Forsikringsaktieselskapet Vesta & Ors [1989] UKHL 5

House of Lords

Between

Forsikringsaktieselskapet Vesta & OrsAppellant

Before

Lord Bridge of Harwich

Lord Templeman

Lord Griffiths

Lord Ackner

Lord Lowry

Date 26 January 1989

LORD ACKNER

My Lords,

I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Templeman and Lord Lowry. For the reasons they give I would dismiss the appeal.

I wish also to record my concurrence in the views expressed by my noble and learned friend Lord Griffiths regarding the relationship normally to be found between contracts of insurance and contracts of re-insurance. I entirely agree with him as to the desirability of the Lloyd's standard form of reinsurance being redrafted in grammatical, intelligible and unambiguous language. The only people who can expect to profit from the obscurities of the present form 31 are the lawyers.

LORD TEMPLEMAN

My Lords,

The business of the respondent Norwegian company, Vesta, comprises or includes the issue of insurance policies against the risk of loss from storm damage and other catastrophe being suffered by Norwegian fish farmers. The business of the appellant

underwriters includes the issue of reinsurance policies against the risk of loss being suffered by insurers of fish farmers in many parts of the world. Vesta insured a Norwegian fish farmer. Vesta effected reinsurance with the underwriters for 90 per cent. of the liability of Vesta to the fish farmer. The fish farmer suffered loss as a result of storm damage and Vesta paid the loss. In these proceedings Vesta seek to recover 90 per cent. of the loss from the underwriters. The trial judge (Hobhouse J.) and the Court of Appeal (O'Connor and Neill L.JJ. and Sir Roger Ormrod) found in favour of Vesta. The underwriters appeal.

When both the insurance policy by Vesta in favour of the fish farmer and the reinsurance policy by the underwriters in favour of Vesta were under negotiation, the brokers required both policies to incorporate the following terms:

"Special conditions and warranties

It is warranted that a 24-hour watch be kept over the site.

Claims control clause

In the event of loss hereunder, no payment, offer or compromise shall be made without the consent of underwriters who shall have sole control of all negotiations.

Failure to comply with any of the warranties outlined hereunder will render this policy null and void. All warranties to be completed at the assured's expense."

A 24-hour watch was not kept on the fish farm so that there was a breach of warranty in each policy. Under Norwegian law, which governed the insurance policy issued by Vesta to the fish farmer, the breach of warranty did not render the policy null and void, despite the express words of the policy, because the breach was irrelevant to the loss. A 24-hour watch could not have prevented the loss of fish caused by the storm. Under English law, which governed the reinsurance policy issued by the underwriters to Vesta, the breach of warranty, whether relevant to the loss or not, rendered the reinsurance policy null and void. Therefore, say the underwriters, they are not liable to pay Vesta under the reinsurance policy although Vesta were liable to pay the fish farmer under the insurance policy.

The question is whether the reinsurance policy, upon its true construction, insured 90 per cent. of the liability of Vesta under the insurance policy or 90 per cent. of the liability which would have been incurred by Vesta if the insurance policy had been governed by English law.

By the reinsurance policy in terms both inelegant and ungrammatical:

"the underwriters hereby agree to reinsure against loss to the extent and in the manner hereinafter provided. Being a reinsurance of and warranted same gross rate, terms and conditions as and to follow the settlements of the company [Vesta] 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 the same proportion on each separate part thereof but, in the event of the retention being less than that stated in the schedule, the underwiters' lines to be proportionately reduced."

The reinsurance policy thus emphasised that the two policies were on identical terms, that the risks of the underwriters and Vesta were identical and that a claim settled under the insurance policy would be a claim payable under the reinsurance policy.

By the operative parts of the reinsurance policy:

"the underwriters . . . hereby bind ourselves . . . to pay or make good to the company all such loss a$ herein provided, such payment to be made after such loss is proved . . .."

The schedule defined the reinsured as Vesta and the original assured as the fish farmer. Retention was 10 per cant. The sum reinsured was 90 per cent. of 750,00G Norwegian kroners, the amount insured by Vesta. The period of reinsurance was expressed to commence and expire at the hour expressed in the original policy. "The perils and interest reinsured hereunder" were expressed to be " livestock reinsurance rainbow trout and salmon only, the property of [the fish farmer] only as more fully set forth in the original policy."

By the reinsurance policy, the underwriters promised that if Vesta became liable for a loss under the insurance policy, Then the underwriters would make good 90 per cent. of the loss. Vesta became liable for a loss under the insurance policy and the underwriters must perform and observe their promise in the reinsurance policy., The provision incorporated in the reinsurance policy that upon a breach of warranty the reinsurance policy shall become null and void is identical with the provision in the insurance policy that upon a breach of warranty the insurance policy shall become null and void. In my opinion, in the absence of any express declaration to the contrary in the reinsurance policy, a warranty must produce the same effect in each policy. The effect of a warranty in the reinsurance policy is governed by the effect of the warranty in the insurance policy because the reinsurance policy is a contract by the underwriters to indemnify Vesta against liability under the insurance policy. The reinsurance policy could have provided expressly that the warranties were to have different effects in the two policies. The reinsurance policy could have limited the liability of the underwriters by providing that a breach of warranty by Vesta would absolve the underwriters even if an identical breach of warranty by the fish farmer did not absolve Vesta. Any such limitation would, however, have been inconsistent with the concept of reinsurance, unacceptable as a basis for the business relationships between brokers, insurers and reinsurers and contrary to the language of the reinsurance policy which insists on the identity of terms, subject-matter and risk involved in both the reinsurance policy and the insurance policy.

Mr. Walker, in the course of a painstaking and forceful address on behalf of the underwriters) submitted that the "follow settlements" clause which provided for the reinsurance "to follow the settlements" of Vesta, was emasculated by the incorporated "claims control clause" which provided that no payment offer or compromise should be made without the consent of underwriters who should have sole control of all negotiations. For this purpose, Mr. Walker cited the judgment of Robert Goff L.J. in Insurance Co. of South Africa v. Scor (U.K.) Reinsurance Co. Ltd . [1985] 1 Lloyd's Rep. 312, 331. In deciding this appeal I decline to follow counsel down the trail of insurance jargon in a reinsurance policy and incorporated documents littered with language which is ungrammatical and contradictory.

The "follow settlements clause" shows that a compromise of Norwegian proceedings brought by the fish farmer against Vesta was intended to bind the English underwriters. The "claims control clause" shows that the underwriters were entitled to negotiate a settlement of Norwegian proceedings brought by the fish farmer against Vesta. Neither the settlements clause nor the claims control clause indicates that if Vesta, or underwriters on behalf of Vesta, unsuccessfully defend proceedings brought by the fish farmer in Norway on the grounds that the fish farmer has committed a breach of warranty, nevertheless, the underwriters may successfully defend proceedings brought by Vesta in England on the grounds that an identical breach of warranty was committed by Vesta.

In my opinion the reinsurance policy in the present case, upon its true construction, insure 90 per cent. of the liability of Vesta under the insurance policy and I would dismiss the appeal of the underwriters.

LORD GRIFFITHS

My Lords,

It is common place for an insurer to wish to lay off in the reinsurance market part of the risk he has accepted on a policy of insurance. This litigation arises out of that everyday situation in the insurance market. I find it disturbing that the underlying document, form 31, used in the Lloyd's market to effect reinsurance should be framed in terms which are inelegant and ungrammatical, to quote Lord Templeman and, in my view, obscure. I also regret that so little thought was apparently given to the difference between a primary insurance contract and a reinsurance contract at the time the reinsurance was placed with Lloyd's.

The essential facts are simple. Lloyd's brokers produced a policy of insurance to cover fish farms. The brokers interested Vesta, a Norwegian insurance company, in accepting insurance of fish farms on the terms of this policy on the understanding that the brokers would be able to obtain reinsurance of 90 per cent. of Vesta's risk under the policy in the Lloyd's reinsurance market in London. Vesta insured a Norwegian fish farm on the terms of the policy and the brokers effected reinsurance with Lloyd's. In fact the reinsurance was placed before the insurance; the details are fully set out in the speech of Lord Lowry and I will not repeat them. In my view no importance attaches to the fact that the reinsurance antedated the insurance.

The policy of insurance contained a warranty that a 24-hour watch would be kept over the fish stocks and a further clause in the following terms:

"Failure to comply with any of the warranties outlined hereunder will render this policy null and void. AH warranties to be completed at the assured's expense."

The fish stocks were destroyed in a storm. A 24-hour watch was not kept over the stocks but even if it had been kept it could not have prevented the storm damage. Under Norwegian law a breach of warranty cannot be relied upon by an Insurer to avoid liability unless there is a causal link between the breach and the damage. There was no causal link in this case and Vesta were therefore liable under the policy.

Vesta therefore turned to their reinsurers to recover 90 per cent. of the claim that they had had to meet under the policy. The reinsurers refused to pay. They said that the terms of the reinsurance contract were the same as the terms of the original insurance contract and therefore contained the 24-hour watch warranty and the clause rendering the policy null and void in breach of the warranty. It is one of the less attractive features of English insurance law that breach of a warranty in an insurance policy can be relied upon to defeat a claim under the policy even if there is no causal connection between the breach and the loss. The reinsurance policy is undoubtedly governed by English law and the reinsurers claim that they are entitled to rely upon the breach of the 24-hour watch clause to refuse to pay under the reinsurance policy.

This litigation has been conducted upon the basis that the same terms were terms of both the insurance policy and the reinsurance policy. In so far as I rnust accept this assumption, I agree that this appeal fails for the reason.*) given in the speeches of Lord Templeman and Lord Lowry. However, at the trial the brokers sought to challenge this assumption and to argue that the 24-hour watch clause, the stock control clause and other clauses in the original insurance policy were not terms of the reinsurance policy. They would have required to obtain leave to amend their pleading to raise this issue and the judge. Hobhouse J., after hearing argument, gave the following reasons for refusing leave to amend [1986] 2 All E.R. 478, 496-497;

"Because of the way in which they sought to raise this argument the brokers had to ask for leave to amend their pleadings to do so. If this leave had been given certain other consequential amendments raising further issues would have had to have been allowed for other parties. Therefore I permitted the brokers to develop their argument (which was purely one of law and based on English law) to establish whether the argument had any substance in it. It did not and was plainly demurrable and I therefore refused the brokers leave to amend. The broker's argument was unsustainable for a number of reasons but three will suffice. First it overlooked that policy Form 31 was to be used; this meant that any term of the original insurance was also to be a term of the reinsurance. Second, it is not sound to argue that because a provision relates to an act to be done by another the contracting party is not promising that that other will do that act. For example, a warranty of seaworthiness may be given in a charterparty by a despondent owner or, under the Marine Insurance Act 1906, by a cargo owner insured under a policy of marine insurance. In any such case the contracting party is dependent on another to perform the obligation and, if he is wise, has a back-to-back contract with another to give him a like remedy for nonperformance. Third, even on the reinsurance slip itself the document annexed is not one which refers to the original insurance but to the 90% reinsurance. It follows that each of the stock control and 24-hour watch clauses as well as the claims control clause are terms of the reinsurance contract between plaintiffs and the reinsurers."

Whilst I fully appreciate the reluctance of the judge to allow an amendment at such a late stage which altered the basis upon which the case had been pleaded and prepared for trial, I myself regret that it has not been possible to examine the issues in this case in the light of such an amendment.

I am not myself persuaded that on its true construction form j1 does make the terms of the original policy of insurance terms of the policy of reinsurance, but if it does have that effect it is, I think, a highly unsatisfactory way of conducting reinsurance business and likely to lead to many unnecessary disputes.

An insurer who has accepted a risk by issuing a policy of insurance goes to reinsurers to lay off part of that risk. Before the reinsurer accepts part of the insurer's risk, he will wish to assess the risk for himself. The reinsurer can only assess the risk if he is shown the terms on which the insurer has accepted the risk; in other words if the reinsurer is shown the policy that has been or is to be issued by the insurer. When the reinsurer has assessed the risk covered by the policy he can then decide whether or not he will reinsure the risk. In the ordinary course of business reinsurance is referred to as "back-to-back" with the insurance, which means that the reinsurer agrees that if the insurer is liable under the policy the reinsurer will accept liability to pay whatever percentage of the claim he has agreed to reinsure. A reinsurer could, of course, make a special contract with an insurer and agree only to reinsure some of the risks covered by the policy of insurance, leaving the insurer to bear the full cost of the other risks. Such a contract would I believe be wholly exceptional, a departure from the normal understanding of the back-to-back nature of reinsurance and would require to be spelt out in clear terms. I doubt if there is any market for such a reinsurance.

With these general considerations in mind I turn to consider the slip, and Form Jl. The contract of reinsurance is contained in the slip which incorporates form Jl:

"TYPE Livestock Reinsurance.

FORM 3.1.

ASSURED R/l Forsikringsaktieselskapet Vesta a/c Fjordlaks, Tafjord A/S. [Then it states the period covered].

INTEREST Rainbow trout and salmon only, the property of Fjordlaks Tafjord A/5 only as more fully set forth In the original policy. [Then it gives the sum insured as 90 per cent. of the relevant kroner figure. It also gives the situation of the cages in Tafjord.]

CONDITIONS Being a reinsurance of Forsikringsaktieselskapet Vesta who retain 10 per cent. of Full R.I. Clause. PREMIUM [The Kroner deposit premium is stated.]

BRKGE 25 per cent..

INFN Original policy of Forsikringsaktieselskapet Vesta as attached hereto,"

Form 31 is the standard form of reinsurance policy used in the, Lloyd's market., The material parts reads

"LLOYD'S REINSURANCE POLICY

"Whereas the reinsured named in the schedule herein (hereinafter called 'the company') has paid the premium specified in the schedule to the underwriting members of Lloyd's who have hereunto subscribed their names (hereinafter called 'the underwriters'),

"Now We the Underwriters hereby agree to reinsure against loss to the extant and in the manner hereinafter provided.

"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 the same proportion on each separate part thereof but, in the event of the retention being less than that stated in the schedule, the underwriters' fines to be proportionately reduced.

"If the company shall make any claim knowing the same to be false or fraudulent, as regards amount or otherwise, this policy shall become void and all claim hereunder shall be forfeited,"

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 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 reinsurance is that the policy has been or will be written in those terms.

A contract of insurance will almost inevitably contain terms that are wholly inappropriate in a contract of reinsurance. The two contracts are dealing with entirely different subject matter. The original policy is concerned to define the risk that the insurer is prepared to accept. The contract of reinsurance is concerned with the degree of that risk as defined in the policy that the reinsurer is prepared to accept.

I accept that this view of the documents faces the difficulty that the brokers altered the schedule of the policy attached to the slip to show the name of the assured as Vesta and not the fish farmer and referred to the 90 per cent. reinsurance, and that the policy of insurance contained a claims control clause which is only relevant to a reinsurance policy. But I would prefer to regard this as indicative of thoughtless confusion rather than an intention to introduce into a contract of reinsurance terms which were wholly inappropriate. To take but one example the stock control clause provides:

"In the event of a claim under this policy, underwriters reserve the right to replace the stock lost, for which the claim is made, with similar stock of a like species."

Is it seriously to be supposed that it was the intention of the parties that London underwriters were to have the option of discharging their liability to Vesta by delivering a load of live fish to them?

The fact is that all the terms of the policy attached "for information" to the slip (apart from the reference to the reinsurance in the schedule and the claims control clause), are sensible terms in a policy of insurance on a fish farm but many of them are wholly inappropriate in a policy of reinsurance, and I find it difficult to conceive that sensible and skilled reinsurers, brokers or insurers should have intended them to apply to the contract of reinsurance.

In Home insurance Co. of New York v. Victoria-Montreal Fire Insurance Co .

[1907] AC 59

, the Privy Council were faced with a problem in many ways similar to that presented by the present case. Reinsurers denied liability to meet a reinsurance claim arising out of a fire policy upon the ground that a condition in the original fire policy had been incorporated into the reinsurance policy and resulted in the reinsurance claim being time barred. The reinsurance contract had been created by attaching to the printed form of the original fire policy a reinsurance slip and amending the original fire policy by insertion of the word "re" before the word "insure" thus substituting the expression "does reinsure" for "does insure." (Which is an echo of the way in which the brokers amended the schedule to the policy attached to the slip in this case). Reinsurers argued that all the terms of the original policy were thus terms of the reinsurance and that they were entitled to repudiate because a breach of the time clause in the original policy. That clause provided that no claim could be brought unless commenced within 12 months of the fire. The insurance claim had taken time to investigate and settle and therefore the claim against the reinsurers was not made until more than 12 months after the fire. In rejecting this defence Lord Macnaghten said, at pp. 64-65:

"It is difficult to suppose that the contract of re-insurance was engrafted on an ordinary printed form of policy for any purpose beyond the purpose of indicating the origin of the direct liability on which the indirect liability, the subject of the re-insurance, would depend, and setting forth the conditions attached to it.

"In the result their Lordships have come to the conclusion that according to the true construction of this instrument, so awkwardly patched and so carelessly put together, the condition in question is not to be regarded as applying to the contract of re-insurance. To hold otherwise would, in their opinion, be to adhere to the letter without paying due attention to the spirit and intention of the contract."

The opinion expressed in the first paragraph of this passage accords closely with my own approach to the case. I appreciate that I have not heard full argument but s if I am right, it provides a simple answer to the problem posed by this case. Vesta did place the insurance on the terms they disclosed to the reinsurers and thus fulfilled the warranty in form 31. The policy took effect in Norway on Norwegian fish stocks and therefore the risks covered by the policy fell to be judged by Norwegian law. Reinsurers had agreed to indemnify against the risks covered by the policy and therefore are liable to indemnify Vesta for 90 per cent. of the claim which was, under Norwegian law, a risk covered by the policy.

I have ventured to set out these views because I am satisfied that the Lloyd's market, perhaps the largest reinsurance market in the world would be well advised to give urgent consideration to the desirability of redrafting their standard form of reinsurance policy.

At present whatever it is intended to mean it is obscure. If it means what I have suggested it should be redrafted to make that clear. If, on the other hand, it is really intended to mean that the terms of the original policy of insurance are to be terms of the reinsurance contract then, again, the policy should be redrafted to spell this out. If that is done, however, Lloyd's must face the difficulties that will inevitably follow when trying to construe and apply terms in reinsurance contracts which serve no useful purpose and are appropriate only to the original policy of insurance.

LORD ACKNER

My Lords,

I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Templeman and Lord Lowry. For the reasons they give I would dismiss the appeal.

LORD LOWRY

My Lords,

The appellant, who is the nominated representative of a group of Lloyd's underwriters, seeks in this appeal to reverse the judgment of the Court of Appeal (O'Connor and Neill L.JJ. and Sir Roger Ormrod), which, affirming the decision of Hobhouse X, held that the underwriters, as reinsurers, were liable to indemnify the plaintiff and respondent, Forsikringsaktieselskapet Vesta ("Vesta"), a leading Norwegian insurance company, as to 90 per cent. (the reinsured proportion of the risk borne by Vesta) of a sum of 2.75 million Norwegian kroner properly paid by Vesta to Fjordlaks Tafjord A/S, the owner of a Norwegian fish farm ("the insured") in settlement of its claim under an insurance policy in respect of loss and damage caused to the fish farm by a storm. The contracts of insurance and reinsurance each expressly incorporated identical wording, known as "Aquacultural Wording No. V" which contained a warranty that a 24-hour watch would be kept over the site and also the following statement:

"Failure to comply with any of the warranties outlined hereunder will render this policy null and void. All warranties to be completed at the assured's expense."

A 24-hour watch was not kept but the failure to keep watch was not a cause of the loss and accordingly, by virtue of section 51 of the Norwegian Insurance Contracts Act 1930 (out of which the parties may not contract), Vesta was fully liable to the insured despite the breach. On the other hand, if considered exclusively under English insurance law, the breach of a warranty renders the insurance policy null and void, even if, as in the present case, the breach has not caused any part of the loss sustained by the insured. The question for decision, as between Vesta and the underwriters, is whether the 24-hour watch warranty should, as the courts below have held, be given in spite if the principles in English law, the same meaning and effect in the contract of reinsurance as it had in the Norwegian contract of insurance. If Yes, the appeal fails and the underwriters are liable on their contract with Vesta; if No, the appeal succeeds, the underwriters escape liability and further questions fall to be decided between Vesta and Aquacultural Insurance Services Ltd. ("the brokers"), who were co-defendants in the action and are also respondents in this appeal.

The facts of the case are fully set out in the judgment of the learned trial judge, as reported in [1986] 2 All E.R. 488, at p. 490j. For present purposes I am content to say that in 1977 the insured set up at Tafjord in Norway a fish farm consisting of about 14 large net cages moored in the water and containing trout and some small salmon, which are fed and allowed to grow with a view to slaughter and sale. On 17 September 1978 a violent storm broke the moorings and broke open about ten of the cages so that most of the fish escaped. Some were recaptured but a serious loss occurred and the insured claimed under its contract with Vesta, which was by necessary implication governed by Norwegian law. It is now agreed that Vesta was fully liable on the contract and that the sum of Nk. 2.75 million, for which it settled the claim on 27 October 1978, was a fair figure. Vesta had covered the insured for twelve months from 26 October 1977 against loss of living fish from any cause and were through the brokers reinsured for 90 per cent of the loss. The underwriters, however, repudiated liability and declined to consent to any settlement of the insured's claim. Then Vesta sued the underwriters on the reinsurance contract and, in the alternative, claimed damages from the brokers for negligence and breach of contract, while in a separate action the underwriters (in the event of their being found liable to Vesta) have claimed damages against the brokers.

Before this particular insurance or reinsurance had been effected or contemplated the brokers, as part of a scheme for insuring fish farms which they were promoting world-wide, had prepared a set of clauses considered suitable for this kind of insurance and known as the Aquacultural No. V wording ("the No. V wording"). As their name implies, the brokers, a subsidiary of Bain Dawes Ltd. the second defendants, had been set up to cater for this type of business, which might accrue not only in Norway but in other countries, such as Canada, France and the United States. They issued brochures in different languages, claiming to provide "a comprehensive world-wide facility for fish farmers, their insurance brokers and agents . . . and solely concerned with solving the insurance problems of aquaculture" and they prepared insurance schemes of which the No, V wording was one. As Hobhouse 3. put it, at p. 492d:

"Bain Dawes and London underwriters wished to promote and share in this business either by way of direct insurance or by way of reinsuring local insurance companies carrying on business in the relevant foreign countries."

In March 1977 the brokers' manager visited Vesta in Norway, partly at Vesta's expense, and discussed the possibility of selling insurance to Norwegian fish farmers. Vesta then began to get orders for fish farm insurance which it passed on to the brokers for reinsurance. The brokers provided the documentation which, as they and Vesta recognised, had to be translated into Norwegian and, while it was difficult to be certain, the judge considered it more likely that it was the brokers' translations which were used.

In London the brokers had obtained from the underwriters In June 1977 a slip (C/792) in the form of twelve months' open cover worldwide on all risks to aquatic creatures, terms of cover to be agreed with leading underwriters in each case. The special conditions, which gave the brokers a profit commission and authority to bind the underwriters, granted permission to issue cover notes showing the terms, conditions and wordings for each risk, to cancel policies and to bind risks up to £ 100,000 or equivalent subject to confirmation within seven days. Translations, where required, of wordings, terms and conditions were to be carried out by translators specified by the Lloyd's Policy Signing Office and policies and cover notes would be issued accordingly. The slip was in the form of a binder given by all underwriters to the brokers to give limited temporary cover and by the following underwriters to the leading underwriters to write risks on their behalf, and all underwriters authorised the brokers to issue cover notes on their behalf and to cancel the cover. The slip was accordingly referred to as "the binder slip".

The terms of the insurance and reinsurance and the circumstances in which they came about are important and I cannot describe what follows more succinctly than did the trial

judge [1986] 2 All E.R. 488, 493-494:

"When on 26 October 1977 the plaintiffs telexed the brokers asking for cover in respect of Fjordlaks, Mr. Secretan made use of the authority given by the binder slip to hold the plaintiffs covered for seven days, obtaining the confirmation of the leading underwriters for a further thirty days on 2 November. This was subject to the completion of a proposal form within thirty days and a marine survey. However, by the beginning of December the plaintiffs had still not forwarded either of these documents, so the brokers sent them a reminder and repeated the process of themselves first giving and then obtaining from the leading underwriters a further held cover note. In fact the proposal form arrived shortly afterwards and no one seems to have insisted on the marine survey. The specific slip under which the plaintiffs were reinsured was prepared by Bain Dawes and was, on 30 December 1977, initialled by the three leading underwriters on behalf of all the underwriters who had underwritten the open cover together with an indorsement which increased the sum insured to Nkr 8m. It is now agreed that this slip and indorsement is the actual contract order under which the plaintiffs were reinsured and that no further problem of rectification arises. The slip provides:

'TYPE Livestock Reinsurance.

FORM J.1

ASSURED R/l Forsikringsaktieselskapet Vesta a/c Fjordlaks, Tafjord A/S. [Then it states the period covered].

INTEREST Rainbow Trout and Salmon only, the property of Fjordlaks Tafjord A/S only as more fully set forth in the original policy. [Then it gives the sum insured as 90% of the relevant Kroner figure. It also gives the situation of the cages in Tafjord.]

CONDITIONS Being a reinsurance of Forsikringsaktieselskapet Vesta who retain 10% of Full R.I. Clause. PREMIUM [The Kroner deposit premium is stated.]

BRKGE 25%

INFN Original policy of Forsikringsaktieselskapet Vesta as attached hereto.'

"Form J1 is a standard form of Lloyd's reinsurance policy which contains the words (printed in red) 'being a reinsurance of and warranted same gross rate and terms and conditions as and to follow the settlements of the [reassured]'. It is thus an express term of this form that the reinsurance shall be on the same terms and conditions as the original insurance. It also includes an express follow-settlements provision. The document attached to the slip was not in fact the original insurance policy but was a document headed 'The Aquacultural Insurance Service Ltd. Aquacultural wording No V. General purpose wording. Monthly reporting of values. Schedule.' There then follow various particulars of the contract which start with 'ASSURED': R/L Forsikringsaktieselskapet Vesta a/c Fjordlaks Tafjord A/S' and the sum assured is again given as 90% of the full Norwegian kroner sum. Then there follow some six pages of unnumbered clauses which make up the Aquacultural No V wording. It is only necessary to make limited quotations from the wording. The scheme is that of an insurance on wide terms with a few warranties and exclusions in favour of the insurer, and among other provisions, an indemnity clause which provides for agreed values (in Norwegian kroner) of fish lost depending on the average weight of the individual fish concerned, a differential franchise clause and a premium adjustment clause. The clauses on which the defendants particularly rely are:

'STOCK CONTROL CLAUSE

The assured will maintain regular written stock control records which records will, at all times, be available to underwriters or their representatives for their inspection ...

SPECIAL CONDITIONS AND WARRANTIES

It is warranted that a 24-hour watch be kept over the site.

CLAIMS CONTROL CLAUSE

In the event of loss hereunder, no payment, offer or compromise shall be. made without the consent of underwriters who shall have sole control of all negotiations. Failure to comply with any of the warranties outlined hereunder will render this policy null and void. All warranties to be completed at the assured's expense.'

"Having obtained the signatures of the leading underwriters on the slips the brokers on 4 January 1978 sent to the plaintiffs a letter enclosing a cover note. This letter said:

•Fjordlaks Tafjord A/S

Please find enclosed the bills, Cover Note and a copy of the Policy Wording No V in respect of the above client. You will note from the Wording that the sum insured is shown as N.Kr. 750,000. The increase of the sum insured to N.Kr. 8,000.000 from 8th December 1977 will be dealt with by endorsement and the relevant document will be forwarded to you together with the policy document when it is received from the Lloyd's Policy Signing Office. You will further note that the increased sum insured has been noted on the Cover Note. We would ask that the assured reads his policy wording carefully in order that there are no misunderstandings. We trust that the enclosed documents are in order.'

"The enclosed cover note had a first sheet which was similar to the schedule attached to the slip but it also included the heading 'COVER NOTE THE AQUACULTURAL INSURANCE SERVICE LIMITED. Subscribed by Lloyd's and Company Underwriters under Cover Number C792/7' and the words:

'This is to certify that insurance has been arranged with Lloyd's and company Underwriters in accordance with the terms, conditions and limitations provided by the Aquacultural Insurance Service Limited Wording Number V under Cover Number C792/7 subject to the attached special conditions and loss reporting clause, as more fully set forth in the policy document to be issued on receipt of the stipulated premium . . . '

and then below the signature of Mr. Hewitt of the brokers the words 'Specially empowered by Underwriters to issue this temporary Cover Note.' The attached No V wording was the same, save for some minor and irrelevant differences, as that attached to the slip."

Having received the cover note, Vesta issued its policy to the insured, with a request to read through the terms and stressing their importance. Mr. Pedersen, the "alter ego" of the insured, on reading the 24-hour watch clause, appreciated that he could not comply with it and so informed the local branch of Vesta by telephone. Mr. Kolbeinsen of Vesta then passed this information to the brokers, but nothing more happened. By doing nothing Vesta can be taken, as the judge held, to have waived this condition, but the position of the underwriters was not affected by what happened and, for the purpose of the question now before your Lordships, this complication can be disregarded.

The reinsurance policy was issued on 7 February 1978. It was on the 31 form mentioned in the slip, specified the 10 per cent. retention and referred in a number of places to the original policy or policies. In the relevant box in the schedule it stated:

"The peril and interest reinsured hereunder: Rainbow Trout and Salmon only, the property of Fjordlaks Tafjord A/S only as more fully set forth in the original policy."

The underwriters raised three defences against Vesta's claim:(1) that a 24-hour watch had not been kept;

(2) that stock control records had not been kept or produced;

(3) that the underwriters had not consented to Vesta's settlement with the insured. The judge rejected the second and third defences for reasons which I need not recall, since the arguments which he dismissed were not revived.

Turning to the 24-hour watch clause, he noted the effect under English law of failure to comply and, in the course of what Sir Roger Ormrod rightly described as a meticulously careful judgment, stated his conclusion on this part of the case. Vesta had contended that the reinsurance contract was governed by Norwegian law. Its alternative submission, "pursued with only lukewarm enthusiasm" but supported by the brokers, was that the No. V wording incorporated in both contracts was so governed. The underwriters had contended that the contract was governed by English law and that English law alone was relevant. The learned

judge said, at pp. 504-505:

"I consider that there is a solution to the problem of the choice of law in the present case which does give a satisfactory answer. It is the almost invariable rule that there is only a single proper law of a contract which governs all aspects of the contract. This is conceptually sound as the primary function of the proper law is to give effect to the parties' intention not merely to agree but also to make a legal contract, i.e. to create a legal relationship. This presupposes a legal system since a legal contract cannot be made without reference to a legal system which is to give it its legal effect. As Lord Diplock said in Amin Rashee d Shipping Corp. v. Kuwait Insurance Co. (The Al Wahab) [ l984] A.C. 50, 65:

' . . . contracts are incapable of existing in a legal vacuum. They are mere pieces of paper and void of all legal effect unless they were made by reference to some system of private law ...'

In the present case one would prima facie assume that this underlying legal system was English law. But by the same logic the choice of law is a matter for the actual or imputed choice of the parties and it has been recognised for a long time that parties may choose that different parts of the contract should be governed by different laws. This is stated in the current edition of Dicey and Morris, Conflict of La ws (10th edn. 1980) p. 749. In Hamlyn & Co. v. Talisker Distillery

[1894] AC 202

, 207, Lord Herschell L.C. said:

'Where a contract is entered into between parties residing in different places, where different systems of law prevail, it is a question, as it appears to me, in each case, with reference to what law the parties contracted, and according to what law it was their intention that their rights under the whole or any part of the contract should be determined.'

"In In re Helbert Wagg & Co. Ltd . [1956] Ch. 323, 340 Upjohn 3., considering a contract which in certain of its areas of operation clearly contemplated that a foreign law would apply, said:

'Those considerations are not conclusive of the question for the parties may well contemplate that different parts of their contract shall be governed by different law.'

"In the present case there is an express provision for the terms and conditions of the reinsurance contract and those of the original insurance to be the same and the reinsurance is manifestly to be back-to-back with the original insurance. From this one should infer a contractual intent that the legal effect of the clauses which define and limit the scope of the cover should be the same in the reinsurance and in the original insurance. When one takes into account that the parties clearly must contemplate that the original insurance is governed by Norwegian law I infer as a matter of English law that the parties intended the construction and effect of the clauses of the Aquacultural wording shall be governed by Norwegian law. Whether one chooses to categorise this conclusion as an application of the English substantive law of construction of an English law contract or as the application of the English choice of law rules does not matter. They are in the present context essentially the same thing. The parties have on the true ascertainment of their contractual intention chosen that that part of the contract shall be governed by Norwegian, not English, law. It will be appreciated that it is a corollary of this particular conclusion that it is the law of Norway applicable to domestic contracts of original insurance which the parties intend shall govern, not the Norwegian law which may or may not apply to reinsurance contracts. The reinsurance contract itself is and remains an English law contract but it is one which is made with reference to, and on the terms of, the Norwegian law contract of original insurance. This view of the English law parallels that of Mr. Rafen on the first point I discussed under the heading of Norwegian law and which I accepted. It follows from this that the dispute about the Norwegian law applicable to reinsurance contracts is really irrelevant and the plaintiffs could succeed even if that dispute had been decided against them.

"I therefore hold as a matter of English law that the proper law of the reinsurance contract is English law subject to the construction and effect of the clauses of the Aquacultural wording being determined in accordance with Norwegian law in the same manner as they are as part of the contract of original insurance. If I had not decided that this hybrid and admittedly somewhat unorthodox conclusion was open to me, I would have been compelled to the conclusion that the whole contract should be governed by Norwegian law, because any other conclusion would be contrary to the manifest intention of the parties to provide the plaintiffs with reinsurance cover in respect of a contract of original insurance on the same terms which is governed by Norwegian law."

The judge rounded off this part of his judgment thus, at pp. 505-506:

"I accordingly hold that the plaintiffs are entitled to judgment against the reinsurers. I would add that this conclusion is fully in accordance with the business nature of the transaction. London underwriters and brokers are seeking to market insurance contracts in foreign countries. As a matter of business they do not do this directly but make use of a local insurance company to obtain the business. The business reality is that the contract that is marketed is a local contract fronted by the local insurance company. The 90 per cent. reinsurance framework, like the profit commission and 25 per cent. brokerage payable to the brokers, is in reality only a mechanism to achieve this end.

It is commercially unrealistic for reinsurers to rely on an English law consequence which forms no part of the scheme of insurance which is being provided and which, if they had stopped to think, they would have realised made the insurance package wholly unsaleable to the overseas insurers and assureds from whom they are seeking to acquire premium income. In subsequent years the package was expressly varied to take this into account."

The reasoning of the Court of Appeal is well summarised by the learned reporter in his headnote [1988] 2 All E.R. 43, 44:

"(1) Although the reinsurance contract was in the main governed by English law the 24-hour watch clause was to be construed in the same way as the underlying insurance contract because (a) that condition was to be performed locally and by the insured, (b) the insurance and the reinsurance were in essence back-to-back, (c) the follow-settlements clause, however much it was affected by the claims control clause, could not be ignored, (d) if the underwriters had exercised their right under the claims control clause to negotiate with the insured they would have had to have done so on the basis that the insurance policy was governed by Norwegian law and (e) the only construction that made commercial sense was that the 24-hour watch clause in the reinsurance contract was to be given the same effect as it had in the underlying insurance contract. Since the breach of the 24-hour watch condition did not provide a valid defence in Norwegian law to the owners' claim under the underlying insurance contract, the reinsurers could not rely on that breach as a defence to the plaintiffs' claim under the reinsurance policy."

O'Connor L.J. devoted his judgment to Vesta's claim against its brokers. As to the case against the underwriters, he agreed with Neill L.J. for the reasons given by him. Neill L.3., having pointed out (at p. 56h) that the brokers were formed for the specific task of providing specialised insurance cover for fish farms throughout the world and that they considered with Vesta the possibilities of selling insurance cover to groups of Norwegian fish farmers, expressed his view on this part of the case as follows (p. 58e):

"What effect then should be given to the watch clause? I have found this to be a difficult question to answer and the arguments put forward so attractively on behalf of the underwriters very formidable. There are, it would appear, three possible solutions: (a) that the reinsurance contract, like the insurance contract, is governed by Norwegian law; (b) that the reinsurance contract in its entirety is governed by English law; (c) that though the reinsurance contract is in the main governed by English law the watch clause is to be construed in the same way as in the underlying insurance contract,

"The first solution, though it was pressed by Vesta before the fudge and was kept alive as an alternative in this court, appears to me to be quite unrealistic. The reinsurance was placed In London on the London market and the documents which were used strongly support the argument that the contract was prima facie governed by English law.

"It follows therefore that the second solution has much to commend it. In the end, however, I find myself compelled, as was the judge, to reject it.

"The relevant term was to be performed locally and by the insured. The contract of insurance itself was in a form devised by the brokers and was part of an operation in which the underwriters themselves were clearly keenly interested. Both the history of the negotiations and the form of the documents shows that in essence the insurance and the reinsurance were back-to-back. The follow-settlements clause, however much emasculated by the claims control clause, cannot be ignored. Furthermore, the rights given to the underwriters by the claims control clause included the right to negotiate with the insured with reference to an insurance policy which was indubitably governed by Norwegian law.

"In my judgment the word 'hybrid' may itself be a source of confusion. I would prefer to say that as a matter of construction of the reinsurance contract and by seeking to ascertain the presumed intention of the parties the watch clause has to be given the same effect as it is given in the underlying insurance contract. In the context of the present case this solution is to my mind the only one that makes commercial sense."

Sir Roger Ormrod began his judgment with a trenchant introduction (p. 59d):

"The main issue in this appeal, stated bluntly but fairly, is whether underwriters under a contract of reinsurance with the plaintiffs ('Vesta'), a Norwegian insurance company, can avoid liability to reimburse them for losses sustained by them under a policy with their insured (Fjordlaks) on the ground of breach of a warranty which is wholly irrelevant to the cause or size of the loss, when they themselves, whose policy with the insured contained a warranty in identical terms, are precluded by Norwegian law from relying on it."

He also attributed some of the difficulties in the case to the way in which the business was conducted in London by the brokers, Bain Dawes Ltd., whom he described as the prime movers through their subsidiaries (p. 59h):

"They designed the form of words (Form V) to be used in contracts for the insurance of fish farms. They negotiated with underwriters and obtained their approval to this form of words and arranged that the business would be done in the form of reinsurance at a time when they had no actual clients and no 'original' insurance contracts to be reinsured. In this case the terms of the reinsurance contracts were copied into the original insurance contracts. Finally, it was the brokers' expressed intention to market this form of insurance 'worldwide' for fish farms wherever situated."

Noting the general principle stated In The Njegos [1936] P. 90, that interrelated contracts should prima facie be governed by the same law, Sir Roger did not consider that principle, "which is after all one of common sense," powerful enough to take the whole of the reinsurance contract into Norwegian law, but he saw a strong argument for saying that it was not governed entirely by English law. He said, at p. 60ds

"Whereas the risk insured by the original policy . . . was financial loss arising from damage to or loss of the fish, the risk insured by the reinsurance policy was loss to the reinsured arising out of their liability under the original policy. Liability under the original policy and the quantum of the loss are governed by Norwegian law. Therefore, liability under the reinsurance policy is governed de facto by Norwegian law."

He continued, at p. 60g:

"Finally, and perhaps most cogent, is the fact that it was the intention of all parties that the terms of the reinsurance contract governing liability should be the same as the terms governing liability under the original contract. The reinsurance policy expressly says so; the brokers insisted on the Form V wording being incorporated in both the reinsurance and the original policies; and Vesta clearly expected to be covered up to 90 per cent. of anything they would be called on to pay under their policy with Fjordlaks. In fact, ail concerned were agreed that the two policies were to be 'back-to-back'.

"Faced with this problem Hobhouse J. held -

'as a matter of English law that the proper law of the reinsurance contract is English law subject to the construction and effect of the clauses of the Aquacultural wording being determined in accordance with Norwegian law in the same manner as they are as part of the contract of original insurance.'

[See [1986] 2 All E.R. 488 at 505]. Had he not gone on to refer to his conclusion as 'hybrid and admittedly somewhat unorthodox,' the matter might have been left as a question of construction of an English contract on English principles. Notwithstanding Mr. Walker's powerful argument for the reinsurers, I think that Hobhouse J.'s conclusion was correct. There is no other way in which the intention of the parties that liability of Vesta should be matched by liability of the reinsurers on a back-to-back basis can be achieved."

Sir Roger concluded his judgment on this part of the case with a passage, at p. 61c, which views the problem differently and which I wish to cite and comment on, partly because it was criticised by the appellant as being inconsistent with what had gone before:

"Turning to the warranty, both the reinsurance contract and the original insurance contract contain a warranty that a 24-hour watch shall be kept over the site. Both contracts also contain a claims control clause to which there appears to be attached a provision which has no connection with it, providing that failure to comply with any of the warranties will 'render this policy null and void.' The claims control clause itself was, of course, wholly inapposite and ineffectual in the original insurance contract. Although there is no evidence that the 24-hour watch warranty was included in the reinsurance contract by a similar mistake and it is accepted that it formed part of it, it is obviously much more appropriate to the original contract.

"By section 51 of the Norwegian Insurance Contracts Act 1930 breach of a safety regulation (anglice warranty) gives no defence to an insurer unless the breach caused the loss. In English law causation is still irrelevant. This introduces a major difference between the two contracts and, if the English version prevails, effectively destroys the basis of the reinsurance policy. So there is a direct conflict between the terms of the Lloyd's Reinsurance Policy which contains a warranty that its terms are the same as those in the original contract, and the warranty provision. It is also plainly inconsistent with the intention of the parties when they entered into the reinsurance contract.

"In my judgment the only way to resolve this problem is to imply into the reinsurance contract a term to the effect that breach of warranty will only avoid, or permit underwriters to repudiate, the policy if breach of the same warranty would permit the reinsured to avoid the original policy with their clients. Some such term is necessary to give business efficacy to the reinsurance contract, and to give effect to the real intention of the parties."

The words to which exception is taken are "the only way to resolve this problem," having regard to what Sir Roger had said when agreeing with Hobhouse J., namely, "There is no other way in which the intention of the parties . . . can be achieved." I do not, with due respect to Mr. Walker's argument (which at every other point was extremely clear, well-marshalled and persuasive), detect here an inconsistency because I have understood "this problem" to be the one mentioned in the immediately preceding paragraph of the judgment. Sir Roger had found a clear intention that the terms of the two contracts should be the same and that Vesta should be insured against its own liability to the fish farmer. At the same time he had found a term in the reinsurance contract which, if read literally according to English insurance law, would have a different effect from that of the same term in the insurance contract, thereby nullifying that intention and depriving Vesta of what it had contracted for; hence the problem. This passage in the judgment clearly illustrates the legal problem that, given the joint intention found to exist by all the judges, a way must, if possible, be found of giving effect to it. I readily concede Mr. Walker's point that one ought not to imply a term in a contract which contradicts an express term of the same contract. Moreover, neither the proposed nor any other implied term had been pleaded by the plaintiff or relied on in argument.

Reinsurance is prima facie a contract of indemnity, as the many examples in the plaintiff/respondent's printed case effectively illustrate, under which the reinsurer indemnifies the original insurer against the whole or against a specified amount or proportion (in this case 90 per cent.) of the risk which the latter has himself insured. This, my Lords, is the situation one expects to find on turning to look at the reinsurance contract. The judge has mentioned the slip and endorsement under which Vesta was reinsured. The slip incorporated Lloyd's form J1 , a standard form of reinsurance policy, which was incorporated by reference in the slip and became the reinsurance policy here. It was "a reinsurance of and warranted same gross rate, terms and conditions as and to follow the settlements of the Company" (Vesta) under which the underwriters "hereby bind ourselves ... to pay or make good to the Company all such loss as herein provided." The No. V wording was also incorporated in the contracts of insurance and reinsurance. I am of the opinion, like all the judges in the courts below, that the intention of the underwriters and Vesta to enter into a legally binding contract of indemnity (up to 90 per cent. of the risk) is absolutely clear. Because, however, the underwriters have contended that the contracts are not, in insurance jargon, "back-to-back," I shall consider, as the courts below have done, the surrounding circumstances which I have already referred to. The propriety of doing this in order to ascertain and give effect to the intention of the parties is amply illustrated by authority. A basic rule is stated by Kelly C.B. in Gwyn v. The Neath Canal Navigation Co . (1868) L.R. 3 Ex. 209, where he said, at p. 215:

"The result of all the authorities is, that when a court of law can clearly collect from the language within the four corners of a deed, or instrument in writing, the real intention of the parties, they are bound to give effect to it by supplying anything necessarily to be inferred from the terms used, and by rejecting as superfluous whatever is repugnant to the intention so discerned."

I would also refer to Prenn v. Simmonds [1971] 1 W.L.R. 1381, where Lord Wilberforce observed, at p. 1383:

"'The time has long passed when agreements, even those under seal, were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations* There is no need to appeal here to any modern, anti-literal, tendencies. Lord Blackburn's well known judgment in River Wear Commissioners v. Adamson (1877) 2 App Cas. 743, 763 provides ample warrant for a liberal approach, We must, as he said, inquire beyond the language and see what the circumstances were with reference to which the words were used and the object, appearing from those circumstances, which the person using them had in view."

In Reardon Smith Line Ltd. v. Yngvar Hansen Tangen [1976] 1 W.L.R. 989 again Lord Wilberforce stated, at pp. 995 and 996:

"In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating."

His speech also made reference, at p. 997, to an apt quotation from the speech of Lord Dunedin in Charrington & Co. Ltd. v. Wooder

[1914] AC 71

, 82:

"... in order to construe a contract the court is always entitled to be so far instructed by evidence as to be able to place itself in thought in the same position as the parties to the contract were placed, in fact, when they made it - or, as it is sometimes phrased, to be informed as to the surrounding circumstances."

Finally, the observation of Lord Reid in Wickman Machine Tool Sales Ltd. v. L. Schuler A.G.

[1974] AC 235

, 251 may be thought particularly apposite in this case:

"The fact that a particular construction leads to a very unreasonable result must be a relevant consideration. The more unreasonable the result the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear."

I consider that all the surrounding circumstances to which i have already referred provide strong confirmation that the intention of the parties was to provide an indemnity for Vesta. Assuredly, they furnish no support for the opposite view.

The main thrust of Mr. Walker's argument was as follows:

1. The proper law of the reinsurance contract is English law; 2. that contract contained a warranty by Vesta that a 24-hour watch would be kept, accompanied by the words, "Failure to comply with any of the warranties outlined hereunder will render the policy null and void;" 3. there was failure to comply; 4. that failure, even though not a cause of damage, rendered the policy null and void according to English law; 5. therefore the underwriters are not liable.

Put like that, nothing could be simpler and no logical conclusion more inevitable. But, the real intention of the parties having, as I, like every judge who has considered the case, believe, been found within the four corners of the contract, effect should, if legally possible, be given to it.

As your Lordships will recall, so clear was Hobhouse J. about the intention of the parties and the need to give effect to it that he would, if compelled, have held Norwegian law to be the proper law of the reinsurance contract. He did not, however, adopt that unlikely solution, described by Neill L.J. as "quite unrealistic," but said [1986] 2 All E.R. 488, 505:

"I infer as a matter of English law that the parties intended the construction and effect of the clauses of the Aquacultural wording shall be governed by Norwegian law. Whether one chooses to categorise this conclusion as an application of the English substantive law of construction of an English law contract or as the application of the English choice of law rules does not matter. They are in the present context essentially the same thing. The parties have on the true ascertainment of their contractual intention chosen that that part of the contract shall be governed by Norwegian, not English, law."

The learned judge described his conclusion as "hybrid and somewhat unorthodox." As to this, Neill L.J., having rejected the underwriters' argument that the contract was in its entirety governed by English law, said:

"In my judgment the word 'hybrid' may itself be a source of confusion. I would prefer to say that as a matter of construction of the reinsurance contract and by seeking to ascertain the presumed intention of the parties the watch clause has to be given the same effect as it is given in the underlying insurance contract. In the context of the present case this solution is to my mind the only one that makes commercial sense."

On this point Sir Roger Ormrod said:

"Had he not gone on to refer to his conclusion as 'hybrid and admittedly somewhat unorthodox,' the matter might have been left as a question of construction of an English contract on English principles. Notwithstanding Mr. Walker's powerful argument for the reinsurers, I think that Hobhouse J,'s conclusion was correct."

My Lords,

I respectfully consider the problem to be one of construing the words in the reinsurance contract and not one involving an imputed choice of law. The words "It is warranted that a 24-hour watch be kept over the site" are clear in any language and mean what they say. The important words (underlined) are in the next sentence:

" Failure to comply with any of the warranties outlined hereunder will render this policy null and void."

The original insurance contract was governed by Norwegian law. Consequently the words "failure" in the phrase "failure to comply," once the No. V wording was incorporated in the Norwegian contract, meant "relevant failure," that is "causative failure" because that contract was governed by Norwegian law. "Failure to comply" had, despite the general rule of English law, the same meaning and effect In what I shall without compromise call the English contract of reinsurance. The parties to that contract are deemed to have used the same dictionary, in this case a Norwegian legal dictionary, to ascertain the meaning of the terms and conditions in wording No. V, including the conditions relating to the 24-hour watch and the words "failure to comply." There is, in my view, no need to treat the reinsurance contract as partly governed by Norwegian law, except in the special sense that one must resort to Norwegian law in order to interpret and understand the meaning and effect of the No. V wording in both contracts. That is a different concept from "the proper law of the contract" (or of part of the contract) which is discussed in the authorities on that subject.

I do not, having regard to my conclusion, consider that it would be helpful for me to discuss those authorities. The ascertainment of the parties' intention (including imputed intention) with regard to the choice of law is, however, often related (and must be subservient) to their contractual intention as deduced from the instrument and the surrounding circumstances, because an imputed choice of law for the whole or part of a contract will sometimes be determined by the court by reference to what it finds the parties were trying to achieve. As Bigham J. said in Royal Exchange Assurance Corporation v. Sjorforsakrings Aktiebolaget Vega

[1901] 2 KB 567

at p. 574.

"Now, no doubt, as a rule, the law to be applied in construing and enforcing a contract is the law of the country where the contract is made; but this is only because, in the absence of other circumstances, our courts assumed that such was the intention of the parties. If it should appear clearly from other circumstances that the parties intended that the rights should be ascertained and determined by some other law, our courts will give effect to such intention."

There is another possible approach which I would briefly examine. The No. V wording was included in both contracts in toto, with the strange result, among others, that not only Vesta but the underwriters appear to claim the benefit of the following provision:

"In the event of a claim under this policy Underwriters" (the term must be generic) "reserve the right to replace the stock lost, for which the claim is made, with similar stock of a like species."

Sir Roger Ormrod has already pointed out that the claims control clause was "wholly inapposite and ineffectual in the original contract." It is tempting to say that different parts of the No. V wording ought to be rejected in each contract as superfluous or alternatively that in the reinsurance contract Vesta is simply telling the underwriters the terms on which it has signed its original insurance. The 24-hour watch clause, like the stock control clause, could very well with a different method of drafting have been confined to the insurance contract, leaving the reinsurance contract to function as a straightforward indemnity incorporating further settlements and claims control clauses. But both the underwriters and Vesta have throughout regarded the entire No. V wording as part of both contracts and have presented their arguments on this basis. Accordingly, I have not felt able to adopt this solution, which was briefly canvassed during the argument before your Lordships. Indeed, in view of the way in which the contracts were formed, it is doubtful whether Vesta could ever have adopted this approach.

Since the hearing, and after reaching my own conclusion, I have read an instructive article by Mr. Robert Merkin in [1988] 1 Lloyd's Maritime and Commercial Law Quarterly p. 5, in which the learned author criticised the drafting of the contracts as having failed to distinguish between insurance and reinsurance and cited two cases, Home Insurance Co. of New York v. Victoria-Montreal Fire Insurance Co. [I907] A.C. 59 and Pine Top Insurance Co. Ltd. v. Unione Italiana Anglo-Saxon Reinsurance Co. Ltd. [1987] 1 Lloyd's Rep. 476, as authority for the proposition that the courts will not permit the incorporation of inappropriate terms from an insurance agreement into a reinsurance agreement. The way in which the reinsurance contract was formed in those cases is interesting, but it is now impossible to say how far Vesta could have succeeded with the argument which prevailed there or whether its advisers would have risked the attempt when the case which they actually made depended on showing that the terms of the two contracts were the same.

My Lords,

the parties devoted considerable time at every stage of these proceedings to arguing about the effect of the follow settlements clause and the claims control clause. I have not found in those clauses any real help for either side, but ought to mention them, starting with the observations of

the judge at p. 497e-j, where he said:

"Where a reinsurance contract contains a provision requiring the reinsurers to follow the settlements of the reassured, a consent and control of the negotiations clause is a qualification of that provision. Thus reinsurers are not under an obligation to follow settlements if made without their consent. If the consent has not been obtained then the reassured must prove his loss, that is to say, prove his legal liability under the policy of original insurance to the original assured. If he fails to do so, he fails to prove his right to an indemnity under the reinsurance contract; if he succeeds, he has proved his loss and may, subject to other defences, recover under the reinsurance contract. As Robert Goff L.J. said in Insurance Co. of Africa v. Scor (U.K.) Reinsurance Co. Ltd. [1985] 1 Lloyd's Rep. 312, 331;

'In my judgment the undertaking by the insurers not to make a settlement without the approval of reinsurers must have been intended to circumscribe the power of insurers to make settlements binding upon reinsurers, so that reinsurers would only be bound to follow a settlement when it had received their approval. In other words, the follow settlements clause must be construed in its context in the policy, containing as it does a claims co-operation clause in this form, as only requiring reinsurers to follow settlements which are authorised by the policy, i.e. those which have received their approval, though presumably reinsurers can, if they wish, waive that requirement. This effectively emasculates the follow settlements clause; but it is nevertheless, in my judgment, what the parties to a policy in this form have agreed.'

"See also per Fox L.J. (at 334).

"Therefore under English law the presence of the consent clause has only limited effect. This conclusion is not affected by its juxtaposition with the breach of warranty provision which clearly deals with a different subject matter altogether."

The insurer, if he settles a claim without the reinsurer's consent, must prove his liability by showing(1) that he was liable and

(2) that the amount paid was correct. (I am not for present purposes concerned with compromise settlements.) The reinsurer must then pay up, unless he has a good defence, as the underwriters have contended they have in this case. Let me give an example. If the failure of the insured here to keep a 24-hour watch had been a cause of the loss, Vesta, having waived the obligation, would still have been liable to the insured for the proper amount of the claim, but the underwriters, not having waived it, would have had a good defence against Vesta.

It is idle for the underwriters to attack Vesta's case by pointing to the absurdity of saying that the follow settlements clause is governed by English law and the claims control clause, which qualifies it, by Norwegian law. In saying that I am not merely relying on the "construction of contract" solution but am pointing out the fallacy of regarding the words "Failure to comply with any of the warranties etc." as part of the claims control cause. As the judge said in the passage quoted above, "the breach of warranty provision . . . clearly deals with a different subject matter altogether."

I wish finally to mention another fallacious argument of the underwriters, who said that if, contrary to their contention, the No V wording in the reinsurance contract is governed by Norwegian law, then it should be remembered that the need for the breach to be causative expressly does not apply to reinsurance contracts under Norwegian law. The answer to this point is that, according to the view taken in the courts below, with which I respectfully agree, we are not here concerned with Norwegian reinsurance law and that the meaning and effect of the failure to comply provision are the same in both contracts.

For these reasons, my Lords, I would affirm the judgment of the Court of Appeal on the question at issue and would dismiss the underwriters' appeal.

Forsikringsaktieselskapefc Vesta (Respondents) v. Butcher

(Appellant) and others (Respondents)

(First Appeal)

JUDGMENT

Die Jovis 26° Januarii 1989

Upon Report from the Appellate Committee to whom was referred the Cause Forsikringsaktieselskapet Vesta against Butcher and others, That the Committee had heard Counsel on Monday the 14th, Tuesday the 15th, Wednesday the 16th and Thursday the 17th days of November last, upon the Petition and Appeal of James Neil Eric Butcher of Lloyd's, One Lime Street, London EC3M 7HA, praying that the matter of the Order set forth in the Schedule thereto, namely an Order of Her Majesty's Court of Appeal of the 30th day of October 1987, might be reviewed before Her Majesty the Queen in Her Court of Parliament and that the said Order might be reversed, varied or altered or that the Petitioner might have such other relief in the premises as to Her Majesty the Queen in Her Court of Parliament might seem meet; as upon the cases of Forsikringsaktieselskapet Vesta and of Bain Dawes Limited and the Aquacultural Insurance Service Limited lodged in answer to the said Appeal; and due consideration had this day of what was offered on either side in this Cause:

It is Ordered and Adjudged , by the Lords Spiritual and Temporal in the Court of Parliament of Her Majesty the Queen assembled, That the said Order of Her Majesty's Court of Appeal. (Civil Division) of the 30th day of October 1987 complained of in the said Appeal be, and the same is hereby, Affirmed and that the said Petition and Appeal be, and the same is hereby, dismissed this House: And it is further Ordered , That the Appellant do pay or cause to be paid to the said Respondents the Costs incurred by them in respect of the said Appeal , the amount thereof to be certified by the Clerk of the Parliaments if not agreed between the parties.

Cler: Parliamentor: