order to conceal the loss and had passed false stock figures to Tradigrain. On discovering that deception Mr. Rackham suspended Mr. Nair from further operations at Kandla, but he did not dismiss him immediately, nor did he prevent him from continuing to manage goods in storage at other Indian ports, including Mumbai. Mr. Milligan submitted that Mr. Rackham’s failure to take immediate steps to prevent Mr. Nair from having anything further to do with similar business at other Indian ports involved a failure to act in a way that was plainly and obviously necessary in that situation.[29]Mr. Swainston submitted that, although they had not been reduced to writing, satisfactory operational procedures were in place at all material times. Moreover, Mr. Rackham had put in place a system under which Mr. Nair was supervised by a more senior employee, originally the senior general manager in charge of bulk oils, Capt. Bahaguna, and after he left the company by the senior manager in charge of marketing and trading, Mr. Debashish Mukherjee. He submitted that in view of Mr. Nair’s long period of satisfactory service with Seascan and CBI, Mr. Rackham was entitled to regard the risk of a loss resulting from dishonesty on his part as remote and certainly not so great as to call urgently for the introduction of more stringent safeguards.[30]The judge rejected this part of the claimants’ case in the following terms in paragraphs 92-93 of his judgment:
“92. If it were (which, on my findings, it is not) necessary to consider whether Mr Rackham himself was guilty of gross negligence in the sense I have identified, I would also have concluded that he was not. I would endorse Mr Notman-Watt’s assessment that Mr Rackham bore some of the responsibility for what occurred but he did take some steps to provide a supervisory system for Mr Nair whom he was entitled to believe was honest and hard-working. He also took firm action on consideration of the Kandla incident. 93. I do not think that the evidence justifies the conclusion that Mr Rackham’s conduct should be characterised as disregarding what would otherwise have been done by or would have been evident to anyone. There was no deliberate or knowing failure on his part. The risk of unauthorised release was, I think, obvious in theory or analysis but it was not obvious in the sense of its actual occurrence or immediacy being self-evident, which has been a feature of the decisions of the BGH to which I have been referred. . . . . . . . . I do not think the claimants have shown more than that Mr Rackham was honestly and conscientiously doing his best in difficult circumstances in the belief that those he had appointed were the best available, honest and up to the job. It may have been, and in 2000 I think was, a poor best but it is not, in my judgment, deserving of the epithet “gross” negligence.”
[31]Mr. Milligan criticised the judge’s reasons on a number of grounds. He submitted that the supervision of Mr. Nair was inadequate and in any event was virtually ineffective after the departure of Capt. Bahuguna, as Mr. Rackham was well aware. More importantly, there had been a complete failure to establish any proper control and monitoring systems including regular independent stock checks which the expert inspectors agreed ought to have been undertaken. He submitted that it was quite wrong for Mr. Rackham to assume that Mr. Nair was honest, whatever his past record, and the evidence showed, contrary to the judge’s finding, that he had failed to take effective action following the Kandla incident to ensure that Mr. Nair could not continue to participate in dishonest schemes leading to further losses of oil in the future (as in fact occurred). Finally he submitted that the judge was wrong to find that it was necessary for the risk of harm to be obvious in the sense of immediate or self-evident in order for a failure to take steps to prevent it to amount to gross negligence.[32]With the benefit of hindsight one can appreciate only too well how serious were the deficiencies in the control system operated by CBI prior to the summer of 2000. Indeed, when one of Intertek’s senior managers learnt what had happened he described it as “a model of what NOT to do in the operational handling of a CMA contract.” Mr. Rackham was aware from the outset that he would have to contend with a business environment in which dishonesty and corruption were endemic and he realised that it would be necessary to change the culture of the organisation he was inheriting in order to guard against it. A year after his arrival he remained concerned about the security and trustworthiness of local staff. During a visit to India in October 1999 Mr. Notman-Watt discussed with Mr. Rackham the implementation of quality assurance (i.e. control) procedures, noting that no manuals had yet been produced and no audits had taken place. Until the end of November 1999 the CMA business relating to vegetable oils was managed by Capt. Bahaguna and releases were signed by him and Mr. Nair. Following his departure from CBI, however, the procedures in force allowed Mr. Nair to authorise the release of goods by his sole signature and between 15th December 1999 and 31st May 2000, acting, as the judge found, under pressure from receivers, he signed 28 unauthorised releases of oil from four cargoes discharged from three separate vessels. During that period there were no procedures in place for independent verification of the amount of oil in store for which CBI was responsible and as a result Mr. Nair was in a position to carry out a significant fraud which CBI’s systems did not prevent and which went undetected for some 6 months. In those circumstances I can see much force in Mr. Milligan’s argument that a failure to devise and implement procedures which would eliminate, as far as reasonably possible, the risk of dishonesty among CBI’s own employees amounted to a failure to guard against a plain and obvious risk.[33]Since Mr. Nair had responsibility for authorising the release of goods being managed by CBI, it is understandable that attention was directed primarily to his position. He had given many years of unblemished service and it is therefore understandable that Mr. Rackham should have regarded him as an honest and hardworking employee, but I do not think that provided a sufficient reason for failing to implement proper security measures. One of the purposes of carrying out regular independent stock checks as a matter of routine is to guard against dishonesty on the part of one’s employees, including those whom one would not ordinarily expect to act in that way. In this respect, therefore, I think there was a very serious shortcoming on Mr. Rackham’s part. Moreover, although the judge was entitled to find, as he did, that Mr. Rackham had taken some steps to provide supervision for Mr. Nair, he does not appear to have considered in any detail whether such supervision was adequate in nature or effective in practice. In fact, the evidence of CBI’s witnesses, Mr. Mukherjee, Mr. Mendonca and Mr. Nair himself, suggests that, even if Mr. Mukherjee was nominally responsible for Mr. Nair during the period in question, in practice he exercised very little, if any, proper supervision and was largely dependent on Mr. Nair’s choosing to bring matters to his attention. At the end of February 2000 Mr. Rackham reported to Mr. Singh that Mr. Nair was not on top of his job and that he had agreed that Capt. Suvarna would take over responsibility for edible oils and keep a close eye on Mr. Nair. It appears, therefore, that Mr. Rackham was aware both that Mr. Nair was not performing properly and that he was not being adequately supervised by Mr. Mukherjee. However, Capt. Suvarna did not understand himself to be Mr. Nair’s manager, so it is unclear whether anyone was supervising Mr. Nair after that.[34]Following the discovery in May 2000 that a quantity of about 3,000 metric tons of oil belonging to Tradigrain had gone missing at Kandla, Mr. Rackham made enquiries as a result of which he learnt that a few months earlier Mr. Nair had issued a false stock report to Tradigrain showing that the oil was still in stock. Mr. Nair said that he had made the report on the instructions of Mr. Mukherjee. Mr. Rackham reported the position to Mr. Notman-Watt in an e-mail sent on 19th May 2000 in which he said that he had removed all responsibility for vegetable oil operations from Mr. Mukherjee and Mr. Nair. In fact, however, he did so only in relation to operations at Kandla, leaving Mr. Nair in a position to co-operate in further unauthorised drawings from cargo stored at other ports.[35]The judge dealt with these different aspects of Mr. Rackham’s conduct compendiously in paragraphs 92 and 93 of his judgment, but they are related only indirectly and I prefer to consider them separately. Although in individual cases procedures were put in place to ensure that authority was obtained from the seller or bank involved for the release of goods, they did not always contain safeguards of a kind that would prevent a corrupt employee from releasing goods in conjunction with a dishonest receiver. Mr. Rackham failed to establish any general procedures for monitoring cargoes in storage for which CBI was responsible and in particular failed to ensure that there were regular independent stock checks of a kind which would have ensured that any misdelivery, whether dishonest or merely accidental, was quickly brought to light.[36]The judge did not think that in this case loss through the actions of a corrupt employee represented such an immediate and self-evident risk that the failure to guard against it amounted objectively to gross negligence. It is quite true that in some of the decided cases to which he was referred the risk of loss was both immediate and strikingly self-evident. Perhaps the most obvious example was that in which the claimant made use of an area adjacent to the River Saar for storing vehicles. As a result of heavy rain the Saar burst its banks and began to flood the area where the vehicles were standing. The claimant failed to take any steps to move the vehicles despite the fact that the water level was still rising rapidly and the court held, not surprisingly, that the loss was caused by his gross negligence. This may appear to be an extreme case, but the experts agreed that gross negligence involves a failure to take into account a risk that in the circumstances must have been obvious to anyone so that the failure to take steps to prevent the loss can be said to represent an unusually high degree of negligence.[37]In the context of collateral management business the risk of loss through the dishonesty of an employee is always immediate and self-evident in the sense that it is one of the obvious means by which the goods in question may be lost. Since a company undertaking this kind of work would be unlikely to allow a person whose honesty was in doubt to have control over the goods, the risk is always present but uncertain. Moreover, the very fact that senior managers could describe what happened in this case as an example of how not to conduct such business speaks volumes. In my view it should have been obvious to anyone that procedures of some kind were required to guard against the risk that an employee who effectively had sole control over the goods might act dishonestly and release them without proper authority. The only question is whether, having regard to the nature and imminence of the risk the need to establish and implement procedures to guard against it would have been obvious to anyone at the time. With the benefit of hindsight the answer seems obvious, but if the risk had been as immediate and obvious as the claimants suggest, one would have expected Mr. Notman-Watt to take much more active steps when he visited Mumbai in October 1999, if not before, to ensure that proper procedures were put in place without delay. In my view the issue is finely balanced, but in the end I think the judge was entitled on the evidence before him to find that, viewed objectively, Mr. Rackham’s failure to introduce appropriate procedures did not amount to gross negligence in objective terms.[38]The failure to dismiss Mr. Nair immediately upon discovering that he had issued false stock records to Tradigrain some months before has to be viewed in the context of a developing enquiry. At the time there were reasons to think that the misdelivery might have been the result of a mistake rather than deliberate dishonesty and Mr. Rackham had reason to believe that Mr. Nair was basically honest. In hindsight his action in merely suspending Mr. Nair from operations at Kandla appears surprising, but I do not think that the risk of his involvement in further dishonest withdrawals of stock at other ports was so obvious that his failure to remove him there and then from all contact with this kind of business can be categorised as gross negligence.

(b) The subjective element

[39]In paragraph 93 of his judgment the judge expressed the view that in the circumstances of his workload and illness, Mr. Rackham’s conduct did not demonstrate the necessary “subjectively inexcusable violation of the requirements of ordinary care” that would be required for his omissions to amount to gross negligence under German law. However, although Mr. Milligan accepted that when he took over responsibility for CBI’s business Mr. Rackham had faced a much heavier task than anyone had originally contemplated and that there was also evidence that he had suffered severe intermittent bouts of fever and gastric illness, he submitted that it did not excuse the very serious omissions to which I have referred.[40]Again, with the benefit of hindsight it is possible to understand how important it was to devise and implement security procedures that would ensure the independent monitoring of goods for which CBI was responsible before undertaking CMA business of any kind. However, that was only one part of CBI’s business and Mr. Rackham had limited resources at his disposal. He had to decide where to concentrate those resources and in doing so had to make some assessment of the importance of competing demands on his own time and that of his staff. Moreover, from at least the middle of 1999 he began to suffer periodic bouts of illness of a kind that must have interfered significantly, albeit intermittently, with his ability to do his job efficiently. Medical records show that when these bouts of illness occurred they affected him seriously, although in the main their effects do not appear to have been long-lasting.[41]Mr Milligan submitted that neither pressure of work nor illness of this kind can excuse a failure over a period of several months to implement proper operational strategies of the kind that were required in this case. However, the judge did not think that was the case and in my view he was entitled to come to that conclusion. There was evidence that Mr. Rackham had responsibility for a business spread across the whole of the Indian sub-continent with nine offices and four associated offices which required a thorough overall and integration into the global Intertek organisation. There was also evidence from Mr. Notman-Watt that Mr. Rackham’s illness had to some extent undermined his health generally and left him in a weakened condition to a far greater extent than had been realised at the time. The judge was well-placed to assess the extent to which a combination of Mr. Rackham’s workload and illness affected his decisions and in my view his findings in that respect should not be disturbed. Limitation[42]That brings me to the final issue, namely, whether Intertek is entitled to limit its liability under clause (i) of Schedule III to the CMA in the event that a loss was caused by gross negligence. The judge referred to the fact that the concept of gross negligence finds no place in English civil law and to the fact that the words used are of considerable width. He concluded that it was intended to be as all-embracing as was permissible in law and that Intertek was entitled to limit its liability even in respect of a loss which in German law would be regarded as resulting from gross negligence.[43]I have already referred to the terms of clause (i) of Schedule III, but in view of Mr. Milligan’s submissions it is necessary to refer also at this stage to two other provisions of the CMA. Clause 9 of the contract provided as follows:
“The Depositor [Tradigrain] shall hold harmless and indemnify ITS against any loss, damages, costs, claims or expenses suffered by or made against ITS as a result of any act or omission of ITS or any Sub-Contractor (a) in connection with ITS’ performance of its obligations under this Agreement and/or (b) otherwise in carrying out the instructions of the Depositor, save in the case of gross negligence or wilful default on the part of ITS or the Sub-Contractor.”
[44]Clause 8 of Schedule II provided:
“. . . . . ITS is not . . . . . liable for any loss, theft, damage, wrongful or incorrect delivery to a third party, destruction, deterioration or deficiency of the Goods . . . . . except as may be caused by a deliberate or negligent act on the part of ITS’ or its Sub-Contractors’ employees, and for no other loss whatsoever or howsoever arising; . . . . .”
[45]Mr. Milligan submitted that it was apparent from clause 9 that the parties were familiar with the concept of gross negligence and could therefore have included a reference to it in clause (i) of Schedule III if it had been their intention to limit Intertek’s liability in such circumstances. However, this argument is really no more than an adjunct to the wider proposition that by using words of a general nature (“improper or negligent performance, purported performance or non-performance”) the parties cannot be taken to have intended that Intertek should be entitled to limit its liability for losses caused by deliberate misconduct or by misconduct of a such a serious nature as gross negligence.[46]It is certainly true that English law has traditionally taken a restrictive approach to the construction of exemption clauses and clauses limiting liability for breaches of contract and other wrongful acts. However, in recent years it has been increasingly willing to recognise that parties to commercial contracts are entitled to apportion the risk of loss as they see fit and that provisions which limit or exclude liability must be construed in the same way as other terms: see, for example, Photo Production Ltd v Securicor Transport Ltd [1980] A.C. 827.[47]As the judge pointed out, clause (i) of Schedule III is worded in very broad terms and suggests that the parties were seeking to cast the net as widely as possible. That appears most clearly from the use of the words “purported performance or non-performance.” Moreover, whereas clause 8 of Schedule II preserves Intertek’s liability for deliberate or negligent acts of its employees, the purpose of clause (i) of Schedule III is to impose a monetary limit on its liability. Clause 8 clearly renders Intertek liable for gross negligence on the part of its employees, and one might therefore expect that the monetary limitation in clause (i) would extend to the same acts and omissions.[48]Against that Mr. Milligan submitted that one can discern in the contract as a whole three recognisable layers of loss which the parties had in mind: losses occurring through gross negligence or wilful default, losses occurring through simple negligence and losses occurring without negligence of any kind. He submitted that clause (i) of Schedule III applies only to the second and third categories.[49]In my view this is essentially another aspect of the same argument. Although it is true that one finds the expression “gross negligence” used in clause 9, I do not think that the agreement displays enough consistency of structure or language to support Mr. Milligan’s argument. For example, under clause 9 Intertek bears the risk of losses by gross negligence or wilful default and Tradigrain the risk of losses caused by simple negligence, whereas under clause 8 of Schedule II Intertek bears the risk of losses caused by simple negligence. The reason for the difference between these clauses in language and scope is, I think, mainly attributable to the fact that they are directed to different ends. Clause 9 contains an indemnity in favour of Intertek, whereas clause 8 of Schedule II and clause (i) of Schedule III are directed to Intertek’s liability for breaches of contract and of its duty towards Tradigrain. In the end I think that all one can do is to construe clause (i) in the context of the remainder of the agreement. I think the judge was right for the reasons he gave, which ultimately do not admit of much elaboration.[50]For these reasons I would dismiss the appeal.

Lord Justice Carnwath:

[51]I agree.

Lord Justice Laws:

[52]I agree that this appeal should be dismissed for all the reasons given by my Lord, Moore-Bick L.J. I add these few words only in order to lay special emphasis, with respect, on my Lord’s observation at paragraph 12 of his judgment that the application to set aside the grant of permission to appeal should never have been made. The circumstances in which the jurisdiction to set aside such a grant are very narrowly confined. They have been explained in this court on several occasions, notably in Re BCCI, Morris v Bank of India [2004] EWCA Civ 1286. They are effectively limited to cases where the court granting permission was misled, or lacked jurisdiction, or some plainly and unarguably decisive statute or authority was overlooked. There is very good reason for confining the jurisdiction in this way. It might otherwise be a source of satellite litigation, which (as has been shown in other fields) is particularly prone to be wasteful of time, money and judicial resources.[53]None of the factors I have mentioned applied in the present case. No attempt was made to suggest that any of them did.

Cited in 10 later judgments

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