Bodden v. Delta American Reinsurance Company (Cayman Islands) [2001] UKPC 6

Judicial Committee of the Privy Council

Case No Privy Council Appeal No. 5 of 2000

Venue FROM THE COURT OF APPEAL OF THE CAYMAN ISLANDS

Between

BoddenAppellant

Delta American Reinsurance Company (Cayman Islands)Respondent

Before

Lord Steyn

Lord Lloyd of Berwick

Lord Cooke of Thorndon

Lord Scott of Foscote

Sir Patrick Russell

Date 1 January 1985

[1]Gross written premium, less returns and cancellations.

[2]Commission, Taxes and Expenses.

[3]….

[4]….

[5]Loss and loss adjustment expense payments, less salvage recoveries.

[6]Funds withheld and released, and any interest earned thereon. Any balance due by either party shall be paid as soon as possible, but not less than 60 days after the close of the quarter for which the account is rendered. The Retrocessionaire shall also be advised of the following:

[1]Outstanding Loss Reserves reported.

[2]Unearned Premium Reserves.

[3]Reserves for Incurred but Not Reported Losses." " Loss Settlements: Article XI The Retrocessionaire shall pay its proportionate share of all loss settlements and loss adjustment expenses falling within the scope of this Agreement." " Insolvency: Article XVI 1. In the event of the insolvency of the Company, this reinsurance shall be payable directly to the Company, or to its liquidator, receiver, conservator or statutory successor on the basis of the liability of the Company without diminution because of the insolvency of the Company or because the liquidator, receiver, conservator or statutory successor of the Company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Retrocessionaires of the pendency of a claim against the Company indicating the policy reinsured which claim would involve a possible liability on the part of the Retrocessionaire within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim the Retrocessionaires may investigate such claims and interpose, at their own expense, in the proceeding where such claim is to be adjudicated any defense or defenses that they may deem available to the Company or its liquidator, receiver, conservator, or statutory successor." It is common ground that the Agreement is to be construed in accordance with its proper law, the law of New York. Two experts on New York law gave evidence at the trial, one on each side. The issue between them related to the inter-action between the final sentence in the "Original Conditions" clause, the "follow the fortunes" provision, and the first sentence of the "insolvency" clause. On behalf of Delta Re it was contended that the effect, under New York law, of the insolvency sentence was to transform Transnational’s contractual obligation from the normal obligation under an insurance contract, namely, to indemnify the insurer – in which case the obligation would be based on the payments Delta had actually made to its insured – to an obligation based on the liability of Delta Re to its insured. It was argued by Transnational that that would be to deprive the "follow the fortunes" sentence of any real effect. Smellie J., having heard the evidence of the experts, found in favour of Delta Re and the Court of Appeal upheld him. Their Lordships agree that, once Delta Re had become insolvent, the Insolvency provision became the contractual provision governing the obligations of Transnational to Delta Re and that the liability of Transnational to Delta Re fell to be assessed by reference to the liability of Delta Re to its insured rather than to the actual payments made by Delta Re to its insured. Accordingly, in their Lordships’ view, the terms of the plan, which postpone, perhaps indefinitely, the time when Delta Re will have to make any payment in respect of the claims that were IBNR on 31st December 1995, do not reduce Transnational’s contractual liability to Delta Re. For the same reason, the more general contention that Delta Re is not entitled to prove in respect of a liability that is based on IBNR claims cannot be accepted. The figure given for IBNR claims represents an estimate of an actual liability. The insured events justifying claims will have happened. Transnational’s liability to pay the appropriate proportion of the sums payable by Delta Re under the relevant policies will have accrued. Transnational’s liability is contingent only on the specific claims being notified to Delta Re and verified. Both Smellie J. and the Court of Appeal accepted Delta Re’s contention that Delta Re, being in insolvent liquidation, was entitled to claim, and prove in Transnational’s liquidation for, an amount equal to the provision it had made in its accounts in respect of IBNR. Their Lordships agree that the objections of principle put forward by Transnational for opposing this conclusion fail. There has been no argument before your Lordships on the actual figures. Their Lordships have accordingly concluded that the appeal on the second issue must fail. The Interest Issue In its proof of debt, Delta Re claimed interest of $151,953 odd. The interest claimed related to the period up to the commencement of the winding-up. The liquidator rejected the claim in toto . Their Lordships are not clear as to the basis on which interest was originally claimed but it appears that, at the opening of the hearing before Smellie J., Delta Re based its claim to interest on Rule 4.93 of the Insolvency Rules 1986. Under Ord 102, rule 17 of the Grand Court Rules, the Insolvency Rules 1986 apply in the Cayman Islands "unless and until any rules are made under section 173 [of the Companies Law (1995) Revision"] and "in so far as such rules are not inconsistent with the [Companies] Law or such other rules as may be applied to the proceeding in question." Smellie J. applied Rule 4.93 to Delta Re’s interest claim. Rule 4.93 provides, in sub-rule (4), that "The rate of interest to be claimed under paragraphs (3) and (4) is the rate specified in section 17 of the Judgments Act 1838 on the date when the company went into liquidation". On 15th January 1993, the date when Transnational went into liquidation, the rate specified was 15 per cent (see the Judgment Debts (Rate of Interest) Order 1985 – S.I. 1985 No. 437). So Smellie J., having accepted that Delta Re was entitled under Rule 4.93 to prove for interest up to 15th January 1993, allowed interest at the rate of 15 per cent per annum. The Court of Appeal agreed that interest up to 15th January 1993 should be allowed but held that, having regard to recent Cayman Island enactments, namely, the Judicature Law (1995 Revision) and the Judgment Debts (Rate of Interest) Rules 1995, the rate should be 7 3 / 8 per cent per annum. Transnational has contended before their Lordships:(i) that the common law does not permit the award of interest by way of general damages for delay ( President of India v. La Pintada Compania Navigacion S.A. [1985] A.C. 104);

(ii) that the Retrocession Agreement contains no provision for interest;

(iii) that whereas Rule 4.93 has statutory authority in England by virtue of sections 411 to 413 of the Insolvency Act 1986 and section 189 of that Act makes express provision for interest on debts in insolvency, there is no comparable statutory authority for the award of interest under Cayman Islands law;

(iv) that without appropriate statutory authority subordinate legislation cannot validly confer an entitlement to interest;

(v) that although, pursuant to the Grand Court Rules, Ord 102, rule 17, applies the Insolvency Rules 1986 to Cayman Islands liquidations, the Grand Court Rules themselves derive their validity from section 19(3) of the Grand Court Law which enables rules to be made:- "(a) regulating pleading, practice and procedure … in relation to all matters within the jurisdiction of the Court …" and "(g) generally providing for such other matters as may be reasonably necessary for or incidental to the administration of this Law" and

(vi) that, accordingly, the application of Rule 4.93 to the Cayman Islands liquidations was ultra vires and ineffective." There is no indication in Smellie J.’s judgment that the vires point was taken before him. It does, however, appear to have been taken in the Court of Appeal. Be that as it may, Kerr J.A. in the Court of Appeal, with whose judgment Zacca P. and Collett J.A. agreed, held in clear terms that Ord 102, rule 17, of the Grand Court Rules applied the whole of rule 4.93, including the sub-rule relating to interest, to Cayman Islands liquidations subject only to the express reservations and limitations contained in rule 17 itself. The boundary between substantive law and practice and procedure is often a difficult one to identify with precision and their Lordships consider that paragraphs (a) and (j) of section 19(3) of the Grand Court Law do permit the interest provisions of rule 4.93 to be applied to Cayman Islands liquidations and are not disposed to disagree with the local judges on a point such as this. A final point relates to the rate of interest. Delta Re has contended before their Lordships that the rate of interest should be restored to 15 per cent. Leave to raise this point by way of cross appeal on the hearing of Transnational’s appeal to the Board was not sought by Delta Re but the point was referred to in the Respondent’s Case. Kerr J.A. reduced the rate from 15 per cent to 7 3 / 8 per cent in order to take account of the recent Cayman Islands legislation to which reference has already been made. He regarded this legislation as falling within the express reservation in Ord 102, rule 17 applying the Insolvency Rules 1986 "in so far as such rules are not inconsistent with the [Companies] Law or such other rules as may be applied to the proceeding in question". On this point their Lordships agree with the Court of Appeal. For these reasons their Lordships will humbly advise Her Majesty that Transnational’s appeal and Delta Re’s cross-appeal should be dismissed. Transnational must pay the costs of the appeal.