Toomey v Banco Vitalicio De Espana SA De Seguros Y Reaseguros [2003] EWHC 1102 (Comm)

Case No 2001/178
IN THE HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISION
COMMERCIAL COURT
Neutral Citation No. 2003EWHC1102 (Comm.)
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 20 May 2003
Before
THE HONOURABLE MR JUSTICE ANDREW SMITH
Between
PAUL TOOMEY OF SYNDICATE 2021ClaimantBANCO VITALICIO De ESPANA SADefendantDe SEGUROS Y REASEGUROSDefendant
George Leggatt Q.C. and Simon Salzedo(instructed by CMS Cameron McKenna) for ClaimantAnthony Boswood Q.C. and David Edwards(instructed by Thomas Cooper & Stibbard) for RespondentHearing Hearing dates : 4, 5, 10, 11 March 2003.
Approved JudgmentI direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic..............................The Hon. Mr Justice Andrew Smith

Period: 22nd August 1999 until the end of tournaments detailed hereafter nominally 22nd August 2000

[1]The claimant in this case represents a number of reinsurers in the London market (“the reinsurers”) who subscribed to a policy of facultative reinsurance of the defendant, Banco Vitalicio de Espana SA de Seguros y Reaseguros (“Vitalicio”). Vitalicio wrote an insurance policy in respect of losses resulting from the performance of the Spanish football club, Club Atletico de Madrid SAD (“Atletico”), in the 1999/2000 season, either because their first team was relegated from the first division of the Spanish Professional Football League, so that Atletico lost income from broadcasting rights for their home matches, or because their success in the League or the Copa del Rey meant that they had to pay bonuses to their players and staff in the first team squad.[2]The claimant represents his own Lloyd’s syndicates (nos 2021 and 102), five other syndicates (nos 1069, 1239, 1243, 2020 and 994), the Tyche Consortium, who through ASU International act for Lloyd’s underwriters, and three insurance companies, Reliance National Insurance Company (Europe) Limited (“Reliance”), Lexington Insurance Company Limited (“Lexington”) and Global Speciality Risk (“GSR”). Together they reinsured Vitalicio as to 31.54% of the risk. In all Vitalicio reinsured 98% of the risk, in London and the European markets.[3]The reinsurance was placed on a slip policy, which in its final form contained the following provisions: “Type: Facultative reinsurance slip Form: J(A)NMA 1779 slip policy. As original Assured: Atletico de Madrid Reassured: Vitalicio Seguros Retention: 2% Period: 22nd August 1999 until the end of tournaments detailed hereafter nominally 22nd August 2000 Interest: A) This insurance to indemnify the assured for their net ascertained loss of contracted television rights arising directly as a consequence of the relegation of the assured from the 1st division of the Professional Spanish Football league. Limit: pts 2.900.000.000 B) To indemnify the assured in respect of the contracted bonuses to be paid to the squad in the event of obtaining the following classifications in different tournaments: As original Reassured: Vitalicio Seguros Retention: 2% Period: 22nd August 1999 until the end of tournaments detailed hereafter nominally 22nd August 2000 Limit: pts 2.900.000.000 B) To indemnify the assured in respect of the contracted bonuses to be paid to the squad in the event of obtaining the following classifications in different tournaments:

ADDITIONAL CLAUSES

[1]To win the Spanish Football League Limits (1st division) pts 1,000,000,000[2]To win the Copa del Rey pts 500,000,000 Conditions: Full reinsurance clause. Claims control clause (as attached) Proof of interest and sight of contracts Legal clause (as attached) In the event of the assured being relegated to the 2nd division, there will not be any indemnity in respect of the section B) All other terms as original policy. Order hereon: 49% Premium: Pts 158,000,000 in full … Information: At. Madrid last 25 years best results: 1. First division league titles: 1976, 1995 2. Copa del Rey titles: 1985, 1991, 1992, 1996 3. UEFA Cup titles: nil At. Madrid historically has never been in the 2nd division. New acquisitions: …”[4]The reinsurers’ allegation is that the underlying insurance was not properly described in the statement of “Interest” on the slip in two respects relating to the insurance of losses resulting from relegation: firstly, in that Vitalicio agreed to indemnify not Atletico, but a television company called Audiovisual Sport SL (“Audiovisual”); and secondly, in that the underlying insurance did not provide an indemnity for ascertained loss with a limit of pts.2.9 bn., but was for an agreed value of pts. 2.9 bn. As a result, the reinsurers say, Vitalicio were in breach of a warranty in the reinsurance policy. Alternatively, they say that Vitalicio misrepresented the terms of the original policy, and that misrepresentation was material and induced them to subscribe to the reinsurance.[5]Accordingly the reinsurers seek a declaration that they are not liable to Vitalicio. Vitalicio make a counterclaim for a declaration that the contract of reinsurance is valid and binding, and for payment under it.[6]The original policy, which was executed on 23 August 1999, was written in Spanish. There is an agreed translation of it. It comprised two parts, General Conditions and Special Conditions.[7]The Special Conditions read, so far as is relevant, as follows:10. INSURER … VITALICIO … … VITALICIO …11. POLICY HOLDER AND INSURED12. Policy Holder: … ATLETICO …13. Insured: The same.14. POLICY NUMBER, EFFECTIVE TERM AND AGENT15. …16. Effective term of policy: from: 00.00am, August 22, 1999 until: 00.00am, August 22, 2000 until: 00.00am, August 22, 200017. …18. RISKS AND POLICY COVERAGE19. SECTION ONE20. To indemnify AUDIOVISUAL…, for economic loss which may arise from the fact of ATLETICO… losing its status as member of the first division…, all of it, due to items linked to the assignment of T.V. and audio-visual rights entered into with AUDIOVISUAL … for the exploitation of static and dynamic advertising rights and others, which has been assessed, by mutual consent and not subject to any review or subsequent valuation, in Pesetas 2,900,000,000 …21. Scope of the coverage provided for in this section one is limited to the losing of such status which arises only and exclusively from strictly sport reasons.22. SECTION TWO23. To indemnify the amount of the bonuses agreed between … ATLETICO and the players, trainers, doctors, mates, masseurs, etc. of the first team squad should it achieve any of the aims set forth hereinbelow:[1]CHAMPION of the First Division Professional Football League. Insured amount: Pesetas 1,000,000,000…[2]CHAMPION of the King’s Cup (Copa del Rey). Insured amount: Pesetas 500,000,000… INSURANCE NET PREMIUM It amounts to Pesetas 158,000,000… for all the options covered as a whole…Such amount shall be paid by the Insured Company on the following dates… ADDITIONAL CLAUSES[1]This insurance shall not cover …[12]Loss arising from financial reasons of any kind whatsoever including, but not limited to: financial loss, insolvency, breach or violation of any legal provisions in force, changes of currency exchange or stability.” In setting out these provisions, I have corrected the translation of the provision about the premium: the translation refers to payment by “the Insurance Company”, a clear mistranslation of “la Entidad Asegurada”. Although the Additional Clauses are not grammatical, it is clear and uncontroversial that Additional Clause 12 was by way of an exception from the cover.[8]The General Conditions of the policy included the following: At clause 1, which was headed “People intervening in the Contract”,:
“1.1 The Taker of the insurance, who has requested and contracted the policy. 1.2 The Insured, that is to say, the person who has an economic interest in the asset covered by the insurance. He may if he is interested, fulfil the duties and obligations which in principle, correspond to the Taker of the Insurance, Transferring, unless a different Beneficiary has been designated, the rights deriving from the contract. 1.3 The Company, which is the Insurer, the fundamental aim of which is to offer insurance. ”
At clause 2.2, under the heading “Documentation of the Contract”,:
“Subsequent to its formalization, the policy may be amended by agreement with the Taker of the Insurance, by means of annexes, numbered correlatively, as many times as necessary.”
At clause 13.1, “…the laws of Spain shall apply to this Contract”.[9]The claim arises because Atletico’s first team was relegated from the first division to the second division of the League at the end of the 1999/2000 season, on 7 May 2000. One consequence of this was that, under the rules of the League, their second team was automatically relegated from the second division.[10]Vitalicio settled the resulting claim under the policy for pts 2.7bn in late 2000, making this payment to Audiovisual. They have recovered some two thirds of the loss through reinsurance, but the reinsurers represented by the claimant have denied liability.

… VITALICIO …

[11]The issues between the parties are these: i) Did Vitalicio give a warranty to the reinsurers that the interest insured was an obligation to indemnify Atletico for their net ascertained loss of contracted television rights resulting from relegation? ii) If so, were Vitalicio in breach of their warranty(a) because the underlying insurance policy, being for an agreed value in the sum of pts 2.9bn, was not for an indemnity of ascertained loss, and/or(b) because the policy provided an indemnity for Audiovisual’s loss, and not for that of Atletico? iii) Did Vitalicio misrepresent the underlying insurance policy in these respects? iv) If so, (a) was the representation material, and (b) were the reinsurers thereby led to enter into the reinsurance contract? When the trial before me started, Vitalicio also asserted that the reinsurers were prevented (by a waiver or an estoppel or an affirmation) from asserting that the reinsurance contract was discharged or avoided, but Mr A Boswood QC, who appeared for Vitalicio, did not pursue this argument, in my judgment rightly.[12]I heard oral evidence of fact from six underwriters who wrote the risk for reinsurers, and from three employees of Vitalicio: Mr Eduardo Llinas, their Director of the International and Companies Division; Mr F J Zuazo, who works in their Department of Large Accounts (Industrial Risks) in their Madrid Office; and Mr Alfredo Corte, who is their Head of Reinsurance.[13]I also heard evidence of Spanish law from two lawyers. The claimant’s witness was Mr Jorge Angell, a practising lawyer and a specialist in commercial litigation and other matters concerning insurance and reinsurance. Vitalicio called Prof Juan Sanchez-Calero, the Professor of Commercial Law at the Complutense University of Madrid and a practising lawyer. Both were well qualified to give evidence of Spanish law, produced careful and helpful reports, and were clearly seeking to help the court.[14]On 19 April 1996, Atletico assigned broadcasting rights in respect of the home games of their first team to a predecessor of Audiovisual called Gestora de Medios Audiovisuales SA. (“Gestora”). No issue arises from the transfer of the rights to Audiovisual, and in this judgment I shall not distinguish between Gestora and Audiovisual.[15]The agreement between Atletico and Audiovisual, which initially covered the five seasons from 1998/99 to 2002/03, entitled Audiovisual to broadcast up to twelve home matches of Atletico’s first team on “free air” television, and an unlimited number of their matches on “pay-per-view” television. For these rights, Atletico were to be paid annually a minimum of pts 2 bn (plus VAT), which comprised a fixed guaranteed sum of pts 1.75 bn and a share of the net profit obtained by Audiovisual from the exploitation of the rights, which share was to be at least pts 250 mn. The fixed sum was payable in twelve monthly instalments. Atletico were also to be paid a further pts 1 bn if they finished the season among the top four teams in the first division. If, however, Atletico’s first team was relegated, they were to be paid only pts 150 mn for all broadcasting rights of their home games in the second division, without any limit on the number of matches that might be broadcast.[16]The agreement was amended by an addendum dated 16 August 1996. The period of the agreement was changed to seven seasons from 1996/97. The amount to be paid to Atletico was increased to a minimum of pts 3bn, a guaranteed sum of pts 2.625bn and the minimum payment by way of the share of the profits of pts 375 mn. However, there was to be no bonus for finishing among the top four teams: on the contrary, Atletico were to repay pts 500 mn to Audiovisual if they did not do so. The relevant provision read as follows:
“B).- For each of the seasons during the in force period of this Agreement where [Atletico] fails to be classified amongst the first four of the Official Championship League, [Atletico] will be obliged to return to [Audiovisual] the sum of FIVE HUNDRED MILLION PESETAS … plus the corresponding VAT charge, before the start of the following season or failing that, to authorise [Audiovisual] to deduct the same sum from the amounts due in respect of the following season.”

until: 00.00am, August 22, 2000

[17]This term was amended on 30 July 1998, and the condition triggering the obligation to repay became Atletico’s failure to qualify for European competition (either the Champions League or the UEFA cup), which they could do by finishing among the top seven teams in the first division of the Spanish League or by winning the Copa de Rey.[18]Atletico had a separate agreement with Audiovisual dated 8 July 1996 for broadcasting rights in respect of the home games of their second team. Under that agreement, Atletico were to be paid a minimum of pts 150 mn, comprising a guaranteed sum of pts 120 mn and a share of the profits from exploitation of the broadcasting rights of no less than pts 30 mn.[19]The recitals to the agreements of April 1996 and July 1996 referred to a Re-Structuring Plan under what is referred to as “the Spanish Sports law”, and under their arrangements with Atletico, Audiovisual were to produce a bank guarantee in an amount equal to what was outstanding from Atletico under the Re-Structuring Plan, with any payments made by Audiovisual under the guarantee being off-set against sums due from Audiovisual to Atletico. Accordingly, in advance of the season, Audiovisual issued promissory notes reflecting in amount and date sums payable to Atletico for the first team broadcasting rights. These promissory notes were lodged with Atletico’s bankers, Banco Pastor, and the loans to Atletico were thereby secured.[20]In September 1998 Audiovisual issued promissory notes in anticipation of what Atletico was to be paid in respect of the 1999/2000 season. The total value of the notes was pts 3.48 bn (the equivalent of pts 3bn plus VAT at 16%). The notes had monthly maturity dates between 15 September 1999 and 15 August 2000, each instalment being covered by three promissory notes for a total of pts 290 mn. In July 1999 the notes maturing between December 1999 and August 2000 were replaced by notes maturing between 15 September 2000 and 15 June 2001 for pts 2.9 bn in total.[21]Audiovisual were potentially exposed under these arrangements if Atletico’s first team was relegated. Audiovisual might then be obliged to pay more under the promissory notes than Atletico were entitled to receive under the broadcasting agreements. Audiovisual could, of course, seek reimbursement from Atletico, but if Atletico defaulted, they had no security. Accordingly, insurance was taken against the risk of relegation. When Audiovisual first issued promissory notes in September 1998, Atletico acknowledged them in the following terms:
“We have received from Audiovisual …the following promissory notes….To be applied to invoicing for television and audiovisual rights for season 1999/2000, whose invoices are raised and submitted to Audiovisual in this undertaking and at the same maturity dates as the aforementioned promissory notes, provided that the first team of Atletico remains in the first division in this season, otherwise they undertake to reimburse the sum immediately, whereby in a term of ten days they undertake to take out insurance as guarantee to Audiovisual for the entire sum paid in this undertaking, that is to say, 3,480,000,000 pesetas …, expiring on 25 June 1999 and naming Audiovisual Sport the beneficiary. In the event that the club fails to set up such guarantee, Audiovisual will do it themselves, and pass on and deduct the cost of the insurance and any costs, including financial, involved in the Club’s insurance operation.”
[22]When Atletico first took out insurance for the 1998/99 season, their brokers placed it with Vitalicio’s office in Barcelona, who had been writing insurance of this kind since about 1997. Vitalicio retained only some 2.5% of the risk reinsuring the balance in the London and European markets through their producing brokers, SIACI, and in the case of the London placement, through Lloyd Thompson as placing brokers. The reinsurers included Syndicates nos 102, 2021 and 1239, the Tyche Consortium, and Reliance.[23]Atletico gave instructions to their brokers to obtain quotations for insurance in respect of the 1999/2000 season by a letter dated 27 July 1999, seeking insurance both against the risk of relegation and against the possibility that they might have to pay bonuses to their players and staff. The amount of cover sought in respect of relegation was pts 2.9 bn. Atletico used new brokers, two subsidiaries of Aon called Gil & Carvajal and Cyarsa. The insurance was in due course placed with Vitalicio, but this year they were to write it through their Madrid office. As in the previous year, Vitalicio required reinsurance.[24]On 5 August 1999 Mr Jacobo Hornedo of Cyarsa approached Mr Mark Chapman of the London Brokers, Tysers Special Risks Limited (“Tysers”) in order to place reinsurance of the risk in the London market. He said that Cyarsa had already contacted some Continental and London companies. Mr Hornedo provided Tysers with a copy of Atletico’s instructions and a draft reinsurance slip. At that stage Cyarsa did not identify Vitalicio as the intended reinsured.[25]On 19 August 1999, Cyarsa told Tysers that they had a firm order from Atletico to place the insurance, conditional upon the arrangements being concluded by 20 August 1999. They now identified Vitalicio as the insurer. Tysers went into the market. Mr Burns, a recognised leader of risks of this kind and an underwriter of Goshawk, subscribed a line of 7.5%, subject to sight of the relevant contracts . Later that day, Tysers were able to confirm to Cyarsa that the reinsurance was placed, although in fact the market did not sign slips until 24 August 1999 or thereafter.[26]On the same day, 20 August 1999, Mr Zuazo was drafting the underlying insurance of Atletico with Mr A Cavero of Gil & Carvajal at Vitalicio’s offices in Madrid. While Mr Cavero was with him, Mr Zuazo received by fax from Mr Hornedo a copy of the draft reinsurance slip, which described the interest in the same terms as the slip that was later signed.[27]Mr Zuazo had not been involved with writing or issuing the policy for Atletico for the 1998/9 season, and did not have access to that policy. He had, however, been involved with insuring another Spanish football club, Club Racing de Santander, for the 1998/99 season covering the “economic loss” (or quebranto economico) of the Club in the event of relegation. That policy stated that the loss had been “estimated by common agreement for the set amount” of pts 1.5 bn, “not subject to further revision”. It also stated:
“Limit of Indemnity: it is set at pts 1,500,000,000 per season. Such sum is definitely set and will be automatically payable by the Insurer should the loss of category of Santander as member of 1st Division occur”
. Mr Zuazo had a copy of the Club de Santander policy on his computer, and he and Mr Cavero adapted it to draw up the cover for Atletico for the 1999/2000 season.[28]Mr Zuazo explained in his witness statement that Mr Cavero required that the interest section of the policy should refer to Audiovisual in order that, in the event of loss, they might be paid the insurance money, and so Mr Zuazo drafted the “Risk and Policy Coverage” section in the terms of the policy that was in due course issued to Atletico. However, Mr Zuazo said that he intended that it should be Atletico’s loss that was being insured and he meant to make this clear when he drafted the policy.[29]As for the sum insured, Mr Cavero told Mr Zuazo that the rights that were the subject of the contract between Atletico and Audiovisual (which Mr Zuazo had not seen) were worth at least pts 2.9 bn, and so, at Mr Cavero’s request, he did not amend the wording of the Club de Santander policy stating that the loss had already been assessed. He told me, however, that, not intending that the Atletico cover should be for a fixed amount, he omitted the wording in the Club de Santander precedent under the heading “limit of indemnity”.[30]Mr Zuazo was clearly conscious that the Atletico policy referred to the loss being agreed. On 28 September 1999, he received a cover note for the reinsurance in which the statement of the interest reflected the slip, and he had the reinsurance wording translated into Spanish. Having read it, Mr Zuazo raised this query with Mr Hornedo, in a fax dated 29 September 1999:
“… it is indicated that in the issued policy given under interest of the assured: “to indemnify Audiovisual … with figure… for the financial losses to which you will be subjected… which have been estimated by common agreement as a fixed quantity and are not subject to revision or later evaluation at ptas. 2,900,000,000 while in the cover note it is not indicated that the amount is fixed and therefore not subject to revision.”
[31]The broker assured him that there was no conflict between the insurance policy and the reinsurance.[32]During the 1999/2000 season Atletico’s first team had poor results and the Club faced financial difficulties. In April 2000 Mr Burns raised questions about what was known of the financial position when the insurance was placed, and also about whether the exclusion from cover of loss arising from financial reasons applied. These points are not pursued in these proceedings.[33]Following the relegation of Atletico’s first team, Vitalicio appointed the loss adjusters, Revenga International Group Inc (“Revenga”), to investigate the resultant claim. In a report made on 30 August 2000, Revenga suggested that, as a commercial solution, Vitalicio might offer Atletico and Audiovisual pts 2.29 bn in settlement of the claim, this being the amount outstanding on the Banco Pastor loan, and accordingly the amount that Banco Pastor might accept for the release of Audiovisual’s promissory notes. However, this proposal was not acceptable to Atletico and Audiovisual. In a supplemental report dated 22 September 2000, Revenga confirmed their opinion that the economic loss suffered by Atletico was pts 2,889,034,851.[34]Eventually, by a letter agreement dated 12 December 2000 countersigned by both Atletico and Audiovisual, Vitalicio settled the claim in the sum of pts 2.7bn. It identified Atletico as the insured under the policy, recorded the agreement and explained the involvement of Audiovisual in the following terms:
“Notwithstanding the above, we are pleased to confirm our firm commitment to cover the entire 2.7 billion pesetas…, agreed with you as full indemnity for the financial loss experienced by [Atletico] as a result of its relegation to the second division, for reasons linked to licensing of television and audiovisual rights to Audiovisual… “Considering that Audiovisual … had advanced the Club the sum of such rights for season 2000/2001 and that relegation to the second division compels the Club to return this, which is why Audiovisual Sport was included as beneficiary, payment of the ... indemnity will be direct to Audiovisual …, after deducting the sums paid on account (12,000,000,000 pesetas), on 29 December 2000.”
[35]On 28 December 2000, a more formal settlement agreement was concluded between the same parties. It recited that the parties had subscribed to an insurance “covering the risk of economic loss which [Atletico] would suffer as a consequence of the loss of category as a member of the First Division of the Spanish Football League, in respect of amounts connected with the assignment of television and audiovisual rights formalised with Audiovisual, with an insured value of 2,900,000,000 pesetas”. It was a term of the agreement that Vitalicio agreed not to claim from Atletico or from Audiovisual any amount derived from the policy, subject to Atletico and Audiovisual “not re-negotiating the contract for the 2000/01 season in an amount higher than 150 million pesetas”.[36]After these proceedings were brought on 15 February 2001, Vitalicio obtained from Mr Miguel Angel, the general manager of Atletico, a statement dated 27 June 2001 in the these terms:
“We wish to confirm that in relation to policy…we understood at the time of taking the policy and subsequently that the interest covered by the policy was the net ascertained loss which our Club might suffer from loss of television and audiovisual rights as contracted with Audiovisual … up to a limit of cover of Pesetas 2,900,000,000, which in view of the fact that these loss of rights were established in our contracts with Audiovisual … in that sum of, at least, Pesetas 2,900,000,000, were predetermined under the policy in that amount. Any claim made under the Policy was to be paid to Audiovisual …”
.

The insurance contract

[37]The insurance contract was, by the express choice of the parties, governed by Spanish law. I must therefore interpret the contract in accordance with the principles of Spanish law proved by the expert witnesses, but it is common ground that it is not their task themselves to construe the policy. The position is correctly stated by Dicey and Morris, The Conflict of Laws (13th Ed.) at para. 9-019: “… the expert merely proves the foreign rules of construction, and the court itself, in light of these rules, determines the meaning of the documents”: see Rouyer Guillet & Cie v Rouyer Guillet & Co. Ltd, [1949] 1 All ER 244 (CA).[38]The relevant principles of Spanish law for interpretation of a contract such as the insurance contract are set out in articles 1281 and 1282 of the Spanish Civil Code:
“Article 1281: If the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of its clauses shall be relied upon. If the words appear to contradict the evidentintention of the contracting parties, the latter will prevail over the former. “Article 1282: In order to judge the intention of the contracting parties, regard must be had principally to the acts of the parties, both those contemporaneous and subsequent to the contract.”
[39]Vitalicio submit that there are relevant acts of the parties which evidence the intention of the contracting parties and which fall to be considered under article 1282. The reinsurers dispute, first, that there are such significant acts, and, secondly, that Spanish law requires or permits the court to have regard to the acts of the parties in a case such as this. They accept, however, that the latter question is to be determined in accordance with Spanish law, and do not contend that the question whether the court can or should take into account such evidence of conduct is a procedural question governed by the lex fori. It is, however, convenient that I first state how I would interpret the contractual document as a matter of English law and leaving aside consideration of the acts of the parties upon which Vitalicio relies.[40]First, it is clear that the parties have agreed that the amount to be paid by Vitalicio in the event of relegation is pts. 2.9 billion. The amounts to be paid under section 2 of the policy are also agreed. The policy specifies the agreed values of the subject-matters insured and it would be regarded in English law as a valued policy.[41]Spanish law, like English law, recognises that there are insurance policies for agreed values. Article 26 of the Spanish Insurance Contract Act 1980 provides that insurance may not be the source of unjust enrichment for the insured, and that in order to determine the amount of damages sustained, the value of the insured interest is to be taken into account at the moment immediately prior to the occurrence of the loss. Article 28 of the Act, however, provides as follows:
“Notwithstanding what is provided for in Article 26, the parties, by common agreement, may set out in the policy, or subsequent to the conclusion of the contract, the value of the insured interest that will have to be taken into consideration when calculating the indemnity. It will be understood that the policy is agreed when the insurer and insured have expressly accepted in the policy the value allocated to the insured interest. The insurer may only challenge the agreed value where the acceptance of the same may have been induced by violence, intimidation or fraud, or when by mistake the estimation may be substantially higher than the real value at the moment of loss, as determined by experts.”
If the contract of insurance is to be interpreted without regard to the acts of the parties upon which Vitalicio rely, it falls under article 28.[42]The second issue is whether Atletico or Audiovisual is the insured under the policy, that is to say, is the person who has an economic interest covered by the insurance, or, as it was put by Prof Sanchez-Calero, was the holder of the insured interest. Atletico is undoubtedly the insured under section 2 of the policy, but the reinsurers submit on the basis of the “Risks of Policy Coverage” that Audiovisual is the insured under section 1. If that provision were to be read in isolation, there would be force in the reinsurers’ argument. However, Vitalicio are able to point to the specific identification of the insured as the same person as the policy holder, that is to say Atletico, and they submit that therefore the natural interpretation of section one of the risks and policy coverage provision is that any insurance moneys in the event of relegation are to be paid to Audiovisual. This submission is supported by the term that the premium of pts. 158 mn, the total premium for cover under both sections of the policy, is to be paid by “the Insured Company”, contemplating that there was one insured under the policy. I accept Vitalicio’s submission on this point.[43]Vitalicio say that the interpretation of the insurance contract is not the same under Spanish law as under English law because the question whether this contract was a valued policy is to be determined having regard to the acts of the parties. They would also, if necessary, rely upon article 1282 in support of their case about the identity of the insured under section 1 of the cover. The conduct that I must consider is the exchanges between Mr Zuazo and the brokers at the time that the contract of insurance was drafted and made, and the conduct of Atletico, Audiovisual and Vitalicio when and after the claim was settled.[44]The evidence of the expert witnesses about what acts will be received under Spanish law under article 1282 as indicative of the intention of the parties was not, as I understood it, significantly controversial. The acts, as Prof Sanchez-Calero told me, must be “common acts of both parties to the contract”, that is to say the interpretation of the contract cannot be coloured by unilateral acts of one party not known to the other. This is not a relevant restriction in this case. (Mr Boswood did not rely upon the terms of Atletico’s acknowledgement of the promissory notes in support of his argument that the intention was that the assured was Atletico, Audiovisual being a beneficiary of the insurance.) There is no other relevant limitation upon what acts may be adduced in evidence.[45]However, both experts made clear that what is considered under article 1282 is evidence of the actual intention of the parties at the time that they made the contract, and this is to be distinguished from evidence of what the parties later agree would have been a sensible contract and which, by way of variation or modification of the contract, they agree to adopt as a mutually acceptable “interpretation” of it. Accordingly, Mr Angell told me that the Spanish court would disregard acts which are not “spontaneous” in as much as they that do not really witness the contractual intention of the parties.[46]I accept Mr Zuazo’s evidence that Vitalicio, as a fronting company retaining only 2% of the risk, intended that the insurance should reflect the terms of the reinsurance that he was told had been arranged. Undoubtedly he and Vitalicio intended that the contract of insurance and reinsurance should be back-to-back in the sense that there should be no significant difference between the terms of the insurance and the reinsurance such that Vitalicio might be exposed to liabilities that were not the subject of the reinsurance. I have had no evidence from any broker involved in the placement, but I accept that this was also Mr Cavero’s intention: nothing else would have made commercial sense.[47]I also accept Mr Zuazo’s evidence that Mr Cavero required that the policy should refer to Audiovisual with a view to ensuring that any insurance monies might be paid to them, and not intending that the insured interest should be Audiovisual’s loss; and that he so understood Mr. Cavero’s request. It was his intention that the insured interest should be that of Atletico, and Mr Cavero shared that intention.[48]However, I do not accept that at the time that Mr Zuazo drafted the insurance policy and Vitalicio issued it, either he or Mr Cavero intended that the policy should not be for an agreed value and that it should be for an indemnity of loss quantified only when it occurred. Although Mr Zuazo was concerned that there should be no significant difference between Vitalicio’s liability under the insurance and their protection under the reinsurance, he and Mr. Cavero were not precise in their thinking about how that was to be achieved. Mr. Zuazo, I conclude, simply accepted Mr Cavero’s assurance that the loss would not be less than pts2.9 bn, and in these circumstances was willing to proceed on the basis that the difference between a valued policy and an indemnity policy subject to a limit was insignificant. This was, as I understood it, the thrust of his evidence before me, and is reflected in the wording of his enquiry of 28 September 1999.[49]I add that, even if I had accepted that the intention of Mr Zuazo was to draft a policy providing an indemnity for loss to be quantified if and when it occurred subject to a limit, rather than a valued policy, I would not have concluded that this was an intention that was shared by the broker or the insured. On the evidence before me, there is no basis for that inference.[50]I do not consider that the terms of settlement of the claim, either as expressed in the letter of 12 December 2000 or in the agreement of 28 December 2000, assist Vitalicio. The fact that the claim was settled for something less than pts 2.9 bn does not demonstrate that, when the parties agreed the terms of the contract, they intended that the cover should not be a valued policy. I cannot speculate why Atletico or Audiovisual agreed to settle the claim for pts. 2.7 bn. There was no evidence from either of them. They might have thought there was some doubt about the meaning and effect of the policy. They might have been driven by commercial considerations to make a prompt and amicable settlement with Vitalicio.[51]Nor, in my judgment, does Atletico’s letter of 27 June 2001 support Vitalicio’s contentions. I regard the letter with some scepticism. It can hardly be described as “spontaneous”, being written after these proceedings were brought. But even taking it at face value, it seems to me to indicate that the parties intended to agree upon a valued policy rather than otherwise.[52]I therefore conclude that Vitalicio have not proved acts that evidence the parties’ contractual intention about this, still less acts that demonstrate their intention with such clarity as to outweigh the clear wording of the written agreement. Accordingly, it is not necessary for my decision to determine a dispute between the expert witnesses about the relationship between articles 1281 and 1282 of the Code, and about whether it is permissible in the circumstances of this case to interpret the contract in light of the acts of the parties. However, I should state my conclusions about this.[53]Mr Angell’s opinion was that the primary rule of contractual interpretation is expressed in article 1281, and that, if the contract itself is unambiguous, it is impermissible to examine the conduct of the parties to determine its meaning. As he put it in one of his reports, “According to the principles of construction of contracts in Spanish law, no question on the intention should be admitted where there is no ambiguity in the words. The intention rule operates on a subsidiary basis and only comes into play if there is doubt about the terms of the contract”.[54]Prof Sanchez-Calero, on the other hand, while acknowledging that the first part of article 1281 “establishes, as a primary rule, the prevalence of the literal interpretation of a contract”, nevertheless considered that the effect of the second sentence of article 1281 is “to limit the prevalence of the literal interpretation of the contract, including situations where the terms are clear and conclusive”.[55]Despite the academic interest of the disputed question, as the evidence was developed it became increasingly apparent that the difference between the experts was one of jurisprudential principle rather than about the approach adopted in practice by the Spanish Courts to contractual interpretation. Despite the words of article 1281 that are translated “the literal meaning of its clauses shall be relied on”, there is no dispute that the meaning of a contract is ascertained by reading and interpreting it as a whole, and not governed by the literal wording of particular clauses. The evidence of Prof Sanchez-Calero demonstrated that the fundamental objective in Spanish law when interpreting a contract is to ascertain the intention of the parties at the time that they made it. He cites in his report what Lopez Lopez in his Comentarios calls the “principle of spirit”:
“The principle which both articles [sc 1281 and 1282] reflect, is the so called principle “of spirit”, which appears here in the matter of interpretation, and it is compulsory, in order to understand the meaning and scope of a contract, to follow the intention of the contracting parties”
. The authorities make it clear that the literal wording of contractual provisions must not override that principle. One authority cited by Prof Sanchez-Calero, was a decision of the Supreme Court dated 26 June 2002, in which it was said:
“When from what is claimed and proven in the proceedings doubts arise based on the true intention of the contracting parties, the legal authority cannot rely on the mere literality of the terms of the contract, however clear they may be, without having the duty to investigate what is truly wanted or the clear intention of the contracting parties, using for this the other legal means covered in the legislation, one of which is to address the contemporary and later actions of the contracting parties, in accordance with article 1282 of the Civil Code.”
[56]However, Prof Sanchez-Calero acknowledged that there are cases in which the meaning of the contractual documents is so clear that there can be no room for doubt that the parties’ intention is that expressed in them regardless of the parties’ conduct. In cross-examination he said this, “If it happens [that the terms of the contract very clearly reflect the intention of the parties], so then the Supreme Court says “Well, we do not need to find out any further evidence of the intention”. But this does not mean that the terms of the contract, the wording of the contract by itself, has been accepted as the exclusive criteria”.[57]For his part, Mr Angell does not dispute that if the meaning of the contractual document is other than clear and unambiguous, it is permissible to look to the acts of the parties in order to ascertain their intention. However, the reinsurers were able to put before me adequate material (decisions of the Supreme Court dated 2 September 1996, 21 May 1997, 20 February 1999 and 8 March 2000) to establish that Spanish law sometimes regards the meaning of a contractual document (read as a whole) as so clear that no doubt could arise about the parties’ intention, and that then the court will not allow other considerations to displace the clear wording of the contract. It suffices to cite one of these cases, that of 20 February 1999:
“Section 1281 of the Civil Code is a rule of construction of a psychological or subjective type and that tries to avoid an absolutely clear declaration of intent being altered on the pretext of an act of interpretation. In other words, as, for all purposes, it affirms the judgments of this Division of the 12th of June 1990 that, as the terms of the contractual clause are clear, without offering rational doubt of the parties’ intention, we have to follow its literal meaning, without it being acceptable to apply another rule of construction, nor other interpretational arguments that distort the expressions clearly revealing the intention of the parties who contracted.”
[58]I accept the evidence of Mr Angell that the words of the contract sometimes so clearly demonstrate the parties’ intentions that any other indications of the parties’ intentions are to be left aside. Indeed, in view of his answers in cross-examination, I am not certain that Prof Sanchez-Calero would disagree with this.[59]The contract wording seems to me unambiguously to state that the parties agreed upon the amount to be paid in the event of relegation. I conclude that Spanish law would not in these circumstances have regard to the acts of the parties under article 1282.[60]I also conclude that, the contractual document being less than clear about who was the insured under it, under Spanish law the acts of the parties in interpreting it would be taken into account in determining this. The conduct of Vitalicio and Atletico and their brokers is certainly consistent with, and provides some small measure of support for, the conclusion that I have reached upon the wording of the document itself.

Misrepresentation

[61]Although the reinsurers’ primary case is one of breach of warranty, it is convenient first to consider whether they are entitled to avoid the reinsurance contract because of misrepresentation of the subject matter of the cover. Mr Boswood does not dispute that in the description of their interest on the reinsurance slip Vitalicio made a representation to the reinsurers about the underlying insurance.[62]The parties have exchanged reports of expert witnesses about the materiality of the representation, but in the event there was no need for them to give oral evidence because of the measure of agreement between them. First, the reinsurers accept that it would not be material in itself if the insured was not Atletico but Audiovisual, although that is of no consequence if, as I have found, the insured was Atletico. Secondly, there is no dispute that it would have been a material fact for a prudent underwriter to know that the original insurance was for an agreed value of pts 2.9 bn if, when the reinsurance was placed, there was a realistic possibility that the net ascertained loss in the event of relegation might be less than that amount; but otherwise it would not have been material for a prudent underwriter to have known this. I must therefore consider whether there was then any such realistic possibility.[63]It was Vitalicio’s contention that the minimum amount that Atletico might lose by way of recoverable loss under the policy in the event of relegation of its first team was pts 3,139,034,851, comprising pts 2,764,034,851 by way of the fixed payment increased by indexation, plus the minimum bonus of pts 375 mn. The income of pts 150 mn earned from the first team playing in the second division was, they say, balanced by the loss of that amount as a result of the automatic relegation of the second team following the first team’s relegation.[64]In reply to this, the reinsurers say that the actual loss suffered by Atletico in the event of relegation was inherently uncertain, and they dispute that at the time that the reinsurance was written, it could properly be said that the loss would be at least pts 2.9 bn., or even that it would probably be so much. Specifically, they make three points:(i) that there is to be brought into account the potential obligation to repay pts 500 mn if Atletico’s first team did not qualify for European competition;(ii) that the loss of pts 150 mn resulting from the automatic relegation of the second team is not properly brought into account; and(iii) that Atletico might be able to reduce their loss, for example by renegotiating the price for the rights to broadcast their second division games.[65]The first of these points seems to me the strongest. Under the insurance policy Vitalicio were to pay an indemnity for “economic loss which may arise from the fact of [Atletico] losing its status as a member of the first division”. If Atletico’s first team had remained a member of the first division for the 2000/01 season, the Club would have been paid some pts 3.139 bn in respect of the television broadcasting rights for the team’s home matches, but would have entitled to keep only pts 2.639 bn unless they qualified for European competition. Mr Boswood conceded that if Atletico’s entitlement from Audiovisual had been structured as a payment of pts 2.639 bn with a bonus or additional payment of 500 mn. if the first team qualified for European competition, then the loss from relegation would not have been as much as pts 3.139 bn, but he submitted that it made a crucial difference to the measure of Atletico’s “economic loss” that the arrangements were structured in the form of a gross up-front payment and a potential refund. I cannot accept this. It seems to me that the expression “economic loss” requires less blinkered and commercially more realistic view of Atletico’s economic loss. The evidence does not explain why the arrangement between Atletico and Audiovisual was structured as it was, but the reality is that if Atletico’s first team had not been relegated in the 1999/2000 season and had played in the first division in 2000/01 without qualifying for European Competition, the overall financial benefit to the Club would have been pts 2.639 bn, plus the use of pts 500 mn until they were obliged to reimburse it. Their economic loss from relegation was the loss of this benefit. After all the arrangement with Audiovisual was not that they should simply that they should pay a penalty of pts 500 mn if they did not qualify for European competition, but for reimbursement of part of the up-front payment, as is evidenced not only by the terminology of the agreement but by the provision for the pts 500 mn to be repaid with the corresponding VAT.[66]If I am right in this conclusion, the reinsurers do not need to rely upon the other two points. I reject them, and can indicate my reasons briefly.[67]The economic loss that is to be indemnified is that of the Club. It is not that of the first team and it is not limited to the loss in respect of the right to broadcast the games of the first team. The first team is specifically referred to in section 2 of the risks and coverage provision, but not in section 1. There is no reason to leave out of account the loss in respect of broadcasting second team games as a result of the relegation of the first team and the (wholly unremarkable) consequence that the second team was automatically relegated so as to prevent the Club having two teams playing in the same division of the league and competing against one another.[68]There is no reason to think that Atletico had any realistic chance of re-negotiating the price for the right to broadcast their second division games. Mr Leggatt suggested that the price of pts 150 mn for the second division rights appears low. This is speculation, and I do not accept it. There is no reason to suppose that when it was negotiated, this price did not represent the market value of those rights, or that the market value had increased significantly after the price had been agreed. Still less is there any cogent reason to suppose that re-negotiation would reduce Atletico’s loss from over pts 3.1 bn to under pts 2.9 bn (which would require the broadcaster to more than twice the agreed price).[69]I turn to the question whether the representation that the insurance was an indemnity of Atletico’s ascertained loss rather than a valued policy induced the reinsurers to subscribe to the reinsurance slip. The reinsurers have to show that, but for the representation, they would not have subscribed to the terms of the slip: see Assicurazione Generali SpA v Arab Insurance Group (BSC), [2002] EWCA 1642 in which Sir Christopher Staughton said (at para 187):
“A misrepresentation or non-disclosure which did not make any difference, in the sense that the underwriter would have agreed to the same contract on the same terms if it had never been made, cannot be an inducement. …. in my view, causation cannot in law exist when even the “but for” test is not satisfied.”
See too para 59 per Clarke LJ.[70]I must therefore consider the evidence of the underwriters. I heard oral evidence from six underwriters: Mr D G Burns, Mr M P Gorman, Mr C J Phillips, Mr T W Stubbs, Mr H R Rivington, and Mr D J Knight. Vitalicio did not wish to cross-examine two underwriters, Mr R M Gaunt and Mr W D R Stewart, on their witness statements. There is also in evidence a witness statement of Mr J W G Jackson, who was not well enough to give oral evidence. There was no evidence from the underwriter of, or any other witness from, GSR, for whom Mr C Kline wrote a line of 5.08%. I was told – and it is not disputed – that it has proved impossible to trace him.[71]The underwriters’ evidence was as follows: i) Mr Burns of Goshawk Syndicate Management Limited (“Goshawk”), led the slip and wrote a line of 2.79% for Lloyd’s Syndicate 2021 and a line of 1.86% for Lloyd’s Syndicate 102. He told me that the underwriting policy of Goshawk was not to cover risks of this kind if they were written on an agreed value basis, the reasons being, as he understood it, a perceived risk of moral hazard and a belief that the insurers (rather than the insured) should benefit from any savings that were made. It became apparent during cross-examination that the agency had no such written policy and that he had never been given formal instructions to adopt such a policy. I am not persuaded that Goshawk had anything that could properly be described as a “policy” of this sort. I do, however, accept that it was Mr Burns’ own underwriting practice and the practice of the Goshawk as a whole not to reinsure risks of this kind if the insurance was on an agreed value basis. Mr Burns said that he had never written a relegation cover that was an agreed value policy, and I accept that he would not have underwritten this risk if he had known that Atletico were insured under a valued policy. ii) Mr Phillips wrote a line of 1.22% for the Tyche Consortium. Like Mr Burns, he stated in his witness statement that the Tyche Consortiumhad a rule against underwriting contractual bonus risks on an agreed value basis. He was cross-examined about a cover note that appeared on its face to suggest that he had in fact written such a risk in respect of the Club Racing de Santander for the 1999/2000 season. This clearly perplexed him, and his evidence became confused. However, later in the trial through a further witness statement he presented documents that demonstrated that, when the risk in respect of Club Racing de Santander was broked to him, it was not broked on the basis that the underlying insurance was a valued policy. Certainly, after he had accepted the risk Mr Phillips was sent a cover note that showed that the insurance was a valued policy and certainly he scratched insurance wording that indicated that he approved the insurance being on an agreed value basis. However, Mr Phillips’ evidence in his second witness statement was that he did not appreciate that the cover note and the wording did not faithfully reflect the risk broked to him and he did not appreciate its significance. Mr Boswood did not wish Mr Phillips to be recalled for cross-examination about his second witness statement, and I accept this evidence. I conclude that Mr Phillips would not have subscribed to the reinsurance of Vitalicio had he been told that the insurance was on an agreed value basis. iii) Mr Gorman wrote a line of 4.23% for Lexington, a part of the AIG Group. His evidence was that, if he had been told that the insurance was written on an agreed value basis, he would have wanted to be satisfied that the agreed value was a reasonable quantification of the likely loss of Atletico in the event of relegation; and therefore he would have required sight of the contract between Atletico and Audiovisual. It was not the normal policy of Lexington to subscribe to agreed value cover without proof of valuation. iv) Mr Stubbs wrote a line of 1.06% for Lloyd’s Syndicate 2020. His evidence was that he had limited experience of this class of business, and that he was relying heavily upon the leading underwriter. In cross-examination he said that, if he had known that Vitalicio had underwritten Atletico on an agreed value basis, he would still have subscribed to the reinsurance of the risk provided, first, it was led by Mr Burns and, secondly, he was satisfied that the agreed value was a reasonable quantification of the loss that Atletico would suffer as a result of relegation. v) Mr Rivington, who wrote a line of 4.6% for Lloyd’s Syndicate 1069. He said in his witness statement that he had on occasions written valued policies, but generally he preferred not to do so. If he had known that Atletico were insured on an agreed value basis, he would certainly not have written so large a line on the reinsurance, if indeed he had subscribed at all. He would have subscribed a smaller line only if he had himself been satisfied that the agreed value was a reasonable measure of the likely loss of Atletico in the event of relegation of their first team, or if the leading underwriter had been so satisfied. vi) Mr Knight wrote a line of 0.74% for Lloyd’s Syndicate 994. In his witness statement Mr Knight said that he would not have subscribed to the reinsurance at the same rate if he had known that Vitalicio had insured Atletico on an agreed value basis. However, I understood him to modify this in his evidence at trial. He would have underwritten on the same terms if he had been satisfied that the agreed value was the loss which Atletico would suffer in the event of relegation. vii) Mr Jackson, who wrote a line of 3.18% for Lloyd’s Syndicate 1243. His evidence was that he would have declined to subscribe to the reinsurance at all, or at least he would have underwritten a smaller line, if he had known that the underlying risk was written on an agreed value basis. viii) Mr Gaunt wrote a line of 4.66% for Lloyd’s Syndicate 1239. Mr Stewart wrote a line of 2.12% the risk for Reliance. Their witness statements were to similar effect. If they had known that the underlying policy was written on an agreed value basis, they would have asked further questions about quantum and might well have required a different rate. I infer that both would have subscribed to the reinsurance at the same rate if satisfied that the agreed value was a reasonable quantification of the loss that Atletico would suffer as a result of relegation, but that otherwise they would not have underwritten on the same terms.[72]I accept the evidence of the underwriters to which I have referred.[73]The underwriters therefore fall into two categories: i) Four of the underwriters, Messrs Burns, Phillips, Rivington and Jackson, would not have subscribed to the risk if they had known that the underlying policy was written on an agreed value basis. I am satisfied that these underwriters subscribed to the cover because they understood from the slip presented to them that Atletico was insured on an indemnity basis subject to a limit of pts 2.9 bn, and they would not have subscribed to the reinsurance with the same line (if at all) if they had known that Atletico were insured on an agreed value basis. ii) The other five underwriters, Messrs Gorman, Stubbs, Knight, Gaunt and Stewart, would not have subscribed to the reinsurance if they had known that Vitalicio had written the risk on an agreed value basis unless they were satisfied (either through their own assessment or through that of the leading underwriter) that the agreed value represented a reasonable assessment of the loss that Atletico would sustain if the first team was relegated.[74]There remains GSR. In the absence of evidence from Mr Kline, Mr Leggatt submits that I should infer that he would not have underwritten the risk if he had been told that the underlying insurance was a valued policy and he thought that the agreed value might well prove higher than Atletico’s actual loss. I accept that submission. There is no reason to suppose that he alone of the underwriters acting for the reinsurers would have subscribed on the same terms to the reinsurance of a policy written on an agreed value basis without being satisfied that the agreed value was not excessive.[75]I also conclude that if any of the underwriters had examined the underlying insurance and the contract between Audiovisual and Atletico, and assessed the loss that Atletico would suffer in the event of relegation, they would have concluded that the agreed value of pts 2.9 bn was not a reasonable assessment of Atletico’s loss but would have taken the view that the loss would be or might well be less than pts 2.9 bn. They would have recognised that, despite the way in which the arrangements between Audiovisual and Atletico were structured, the reality was that Atletico were being paid pts 2.5 bn (subject to indexation) for the television rights unless they qualified for Europe.[76]I add that there was evidence that both Mr Gorman and Mr Stubbs were influenced to write the risk because it was being led by Mr Burns, a recognised leader for this class of business. However, I am not persuaded that they would not have written the cover if Mr Burns had not led it. There is no reason to suppose either that the reinsurance could not have been placed with another recognised leader, or that Mr Gorman and Mr Stubbs would not have underwritten the risk behind another recognised leader.[77]In my judgment, therefore, each of the underwriters acting for the reinsurers was induced by the misrepresentation of the underlying risk to subscribe to the reinsurance, and that their case in misrepresentation is made out.

Breach of warranty

[78]The claimant submits that, by agreeing to the full reinsurance clause in the reinsurance slip, Vitalicio gave a warranty that the interest that they were reinsuring was an insurance of Atletico’s net ascertained loss of contracted television rights arising direct from relegation, and that, Vitalicio being in breach of that warranty, they are discharged from any liability under the contract of reinsurance. Their first argument is as follows: i) The expression “full reinsurance clause” when used in a contract of reinsurance is long-established and well-understood, and it introduces into the contract (at least) the following wording: “Being a reinsurance of and warranted same gross rate, terms and conditions as and to follow the settlements of the Reassured”. ii) The effect of including these words in the reinsurance agreement is that Vitalicio gave a warranty that the underlying insurance was on identical terms to those disclosed to the reinsurers. iii) The insurance provided that(a) the insured interest was that of Audiovisual, and(b) the policy was a valued policy and not to indemnify net ascertained loss in the event of relegation. iv) These terms were not disclosed to the reinsurers, the reinsurance slip being misleading in these respects. v) Accordingly, Vitalicio were in breach of a warranty in the contract of reinsurance. vi) Therefore the reinsurers are discharged from any liability to Vitalicio under the contract of reinsurance.[79]Vitalicio dispute the second and third steps of this argument, but I have upheld the reinsurers’ contentions at the third step in relation to the policy being for an agreed value. The second step is therefore crucial.[80]The reinsurers’ submission is based upon what was said by Lord Griffiths in Vesta v Butcher, [1989] AC 852. That case concerned a contract of reinsurance of the insurance of a fish farm written by Vesta, a Norwegian insurance company. The insurance contract contained warranties by the insured about keeping a 24-hour watch over the farm (the “24-hour watch clause”) and about maintaining stock records (the “stock control clause”), and the reinsurers denied liability on the grounds that the reinsurance contract contained similar warranties given to them by the insurers and they were broken The contract of reinsurance was on the standard J1 Lloyd’s form of reinsurance, which contained the following wording: “Being a reinsurance of and warranted same gross rate, terms and conditions as and to follow the settlements of the company and that the company retains during the currency of this policy at least the amount stated in the schedule as the retention on the identical subject matter and risk and in identically that same proportion on each separate part thereof …”.[81]During the trial, the second defendants, the reinsurance brokers, had sought to amend their pleadings in order to introduce an argument that the 24-hour watch clause and the stock control clause were terms only of the original insurance, and not of the reinsurance. The trial judge, Hobhouse J, refused the application to amend, taking the view that the argument was “plainly demurrable”, for the following reason among others: “…it overlooked that policy form J1 was to be used; this meant that any term of the original insurance was also to be a term of the reinsurance”: [1986] 2 Ll L R 179 at p.186.[82]The brokers did not seek leave to appeal against the refusal of this application, and so before the House of Lords the point was not in issue. In argument, Mr Longmore QC, counsel for Vesta, made the following submission (at [1989] AC 852,887C/D):
“The critical words of form J1 at Lloyd’s which here constitute the policy of reinsurance are: “being a reinsurance of and warranted the same ... terms and conditions as and to follow the settlements of the company (viz. Vesta).”
The true meaning of this provision is that in consideration for the reinsured agreeing that the terms of the original contract of insurance should be incorporated in the contract of reinsurance, so that any variation of the original insurance cannot affect the liability of reinsurers, reinsurers agree to accept and follow the settlements made by his reinsured.”[83]Lord Templeman, with whom Lord Bridge and Lord Ackner agreed, apparently accepted the thrust of this submission. Having cited the wording of form J1, he said (at p.891G) that, “The reinsurance policy thus emphasised that the two were on identical terms, that the risks of the underwriters and Vesta are identical and that a claim settled under the insurance policy would be a claim payable under the insurance policy”.[84]Lord Griffiths, however, said this of the provisions in the form J1 (at p.896C/D): “For my part, I would be reluctant to read these contractual documents as making the terms of the contract of insurance terms of the contract of reinsurance. Although the wording is archaic and difficult to comprehend I understand the phrase “warranted same gross rate terms and conditions” as a warranty given by the company, i.e. the insurer, that he has placed the risk on the same terms that he has disclosed to the reinsurers. This view is I think strongly supported by the fact that the policy is attached to the slip against the heading “Infn” which is clearly an abbreviation of the word “Information” and shows that at the time the slip is completed the policy terms are available to the reinsurer to show the nature of the risk that he is accepting. The warranty in the insurance is that the policy has been or will be written in those terms”.[85]The dispute between the claimant and Vitalico is whether the proper meaning and effect of a full reinsurance clause is that stated by Mr Longmore in his submissions or that which appealed to Lord Griffiths. The other members of the House of Lords did not indicate agreement with this part of Lord Griffith’s speech. It was, as Mr. Leggatt pointed out, cited uncritically by Beldam LJ in Gan Insurance v Tai Ping, [1999] Ll L R (I & R) 472 at p.479, but I do not read that judgment as indicating that Beldam LJ necessarily agreed with what Lord Griffiths said about the reassured giving a warranty. Mr Leggatt has not cited any other authority in which Lord Griffiths’ observations have been cited with approval, still less where they have been followed. The highest that he can put his submission is that they have not been the subject of judicial criticism.[86]As I have indicated, Mr Boswood’s submission reflects that of Mr Longmore in the Vesta case. He says that a full reinsurance clause has the effect of incorporating into the contract of reinsurance, with or without a degree of manipulation, all those terms of the underlying insurance that regulate the scope of the cover. By agreeing to it, the insurer agrees that all the relevant and applicable terms of the original contract of insurance become terms of the reinsurance, and in return the reinsurer agrees to accept and to follow the settlements made by the insured. It is, as Mr Boswood put it, “a self-fulfilling clause” in that the original policy terms automatically become part of the reinsurance contract.[87]I agree with this submission. First, it gives the full reinsurance clause the meaning that, I think, it is generally understood in the insurance industry to have. The ordinary presumption is that facultative reinsurance is intended to be back-to-back with the underlying policy. In Phoenix Insurance v Halvanon Insurance, [1988] QB 216 at p.278F/G, for example, Kerr LJ said this; “[The parties] clearly intended, probably as a matter of routine, that the “full reinsurance clause” should be incorporated, because it usually is, and because its first part is an uncontroversial and virtually universal feature of reinsurance business, viz that the reinsurance should be on the basis of the same rate, terms and conditions as the primary insurance and that the reinsurers are bound to follow the settlements of the reinsured made properly and in good faith”.[88]Secondly, I find it difficult to read the words of the full reinsurance clause themselves as expressing the meaning that Lord Griffiths suggests. It must be acknowledged that the clause has been frequently and justifiably criticised, and that it is ungrammatical and somewhat obscure. However, on no view does it refer to the terms of the original insurance being disclosed to the reinsurers.[89]Thirdly, even if a full reinsurance clause might sometimes import the warranty that Lord Griffiths suggests, I do not consider that it would do so in this case. It is not clear to me that Lord Griffiths was intending his observations to apply to any case other than that before him. In the Vesta case, not only were the terms of the original insurance disclosed to the reinsurers, but it was stated on the slip that they were. Lord Griffiths attached importance to this. In this case, the terms of the original insurance were not even disclosed to the reinsurers.[90]I add that the slip presented to the reinsurers stipulated that the form was to be “as original”, and also “all other terms as original policy”. It is true that, on Vitalicio’s case, therefore, there is some repetition in the reinsurance slip, but this is unremarkable. It is unrealistic to suggest that this is an indication of the import of the full reinsurance clause that the parties intended.[91]I reject the claimant’s argument that the full reinsurance clause introduced a warranty by Vitalicio about the terms of the underlying insurance.[92]However, the reinsurers have an alternative argument: that upon the proper interpretation of the slip, Vitalicio is to be regarded as undertaking that the original insurance was properly described in the statement of their interest, and in particular as undertaking that the insurance indemnified Atletico for their net ascertained loss in the event of relegation, subject to the limit of pts 2.9 bn.; and that those undertakings were by way of warranties.[93]In support of this submission, Mr Leggatt cited the judgment of Rix LJ in HIH Casualty and General Insurance Ltd v New Hampshire Insurance Co and ors, [2001] 2 Ll L R 161. The case concerned a contract of “pecuniary loss indemnity” in respect of a group of films to be co-produced by 7.23 Productions LLC and Flashpoint Ltd (“the 7.23 slate”), that provided collateral for film finance, and the reinsurance of that risk. The underlying contract was a slip policy and against the word “interest” it was stated that “7.23 Productions will produce and make six made-for-TV films” (the “six film term”). It was held that this was a term of the original policy. It followed that it was also a term of the reinsurance contract, since the reinsurance slip policy stated “Interest: As Original Policy”, and “Conditions: This Reinsurance is subject to all terms, clauses and conditions as original and to follow that placement in all respects”. Against this background, the Court of Appeal had to consider whether the six film term was a warranty. Rix LJ said this (at para 101):
“In my judgment, once the six film term is established as a term of the insurance or reinsurance contract, the grounds for holding it to be a warranty are very strong. It is a question of construction, and the presence or absence of the word “warranty” or “warranted” is not conclusive. One test is whether it is a term which goes to the root of the transaction; a second, whether it is descriptive of or bears materially on the risk of loss; a third, whether damages would be an unsatisfactory or inadequate remedy. Lord Justice Bowen said in Barnard v Faber, [1893] Q.B. 340 at p. 344: “A term as regards the risk must be a condition.”
Otherwise the insurer is merely left to a cross-claim in a matter which goes to the risk itself, which is unbusinesslike …The very fact that the making of the six films lies under the “INTEREST” line emphasizes the importance of the term and its direct bearing on the risk.”[94]The focus of Mr Boswood’s response is that the statement of Vitalicio’s interest on the reinsurance slip was merely descriptive and not promissory at all. He drew my attention to CNA International Reinsurance v Companhia de Seguros, [1999] Ll L R (R & I) 289, in which Clarke J was considering a number of preliminary issues, including one about whether wording set out under the heading “INTEREST” in the reinsurance slip was a description of the defendant reinsured’s interest under the original insurance or constituted the terms of the agreement to reinsure. Clarke J said this (at p.300):
“In short I accept [the claimant’s] submission that all the terms should be treated as terms of the reinsurance, but that each term must then be considered in order to see whether it is applicable in the context of the reinsurance contract set out on the slip. Thus in general the references in the wordings to “the Underwriters” are references to the reinsurers and the references to “the Assured” are references to the reassured, namely Tranquilidade. In the slip, “reassured”, “assured” and “insured” are defined. The words following “INTEREST”, as I see it, are intended to describe Tranquilidade’s insurable interest. There is no need to construe them as the reinsuring words because those are set out in the standard wordings which are terms of the reinsurance policy.”
[95]I do not understand Clarke J to be doing more that construing the particular contract with which he was concerned. The statement of interest clearly bears upon the risk that is being underwritten, and there is a tendency to interpret such descriptions as a warranty if they bear significantly upon the risk that is being insured. Thus MacGillivray on Insurance Law (10th Ed) states the position as follows at para 10-30, the equivalent paragraph to which – though directed to insurance rather than reinsurance – was cited from the ninth edition of the work by Rix LJ in the HIH case (cit sup) at para 102: In marine policies there is a presumption that any statement of fact bearing upon the risks underwritten is, if introduced into the written policy, to be construed as a warranty. In Sceales v Scanlan, Lefroy B. was inclined to follow these early marine cases in a case of life assurance, so that the mere affirmation of a matter of fact which forms part of the contract by actual insertion or by reference to another instrument does make it a matter of warranty. In another Irish case, Quin v National Assurance Company which concerned the description of premises in a fire policy, Jay C.B. thought that a description of premises written in the policy must ipso facto be a warranty. The general tendency in English law, however, is to consider the relevance of the disputed term to the policy as a whole in order to determine the parties’ intention in regard to it. Thus in HIH Casualty and General Insurance Ltd v New Hampshire Co, Rix LJ noted three tests which might be used in determining whether, as a matter of construction a term was to be construed as a warranty… He noted also, with approval, the views expressed in previous editions of this work that a description of the subject-matter of the insurance written into the policy and obviously material to the risk would be likely to be construed as a warranty.”[96]As I see it, therefore, essentially the question turns upon the importance to the risk of the fact that the exposure that was being insured was not an indemnity for loss that was in fact suffered subject to a limit of pts 2.9 bn, but the amount to be paid in the event of relegation was pre-determined. This, of course, goes not to the risk that there will be a loss, but to the amount to be paid to Atletico if there is. Nevertheless, it does, in Rix LJ’s phrase, have a “direct bearing on the risk” being undertaken by the reinsurers.[97]I have already referred to the expert evidence about the importance of this consideration to an underwriter: it would a material fact for a prudent underwriter to know if, but only if, when the reinsurance was placed, there was a realistic possibility that the net ascertained loss in the event of relegation might be less than pts 2.9bn. However, questions of interpretation are determined in light of what the parties knew, or are to be taken to have known, when they made the contract. At the time that they subscribed to the reinsurance, the reinsurers – as Vitalicio, or at least their brokers, appreciated and as is reflected in the condition on the slip about sight of the contracts - did not have, and did not know the terms of, the underlying contracts such as the agreement between Atletico and Audiovisual. They were not in a position to judge whether there was a realistic possibility that in the event of relegation the loss might be less than pts 2.9 bn. This was known to Vitalicio, or at least to their brokers. The contract of reinsurance must therefore be interpreted without reference to whether or not in fact there was a realistic possibility that the loss might be less than pts 2.9 bn.[98]I have accepted that four of the nine underwriters who gave evidence would not write a policy of this kind unless it was for an indemnity for loss actually suffered, and for all nine it was a consideration that significantly affected their underwriting decision. The significance to the underwriting decision of this aspect of the insured risk, the detail with which the underlying insurance is described in the slip, and, importantly, the fact that the description is given by way of a definition of the interest insured, all seem to me to show that this part of the description was intended to be a term of the reinsurance. I do not accept that it was described merely by way of a representation of the reinsured risk.[99]For similar reasons I consider, applying Rix LJ’s first and second tests, its significance is such that the term was a warranty. As for the third test, while damages might be an adequate remedy if the reinsurers were able to demonstrate that Atletico’s net ascertained loss was less than the amount of the settlement of the insurance claim and the measure of the difference, it is unrealistic, it seems to me, to expect them to do so, or to be in a position to do so. Damages would not be a satisfactory remedy.[100]I therefore accept the reinsurers’ second argument that Vitalicio were in breach of a warranty in the contract of insurance.

Conclusion

[101]The claimant therefore succeeds in the claim, and the counterclaim fails. I shall hear submissions as to the order that I should make in light of these conclusions.

Cited in 3 later judgments