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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> T & N Ltd V Royal & Sun Alliance Plc [2003] EWHC 1016 (Ch) (9 May 2003) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2003/1016.html Cite as: [2003] 2 All ER (Comm) 939, [2003] EWHC 1016 (Ch)

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		Friday, May 9, 2003

Mr Justice Lawrence Collins:

I Introduction

1. Turner & Newall Ltd. was established in 1920 by the merger of Turner Brothers Asbestos Co. Ltd., Washington Chemical Co. Ltd., Newalls Insulation Co. Ltd. and JW Roberts Ltd., each of which was involved in the asbestos industry. In the 1970s as Turner & Newall Plc it had a workforce in excess of 20,000. In September 1987 it became T&N Ltd. For convenience I will refer to it and its associated companies throughout as "T&N."
2. T&N is part of the Federal-Mogul Group ("the FM Group"), the ultimate parent of which is Federal-Mogul Corporation. The FM Group is a leading global manufacturer and distributor of parts for automobiles, light commercial vehicles, heavy duty trucks, farm and construction vehicles and industrial products.
3. Administration orders were made in respect of T&N and approximately 130 other companies in the T&N group on October 1, 2001. On the same date that the administration orders were made, the T&N companies filed for protection under Chapter 11 of the United States Bankruptcy Code.
4. The predominant cause of the administration/Chapter 11 proceedings was the asbestos related claims pending in the United States against companies within the FM Group, particularly against T&N. Some 92,000 claims were pending at the date of the administration orders. The purpose of the administration/Chapter 11 proceedings is to provide a breathing space to the FM Group to enable it to put in place a global reorganisation plan for the benefit of creditors, including commercial creditors and asbestos claimants.
5. There are a substantial number of asbestos related claims pending against T&N in England. Most of the claims pending against T&N in England are by former employees or dependants of former employees of T&N. Most of the claims pending in the United States are public liability cases.
6. A number of former employees, or dependants of former employees who have asbestos related claims, have made, or have threatened to make, applications under section 11 of the Insolvency Act 1986 for leave to commence or continue proceedings against T&N.
7. The position taken by the administrators has been that because the central purpose of the administration is to enable a plan to be developed to enable T&N to deal with the weight of claims made against it, leave should be refused unless it is clear that there is available insurance to cover the relevant claim.
8. Where such insurance exists, then the burden of defending and meeting the claim will be borne by the insurer, and the continuation of the claim would not be inconsistent with achieving the purposes for which the administration order was made. By reason of the Third Party (Rights Against Insurers) Act 1930 ("the 1930 Act"), any claimant who was able to establish a claim against T&N would be entitled to recover from any available liability insurance directly from the relevant insurer. In the absence of such insurance, however, the granting of leave to proceed against T&N would, the administrators say, cut directly across the purpose of the administration orders.
9. T&N had for the period October 1, 1969 to March 31, 1977 employer's liability ("EL") cover with the first defendant, Royal and Sun Alliance Insurance Plc, formerly known as Royal Insurance Company Limited ("the Royal"). The head office of the Royal was in Liverpool, and the cover was arranged with one of its two branches in Manchester, the Manchester Exchange branch. I shall refer to them, where it is necessary to distinguish between them, as "head office" and "the Manchester branch."
10. The second defendant, Brian Smith ("Mr Smith") was a Name on, and the active underwriter of, Syndicate 45/177 at Lloyd's ("the Syndicate"). The Syndicate provided EL insurance to T&N for the period April 1, 1977 to April 30, 1995. Mr Smith is sued in a representative capacity on his own behalf and on behalf of all other underwriting members of the Syndicate in each of the years 1977 to 1995.
11. The third defendants are companies which are insured by either or both of the Royal and the Syndicate but which are not currently in administration.
12. The fourth defendant was employed by Newalls Insulation Co. Ltd., a member of the T&N group, between 1946 and 1985. He brought proceedings and obtained judgment against Newalls, and became entitled to pursue that judgment against Newalls' EL insurers under the 1930 Act. He was joined as a representative defendant on his own behalf and on behalf of all other persons who have brought or may bring claims against T&N and its associated companies, in their capacity as employers. He has since died and has been replaced by his personal representative.
13. Marine Insurance Co. Ltd. ("Marine"), the fifth defendant, is an insurance company in which the Royal has a shareholding, and which was named in a 1997 Settlement Agreement between T&N and various "London Market Insurers", as an insurer which was released, pursuant to the Agreement, from liability to T&N under certain insurance policies. It seeks to enforce the Agreement as against T&N on the basis that the effect of the Agreement is that T&N agreed to release the Royal by virtue of a reference in the release to members and shareholders of the parties.
14. Curzon Insurance Ltd. ("Curzon"), the Part 20 defendant, is a captive insurance company established by T&N, which agreed to indemnify T&N in respect of payments T&N might become liable to make to the Syndicate under the payment and reimbursement provisions in the policy conditions. The Syndicate seeks declarations that it is entitled to sums payable by Curzon to T&N.
15. As the result of a ruling by the Court of Appeal on December 30, 2002, the trial excluded all issues in the action which concern the avoidance defences of the Royal and the Syndicate, including issues of non-disclosure, misrepresentation and associated issues.
16. The Royal policy included the following provision:

"The insurance by this Policy does not apply to or include liability in respect of pneumoconiosis or pneumoconiosis accompanied by tubercolosis [sic].

In this Endorsement the expression 'pneumoconiosis' means fibrosis of the lungs due to asbestos dust and includes the condition of the lungs known as dust reticulation."

17. The Schedule in the Syndicate EL policies contained the following provision:

"It is a condition of this insurance that:-

(1) The Assured undertakes:-

a) to pay the full cost and expense of handling and disposing of all claims based upon the allegation that employees or former employees of the Company or its Associated Companies contracted asbestosis or mesothelioma as a result of exposure to asbestos dust in the course of their employment with the Company or its Associated Companies.

…. "

II Asbestos related diseases

18. Dr RM Rudd, a consultant physician, was instructed as a single joint medical expert. The effect of the medical evidence is as follows. Pneumoconiosis is fibrosis (a condition where fibrous tissue spreads and causes breathing difficulties) of the lungs caused by inhalation of dust, and pneumoconiosis caused by asbestos dust is asbestosis. Pneumoconiosis was first recognised in the medical literature in 1796 and the risk of development and severity of the disease increases in relation to the amount of dust inhaled, and if the disease is sufficiently extensive, breathlessness, respiratory failure and finally death may ensue. Pneumoconiosis caused by asbestos dust falls within the diseases of pneumoconiosis and asbestosis, but not mesothelioma. The most widely accepted definition of asbestosis is that proposed by the Advisory Committee on Asbestos (Health and Safety Commission, 1979): "Fibrosis of the lungs caused by asbestos dust which may or may not be associated with fibrosis of the parietal or pulmonary layer of the pleura." Asbestosis seldom appears less than 20 years after first exposure to asbestos, and tends to worsen with time and may cause death from respiratory failure although this is much less common than previously, reflecting lower levels of exposure and hence less severe disease. Dust reticulation has features which are those of mild pneumoconiosis.
19. Mesothelioma is a tumour which arises from mesothelial cells, i.e. cells forming membranes lining body cavities, and occurs most commonly in the pleura (the lining of the chest cavity) but also in the peritoneum (the lining of the abdominal cavity). From 1960 its existence and the fact that it was caused by asbestos was widely accepted, and it became a prescribed disease rendering the sufferer eligible for industrial injuries disablement benefit in 1966. It occurs on average 30 to 40 years after first exposure to asbestos. All types of asbestos cause the disease but crocidolite (blue asbestos) is the most potent. The disease usually presents with breathlessness and chest pain, and it is relentlessly progressive and almost invariably proves fatal usually around 12 to 18 months from the onset of clinical manifestations.
20. Lung cancer caused by asbestos usually occurs 20 years or more after first exposure, and increases in proportion to the asbestos dose, and interacts with smoking so that the risk from the hazards combined is much greater than the sum of the risks from each hazard alone. Pleural plaques are localised areas of pleural thickening, and they do not fall within the diseases of pneumoconiosis, asbestosis or mesothelioma. Plaques consist of featureless fibrous tissue which become increasingly calcified with the passage of time, and it is the most common pathological condition caused by asbestos.
21. Dr Rudd concluded:

"The phrase 'pneumoconiosis or pneumoconiosis accompanied by tuberculosis .... the expression 'pneumoconiosis' means fibrosis of the lungs due to asbestos dust and includes the condition of the lungs known as dust reticulation' would not have been understood by the medical profession in 1969 to encompass mesothelioma. Mesothelioma was recognised as a malignant tumour entirely distinct from 'pneumoconiosis, fibrosis of the lungs, or dust reticulation' ".

22. Accordingly, from a medical perspective, the term "pneumoconiosis" did not encompass, and was not understood in 1969 to encompass, mesothelioma or other asbestos related diseases and injuries.

III Workmen's Compensation and the tariff wording

23. Under the Workmen's Compensation Acts, claims by employees were allowed without proof of negligence and compensation took the form of fixed scales depending on the nature and/or seriousness of the injury.
24. In 1942 the Beveridge Report recommended that compensation for industrial injuries should be added to existing social insurance schemes as part of a new unified scheme of social insurance. The National Insurance (Industrial Injuries) Act 1946 came into force in 1946 and repealed the Workmen's Compensation Acts. As a result of recommendations made by the Monckton Committee in 1946, the Employers' Liability Act 1948 conferred common law rights of action on employees.
25. The Accident Offices Associations ("the AOA") was an association of insurance companies and was first formed in 1906 to regulate levels of rating and premium which applied in respect of Workmen's Compensation insurance.
26. Insurance companies which were members of the AOA were called "tariff" companies and those insurers who declined membership were called "non-tariff" companies. The tariff companies were expected to adopt regulations which were laid down by the AOA regarding rates, terms, endorsements and commission which were determined by the AOA on behalf of its member companies.
27. In practice, whilst non-tariff companies were free to follow their own underwriting practices, there was not a significant difference between terms which were being applied by tariff and non-tariff companies. By the late 1960s the tariff system had ceased.
28. The Workmen's Compensation Act 1943 extended the 1925 Act to workmen suffering from pneumoconiosis, which was defined in section 1(2) to mean:-

"Fibrosis of the lungs due to silica dust, asbestos dust or other dust, and includes the condition of the lungs known as dust-reticulation."

29. The National Insurance (Industrial Injuries) Act 1946 repealed the Workmen's Compensation Acts 1925 to 1945. By section 55 an employee insured against personal injury caused by accident arising out of and in the course of his employment was to be insured also against any prescribed disease, and specific provision was made in section 57 as to certain respiratory diseases, including pneumoconiosis, which was defined in section 57(3) in the same terms as the 1943 Act.
30. The 1946 Act provided that regulations might provide that, where any person was found to be suffering from pneumoconiosis accompanied by tuberculosis, the effects of the tuberculosis were to be treated for the purposes of the Act as if they were effects of the pneumoconiosis, and provision was so made in the Regulations under the Act. Regulations were made in 1948 and frequently amended. The National Insurance (Industrial Injuries) (Prescribed Diseases) Regulations 1959 (Regulation 1(2)) contains substantially the same definition of pneumoconiosis as the 1943 and 1946 Acts, and the first set of Regulations in 1948.
31. Mesothelioma became a prescribed disease, in relation to an occupation involving the working or handling of asbestos, by the National Insurance (Industrial Injuries) (Prescribed Diseases) Amendment Regulations 1966, made under the National Insurance (Industrial Injuries) Act 1965, and came into operation in 1966. Mesothelioma was added as a prescribed disease as:

"Primary malignant neoplasm of the mesothelioma (diffuse mesothelioma) of the pleura or of the peritoneum."

32. It appears from the decision in Cape plc v The Iron Trades Employers Insurance Association Limited [1999] PIQR, Q212 at Q218 that the tariff asbestosis exclusion endorsement in the Royal policy dates from 1948, when it appeared in the form which was used in the policy issued to T&N by Midland Employers' Mutual Assurance Ltd (which provided EL insurance to T&N before the Royal came on cover) as follows:

"MEMORANDUM

The insurance by this Policy does not apply to or include liability in respect of pneumoconiosis or pneumoconiosis accompanied by tuberculosis.

In this endorsement the expression 'pneumoconiosis' means fibrosis of the lungs due to silica dust, asbestos dust or other dust and includes the condition of the lungs known as dust reticulation.'

33. The evidence was that from 1959 the tariff wording was in a form which did not deal specifically with asbestos dust, because, it seems from the expert evidence of Mr Williams, for the Royal, by then an exclusion was compulsory in the tariff system only for foundries:

"The insurance by this policy does not apply to or include liability in respect of pneumoconiosis or pneumoconiosis accompanied by tuberculosis arising from foundry work or sand blasting.

In this endorsement the expression 'pneumoconiosis' means fibrosis of the lungs due to silica dust and includes the condition of the lungs known as dust reticulation."

IV The Employers' Liability (Compulsory Insurance) Act 1969 ("the 1969 Act")

34. Section 1(1) of the 1969 Act provides as follows:-

"Except as otherwise provided by this Act, every employer carrying on any business in Great Britain shall insure, and maintain insurance, under one or more approved policies with an authorised insurer or insurers against liability for bodily injury or disease sustained by his employees, and arising out of and in the course of their employment in Great Britain in that business, but except in so far as regulations otherwise provide not including injury or disease suffered or contracted outside Great Britain."

35. An "approved policy" for the purposes of the 1969 Act means (section 1(3)(a)) a policy of insurance which is not subject to any conditions or exceptions prohibited by regulations. An "authorised insurer" includes persons authorised to carry on EL insurance business under the Companies Act 1967 (and, by subsequent amendment, the Insurance Companies Acts 1981 and 1982): section 1(3)(b).
36. Section 4 provides that regulations were to provide for securing that certificates of insurance were issued by insurers to employers entering into contracts of insurance in accordance with the Act.
37. Section 5 provides for monetary penalties against employers who were not insured in accordance with the Act, and for criminal liability on officers of corporations, including directors and company secretaries.
38. The 1969 Act does not expressly prohibit exclusions or excesses, but it is clear that the employer had to be fully insured.
39. The regulations under section 4 are now the Employer's Liability (Compulsory Insurance) General Regulations 1998, but the relevant regulations for the purposes of this case are the Employer's Liability (Compulsory Insurance) General Regulations 1971 ("the 1971 Regulations"), which were made on July 9, 1971 and were to come into operation on January 1, 1972, except as regards the provisions for display and production of certificates in Regulations 6 and 7, which were to come into force on January 1, 1973.
40. The 1971 Regulations provided as follows:

"2(2) Nothing in this Regulation shall be taken as prejudicing any provision in a policy requiring the policy holder to pay to the insurer any sums which the latter may have become liable to pay under the policy and which have been applied to the satisfaction of claims in respect of employees or any costs and expenses incurred in relation to such claims.

…

5(1) Every employer entering into a contract of insurance in accordance with this requirement of the Act shall be issued by the insurer with whom he contracts, in respect of the policy of insurance expressing the contract, with a certificate of insurance in the form and containing the particulars specified in the Schedules to these Regulations.

(2) Every such certificate of insurance shall be issued not later than thirty days after the date on which the insurance commences or is renewed."

41. Regulation 2(1) prohibited certain provisions in policies allowing the insurer to avoid liability. But it did not prohibit exclusions or excesses: the employer had to be fully insured, but what was excluded in one approved policy could be insured under another approved policy.
42. The form of the certificate in the schedule was to be signed on behalf of the authorised insurer and was to state:-

"We hereby certify that the policy to which this certificate relates is issued in accordance with the requirements of the Employers' Liability (Compulsory Insurance) Act 1969 and regulations thereunder."

43. By S.I. 1974 No. 208, the form of the certificate became, with effect from April 1, 1975:

"We hereby certify that the policy to which this certificate relates satisfies the requirements of the relevant law applicable in the United Kingdom."

44. By Regulation 6 copies of certificates issued under Regulation 5 were to be displayed at the employer's place or places of business, and Regulation 7 made provision for production of certificates on demand to the Department of Employment.

V Principal issues

45. The issues for determination at this stage in relation to the effect of the Royal policy relate to the meaning and scope of the pneumoconiosis exclusion, and to the effect of the discussions in 1971 between T&N and the Royal at the time the 1969 Act and the 1971 Regulations were to come into effect. I will deal with the issues in the order in which they are summarised in this section.
46. T&N says that the pneumoconiosis exclusion can only apply to the medical condition of pneumoconiosis as defined in the provision and cannot, therefore, apply to, for example, cases of mesothelioma. The Royal claims that the exclusion was intended by the parties to reflect, and on its true construction did reflect, a shared assumption communicated by T&N and the Royal to each other that T&N would meet all claims relating to any injuries or diseases caused by or arising from exposure to asbestos from its own resources and without the provision of insurance cover. The Royal further relies on estoppel by convention by reference to the shared assumption and has also made a rectification claim on a similar basis. T&N says that, even if the Royal might otherwise be entitled to rely on estoppel by convention or be entitled to claim rectification, it should not be allowed to do so by virtue of its culpable delay.
47. The issue in relation to the 1971 discussions between T&N and the Royal is whether (as T&N contends and the Royal denies) an agreement was reached between them, that in the light of the 1969 Act and the 1971 Regulations, the Royal would provide full cover, but that as between T&N and the Royal, T&N would in practice deal with asbestos related claims and would bear the first £1,000 of all EL claims.
48. The main issue in relation to the construction of the Syndicate EL policies (both as a question of interpretation and also through an alleged estoppel by convention), is whether the condition in the policy that T&N would pay asbestosis and mesothelioma claims amounts to, or is to be treated as, an exclusion (as the Syndicate claims) or whether (as T&N claims) the Syndicate remained ultimately liable for such claims under the policy should T&N be unable to comply with the condition. A further issue arises as to whether the reference to "asbestosis and mesothelioma" in the condition is also to be interpreted to cover other asbestos related diseases.
49. The Royal and the Syndicate also plead that if they are liable under the alleged 1971 agreement (in the case of the Royal) or the condition in the policy (in the case of the Syndicate) that they may set-off against that liability any claim arising from T&N's failure to pay the relevant claims. The Royal's case on set-off was not the subject of argument before me.
50. The issues in relation to the 1997 Settlement Agreement (in which neither the Royal nor the Syndicate is expressly referred to) are: (a) whether the effect of T&N's agreement to release Marine and its "shareholders, members .. in their individual capacity" had the effect that T&N agreed with Marine to release the Royal as a shareholder or member of Marine in relation to the Royal's EL cover; and (b) whether the Syndicate is a party to the Agreement or is otherwise entitled to the benefit of the release in relation to the Syndicate EL policies by virtue of the definition of the policies covered by the Agreement, and whether some of its members are parties and entitled to a release of their liabilities under the Syndicate EL policies because they were members of other syndicates released under the Agreement.
51. In relation to the Curzon policies the issues are whether the Syndicate is entitled to the benefit of T&N's claims against Curzon, by virtue of the Third Party (Rights Against Insurers) Act 1930 or by virtue of a claim to subrogation or to equitable proprietary rights.

VI Cape plc v. Iron Trades Employers Insurance Association Ltd [1999] PIQR, Q212 ("the Cape case")

52. This decision is principally relevant in this case to the scope of the exclusion in the Royal policy, but I will mention it at this stage because it is has some relevance also to the issue on the construction of the scope of the condition in the Syndicate policy. In the Cape case, a decision of Rix J (as he then was), the exclusion (contained in a policy first issued in 1966) provided that "claims arising from Pneumoconiosis or Pneumoconiosis accompanied by tuberculosis" were excluded. The principal question was (at 214):

"Was the term 'pneumoconiosis' used as a catch-all word to cover all asbestos related disease caused by inhalation of asbestos dust …, including therefore mesothelioma, or was it rather used in a strict medical sense as meaning fibrosis of the lungs caused by inhalation of dust, which it is common ground is a different disease from that of mesothelioma?"

53. Rix J held as follows (at p. 237):

"… there may have been some uncertainty in wider medical circles as late as 1966, or even later, as to whether mesothelioma was itself caused by asbestosis, and also some imprecise use of language regarding the term asbestosis, particularly among the wider public. It is also likely that the parties to the policy never gave their direct or close attention to the question of exactly what the pneumoconiosis exclusion would embrace, and in particular whether it would or would not embrace mesothelioma. The fact is, as it seems to me, the pneumoconiosis exclusion was the well known tariff wording which had been in use for many years as an exclusion concerned, loosely speaking, with the risk of inhalation of dust such as asbestos … What it embraced ... was simply not a matter of precise understanding, other than in terms of medical and statutory definition. In those senses, medical and statutory, the meaning of pneumoconiosis was and is clear: it relates to fibrosis of the lungs, not to cancer of the pleura. As it happens, just at the time the policy was being put into effect, the distinction between asbestosis and mesothelioma was being recognised and acted upon in the medical and statutory context by the listing in 1966 of mesothelioma as a separate prescribed disease. This distinction was also a matter of public comment by October 1965 in a lay publication such as The Sunday Times with its wide circulation.

In these circumstances I think that the pneumoconiosis exclusion should be construed according to the medical and statutory definitions and not according to a wider or looser understanding of the term."

54. His reasons included these. First, the terms were medical terms which reflected the language of the statutory regime for the protection of employees. Secondly, the pneumoconiosis exclusion developed historically and chronologically out of that regime. Thirdly, at the time the policy was under negotiation (1965/1966), the introduction of mesothelioma as a prescribed disease was under consideration, and within the first year of the policy it became a prescribed disease. Fourthly, once the meaning of pneumoconiosis went beyond its medical and statutory definition, there would be great uncertainty as to its meaning. Fifthly, the exclusion was framed in terms of pneumoconiosis and not asbestosis, and if therefore pneumoconiosis embraced all conditions due to inhalation of asbestos dust, pneumoconiosis ought to embrace all conditions due to inhalation of any dust, which would create even greater uncertainty.
55. Rix J rejected the insurers' claim for rectification on the ground that they had not come anywhere near meeting the difficult burden of proving a case of rectification. The parties did not share a common intention that all asbestos related conditions were excluded. They were prepared to use a well known tariff wording, but they did not address their minds closely to exactly what that wording included or excluded. If he had been prepared to hold otherwise on the issue of rectification, it would not be just to ignore the delay and acquiescence of the defendants, in particular because the insurers had recognised in 1969 that there might be a problem with the policy wording and had chosen to do nothing about it. On estoppel by convention, he accepted that as a matter of fact Cape handled all asbestos related claims themselves, but there was no shared assumption or mutually manifest conduct upon which a claim for estoppel might be based, particularly (again) because they had been aware of a problem since 1969.
56. T&N has relied strongly on this decision, and I have found it very helpful. But here the policy wording is different, and the principal issues in this case relate to a different factual background, and a different set of facts with regard to the insurance philosophy of T&N, the understanding and intentions of the parties, and what relevant communications they may have had.

VII Dramatis personae and witnesses

57. Many of the principal points of contention in this case relate to questions of contractual interpretation, on which evidence should not normally be relevant or admissible. But because of the parties' reliance on factual matrix or background, and because of the arguments on estoppel by convention, and (in the case of the Royal) on rectification, there was a great deal of witness statement evidence and oral evidence on the negotiation of the Royal cover, and of the Syndicate cover, and on what the parties understood by the exclusion in the Royal policy and the condition in the Syndicate policy; and also on the negotiation of the 1997 Settlement Agreement. Evidence on the alleged agreement in 1971 between the Royal and T&N was plainly relevant and admissible.
58. Many of the most important events happened between 1969 and 1977. Some of those who would be the most important witnesses are dead (especially Mr Kemp, an assistant company secretary at T&N with responsibility for insurance, and Mr George Hey, an assistant general manager at the Royal Manchester branch) or not fit enough to give evidence (especially Mr Lloyd, an underwriter at the Royal Manchester branch). Nor is it realistic to suppose that those who gave evidence about meetings or conversations more than 25 years ago were generally doing anything more than reconstructing events from the documents or giving evidence as to what they thought must have happened, rather than what did happen. Generally the evidence of contemporary documents is more reliable than the memory of witnesses, especially those who appreciate the commercial and legal significance of their evidence. This is particularly so when the events happened so long ago, and some of the witness statements frankly accept that the witness has no personal recollection of the events. Another important factor which must be borne in mind is that the events at the time did not have the significance which they now have. In particular, there was very little focus on mesothelioma in the 1960s, and although by 1977 there were substantial asbestosis claims in the United States against it, T&N was between the crucial years 1969 and 1977 a major United Kingdom company and a major employer (with some 20,000 employees) whose EL business would be very valuable to insurers, and it is unlikely that any of the principal persons concerned realistically considered its possible future insolvency.

T&N

59. Mr Arthur Jones (company secretary and a barrister) was secretary of T&N with ultimate responsibility for insurance matters, until he retired in 1978 or 1979. Mr Kemp was an assistant company secretary until 1976, and had primary day to day responsibility for insurance matters. Mr Kemp died in 1987.
60. Mr John Atkinson was an assistant company secretary from 1962 until the early 1970s, when he became group solicitor. He retired in 1989.
61. Mr Tom Pemberton joined T&N in 1966, and in 1971 he became assistant company secretary, and remained in that position until May 1976. He took over Mr Kemp's responsibilities for insurance when Mr Kemp retired in May 1976. He was made redundant in 1983 but remained a consultant until 1985.
62. Mr Harry Baines began working in the T&N legal department in June 1985 and became group legal adviser after the retirement of Mr Atkinson. In 1993 he became, after the legal department and secretarial department were combined, company secretary, and held that position until he left T&N in 1998. From the early 1990s he was involved with asbestos related claims brought in the United States against T&N and was responsible for negotiating and signing the 1997 Settlement Agreement.
63. Mrs Andrea Crichton worked for T&N from 1985 as a senior legal assistant and became asbestos claims manager in 1994. As senior legal assistant she was responsible for setting up the data base of asbestos and health documents, and since her appointment as claims manager she has had responsibility for handling claims and instructing external solicitors.
64. Mr Tom Unsworth acted for T&N when he was at the well known Manchester firm of solicitors, James Chapman & Co, between 1967 and 1978, and thereafter when he left to become a sole practitioner, until 1991.

The Royal

65. At the Royal the persons mainly responsible for the T&N EL policy at the Manchester Exchange branch were at the time of inception of the policy, Mr George Hey, who was on the client development side, and who has since died, and Mr Dennis Lloyd, on the underwriting side, who was not fit enough to give oral evidence, and later, Mr Owen, who was on the client development side, and Mr Lloyd.
66. Mr Lloyd joined the Royal as a trainee in 1949. He was head of the accident department from 1956 to 1972, and accident superintendent and assistant broker accounts manager from 1972 to 1992. In 1969, as head of the accident department, he was dealing with liability underwriting in areas including EL.
67. As head of department he was largely responsible for the team of underwriters and for dealing with brokers and advising on cover, calculating premiums and issuing policies. Mr Lloyd was involved with the underwriting for T&N from the inception of the policy in 1969. His evidence was that his involvement was initially limited to investigating the company's claims history and putting together calculations for the purposes of the insurance premiums and the issue of the policy documents themselves. He was not initially involved in the negotiations for the terms of cover, which, according to his evidence, would have been conducted by either or both of Alan Spriggs (the branch manager) or Mr George Hey. In 1969 Mr Hey was responsible for liaising with clients and building new business.
68. In 1971 Mr Leslie Owen (who joined the Royal in 1949 as a trainee) took over as production manager (i.e. client development and relationship manager), and was in that position until 1975. Mr Lloyd's evidence was that Mr Owen held the view that the underwriting and sales teams would work more effectively if they worked more closely together. As a consequence Mr Lloyd began to have direct contact with clients, including T&N, as opposed to doing a pure underwriting job. Mr Lloyd dealt with the underwriting side and he and Mr Owen would both attend the renewal meetings with T&N. After 1975, when Mr Owen left the Manchester branch, Mr Lloyd was the principal contact for T&N at the Royal.
69. At head office in Liverpool, Mr Hanmer was head of the liability department from 1970 to 1972, liability underwriter 1972-1973, and liability underwriting manager from 1973. John Williamson was assistant general manager 1971 to 1973, and United Kingdom general manager 1973 to 1982, when he retired. He was not well enough to give evidence.
70. Mr Ronald Prandle joined the Royal in 1961, and in 1970 he came to the Manchester office as a claims handler and in 1973 became section head in the claims department. He had responsibility for the handling of all liability claims brought against T&N. He gave evidence about claims made on the Royal by T&N.

Hogg Robinson

71. Hogg Robinson were T&N's brokers. Mr Mervyn O'Brart was with Hogg Robinson as a broker from 1966 until 1989. He worked in the London office, and was responsible for the placing of non-marine insurance with the Lloyd's market on behalf of the United Kingdom branches of Hogg Robinson, including insurance with Lloyd's for T&N. Mr O'Brart was not fit enough to give oral evidence.
72. Mr Andy Mason was a broker with Hogg Robinson from 1953 until 1991, and managed the T&N account from 1976 until about 1989/1990. He was supported by his assistants Mr Keith Jordan and Mr Kenneth Hindle, who had experience in accident liability matters. Mr Mason and his assistants had day to day involvement with the T&N account.
73. Mr Kenneth Hindle was a broker with Hogg Robinson from 1961 until 1996.

The Syndicate

74. Mr Brian Smith started in the insurance market in 1954 when he went straight from school to join the English and American Insurance Company, which was owned by CT Bowring. In 1970 he became chief underwriter of the Garthwaite Syndicate, which specialised in writing EL cover. In 1972 he formed new syndicates to specialise in EL and public liability, which became Syndicate numbers 45 and 177, which were eventually made into one syndicate when the name was changed to BR Smith Syndicate 45. In 1972 he established Garwyn Ltd as a separate company to handle the Syndicate's claims.
75. Mr Lloyd Holden, who was not fit enough to give oral evidence, was from 1972 the northern regional claims director of Garwyn, working in the Harrogate office, and in 1983 he became the managing director of Garwyn, continuing to work in Harrogate, and he retired in 1992.
76. Mr Derek Marchant was the managing director of Garwyn based in the London office, until 1983.

Lloyd's

77. Mr Howard Rabin worked from 1990 to 1994 with the New York law firm Mendes & Mount in their asbestos department acting on behalf of London market insurers. He was the asbestos direct account manager at Lloyd's Specialist Claims Unit between May 1994 and September 1996. From September 1996 to October 1998 he carried on the same role for the Equitas Claims Unit following the restructuring of Lloyd's. In October 1998 he rejoined Mendes & Mount.
78. Mr Barry Seymour took over from Mr Rabin when Mr Rabin left in 1998.
79. Mr James Teff created the Lloyd's Specialist Claims Unit in 1994 and was its general manager, and from 1996 fulfilled the same role with the Equitas Claims Unit in 1996.

Expert witnesses

80. There was an agreed joint medical report by Dr Rudd, to which I have already referred.
81. The experts instructed on behalf of T&N were Mr Richard Outhwaite, and Mr Keith White. Mr Outhwaite worked at Lloyd's from 1957, and is a very experienced underwriter. He was instructed to report on whether there was any market understanding of the expression "general liability, umbrella or excess insurance policies" (which is found in the 1997 Settlement Agreement). Mr White worked with Prudential as an underwriter, and later with the Excess Insurance Company and the Builders' Accident Insurance, and is now a consultant. He was asked to report (inter alia) on the historical background to the development of EL insurance market in the United Kingdom both before and after the 1969 Act.
82. Mr Christopher Williams was instructed by the Royal. He was in insurance from 1959 and between 1976 and 1991 he held senior management appointments with Excess Insurance group with underwriting responsibilities embracing most commercial classes of insurance. He was instructed to report on (inter alia) the knowledge of underwriters in respect of asbestos related diseases at the time of the inception of the Royal cover, and the detrimental effect on the Royal consequent upon it acting on the alleged shared assumption that the pneumoconiosis exclusion was effected to exclude all asbestos related diseases.
83. Mr Peter Wilson gave expert evidence for the Syndicate. He was in the insurance business from 1958, and was asked to provide an opinion on (inter alia) (a) the understanding and use in the London insurance market of the word "asbestosis" in exclusions and (b) the meaning in the London insurance market of the terms "general liability insurance policies", "umbrella insurance policies", and "excess insurance policies" for the purposes of the 1997 Settlement Agreement.
84. I heard evidence from the following witnesses of fact: for T&N, Mr Atkinson, Mr Pemberton, Mrs Crichton, Mr Baines, and Mr Unsworth; for the Royal, Mr Smith, Mr Owen, Mr Hanmer, and Mr Prandle; for the Syndicate, Mr Smith and Mr Paul Craig (a claims manager at the Syndicate), and Mr Rabin, Mr Teff and Mr Seymour. In addition there were witness statements from Mr O'Brart, Mr Mason and Mr Hindle, who were with Hogg Robinson; Mr Lloyd, Mr Williamson, and Mr Andrew Smith who were with the Royal; Mr Holden of Garwyn, and Mr Cooper, who was a deputy to Mr Brian Smith. As I have already said, several of these witnesses were not well enough to give evidence.

VIII The Midland insurance and T&N's self-insuring policy

85. From the 1930s T&N had a policy of not insuring its liability to employees for asbestosis.
86. In 1931, following the enactment of the Workmen's Compensation Silicosis and Asbestosis Act 1930 (extending the Workmen's Compensation Act 1925 to those diseases), consideration was given to insuring the asbestosis risk but it was found that insurance was not available because of the lack of experience of the risk. T&N decided to create a central insurance fund into which all group companies would pay at a rate equivalent to the premium charged by insurance companies for the silicosis risk, and that an insurance company would be appointed to manage the scheme. Midland Employers' Mutual Assurance Ltd ("Midland") was approached to take on this role, but it seems that the fee which Midland asked was not acceptable, and in 1932 Commercial Union was appointed to manage the scheme for a fee of £100 p.a.
87. T&N had EL cover with Midland, but claims in respect of asbestosis were excluded.
88. The Midland exclusion for at least one of the years (1964/5, the policies for other years not any longer being available) was as follows:-

"The insurance by this Policy does not apply to or include liability in respect of pneumoconiosis or pneumoconiosis accompanied by tuberculosis.

In this endorsement the expression 'pneumoconiosis' means fibrosis of the lungs due to silica dust, asbestos dust or other dust and includes the condition of the lungs known as dust reticulation."

89. This appears from the Cape case to be the 1948 tariff wording. I should mention at this point that in the 1980s there was a coverage dispute with Midland concerning the applicability of the exclusion to mesothelioma.
90. In 1934 Bowrings, T&N's brokers, investigated the market and reported that there were underwriters prepared to insure the asbestosis risk, but T&N did not pursue the matter because (among other reasons) the cost to the company would be high and steps were being taken to make improvements in its factories to minimise the risk.
91. The National Insurance (Industrial Injuries) Act 1946 replaced the Workers' Compensation scheme, and T&N became exposed to common law claims for damages. Two claims in respect of asbestosis were made in the 1948-1950 period, and Midland was approached to ascertain what additional premium would be required to cover asbestosis. Midland indicated it would cover the risk for an additional premium of £1,000, but T&N decided not to go forward with the cover because the premium was excessive and it was advisable for the group to carry the risk itself in the light of the fact that the internal fund had a considerable balance available to meet any claim that might be made. Midland was informed that T&N felt that the risk of a claim being made successfully was small and they felt it better to carry the risk themselves.
92. In 1952 T&N decided to wind up the internal fund, and decided that the individual companies in the group should themselves bear the costs of such claims. From this time the claims were dealt with by James Chapman & Co., the company's solicitors.
93. By July 1962 it had become established that asbestosis carried with it a markedly increased risk of lung cancer, and Mr Jones, the company secretary, noted on July 3, 1962 that the new information would primarily make settlement more difficult and more expensive, but the principles on which they should act remained the same.
94. In his report for the year to September 30, 1964 Mr Jones said that the year had been marked by two "rather sinister developments": the first was that it had become widely known that the medical profession had established a causal connection between asbestosis and carcinoma of the lung, which would inevitably make settlements both more difficult and more expensive. The second development was the establishment of, and the wide publicity given to, the fact that a type of carcinoma known as mesothelioma was due to exposure to the dust of crocidolite fibre.
95. In 1967, when a Turner Brothers Asbestos Co. Ltd. memorandum on asbestos and health was circulated to employees, T&N's position was that (a) the risk of lung cancer associated with asbestosis was the subject of measures in the industry designed to control it; and (b) although there was evidence of a link between crocidolite (blue) asbestos and a rare form of cancer known as mesothelioma, the link with chrysolite (white) asbestos, the type mainly used in asbestos textiles and reinforced plastic products, was much less definite. No connection at all had thus far been established between mesothelioma and amosite, the type of asbestos used most widely in the insulation side of the industry. The memorandum said that the disease was very rare, there being only 500 to 600 cases on record in the world, compared with over 20,000 cases of lung cancer in Britain every year.
96. The first case of mesothelioma (by a Ferodo employee) appears to have come to T&N's attention in 1964, but it was not pursued. In 1967 Mr Atkinson reported to Mr Waddell of Turner Brothers Asbestos Co. Ltd. on asbestosis cases which had arisen since 1948, and his schedules indicate three cases of mesothelioma. In a memorandum of March 13, 1968 for the Chairman's Committee meeting of March 18, 1968 Mr Atkinson reported on the asbestosis and mesothelioma cases and claims for the year ended December 31, 1967. He said that during the year under review there had been four cases of mesothelioma, one involving a Ferodo employee and the remainder involving former employees of other group companies. Prior to 1967, there had been three cases. No claims had yet been made by group employees based on the presence of mesothelioma. Mrs Crichton's evidence was that the first claim on which a payment was made was brought in 1967 and settled in 1969 for £25,000. The discrepancy between her evidence and Mr Atkinson's memorandum is probably due to the fact that the claim was not being treated as a mesothelioma claim at the time when Mr Atkinson wrote.
97. There was no change in the policy of self-insurance in this period. The question was considered from time to time by the insurance committee and the board. The minutes of a meeting of the insurance committee on December 2, 1966 record that it "had been the company's policy for many years not to insure against liability to workmen who contracted asbestosis in the course of their employment with the Group, and that such claims were in fact handled directly by the Company's Solicitors, Messrs. James Chapman & Co." Mr McKenna of that firm had said that, in the light of the settlement levels, the decision not to insure was wholly justified, and his advice was taken as supporting the view that the policy of not insuring asbestosis claims remained the correct one.
98. The policy is reflected in many documents, and those documents also reflect the mixed motives which lay behind it. First, T&N believed it had a paternalistic attitude to employees, and wished to handle claims itself in order to ensure that it retained control, and could arrive at more generous settlements than an insurance company. Secondly, T&N thought that in general the level of settlements would be lower, and that the cost to the company would be lower than the premiums which it would have to pay (even if cover could be obtained). At a board meeting on July 31, 1969 it was reported that asbestosis claims by employees were not insured, and probably could not be on what they would regard as economic terms.
99. Mr Atkinson's evidence was that T&N considered that insurers were not good at deciding which claims to litigate and which to settle, and the degree of control maintained by T&N meant that claims could be settled quickly and so avoid the anxiety and uncertainty of proceedings. This was regarded as an important factor in preserving a good relationship with the trades unions. His evidence was that other advantages included these: (a) the payment of premium in advance was avoided; (b) insurers did not have to be paid on account of reserves; (c) adverse publicity could be avoided as a result; (d) T&N's own expertise in asbestos claims enabled it to make financial savings on the settlement of claims; (f) there were savings in legal costs; and (g) employees did not waste time at court and management time was saved.
100. So, in the discussions with the CBI on the consequences of the coming into force of the 1969 Act, the minutes of the insurance committee meeting on March 12, 1971 record that T&N had, in presenting its case to the CBI, laid emphasis on the need for maintaining a direct relationship with claimants, particularly in relation to asbestosis cases, without the intervention of an insurance company. On October 18, 1971 Mr Gray of the CBI wrote to Mr Atkinson that he had been informed by the Department of Employment that they recognised the importance of maintaining good relations between employees and employers and the part which speedy and generous settlement of claims could play in that respect.
101. In an internal memorandum in August 1981 Mr Atkinson referred to the policy as a decision taken many years previously "to the effect that asbestos disease claims were so intimately connected with the fundamentals of the business that we should ensure our complete freedom to handle them as we wished without the intervention of any third party, including our employers liability insurers. At the time and for a number of years this stood us in good stead since among other benefits it enabled us to avoid publicity of such matters by negotiating settlements at low levels." But, he added, the cost of meeting the claims had grown to the point where it was not open to T&N to obtain insurance cover at an acceptable cost.
102. Mr Atkinson's evidence was that in terms of the handling of asbestos, pneumoconiosis or mesothelioma claims T&N did not draw a distinction, and it continued to handle all such claims directly. By the time the Royal policy was issued in 1969 it was his recollection that mesothelioma had been identified as a separate prescribed disease in asbestos workers for the purpose of industrial injury benefits, and he believed that Dr Wagner, a South African researcher, published the first paper concerning mesothelioma in asbestos workers in 1959 or 1960, although it was not until Dr Molly Newhouse, a United Kingdom researcher, prepared a report in 1964 confirming that Dr Wagner's research was correct that the connection between asbestos and mesothelioma was generally accepted in the United Kingdom.

IX The Royal policy: inception

103. In 1968 Mr Jones reported to the board that during the course of the year there had been evidence of a deterioration in the standard of service provided by Midland, and that it had become increasingly evident that the financial arrangements for EL insurance were in need of simplification and improvement. T&N decided to obtain quotations from other companies, including Sun Alliance and the Royal.
104. What was envisaged was an excess of £1,000 per claim, but with such claims being handled by the insurer for a service charge but being paid by T&N. Midland and Sun Alliance quoted on this basis, and because Midland's quotation was lower, it was decided to make no change in insurers. Mr Jones gave an assurance to the board that suitable action had been taken to ensure a much improved standard of service from Midland and that the revised financial arrangements would reduce the cost of the service mainly by avoiding a continued accretion of T&N's funds in the hands of the insurance company. It was agreed that a full report on the matter should be submitted at the next meeting of the committee or in any event not later than December 31, 1968.
105. Mr Atkinson's report was on November 12, 1968. He reported that group cover was placed on the basis that Midland would be paid the cost of claims plus 17½%. That was undesirable, because the less successful the insurers were in negotiating settlements, the greater their remuneration. In addition, Midland had insisted that the practice of paying sums by way of reserves against outstanding claims should be continued. Those claims might not in fact result in any payment for a considerable time, and as a result the insurers held about £100,000 in respect of reserves.
106. Quotations on the basis of an excess of £1,000 but with the insurers having conduct of investigations and, on instructions, of negotiation of claims, were obtained from Sun Alliance and Midland, whose quotations were virtually identical.
107. The Royal were asked to quote for the insurance. On March 27, 1969 Mr Hey, the assistant branch manager at the Manchester branch, supplied a premium quotation after having "given careful consideration to the claims experience" supplied by T&N. The quotation was for a net premium of £14,500 subject to a £1,000 excess. The Royal would handle all claims, and the premium included an amount to cover costs incurred in negotiating those claims for which, through operation of the excess, they were not liable.
108. Mr Adaire was asked by Mr Atkinson to compare the Sun Alliance and Midland policies, and he reported that they were in almost identical terms, from which it can no doubt be inferred that the Sun Alliance policy also carried a pneumoconiosis exclusion. Although Mr Atkinson does not now recall the matter specifically, and in light of the fact that the wordings were marked up by Mr Adaire for his attention, I accept the Royal's submission that the probability is that Mr Atkinson considered the Sun Alliance and Midland policies himself in the light of Mr Adaire's report and took the view that they were suitable.
109. T&N accepts in its pleading on the non-disclosure aspect of this case that it is inconceivable that it did not disclose to the Royal's underwriters that it was its policy not to insure its employers' liabilities insofar as they related to asbestosis claims, since the Royal policy was a continuation of the situation which prevailed under the prior insurance arrangements with Midland, and T&N wished to continue this arrangement.
110. At a meeting of the insurance committee on April 1, 1969 it was agreed that the Royal, whose quotation was lower than Sun Alliance, would be appointed as EL insurers with effect from October 1, 1969, the next renewal date. Mr Hardie, personnel director, was in the chair. Mr Kemp was the secretary. The decision of the insurance committee to accept the Royal quotation was subject to Mr Atkinson being satisfied with the claims handling service which the Royal was able to offer.
111. On April 22, 1969, Mr Kemp reported to Mr Hardie that he and Mr Atkinson had had further discussions with the assistant branch manager and the claims manager of the Royal concerning the service which they would be in a position to offer, and that Mr Atkinson was satisfied that the change from Midland to the Royal would result in a more effective control of claims. The Royal would be prepared to concede a further 2% discount in consideration of a three year contract.
112. On April 24, Mr Hardie instructed Mr Kemp to go ahead, and on April 25, 1969, Mr Kemp informed Mr Hey that it had been decided to place their EL insurance with the Royal. The premiums which had been quoted by Mr Hey were subject to review if there were any significant variation in the claims experience which might emerge from that year's figures, which were not then available.
113. The letter of April 22, 1969 indicates that the proposal was for a three year initial period of cover, and when this letter was put to him in the witness box Mr Atkinson accepted that his recollection was that it was initially for three years, with the result that the initial cover would have extended until September 30, 1972. Mr Owen said in the witness box that the agreement was a long-term agreement, but it is possible that he said it because he had read the letter of April 22, 1969 in the course of preparation for the trial, or had heard it read out in court.
114. Until the letter of April 22, 1969 came to light in these proceedings it had been assumed that the Royal policy was an annual policy, and it appears to have been treated as such by the Royal. The policy, as originally issued, indicated in the schedule that the period of insurance was from October 1, 1969 to October 1, 1970, and in a letter to Mr Kemp of September 24, 1971, Mr Owen said that the policy fell due for renewal on October 1, 1971. Nothing turns on whether the policy was initially for a three year period in this phase of the proceedings, and I need not decide it at this stage. Until the Royal came off cover in 1977, the policy was not, it seems, ever re-issued, and it always bore the same policy number, R6B3720.
115. On May 29, 1969 there was a report from the insurance committee for the T&N board meeting reporting the change to the Royal.
116. The policy was issued on October 2, 1969, by the Manchester branch under Mr Lloyd's reference, and his initials appear on the policy. The wording of the pneumoconiosis exclusion is the same as the Midland exclusion (rather than that of the current tariff exclusion as it had stood since 1959), except that the inappropriate reference to silica dust has been removed. I consider it probable that the wording of the exclusion emanated from the Royal. In the light of Mr Williams' evidence, I think it probable that the Royal adapted an older version of the tariff wording, rather than adapting the Midland exclusion or adapting the then current tariff wording.

X The Royal policy exclusion: interpretation, estoppel and rectification

1. The policy terms and the rival contentions

117. The Royal policy insured T&N against liability to employees for bodily injury or disease caused during the period of insurance and arising out of and in the course of employment with T&N. The conditions included the usual condition that no admission was to be made, or indemnity given, by the insured without the written consent of the insurer, which would be entitled to take over the defence or settlement of claims in the name of the insured.
118. The schedule contained the following provisions:

"Memo: The Insurers shall not be liable for the amount of the first £1,000 of each and every claim or for any lesser amount for which any claim is settled.

In this endorsement the expression 'amount' means the total amount of damages and claimants costs and expenses together with all costs expenses and fees incurred with the Insurers written consent all as within defined, together with legal and specialist's fees incurred by the Insurers.

Memo: The insurance by this Policy does not apply to or include liability in respect of pneumoconiosis or pneumoconiosis accompanied by tubercolosis [sic].

In this Endorsement the expression 'pneumoconiosis' means fibrosis of the lungs due to asbestos dust and includes the condition of the lungs known as dust reticulation."

119. T&N seeks a declaration that the pneumoconiosis exclusion was not on its proper construction effective to exclude the liability of the Royal to indemnify T&N in respect of claims involving diseases other than the pneumoconiosis as defined in the exclusion.
120. T&N's pleaded case is that the pneumoconiosis exclusion was part of a standard tariff market wording commonly in use which dated from at least 1948. It was consistent with and, in all probability, was a reflection of, the policy of T&N and other asbestos manufacturers and users not to insure against liability to employees who contracted asbestosis in the course of their employment, and to meet such liabilities themselves and/or the policy of insurers not to insure the pneumoconiosis risk. That had been T&N's policy for many years. As from the mid-1960s other asbestos related diseases, such as mesothelioma and asbestos related lung cancer, had come to be recognised as separate medical conditions. T&N accepts that it extended this same policy to all asbestos related diseases.
121. The Royal's pleaded position is that prior to the inception of EL cover in 1969 and at each renewal thereafter, both the Royal and T&N used the term "asbestosis" to refer generally and compendiously to all injuries and diseases resulting from exposure to dust and that "asbestosis" and "pneumoconiosis … due to asbestos dust" were also understood to be synonymous ways of expressing that same concept.
122. The Royal contends that the wording of the exclusion is effective, on its true construction, to incorporate (and thus exclude from cover) "all and any injuries or diseases caused by or arising from exposure to asbestos", and "all injuries or diseases caused by or arising from exposure to asbestos including but not necessarily limited to asbestosis, dust reticulation, mesothelioma, lung cancer, pleural plaques, pleural effusion, diffuse pleural thickening, bronchial carcinoma or any other kindred or asbestos related injury or disease".
123. It is to be inferred that the exclusion was intended by the parties to reflect and, on its true construction, did reflect the shared assumption communicated by T&N and the Royal to each other upon which EL cover was provided to T&N by the Royal, namely that the pre-existing policy of T&N to meet all claims relating to any injuries or diseases caused by or arising from exposure to asbestos from its own resources without the provision of insurance cover would continue, and that all such claims were accordingly to be and were excluded from the EL cover provided by the Royal.
124. It was the continuing common intention of T&N and the Royal at all material times up to and after inception of the policy that T&N would act as self insurer in respect of all asbestos related employee claims. It was also the continuing common intention of T&N and the Royal at all material times up to and after inception of the policy that the Royal would not provide cover in respect of any injury or disease suffered by the employees of T&N arising from exposure to asbestos. The contract of insurance was agreed on the basis of the continuing common intention that such cover should be excluded from the policy. It is to be inferred that T&N's intention to act as self insurer in respect of all asbestos related diseases suffered by its employees was communicated to the Royal when cover was sought in 1969 against its potential liabilities as employer and that the form of exclusion (adapted from the standard tariff form by making express reference to asbestos dust) was adopted by the Royal and T&N with the common intention and on the shared assumption that it was effective to exclude from cover liability for all asbestos related diseases.
125. Alternatively, the Royal seeks rectification of the exclusion insofar as may be necessary to accord with the common intention of T&N and the Royal.
126. In reply T&N denies there was any common intention, or continuing common intention, or any shared assumption. The Royal did not at any time, at inception or at any renewal, seek to widen the scope of the exclusion so as to include other asbestos related diseases, such as mesothelioma, about which the Royal either was or ought to have been aware both at inception and, increasingly, at each subsequent renewal. The fact and nature of mesothelioma as an asbestos related disease was a matter which was in the public domain from at least as early as 1965.
127. There was no concurrent intention as a necessary foundation for any claim of rectification, and the contentions of the Royal relate more to what it maintains were the consequences which it expected from the wording of the exclusion cover rather than to any shared assumption or common intention between the parties. The only common intention or shared assumption was that "pneumoconiosis or pneumoconiosis accompanied by tuberculosis" should be excluded.
128. By the Royal's delay in seeking rectification T&N have suffered prejudice as a result of the death of Mr Kemp and/or as a result of the loss of relevant documents by T&N and the Royal, and T&N on a like basis contends that the Royal is not entitled to rely on the equitable remedy of estoppel by reference to the alleged shared common assumption.

2. Applicable principles

129. Where a party seeks to advance a particular interpretation, but in the alternative seeks rectification of the contract or seeks to rely on an estoppel, the court is almost always presented with evidence of negotiations, which is not admissible for the purposes of construction, but which is sought to be deployed not only to prove common accord or shared assumptions, but also as background or factual matrix. So also evidence of subsequent conduct, which is also not admissible for purposes of construction, is frequently adduced in support of a case of estoppel by convention. As I have indicated (para. 57, above), the evidence is this case contains much material of that kind, and also evidence of the witnesses' understanding of the meaning of the exclusions. But the doctrine of estoppel by convention is not available as a vehicle to admit evidence of the parties' alleged subjective intentions or understanding as to the meaning of contractual documents: Phillip Collins Ltd v Davis [2000] 3 All ER 808, 824. That applies equally to rectification.
130. On the approach to questions of interpretation I was referred to the familiar recent authorities, including Investors' Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896; Mannai Investments Co. Ltd. v Eagle Star Life Assurance Co. Ltd. [1997] AC 749; Bank of Credit and Commerce International v Ali [2002] 1 AC 251, and in particular to what Lord Hoffmann said in Investors' Compensation Scheme at 912-913:

"(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce as the 'matrix of fact,' but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co. Ltd. v Eagle Star Life Assurance Co. Ltd. [1997] AC 749.

(5) The "rule" that words should be given their "natural and ordinary meaning" reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera S.A. v. Salen Rederierna A.B. [1985] AC 191, 201:

'if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.' "

131. "The real question is what evidence of surrounding circumstances may ultimately be allowed to influence the question of interpretation. That depends on what meanings the language read against the objective contextual scene will let in": Mannai Limited v Eagle Star Assurance Co. Limited [1997] AC 749, 768, per Lord Steyn. Lord Hoffmann said in BCCI v Ali, para. 39, that this means circumstances which a reasonable man would have regarded as relevant, and he was not "encouraging a trawl through 'background' which could not have made a reasonable person think that the parties must have departed from conventional usage".
132. But the starting point, and usually the finishing point, is the language which the parties have used. As Lord Hope of Craighead said in Melanesian Mission Trust Board v Australian Mutual Provident Society [1997] 2 EGLR 128, 129 (P.C.):

"Where ordinary words have been used they must be taken to have been used according to the ordinary meaning of those words. If their meaning is clear and unambiguous, effect must be given to them because that it was the parties are taken to have agreed by their conduct. Various rules may be invoked to assist interpretation in the event that there is an ambiguity. It is not the function of the court, when construing a contract, to search for an ambiguity."

133. There was no dispute as to the applicable principles for rectification and estoppel. In the case of common or mutual mistake the party seeking rectification must show that the concluded instrument does not represent the common intention of the parties, and must show some outward expression of accord or evidence of a continuing common intention outwardly manifested: Frederick E Rose Ltd. v William H Pim & Co. Ltd. [1953] 2 QB 450, 461-462 (C.A.); Joscelyne v Nissen [1970] 2 QB 86, 97 (C.A.).
134. There has to be outward accord for otherwise "there could be no certainty at all in business transactions if a party who had entered into a firm contract could afterwards turn round and claim to have it rectified on the ground that the parties intended something different": Denning LJ in Frederick E Rose (London) Ltd v Wm H Pim & Co Ltd [1953] 2 QB 450 at 462.
135. The party seeking rectification does not have to meet more than the civil standard of balance of probabilities, but convincing proof is required to counteract the cogent evidence of the parties' intention displayed by the instrument: Thomas Bates and Sons v Wyndham's Ltd. [1981] 1 WLR 505, 521 (C.A.); Grand Metropolitan plc v William Hill Group. [1997] 1 BCLC 390 at 394.
136. Rectification may be available if the document contains the very wording that the parties intended it to contain, but it has in law or as a matter of true construction an effect or meaning different from that which was intended: Re Butlin's Settlement [1976] Ch 251, 260; Grand Metropolitan v William Hill Group [1997] 1 BCLC 390, 394. Contrast Harlow Development Corp v Kingsgate (Clothing Productions) Ltd (1973) 226 Est Gaz 1960 (C.A.).
137. It is not necessary that the parties should at the material time have formulated the words which it is sought to insert by rectification. It is sufficient that the parties had the necessary common continuing intention as to the substance of that which would be achieved by the rectification sought: Crane v Hegeman-Harris Co Inc [1971] 1 WLR 1390 at 1399; Grand Metropolitan v William Hill Group, at 394-5.
138. "When the parties to a transaction proceed on the basis of an underlying assumption - either of fact or of law - whether due to misrepresentation or mistake makes no difference - on which they have conducted the dealings between them - neither of them will be allowed to go back on that assumption when it would be unfair or unjust to allow him to do so. If one of them does seek to go back on it, the courts will give the other such remedy as the equity of the case demands.": Lord Denning MR in Amalgamated Investment and Property Co Ltd v Texas Commerce International Bank Ltd [1982] QB 84, 122 (C.A.). "It is unconscionable for a party to be permitted to deny that which, knowingly or unknowingly, he has allowed or encouraged another to assume to his detriment": Taylor Fashions v Liverpool Victoria Trustees [1992] QB 133n, 151 – 152, per Oliver J.
139. The agreed assumption must "cross the line": The August Leonhardt [1985] 2 Lloyd's Rep. 28, 34, per Kerr LJ, applied in The Vistafjord [1988] 2 Lloyd's Rep 343, 350, per Bingham LJ. In Republic of India v India Steamship Co. (No. 2) [1998] AC 878, 913, Lord Steyn said:

"It is settled that an estoppel by convention may arise where parties to a transaction act on an assumed state of facts or law, the assumption being either shared by them both or made by one and acquiesced in by the other. The effect of an estoppel by convention is to preclude a party from denying the assumed facts or law if it would be unjust to allow him to go back on the assumption: …It is not enough that each of the two parties acts on an assumption not communicated to the other. But … a concluded agreement is not a requirement for an estoppel by convention."

140. If the party seeking equitable relief has not been reasonably diligent in seeking it, and in consequence the position of the other party has been prejudiced or it would now be unjust or unreasonable to grant the relief, the party seeking it will be debarred from pursuing his remedy on the ground of laches. What amounts to reasonable diligence and what circumstances will render it inequitable to grant the relief will vary with the type of relief sought and the facts of the particular case: Lindsay Petroleum Co. v Hurd [1874] LR 5 PC 221, 239, per Lord Selborne; Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218, 1279, per Lord Blackburn; Chitty, Contracts, 28^th ed. 1999, vol 1, para 29-140. But for the purposes of laches time runs only from notice of the error: Beal v Kyte [1907] 1 Ch 564, 566; Snell's Equity, 13^th ed, 2000, para 3-19.

3. The Royal's position

141. The Royal accepts that, in the light of Dr Rudd's evidence, the wording of the exclusion does not, as a matter of strict clinical definition, apply to asbestos related disease other than asbestosis, and that the actual words used in the clause will not yield the result for which the Royal contends.
142. The Royal submits, however, that this is a classic case in which to conclude that the parties must, in the words of Lord Hoffmann, "have used the wrong words" to express their true intention and in which to make the detailed semantic and syntactical analysis of the words, in the formulation of Lord Diplock, "yield to business commonsense."
143. The medical definition of pneumoconiosis was not intended to be taken as definitive of the relevant clause. The dictionary definition in the Shorter Oxford English Dictionary (3rd ed. 1944, with Revised Addenda 1973, 1974) includes the word Pneumoconiosis in the addenda only, suggesting that the word was not in general usage before the middle of the last century. Moreover, its general meaning is fairly broad, in any event. The 1973 addenda gives the definition: "any condition of the lungs that results from inhalation of dust". The Compact Oxford Dictionary indicates that the word is derived from the Greek words for lung (pneumon) and dust (konis) and defines pneumoconiosis simply as "disease of the lungs produced by inhalation of dust".
144. To limit the meaning of the clause by reference to the clinical sense of "pneumoconiosis" or "fibrosis" is to construe the policy by reference to the clinically accurate meaning of the words used rather than by the meaning which the clause would convey to the reasonable man. The true task is to ascertain the meaning of the clause to the reasonable (not the medical or unduly semantic) man embedded in the factual matrix of these parties in 1969.
145. The evidence shows that references in the documents to asbestosis cannot be taken at face value as referring to that medically distinct condition and no other. Each one of the conditions is a long latency disease caused by the inhalation of asbestos dust. Each was dealt with by T&N in the same way. Although T&N's personnel were aware of the differences between asbestosis and lung cancer and mesothelioma, they also habitually used the terms asbestosis and pneumoconiosis to cover the whole range of diseases caused by asbestos dust. Except in the context of the settlement of individual claims or in the context of reporting emerging trends in claims to the board, there was no reason to refer to them separately. They were familiar with this shorthand and did not hesitate to use it in their dealings with others less familiar than they were with the niceties of medical definition.
146. T&N had a longstanding policy, decided at the highest levels of the group, not to insure itself in relation to the EL asbestos risk. Initially, this related to asbestosis only, but, by at least the mid 1960s, the policy extended to all asbestos diseases known today. This was well known to all the relevant personnel in T&N and to its advisers in 1969.
147. The true nature of the bargain was that the Royal cover excluded liability for all asbestos related disease. If the true nature of the bargain was, instead, that the cover excluded T&N's liability for asbestosis claims only, but covered its liability for claims in respect of other diseases such as lung cancer and mesothelioma, this would have involved an important departure from T&N's policy. It was a departure which would involve an obligation on T&N to pay premium for cover it did not want and to require it to tolerate the Royal's interference in claims handling.
148. This would be a matter requiring explanation to T&N's board and a decision by it or the insurance committee. There is no evidence to suggest that any such step was taken. Mr Atkinson and Mr Kemp dealt with the Royal in relation to the negotiation of EL cover with effect from October 1, 1969. Neither Mr Atkinson nor Mr Kemp had the authority to alter T&N's self insuring philosophy without board approval. No such authority was ever sought.
149. The overwhelming probability is that T&N explained to the Royal what cover it wanted and that the asbestos risk was to be excluded from the cover sought. The Royal relies on T&N's plea that it is inconceivable that its philosophy not to insure against the asbestosis risk would not have been disclosed to the Royal during negotiations for cover. Mr Atkinson accepted in the witness box that it was an essential part of the T&N policy that it retained all control over claims for asbestos related diseases: "I was sure we did not want the Royal involved in dealing with asbestos[is] and other disease claims."
150. All the Royal's witnesses confirm that their understanding of the cover accorded with T&N's real philosophy. If cover had been agreed for some asbestos related diseases that would have run counter to the Royal's own underwriting policy.
151. The exclusion was a standard form wording commonly regarded as the appropriate wording for the exclusion of what was known as the "pneumo-risk" which was the risk of dust inhalation diseases in whatever industry was being insured. There was no other standard wording available.
152. The term "asbestosis" was used generally by insurers and by the insured to cover all asbestos related diseases. The standard tariff based endorsement wording was used to exclude the risk which arose from disease caused by the inhalation of dust or fibres without regard to the precise clinical definition of those diseases. Non-insurance of EL asbestos related disease liabilities by asbestos manufacturers was a feature of the market. Drawing a line between the exclusion of liabilities for one disease arising from exposure to asbestos dust in the workplace and agreeing cover for other diseases made no commercial sense and was contrary to standard insurance industry practice. In 1969, the Pneumoconiosis Medical Board and Panels administered the schemes for industrial injuries compensation for the only prescribed diseases at that time, namely asbestosis and mesothelioma, which confirmed the general usage of the term "Pneumoconiosis" as being of general application to asbestos related diseases.
153. The parties' conduct provides further evidence about the true nature of the bargain struck between them:

(a) there was no disclosure sought or given about claims history for asbestos related disease, and both parties knew that if cover were sought for asbestos related disease liabilities such information was essential for premium calculation;

(b) calculation of the premium at inception and on subsequent renewal was based on cover being limited to T&N's liability for accidents and non-asbestos related disease, and T&N must have known that no premium was being charged for the asbestos risk;

(c) whenever T&N had considered insuring this risk, it had rejected the idea, at least in part, on the grounds of cost. It knew that the Royal quotation was competitive when compared with the cost of the Midland insurance which, on T&N's own case, was effected on the basis that T&N did not insure in respect of the asbestos risk. The board noted on April 1, 1969 that the insurance committee was endeavouring to "achieve economies" in the cost of insurance in seeking a change from Midland. Competitive quotations were sought and the Royal quote was the cheapest. It would have been a commercial nonsense for the Royal to underwrite the asbestos risk in addition to the general EL risk insured by Midland at the premiums charged and T&N must have known that;

(d) there was no information sought by the Royal about T&N's processes or factory conditions. No surveys were sought to establish the nature of the risk. This is to be contrasted with the Royal's attitude when it was, in 1974, asked to "front" asbestos related disease liabilities for T&N when claims history information was sought and information relevant to the risk assessment was asked for;

(e) following inception, claims handling was split in accordance with the true nature of the bargain. T&N alone handled all asbestos related disease claims. No claim for an asbestos related liability (and Mr Unsworth's evidence to the contrary is to be rejected) was ever made on the Royal by T&N until February 1, 2002. The Royal handled all claims which it insured including, by special arrangement, those of the class insured but of a size that fell within the excess. It handled accident claims and disease claims such as dermatitis and noise induced deafness claims. In a letter in 1982 (relating to a claim by Mrs Snowdon, which from the context is plainly a case of mesothelioma, although referred to as an asbestosis risk) the Royal made it clear (with no objection from T&N) that the Royal was not responsible for EL mesothelioma claims;

(f) during the negotiations in 1974/1976, it was accepted that there had been no cover for asbestos related diseases, including mesothelioma, prior to 1972. Thus in the note for a meeting between T&N and the Royal on August 6, 1975 it was said:

"T&N has traditionally handled direct … common law claims arising from asbestosis and mesothelioma and the potential liability of the Royal in the event of the failure of T&N to meet such liabilities is confined to claims arising after the need to insure such claims became compulsory …"

154. The risk was presented to the Royal on the basis that the asbestos disease risk was to be excluded from cover, the Royal quoted on that basis with a premium which was competitive with the existing Midland cover, which T&N believed excluded the asbestos disease risk, and that the assumption that the quoted cover excluded the asbestos disease risk was shared by both parties and communicated in this way between them.
155. Whatever words were actually used, T&N intended to exclude all diseases arising from the inhalation of asbestos dust and communicated this to the Royal, which shared precisely the same intention. If the actual words used do not achieve that common intention, rectification is the appropriate remedy.
156. The critical distinction between this case and the Cape case is that there was no finding that Cape had a self insuring philosophy in relation to all asbestos diseases in 1965 when it sought cover from the insurers, much less that there was any outward expression of accord in this respect. There was positive evidence in that case that there had been no common intention of the kind alleged. There was evidence that the insurers had realised there might be a problem over the terms of the exclusion in 1969.

4. T&N's position

157. The pneumoconiosis exclusion is effective to exclude just that - pneumoconiosis (i.e. "asbestosis", when the disease is caused by asbestos) and only that, and no other asbestos related diseases are incorporated within the meaning of the term, and thereby also excluded. The exclusion contains its own specific definition of "pneumoconiosis" and there is no permissible basis for ignoring that express definition.
158. There is no factual matrix that can be applied to the words for the purpose of assisting in the construction of the exclusion beyond the medical and the statutory. The only relevant matrix relied on by the Royal is the subjective and confused account of the Royal witnesses, which describes differing assumptions as to the meaning and extent of the exclusion, in circumstances in which what was being applied were not the words drafted by either of the parties, but the words of the exclusion that had previously been applied under the tariff system.
159. Any attempt by the Royal to widen the factual matrix for the purpose of putting a different, wider meaning on the word "pneumoconiosis" would be not for the purpose of explaining the words used, but rather for the purpose of contradicting them. The evidence of the witnesses as to what they considered to be the meaning of the exclusion is neither helpful nor admissible.
160. Because the wording used was a standard tariff wording, the Royal's approach of construing the words in the context of one particular factual matrix may have the startling result of producing a different outcome from the construction of the very same standard tariff words when construed in the context of a different factual matrix.
161. The exclusion in this case points even more strongly than did the Cape exclusion, towards a restrictive construction, excluding mesothelioma, by reason of the fact that, unlike the clause in the Cape case, which simply made reference to "pneumoconiosis," the wording of the Royal's exclusion took matters further along the statutory/medical definition route, by giving, within the wording of the exclusion, the statutory/medical definition of pneumoconiosis as being "fibrosis of the lungs due to asbestos dust and includ[ing] the condition of the lungs known as dust reticulation."
162. The Royal's formulation, which refers to all injuries or diseases attributable to asbestos dust, apparently still does not reflect what the Royal now says it had hoped to achieve. The example of the employee who suffered an eye injury or a skin complaint as the result of being exposed to asbestos would be caught by the Royal's formulation, even though it was apparent from the context of this action and from the evidence that this could not have been what the Royal's intention is now said to have been, which was to exclude injuries caused by the inhalation of asbestos dust.
163. The evidence does not in any event support any such commonality of purpose. It appears that in all likelihood the parties simply did not apply their minds to the question of whether mesothelioma should be excluded. There are words that could have been used, such as wordings making reference to "all injuries and diseases caused by the inhalation of asbestos", but the Royal never sought to use such words. Instead it asks the court to construe the clause in a manner that is not only contrary to its natural and ordinary meaning, but which is also contrary to the definition of pneumoconiosis that is contained within the very same clause.
164. On rectification and estoppel, T&N says that there is a complete absence of any direct documentary or witness evidence as to the existence of any outward expression of accord or shared assumption as to what was to be the meaning and effect of the exclusion. The parties simply did not apply their minds to the question of whether or not the policy exclusion was intended to encompass mesothelioma and all other asbestos related injuries and diseases.
165. There is nothing from any witness to the effect that either of the factors of agreement or outward expression of accord took place, and there is consequently nothing like the "convincing proof" that would be required.
166. The fact that T&N used the expression "asbestosis" to refer to all asbestos related inhalation diseases on occasion is not relevant. It may well be that the term asbestosis was used generally when wishing to refer to the diseases in passing, but with more specific references being used when the substance of the discussion was the actual diseases. This would not be surprising, since it would have been laborious to set out repeatedly all of the various asbestos caused diseases each and every time that one wished to make passing reference to them.
167. But when seeking to exclude liability however, careless or casual use of language will not do. It was simply the Royal's mistake to use this form of exclusion and it was not something that was ever discussed with or agreed by anyone at T&N.
168. There is no explanation for the fact that the parties, if they had agreed, or if they were working under the shared assumption, that all asbestos related diseases and injuries were to be encompassed within the exclusion, should have chosen such a specific and restrictive form of wording rather than a wider form of words such as "any and all asbestos related injuries or diseases".
169. It is probable that, just as in the Cape case, those dealing with the insurance adopted an "off the shelf" wording and simply failed to address their minds to the question of what, if any, other conditions, diseases or illnesses might or might not be encompassed within the words of the pneumoconiosis exclusion.
170. On estoppel, the alleged shared assumption is based on, at most, no more than the Royal's personnel's individual ignorance of the existence of diseases caused by asbestos other than pneumoconiosis and/or erroneous understanding of what was embraced by term pneumoconiosis. No thought was had, and therefore no consideration given, to the question of whether or not mesothelioma was to be covered by the exclusion.
171. As regards any detriment that may have been suffered by the Royal, it is accepted by T&N that if there was indeed a shared assumption that the pneumoconiosis exclusion encompassed, and thereby excluded, all asbestos related diseases, then the Royal will have suffered some detriment of some sort in consequence. The mere fact of detriment, however, does not establish that there must have been a shared assumption. It is equally consistent with the Royal operating under a unilateral and undiscovered mistake.

5. Delay/Laches: the arguments

172. T&N pleads that by the Royal's delay in seeking the remedy of rectification, T&N has suffered prejudice as a result of the death in the meantime of Mr Kemp, who dealt with the Royal on T&N's behalf in 1969, and/or as a result of the loss of relevant documents by T&N and the Royal, and that on a like basis the Royal is not entitled to rely on an estoppel by reference to the alleged shared assumption.
173. T&N's case is that individuals at the Royal who were dealing with T&N must have learned, at the very latest by around 1975, that in addition to the disease of pneumoconiosis caused by exposure to asbestos dust (i.e. asbestosis) there was another disease caused by exposure to asbestos dust which was a cancer (i.e. mesothelioma).
174. The material on which T&N relies includes: first, contemporaneous documents passing between offices and personnel of the Royal mentioning lung cancer in families of asbestos workers (November 26, 1974: memorandum from head office to Mr Lloyd); or mesothelioma (Mr Kemp's indemnity letter of February 24, 1975, which was passed on by the Manchester branch to head office; and March 27, 1975 memorandum from Manchester branch to head office). Second, it includes documents that had progressively come into the public domain including press reports from 1965, especially an article in the Sunday Times in October 1965.
175. In particular T&N relies on a publication in 1974 by Peter Nield, Asbestos: A Problem for Liability Insurers, which Mr Williams, the Royal's expert, states was aimed at and for the benefit of liability insurers, with distribution to every Associate or Fellow of the Institute of Chartered Insurers, amongst whose members must have numbered at least some of the Royal's underwriters (including Mr Hanmer and Mr Williamson). Mr Williams states that the article "deals with, inter alia, mesothelioma, lung cancer and other diseases and it is likely to have added to the knowledge of the prudent liability underwriter at that time...". It represented the best marker as to when an underwriter could be said to have been likely to have discovered the meaning of mesothelioma and its distinction from other asbestos related diseases. His evidence is that by 1975 underwriters should all have become aware of the distinction between the two diseases.
176. Mr Lloyd and Mr Hanmer admit, in supplementary statements, to becoming aware in 1975 that mesothelioma was an additional disease caused by exposure to asbestos dust. Mr Hanmer accepted that he must have known before the issue with T&N arose in October 1974 about the fact that what he described as "lung cancer" (by which, from the context of his contemporary documentary references, he must have meant mesothelioma) existed as a distinct asbestos caused disease and that had he looked at the pneumoconiosis exclusion at the time, he would have discovered that the exclusion was insufficient in its terms to exclude liability for lung cancers.
177. The Royal must therefore have known, by no later than 1975, all that it needed to know, if it did not already know, to realise, if it were the case, that it had made a mistake in the wording of the exclusion by confining it to pneumoconiosis. Despite this knowledge, nothing was done to bring the alleged mistake to the attention of T&N, and no steps were taken, until now, to attempt to raise the issue or to rectify the alleged mistake.
178. Once the Royal had become aware of the distinction in the diseases, it cannot have failed to have noticed the need, if its contention as to the intended true meaning of the exclusion is accepted, to have it rectified so as to exclude the liabilities that it was intended to exclude.
179. Recognition of the need for rectification, and of the need to take steps to effect such rectification, should have become even more acute, once claims began to be reported under the EL policy. From the early 1980s T&N through Mr Unsworth, began to report asbestos related claims as and when they arose, even if, as happened, the claims would not be responded to by the Royal. It was at around this time that T&N was looking to Midland for claims under the insurance it had issued and, having had to look to one insurer, whose policy had contained a pneumoconiosis exclusion, it is not surprising that T&N should have decided to protect its position vis a vis the Royal.
180. But no steps were taken by the Royal either to have the wording of the exclusion rectified, or even to raise it with T&N as an issue for discussion. The length of time that has elapsed between what can be taken as a starting date of 1975 and the Royal first taking steps to rectify is 27 years. Even if the starting date is between about 1982 and 1985 (as being the date when the Royal knew of both the inadequacy of the exclusion wording and of the fact that T&N had begun to look to the Royal for cover in respect of asbestos related disease claims), the length of time elapsed is 20 years.
181. Since those dates, Mr Kemp, who was the T&N employee most intimately concerned with the insurance with the Royal, has died. Furthermore, during that period a great number of the Royal documents were lost in the Manchester IRA bomb of 1996. The evidence which would have been available from Mr Kemp and from the Royal documents would have provided important factual context against which the court could better have determined whether or not there ever was any shared assumption or common intention between the parties as to the meaning and intended effect of the pneumoconiosis exclusion.
182. The Royal's position is it accepts that the rectification plea was added by late amendment, but the Royal says that it was only shortly after exchange of witness statements in November 2002, that in December 2002 T&N made a significant amendment to its pleadings, to plead expressly that, as asbestos related diseases other than asbestosis had come to be recognised as separate medical conditions, its self insuring philosophy had been extended to "all asbestos related diseases." This change in T&N's position, coupled with analysis of T&N's witness statements, justified the rectification plea since it was then quite clear that the parties had not been at cross purposes in 1969, as T&N's original plea had suggested.
183. On T&N's present case, the Royal was solely liable in respect of mesothelioma and lung cancer cases etc caused or contributed to by exposure to dust in the period 1969- 1971. Not a single such claim had ever been pursued against the Royal by T&N prior to the administration, despite the fact that there clearly were such cases.
184. It might be different if there were evidence to the effect that the Royal had been alive to a possible problem as to the scope of the exclusion and had made a deliberate choice not to raise it at the time (such as occurred on the facts in the Cape case), but that is not the evidence here.
185. On the contrary, the evidence suggests that T&N seems to have been aware that there was an issue in the 1980s as a result of the Midland litigation but that it failed to bring the matter to a head when it could have done so. T&N decided not to pursue the matter against the Royal, probably because it was known that, in the case of the Royal, a conscious decision not to insure had been made in the 1960s.
186. Constructive knowledge is insufficient. On the assumption that there was a common mistake/common understanding, T&N was always in a better position than the Royal to appreciate the error which underlay both. In fact, both parties proceeded on the assumption that the pneumoconiosis exclusion was effective to exclude all asbestos diseases arising from the inhalation of asbestos dust and neither party realised their common error (if that is what it was) in 1975. The fact that they both had the means to discover their error, if their minds had been focussed on it or their attention drawn to it, is irrelevant.
187. Nothing, in fact, occurred in 1975 which led or, fairly considered, ought to have led the Royal to consider that it or T&N had made a relevant mistake. Mesothelioma cases had begun to surface in the correspondence, but only in the context of (1) claims made against T&N which were not being passed on to the Royal (and were not originally insured) and (2) of the inconclusive discussions as to whether the Royal would be prepared to assume the asbestos risk in the light of the 1969 Act.
188. The reality is that T&N did not consider that it had a viable claim against the Royal in the 1980s because those then in control of T&N knew very well that neither party had ever intended or considered that the Royal was on risk for any asbestos related claims. Having changed its corporate mind 20 years later because of the change of control which has taken place, T&N cannot be heard to say that it is unjust for the Royal to seek equitable relief on the grounds of delay. The delay and any resulting prejudice has been caused by T&N, not the Royal.
189. Any prejudice, in fact, cuts both ways in any event. Both parties suffer at least equally from the loss of documents and the death of relevant witnesses and it is most probable that the Royal's detriment is greater than that of T&N. This is, in part, a function of the fact that long tail diseases are at the core of the issue and that the dispute has only recently manifested itself many years after the relevant events. That should not be regarded as a basis for refusing the Royal equitable relief, if this would otherwise be appropriate.

6. Conclusions

190. The starting point is that the exclusion relates to "pneumoconiosis" which is defined to mean "fibrosis of the lungs due to asbestos dust," i.e. asbestosis. It is plain that the wording of the exclusion does not apply to asbestos related disease other than asbestosis. This is a case in which the contract contains words which are clear and unambiguous. It would take very exceptional circumstances indeed for them not to be given effect in accordance with those terms.
191. The question is what meaning the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. The only substantial question on the construction issue is whether the Royal is right in submitting that this is a case in which the court should conclude that the parties must, in the words of Lord Hoffmann, "have used the wrong words" to express their true intention and a case in which to make the literal wording, in the formulation of Lord Diplock, "yield to business commonsense." with the result that "pneumoconiosis [meaning] fibrosis of the lungs due to asbestos dust" should be interpreted to mean all and any injuries or diseases caused by or arising from exposure to asbestos.
192. On rectification, the issue is whether the Royal has met the standard of convincing proof to counteract the cogent evidence of the parties' intention displayed by the instrument, and has shown that the policy does not represent the common intention of the parties, and has shown some outward expression of accord or evidence of a continuing common intention outwardly manifested, to the effect that the policy exclusion was meant to extend to all and any injuries caused by or arising from exposure to asbestos dust. On estoppel, the question is whether the Royal and T&N acted on a shared and communicated assumption to the same effect.
193. I accept the submission by T&N that since the effect of any estoppel by convention will be the same as the rectification of the exclusion wording (i.e. to change and contradict the true meaning of the written contract), the court should require the same standard of proof from the Royal as it would for rectification; i.e. convincing proof of the allegedly shared or common assumption to the same effect.

A. The use of the term "asbestosis"

194. There is no doubt that executives of T&N frequently, but not invariably, used the expression "asbestosis" to refer to all asbestos inhalation related diseases, even when it became known that lung cancer and mesothelioma were associated with asbestos.
195. Many documents confirm this. Prior to the inception of the policy in 1969, in a memorandum to Mr Waddell of Turner Brothers Asbestos Co. Ltd. of April 6, 1967, Mr Atkinson referred to a schedule of "asbestosis cases" which included some carcinoma cases, including one possible case of mesothelioma.
196. To take some examples among many during the currency of the Royal cover, the minutes of the insurance committee meeting on March 12, 1971 noted that the group solicitor and the committee secretary had, in presenting T&N's case to the CBI, laid emphasis on the need for maintaining a direct relationship with claimants, particularly in relation to asbestosis cases, without the intervention of an insurance company; and on August 16, 1974 Mr Kemp wrote an annual report for the insurance committee meeting on August 21,1974 in which he referred to the Royal policy and said that in compliance with the 1969 Act "this policy covers all claims by employees but, by special arrangement with Royal Insurance, asbestosis claims continue to be handled direct by T&N, who meet the full cost of such claims as well as the first £1,000 of all other claims."
197. But when it was necessary to draw a distinction, T&N did so. In a memorandum of March 13, 1968 for the Chairman's Committee meeting of March 18, 1968 Mr Atkinson reported on the asbestosis and mesothelioma cases and claims for the year ended December 31, 1967. He reported on the number of new asbestosis cases, and noted that during the year under review there had been four cases of mesothelioma, one involving a Ferodo employee and the remainder involving former employees of other group companies.
198. In a letter of August 27, 1971 from Mr Kemp to Mr Quayle of Ferodo stating that they were in touch with the Royal about the consequential changes that would be necessary in the group policy following the 1969 Act coming into force on January 1, 1972, Mr Kemp said:

"Mr Atkinson, who I am glad to say is now back among us, will be looking at the legal aspects of the situation [the coming into force of the 1969 Act], particularly in relation to pneumoconiosis and mesothelioma cases, and I will let you know the outcome in due course."

199. Mr Atkinson accepted in the witness box that generally the expression "asbestosis" was used internally in T&N and in his dealings with their solicitors to cover the whole range of asbestos related diseases. He was clear about the distinction between mesothelioma and carcinoma and asbestosis, but he still internally very frequently referred to all these conditions under the general rubric of asbestosis. Mr Pemberton also accepted that he had used the term "asbestosis" interchangeably with the phrase asbestos disease or asbestos related disease, and that he used the expression "pneumoconiosis" to cover all the asbestos related diseases: "For the purposes of insurance I did not distinguish between them, no, they were all asbestos-related diseases."
200. There are few documents passing between T&N and the Royal which bear on the question. Generally the only term used is asbestosis: letter from Mr Kemp to Mr Owen: December 20, 1974; memorandum of January 22, 1976 from Mr Kemp reporting on a meeting with the Royal; Mr Hanmer's memorandum of a meeting on August 17, 1976 with Mr Atkinson and Mr Pemberton.
201. But there are some documents passing between T&N and the Royal from the mid 1970s which refer not only to asbestosis but also to mesothelioma. Mr Kemp's indemnity letter of February 24, 1975 contains an undertaking to pay claims based upon the allegation that employees contracted "asbestosis or mesothelioma as a result of exposure to asbestos dust." When Mr Kemp sent to Manchester branch on March 21, 1975 a brief note of asbestosis claim settlements, his memorandum was headed "Asbestosis and Mesothelioma Claim Settlements" and this was passed on to head office with a handwritten memorandum using the same expressions. Subsequent internal memoranda in the Royal about the level of claims referred only to asbestosis claims: Mr Hanmer to Mr Lloyd on May 23, 1975; Mr Lloyd to head office on June 13, 1975.
202. Similarly during the discussions between T&N and the Royal in 1974/6, a list of what were headed "Asbestosis Claims Outstanding at 31^st July, 1975" was provided by T&N to the Royal. This emanated from Mr Atkinson's department, and it would appear from analysis of the database produced by T&N that no distinction was being drawn between asbestosis, lung cancer and mesothelioma, since the list included claims which were for lung cancer and mesothelioma. Mr Atkinson accepted that it looked very much as if his list of asbestosis cases contained carcinoma claims and mesothelioma claims. Mr Lloyd reported to head office on August 7, 1975, attaching the same list, which he described as being of "of all currently outstanding asbestosis claims."

B. Inception of the cover: documents

203. As I have said (para 116 above) I consider it likely that the Royal exclusion was adapted (with the omission of the reference to silica dust) from an earlier tariff version, rather than being an adaptation of the Midland exclusion or the then current (1959) tariff wording.
204. There are no documents now available at the time of inception which reflect any discussion with the Royal, or within the Royal, of the scope of the exclusion.
205. Although, as T&N accepts, it must have told the Royal about its self-insurance policy for asbestosis the documents indicate that the only matters of importance which were discussed and negotiated between T&N and the Royal in 1969 were the respects in which T&N wanted a change from the position which obtained in relation to the Royal cover, namely (a) the excess of £1,000, with the Royal providing an investigation and negotiation service; and (b) the premium level. It is very unlikely that the executives of either T&N or the Royal gave any consideration to the wording of the pneumoconiosis exclusion.
206. After the Royal had been asked to quote for the T&N EL business, on March 27, 1969 Mr Hey, the assistant branch manager, supplied a premium quotation after having "given careful consideration to the claims experience" supplied by T&N. The quotation was for a net premium of £14,500 subject to a £1,000 excess.
207. At a meeting of the insurance committee on April 1, 1969 it was agreed that the Royal, whose quotation was lower than Sun Alliance, would be appointed as EL insurers with effect from October 1, 1969, the next renewal date.

C. Witnesses

208. The cover was negotiated by Mr Kemp and Mr Hey, both of whom are dead. There is no evidence at all of any discussion of the scope of the exclusion. If he had recollected any discussion, no doubt Mr Lloyd would have referred to it.
209. Mr Lloyd's evidence was that he was not involved with the drafting of the pneumoconiosis exclusion, which was standard tariff wording. He says that he always understood the exclusion to relate to all asbestos related diseases, and in all his dealings with T&N that was his belief and nothing in any of his dealings suggested T&N thought differently or that the instruction he had at the outset that T&N was, in effect, self-insured for the asbestos risk was wrong.
210. He is sure that when Mr Hey told him about the possibility of obtaining the T&N EL business, Mr Lloyd would have asked Mr Hey about the asbestos risk, and at that time he did not think that the Royal would have been prepared to offer terms of cover for that risk. He is sure that that must have been discussed before they quoted for the cover. He would have needed to know that in order for him to assess the level of premium which they were prepared to quote before they came on risk. He is certain that he was specifically instructed to disregard any asbestos related disease risk when he was making the premium calculations and he is certain that he was not provided with any information about any such claims.
211. He does not think that he personally gave any particular thought as to what specific types of disease might be caused by asbestos. He had never received any training in industrial disease and had no particular knowledge of asbestos or the diseases associated with its exposure. He would have been aware that exposure to dust including asbestos was dangerous and could cause industrial disease. In 1969 he knew that asbestos dust caused pneumoconiosis and he knew that the expression was a generic term for dust disease of the lungs including asbestosis. He was not aware of any other diseases caused by or associated with asbestos exposure. He does not believe he knew about mesothelioma until it was first mentioned in connection with the underwriting of the risk at a later stage. If he had been told by T&N that it did not wish mesothelioma to be within the exclusion, and on the assumption that the Royal would have been prepared to offer terms of cover, there would have been a significant impact on the premium calculation, and there would have had to have been further substantial investigation into the potential for further claims.
212. Mr Owen was not involved in T&N business until 1971. Mr Owen's evidence was that his clear recollection is that the Royal did not insure the asbestos risk. Everything he saw and was told when he joined the branch was to the effect that the Royal did not insure the asbestos risk. The phrase that stuck in his mind was "asbestos related disease". But the only asbestos related disease he knew about in 1971 was asbestosis. He was under the impression that pneumoconiosis was the appropriate expression to describe dust inhalation diseases. He knew that in general terms the inhalation of asbestos dust was likely to give rise to various health hazards, but did not have any great understanding of the illnesses or risks associated with asbestos. He did not believe that any of his colleagues at the branch had any greater understanding at that time. The first he had heard of mesothelioma was in January 1976.
213. Mr Hanmer had nothing to do with the inception of cover, and did not become directly involved with the T&N business until 1974. In 1969 he did not know about mesothelioma and that it was caused by asbestos exposure, and he doubted whether any of the underwriters would have been aware of this at the time. They would have been aware that dust such as asbestos dust presented a serious health hazard and caused disease by inhalation. They would have intended the exclusion to have the effect of excluding all risks associated with asbestos.
214. The Royal employed medical consultants to advise in relation to any medical queries, and he would expect the chief medical officer to notify management of any material changes in the medical world which would affect underwriting practice. He was not expected as an underwriter to be familiar with the contents of medical publications.
215. In cross-examination he accepted that tariff underwriting was something which was a feature of EL business, and was just a matter of applying standard terms and standard exclusions and often standard rates to risks. He accepted that the pneumoconiosis exclusion was simply excluding one specific consequence of hazard of dust exposure, and would not, for example, exclude an eye or skin complaint caused by exposure. He accepted that if it had been the approach of underwriters to exclude all conditions resulting from dust exposure the wording would have said so, and could have done so clearly. He accepted that the pneumoconiosis exclusion selected one particular disease which was known at the relevant time to have a high incidence and high claims cost. If he had looked at the exclusion he would have realised that it did not cover mesothelioma.
216. Mr Williamson, the UK general manager of the Royal, had no personal involvement in T&N business until he was asked to take a decision on continuation of the cover in 1976/1977. His witness statement was to the effect that he had no doubt that the intention of the pneumoconiosis exclusions was to exclude all asbestos related disease. He was not then aware of the precise medical distinctions between asbestosis, lung cancer, mesothelioma and other asbestos related conditions. It would be his understanding that all these conditions were covered over the years by T&N's own provision and these risks were excluded from cover.

D. Discussion

217. T&N had a longstanding policy, decided at the highest levels of the group not to insure itself, in relation to the EL asbestos risk. Initially, this related to asbestosis only, but, by at least the mid 1960s, the policy extended to all known asbestos inhalation diseases. The first cases of mesothelioma became apparent in the mid 1960s, and were reported to the Board. As I have said, the first claim on which a payment was settled in 1969 for £25,000. The policy of self insurance was considered from time to time by the Board and the insurance committee in this period, and was confirmed.
218. I accept that if the parties had agreed that the cover excluded T&N's liability for asbestosis claims only, but included its liability for claims in respect of other diseases such as lung cancer and mesothelioma, this would have involved an important departure from T&N's policy and from its rationale, and that drawing a line between the exclusion of liabilities for one disease arising from exposure to asbestos dust in the workplace and agreeing cover for other diseases would have made no commercial sense. From the Royal's point of view it would have required consideration of premium levels, claims record, and T&N's factory conditions.
219. I also accept that T&N alone handled all asbestos related disease claims, including mesothelioma, and that no claim was made by T&N on the Royal for such claims until February 2002.
220. Mr Unsworth's evidence was that in the mid-1980s (by which time he was a sole practitioner and the principal person handling asbestos claims, which he did until about 1988) T&N instructed him to report all asbestos related claims to the Royal, and from the date of that instruction all new asbestos claims that he received which indicated or even hinted at exposure during the relevant period of the Royal policy and impinged on its coverage were reported by him in writing to the Royal. He said that his letters were never acknowledged.
221. There are no relevant documents subsisting. Much of the Royal Manchester documents were destroyed by the IRA Manchester bomb blast in 1996, and Mr Unsworth destroyed his files in 1999 after giving up practice. There is no evidence in the T&N files of any such reports having been made (although Mr Unsworth says he did not copy his letters to his clients), and the lists of claims made indicate that no such claims were made. Mr Prandle gave evidence for the Royal that it was extremely unlikely that if Mr Unsworth had sent details to the Royal, he would have not heard of them.
222. I am satisfied that if there had been any such claims, some evidence would have survived in some form, and, in the light of the available evidence, I think it is very likely that Mr Unsworth's recollection is mistaken.
223. Almost none of this evidence is admissible on the issue of construction, and none of it goes any way to showing that there was an outwardly expressed common accord, or a shared assumption which crossed the line. The most that Mr Lloyd can say is that Mr Hey specifically instructed him to disregard any asbestos related disease risk when he was making the premium calculations and that he is certain that he was not provided with any information about any such claims. But since the Royal almost invariably referred to asbestosis, and the evidence is that the relevant persons (including Mr Lloyd) were not aware of mesothelioma in 1969, it is unlikely that the expression "asbestos related" risk was used at that time, and its use now is simply the result of hindsight.
224. Mr Owen did not hear of mesothelioma until 1976. His evidence was that his clear recollection is that the Royal did not insure the asbestos risk. The phrase that stuck in his mind was "asbestos related disease". Although he knew that asbestos was responsible for various health hazards, the only asbestos related disease he knew about in 1971 was asbestosis. Both Mr Owen and Mr Hanmer accepted in cross-examination that the pneumoconiosis exclusion was simply excluding one specific consequence of hazard of dust exposure, and would not, for example, exclude an eye complaint caused by exposure. Mr Hanmer accepted that if it had been the approach of underwriters to exclude all conditions resulting from dust exposure the wording would have said so, and could have done so clearly. He accepted that the pneumoconiosis exclusion selected one particular disease which was known at the relevant time to have a high incidence and high claims cost. If he had looked at the exclusion he would have realised that it did not cover mesothelioma.
225. Whether the Royal exclusion is adapted from the 1948 or other pre-1959 tariff wording (which I have already said I think is probable), or from the Midland exclusion, I accept T&N's characterisation of the exclusion as "off the shelf."
226. I do not consider that there is any legitimate process of interpretation which can yield the meaning for which the Royal contends, either on the basis of an appeal to the idea of something having gone wrong with the words, or on the basis of an appeal to the factual matrix. The exclusion contains its own specific definition of "pneumoconiosis" and there is no permissible basis for ignoring that express definition. I accept T&N's case that any attempt by the Royal to widen the factual matrix for the purpose of putting a different, wider meaning on the word "pneumoconiosis" will plainly be not for the purpose of explaining the words used, but rather for the purpose of contradicting them, i.e that "white is black and that a dollar is fifty cents" (Corbin (1944) 53 Yale LJ, as quoted in Chitty, vol 1, para 12-049).
227. So far as rectification and estoppel are concerned, there is no documentary or witness evidence as to the existence of any outward expression of accord or shared assumption as to what was to be the meaning and effect of the exclusion. The only relevant contemporaneous document is the policy itself, and the individuals, Mr Hey and Mr Kemp, who negotiated the terms of the policy, are dead. None of the Royal witnesses refers to any discussion, still less agreement, between themselves and anyone at T&N as to the meaning of pneumoconiosis, and the intended effect and scope of the exclusions. All they can point to is the apparent policy of T&N itself to pay and handle asbestos related disease claims. I accept the submission for T&N that there is no evidence that anyone at the Royal actually applied his mind to the possibility of there being some other asbestos caused disease, and it follows that no attention was paid to the question of whether or not the term pneumoconiosis was or was not adequate to cover such unknown disease. It is unlikely that the Royal gave any consideration to the question of whether or not mesothelioma was to be covered by the exclusion. There is no evidence that the relevant personnel knew at that time of mesothelioma. The evidence of Mr Lloyd, the only Royal witness involved at the inception of cover, was that in 1969 he was not aware of any asbestos related diseases other than asbestosis.
228. As regards any detriment that may have been suffered by the Royal, it is accepted by T&N that if there was indeed a shared assumption that the pneumoconiosis exclusion encompassed, and thereby excluded, all asbestos related diseases, then the Royal will have suffered some detriment of some sort in consequence.
229. In the alternative, T&N pleads that by the Royal's delay in seeking the remedy of rectification, T&N have suffered prejudice as a result of the death in the meantime of Mr Kemp, who dealt with the Royal on T&N's behalf in 1969, and/or as a result of the loss of relevant documents by T&N and the Royal, and that on a like basis the Royal is not entitled to rely on the equitable remedy of estoppel by reference to the alleged shared assumption.
230. T&N relies on the Royal's actual, rather than constructive, knowledge of mesothelioma, from the mid 1970s. Although, if it had checked the policy, the Royal would at least by the mid 1970s have realised that the exclusion did not cover mesothelioma, I would not have considered that the failure to act prior to the assertion in February 2002 by the administrators that the exclusion did not extend to mesothelioma would be a bar.

XI The Royal and the 1969 Act

1. The issue

231. The issue is whether, as is claimed by T&N, there was an agreement, reached between the Royal and T&N, shortly prior to January 1, 1972 (the date on which the 1969 Act and most of the 1971 Regulations came into force), the effect of which was that the Royal would provide, in effect, a "fronting" cover for asbestos related claims and the excess, which T&N would bear. The risk run by the Royal in relation to asbestos related claims and the excess was the risk that T&N might become insolvent, with the result that the Royal would have to pay claimants without full recourse to T&N.

2. T&N's case

232. T&N's pleading is that when the EL policy was renewed in respect of the period between October 1, 1971 and October 1, 1972, as evidenced by the minutes of the insurance committee of March 12, 1971, T&N wished, insofar as was consistent with the compulsory requirements of the 1969 Act and the 1971 Regulations (which were due to come into operation on January 1, 1972, except as regards display and production of certificates, which were due to come into operation on January 1, 1973) to continue itself to deal with asbestosis and other asbestos related claims, but the existence of the exclusion and the excess was inconsistent with the compulsory requirements of the 1969 Act and the 1971 Regulations, and unless modified by agreement would mean that the Royal EL policy would not enable T&N to comply with the requirements.
233. Prior to January 1, 1972, negotiations with the Royal led to an agreement being reached that: (1) the Royal would provide T&N with EL insurance which satisfied the compulsory requirements of the 1969 Act and the 1971 Regulations and would issue T&N with a statutory certificate confirming the existence of compliant insurance cover; and (2) as between T&N and the Royal, and consistently with Regulation 2(2) of the 1971 Regulations, T&N would, in practice, continue to deal with asbestosis and other asbestos related claims (including those arising from mesothelioma and asbestos related lung cancer) and would continue to bear the first £1,000 of all EL claims.
234. Thereafter and pursuant to the terms of the agreement the Royal renewed the policy in respect of the periods to October 1, 1973, to December 31 in 1973 and in each subsequent year to 1976, and to March 31, 1977, on terms which were agreed to provide T&N with full cover, and the Royal confirmed and certified the existence of such cover by issuing statutory certificates. T&N continued to deal directly with all asbestosis and other asbestos related claims and to pay the first £1,000 of EL claims without making any claims in respect of such claims or payments under the Royal policy.
235. In argument, T&N stressed these points. The 1969 Act required the insurance to be in place from January 1, 1972, although T&N did not have to display a certificate until January 1, 1973. All persons involved knew that T&N could not have a policy with the exclusion or the excess, and there had to have been some arrangement about it. The documents evidence that the arrangement was for the Royal to provide insurance compliant with the 1969 Act on the basis that T&N would handle and pay for asbestos related claims and the Royal would handle and pay for all other claims subject to reimbursement of the first £1,000 of each claim.
236. T&N says that the strongest evidence as to the existence of the 1971 agreement comes from the recorded statements of Mr Kemp who, on numerous occasions over the years, made reference to the fact of an arrangement having been reached with the Royal whereby T&N would be insured fully in compliance with its obligations under the 1969 Act.
237. The understanding of Mr Kemp as to the permissibility of side arrangements under the 1969 Act is an understanding which he must have shared with Mr Lloyd. At that time, Mr Lloyd could not possibly have had it in mind that T&N presented any solvency risk. He would not have thought that he was taking on any significant risk by agreeing to underwrite the policy on the terms that T&N say that he did from 1972 onwards. The alternative for Mr Lloyd was to take the Royal off risk, or to refer the matter to head office. T&N was a very substantial company and a major source of very profitable business to the Manchester branch, which would have wanted to accommodate T&N's needs.
238. The insurance could not properly have been written by the Royal, and certificates issued as required, unless there were in existence some arrangement to provide the comfort that the Royal would presumably have sought that, despite the coming into force of the 1969 Act, which forbade exclusions of liability from EL insurance policies, T&N would continue to pay asbestos disease claims, as it had before. The fact of agreement having been reached is supported by the fact that the Royal, consistent with the agreement, did issue certificates of EL insurance.
239. It is inherently unlikely that either Mr Lloyd or Mr Kemp intended that T&N's EL insurance, following the coming into force of the 1969 Act, should not be in compliance with the statutory and regulatory requirements imposed (or that either of them wished the other to be responsible for any breach of the statutory or regulatory requirements).
240. When the Royal head office became concerned about the situation in 1974 and asked the Manchester branch to raise with T&N the problem posed by the fact that the policy contained an exclusion Mr Owen and Mr Lloyd did not tell head office that the branch had already agreed to arrangements by which the Royal would front the cover.
241. There is no policy documentation to evidence the continued incorporation of the pneumoconiosis exclusion after 1971, but even if there were, the subsequent unilateral act of the Royal issuing policy documents which did not accord with that agreement could not override it without evidence of a specific agreement to vary the 1971 agreement: New Hampshire Insurance Co. v MGN Ltd [1997] Lloyd's Reinsurance L.R. 24.

3. The Royal's case

242. The Royal's case is that an agreement of such significance would have been recorded in writing, and no such written agreement was ever made, and is not alleged. The existence of an agreement is inconsistent with the express terms of the policy which remained in the same terms at all material times, and also with discussions which took place between the Royal and T&N.
243. The issue of the certificate did not imply, on a true construction of the 1969 Act and the 1971 Regulations, that the insurer issuing the certificate had insured the entirety of the EL risk without exclusion, excess or exception or otherwise suggest a complete guarantee of cover. Section 1(1) of the 1969 Act clearly envisages that the EL risk may be covered by one or more "authorised" insurers under one or more "approved policies".
244. It was the legal obligation of the employer (not the insurer) to ensure that the EL risk was covered in accordance with the requirements of the 1969 Act and the 1971 Regulations. The Royal was an authorised insurer for the purposes of the 1969 Act, and "approved policy" for the purposes of the 1969 Act means (section 1(3)(a)) a policy of insurance which is not subject to any conditions or exceptions prohibited by regulations. The only prohibited conditions or exceptions are those set out in Regulation 2(1)(a)-(d) and neither the exclusion nor the excess were ever prohibited conditions or exclusions. The Royal policy was therefore an approved policy, and Regulation 5 made it mandatory for the Royal to issue a certificate in the form prescribed by the Schedule to the Regulations.
245. The only obligation imposed upon it by the 1969 Act and the 1971 Regulations was to issue a certificate in the form in which it did so, so long as it continued to provide the insured with an approved policy. The Royal was not at any time under any legal or other obligation to insure the risk excluded by the exclusion and the excess and was at no material time willing to do so. So long as the Royal continued to provide cover under the policy, it was not open to the Royal to issue a certificate in some other form. The prescribed form of certification on the certificate was simply to the effect that the policy had been issued "in accordance with the requirements" of the 1969 Act and the 1971 Regulations. Since the Royal was an authorised insurer for the purposes of the 1969 Act and the Royal policy was an approved policy which did not contain any conditions or exclusions prohibited by the 1971 Regulations, it had been issued in accordance with the requirements of the 1969 Act and the 1971 Regulations. The certificates did not purport to and did not certify that the insured had complied with their obligations under the 1969 Act by reason of the issue of the policy.
246. In argument the Royal stressed these points. There was no agreement of the fundamental kind alleged by T&N. Mr Kemp had probably only a fairly superficial understanding of what was required, and he probably believed that a statutory certificate was sufficient for compliance. The discussions probably went no further than an inquiry by Mr Kemp as to whether the Royal would issue a certificate and continue the existing arrangements and an assurance by Mr Owen that it would. The documents show that there had been no real discussion before renewal on October 1, 1971. In discussions in October 1971 it was agreed that the Royal would issue a certificate, but nothing beyond that was agreed.
247. There is no contemporaneous evidence and no witness evidence to support T&N's case about an agreement. Had there been any agreement of the kind alleged by T&N, it is inconceivable that some express mention of it would not appear in the available documents. There is no such reference, and the evidence of Mr Hanmer and Mr Own is that no oral reference was made to an existing agreement.
248. All that happened was that (a) T&N (i.e. Mr Kemp) thought that all that T&N needed to comply with 1969 was to obtain a statutory certificate from the Royal; (b) he obtained the Royal's agreement to the issue of the certificate; (c) from 1974 the Royal became concerned that it might be liable for all claims (including those covered by the excess and the exclusion) because it had issued statutory certificates.
249. It relies, in particular, on Mr Atkinson's statement that: "As I recall, T&N did not think they were in breach of the Act. They believed they had adequate cover, having been reassured by the Royal at the outset that this was the case [by the issue of certificates]" (the words in brackets having been added at the trial). It also relies on his evidence that:

(1) he recalls Mr Kemp telling him that the Royal were concerned about whether it was complying with the 1969 Act, and he thinks that Mr Kemp meant that the Royal was worried about issuing the certificate;

(2) it was his understanding, when he got involved, that Mr Kemp thought that if he had a certificate T&N would be all right, and it was his recollection that Mr Kemp's interest and what he thought amounted to compliance with the 1969 Act was to get a certificate in the offices;

(3) in 1975 T&N believed that the insurer was on risk if T&N could not meet asbestosis claims, and the Royal also thought that this was the case based on its issue of certificates, which on their face did not state that pneumoconiosis was excluded;

(4) he recalls that T&N did not think it was in breach of the 1969 Act, and it believed it had adequate cover, having been reassured by the Royal at the outset, that this was the case by the issue of the certificates;

(5) what he had said in his statement (in connection with the Syndicate) that "All T&N really wanted from EL Insurance was a certificate to put up in our offices and factories stating that we had insurance which complied with the 1969 Act, and a claims investigation service" was a fair statement of the position throughout;

(6) it was his understanding that the certificate trumped any exclusion in the policy.

250. It was head office which first became concerned about the situation in 1974 and asked the Manchester branch to raise with T&N the problem posed by the fact that the policy contained an exclusion.
251. This led to a proposal involving the Royal in underwriting the risk of T&N's solvency (assuming the policy without exclusion or excess was supported by a Letter of Indemnity ). That led to protracted discussions as to whether the Royal would take on that risk. No solution satisfactory to both sides could be found with the result that the Royal declined to continue with the relationship at all.
252. Alive by then to the problem of its non-compliance with the 1969 Act, T&N obtained cover from Lloyd's on terms which enabled it to comply fully with the Act.
253. The discussions in 1974 to 1977 are inconsistent with T&N's case. If T&N is right, it is inconceivable that Mr Kemp would not have referred to the previous agreement, that he would have immediately responded by suggesting a fronting arrangement of the sort he had already agreed, let alone that he would have proposed written terms (in a letter of indemnity dated February 24, 1975, below, para 316) which did not, by back-dating the operation of the indemnity arrangements, show that this was a retrospective record of an existing arrangement.
254. The theory that the Manchester branch did not tell head office about the agreement does not bear scrutiny. T&N did not mention it, and T&N must have realised that the head office took the view that the exclusions applied, the 1969 Act was not satisfied by this policy, and that security was required if the Royal was to be persuaded to take over the risk.
255. In this case there was no change to the policy conditions and what T&N is alleging is a subsequent inconsistent agreement. New Hampshire Insurance Co. v MGN Ltd [1997] Lloyd's Reinsurance L.R. 24 has no application, and T&N's remedy (if any) is rectification.

4. Background

256. As Mr Hanmer confirmed in the witness box, the 1969 Act was the most significant event in the insurance world since 1948. The documents in this case demonstrate the intense discussions between government and the CBI, industrial employers and the insurance industry. They show T&N making representations to the CBI about the need for maintaining a direct relationship with claimants, particularly in relation to asbestosis cases, without the intervention of an insurance company. Mr Kemp and Mr Atkinson were personally involved in the discussions with the CBI.
257. By March 1971 the Department of Employment was seeking information about whether insurers wanted provision in the regulations to permit the issue of policies subject to excesses.
258. At a meeting on April 6, 1971 between representatives of the Law Reform Panel of the BIA and the Employers Liability Conference it was agreed that the Department of Employment should be informed that insurers would wish to retain the facility of issuing policies subject to excesses.
259. Draft regulations were circulated at the end of April 1971. The draft regulations contained no exemptions, but they did contain a regulation allowing provisions requiring the insured to pay to the insurer sums which became due under the policy. At a meeting of the Employers Liability Conference and the BIA Law Reform Panel on May 12, 1971, it was reported that the Department of Employment had expressed the view that policies subject to an excess would not comply with the 1969 Act, but that policies subject to an arrangement for repayment by the policy holder of amounts paid by the insurer would comply with the 1969 Act, and they requested further views from insurers on this aspect.
260. Mr Montague, an assistant general manager in the Royal head office, was present at this meeting. What appears to have been to be an internal Royal note on May 14, 1971 records that at the meeting it was generally considered that if a policy were made subject to an excess then insurers must indemnify from the ground up and subsequently recover the excess from the insured.
261. At a meeting between members of the Employers Liability Conference and the BIA Law Reform Panel and the Department of Employment on May 25, 1971, insurers confirmed that they accepted that straightforward excesses would not be permissible under the legislation but that policy terms requiring an insured to reimburse the insurer to a stated extent would be permissible, although arrangements of this type were rare.
262. The Regulations were laid before Parliament on July 20, 1971. On August 9, 1971 the Secretary of the Mutual Insurance Companies Association recommended that there should be a market wording to deal with the situation enabling an insurer to reclaim from the insured the amount of any compensation paid by the insurer to an injured employee.
263. At the end of August 1971 the British Insurance Association circulated a memorandum to its members (including the Royal) about the 1969 Act in which it was said:

"On the question of excesses it has been accepted that simple excesses are not permissible under the Act, but that policy terms requiring an employer to reimburse the insurer to a stated extent in respect of any claim would be permitted."

264. By October 1971 the Government's position, as reflected in correspondence between the CBI and T&N, was that even large companies might be compelled to go into liquidation, thus depriving their employees of the protection which would be afforded by compulsory insurance, if large industrial organisations were exempt.
265. On October 18, 1971 Mr Gray of the CBI reported to Mr Atkinson that the Department of Employment had suggested that the employer's concerns could be met by means of a form of policy available from Lloyd's which made the insurer ultimately responsible for all payments, with the right to claim back from the employer an amount of up to £X in respect of any one claim. It was thought that a policy of this kind would enable an employer to comply with the provisions of the 1969 Act and at the same time it would in effect give him the same cover as he would get by insuring only against claims in excess of £X, with an additional safeguard in the event of a liquidation.
266. Accordingly the documents on the implementation of the 1969 Act demonstrate that industry, including T&N, and insurers, including the Royal, were not only well aware that excesses in EL policies would not be permitted under the legislation, but also took part in discussions on the way in which this problem could be circumvented under what became Regulation 2(2), namely by an agreement whereby the insured would reimburse the insurer. The documents show that Mr Kemp and Mr Atkinson of T&N and Mr Montague, from the Royal Head Office, were personally involved in these discussions. They also show that T&N was particularly concerned at the impact of the 1969 Act on T&N's policy of self-insurance.
267. In cross-examination Mr Owen accepted that he knew that the employer had to be fully insured, and that branches would have received guidance from head office on the 1969 Act, and would have realised that even an excess under a policy, a small excess of £50, would not be permitted under the Act.
268. Mr Hanmer also accepted that for T&N to comply with the Act it had to have full insurance cover and they could not have an exclusion or an excess in the policy. No-one underwriting EL business could have failed to have been aware that the insured was not permitted to have a pneumoconiosis exclusion. Mr Hanmer also gave evidence that at the time of the 1969 Act coming into force, the Royal would have sent out guidelines and circulars and that he would have expected such guidelines and circulars to have been received, read and considered by the Manchester branch.

5. Evidence prior to the trial

A. Mr Atkinson

269. It is plain from his witness statement that he had very little memory of what happened in 1971. All he said was as follows:

"I believed that as a result of the 1969 Act T&N would be required to insure all employee injury and disease risks (including those arising from exposure to asbestos) and to display certificates identifying the EL Insurer on notice boards.

I can recall John Kemp telling me that the Royal were not happy with the 1969 Act and whether or not they were complying with it. I think that John Kemp meant they were worried about issuing the certificates. I think this was in the early 1970's. I cannot recall John Kemp ever discussing the 1969 Act with me when it came into force."

270. Then, in the context of the discussions in 1976, he said: "As I recall, T&N did not think that they were in breach of the Act. They believed they had adequate cover, having been reassured by the Royal at the outset that this was the case." In examination in chief he added at the end "by the issue of certificates".

B. Mr Pemberton

271. In his witness statement he said that the contents of the letter of February 24, 1975 (below, para 316) reflected his understanding of the position between the parties at that time in that, notwithstanding the Royal's issue of certificates under the 1969 Act and ultimate liability, T&N would handle and meet asbestos claims on a day to day basis as they arose. From his investigation and reading of the insurance files it became apparent that Mr Kemp and he had very different views about T&N's EL insurance. Mr Kemp had been content that the EL insurance with the Royal complied with the 1969 Act. However, Mr Pemberton was concerned, because although the Royal was prepared to issue a full liability certificate under the 1969 Act, the EL policy referred to the exclusion and an excess, and he was concerned about T&N's compliance with the 1969 Act.

C. Mr Lloyd

272. Mr Lloyd was not well enough to give oral evidence. In his witness statement he said, in relation to the alleged agreement in 1971:

"I have been informed that in these proceedings T&N's administrators assert that an agreement was entered into between Royal and T&N in late 1971 … by which Royal agreed to front the whole of the employers' liability cover whilst T&N continued on a practical basis to deal with asbestos related claims themselves.

I am positive that if any discussions of that nature had taken place they would have involved Leslie Owen and undoubtedly also head office. I certainly do not recall any such discussions, and in light of the discussions which took place between Royal and T&N from the end of 1974, [it] does not seem likely to me that any such agreement was reached at that stage. Had there been a formal agreement I would have expected T&N to raise this with Leslie Owen or me when discussions began in 1974 and I am certain they never did raise it. Also if such a change in cover had been effected I would undoubtedly have been told as one of two people responsible for dealing with the risk. Any suggestion that we should alter terms of cover in this way I am certain would have been referred to head office. We would also undoubtedly have needed full details of the claims history and to have carried out a full investigation into the risk to have considered this. I am certain that we did not do that in 1971.

…

To that date [November 1974] we had been issuing certificates in the prescribed form required by the 1969 Act but the exclusion had continued on the policy, which created a problem because there was a feeling the certificates were potentially inconsistent with the policy.

… I can say that no suggestion was made to me at this stage (or at any time afterwards) that any agreement had been reached in 1971."

D. Mr Owen

273. In referring to Mr Kemp's minutes of December 28, 1971 (below, para 288) Mr Owen said in his witness statement:

"I assume that this minute recorded information which had been provided by John Kemp. In the circumstances I believe that this note is probably a record of a discussion in the sense it simply records that Royal had agreed to issue a ('full') certificate (in fact there was only ever one form used). It is entirely possible, I think, that he raised this with the Royal given he would be concerned to have a certificate as from 1 January 1972 and equally that we would have confirmed we would be issuing one. But there is no doubt in my mind that the status quo continued, namely that T&N would continue to be responsible for asbestos related disease and bear the cost of claims to the extent of the excess as provided by the policy. Had Royal agreed, as I understand is alleged, to front the cover on the basis of an indemnity back, I have no doubt that is what John Kemp would have reported but to my mind the minute does not suggest that. …

In any case, we simply would not have agreed to front the cover without seeing details of the claims experience. That is so even if, which I understand may be suggested, it will be said that we were only taking on a theoretical risk on the basis that our liability would only come in if T&N became insolvent. We could not begin to assess what that solvency risk might be without information about the claims history and potential future liability. There would have to have been a full blown investigation into the risk including surveys of premises to assess risk management and risk improvement where necessary. There is just no prospect that we would effect this fundamental change in the relationship by a casual agreement. I, or indeed anyone else at branch level, would not have had authority to do so without head office approval and the way the issue was addressed in 1974/5 when both I and Dennis Lloyd were both still in the same positions demonstrates the significance we attached to such a proposal. I am sure also that if any such agreement had been reached, both sides would have insisted on it being properly recorded in writing. I have no recollection of any such written agreement. Nor have I any recollection of any verbal agreement to this effect. I am sure that no such agreement was reached.

The whole suggestion is so fundamentally at odds with my recollection of our arrangements with T&N and what happened later that I feel confident in saying it is without foundation. I can accept that we agreed to provide a certificate and again to the extent that the T&N minute records that the legislation left insurers free to underwrite risks as they saw fit, it accords with my understanding and meant there was no obstacle to us issuing a certificate. I do not think that at that time we would have seen it as of great significance in itself and indeed I can see that the prospect of not issuing such a certificate for a substantial insured in the middle of a policy period would be unthinkable unless there was some real obstacle to doing so. I do not remember any discussion about how T&N would comply with their obligations under the Act at this time and do not believe that there was any."

E. Mr Hanmer

274. In his witness statement he said that he was not aware of any agreement as T&N allege in 1971/1972, but if there had been such a discussion in 1971 it would have been unlikely that he would have been directly involved since he was working in motor insurance at that time. In the context of the discussions which took place with T&N from 1974 onwards it was never suggested to him that such an agreement had been reached, and any such agreement would have been inconsistent with the discussions which took place at that stage. It is one thing that would have required head office approval, and any underwriter looking at it would have wanted a full asbestos related disease history and background information even if they were, in reality, likely to pick up the bill only if the insured ceased trading.

F. Mr Williamson

275. From 1973 he was the Royal's United Kingdom general manager. He was too ill to give oral evidence. His witness statement said that he was absolutely confident that it was never accepted that the Royal would delete the exclusion and provide insurance cover in consideration of an indemnity in respect of asbestos related disease claims, for there were too many risks associated with such an arrangement. In 1976/1977 the Royal was exploring at T&N's request possible ways in which the Royal might front the asbestos risk, but prominent in their minds was the insolvency risk, at the time believed to be remote but nevertheless a critical issue. There was a crunch meeting which he clearly remembers which took place in Liverpool attended by T&N when all these alternatives were explored and finally rejected. T&N was given notice on his instructions that renewal of the EL policy would not be invited at the year end.

6. The documents

276. In this section I shall consider the documents in the light of the respective contentions. As I have already indicated (para. 58 above), I consider that where the dispute relates to conversations which took place more than 30 years ago, the evidence of contemporary documents is likely to be the most (and, perhaps, the only) reliable guide to what actually happened. An examination of the documents is to some extent a one-sided exercise, because (largely as a result of the IRA Manchester bomb in 1996) there are no Manchester branch documents available in the period before 1974, when head office became involved. The only branch documents which survive are those which were in the hands of head office, or in the possession of the solicitors for Midland, having been disclosed in the course of litigation in the 1980s, and made available to the Royal shortly before this trial. It is also important that the documents should not be scrutinised as if they were ancient texts, but should be looked at in a commercial and common-sense way.

1971/1972

277. There are no relevant Royal documents now available for this period. On August 27, 1971, Mr Kemp wrote a memorandum to Mr Quayle of Ferodo in response to a memorandum about the 1969 Act. Mr Kemp said:

"What we are hoping to do, of course, is to come to an arrangement whereby while fulfilling our statutory obligations under the new Act, we shall continue to enjoy much of the freedom of action which we have hitherto enjoyed under the existing arrangements."

278. This is the first of many references to coming to an "arrangement" with the Royal. It confirms, as is in any event obvious from the T&N documents in connection with the 1969 Act, that Mr Kemp was conscious that without such an arrangement the 1969 Act would affect the freedom of action which T&N had enjoyed under the "existing arrangements", which must be a reference to the exclusion.
279. Mr Owen wrote to Mr Kemp on September 9, 1971 noting that it had been intended to "discuss various aspects of the cover and premium with you no later than this week" but that this had not proved possible due to Mr Kemp's "holiday and business appointments". As a result the Royal continued to hold T&N covered pending a meeting.
280. In October 1971 Mr Kemp and Mr Atkinson met the Royal, and on October 22, 1971 Mr Kemp reported to Mr Hardie (the personnel director and chairman of the insurance committee) about the renewal of the Royal policy. He said:

"Earlier this month Mr. J. M. Atkinson and I had preliminary discussions with the Royal concerning the renewal of the Group Employers Liability Policy …"

281. After referring to the amount of the premium and the operation of the £1,000 excess, he said:

"I have discussed the situation in great detail with the Royal and should be pleased to answer any questions that you may wish to put to me. In the meantime, we are continuing to be held covered.

Mr. Atkinson is well satisfied by the services rendered by the Royal, which have fulfilled the hopes entertained at the time of the change, and the Royal have confirmed that no problems will arise in connection with the Employers Liability (Compulsory Insurance) Act, under which they will issue a full certificate notwithstanding the special arrangements which we have negotiated with them. You may remember that Mr. Atkinson and I made representations to the Confederation of British Industry on this subject and the Regulations as now published meet the points that we made."

282. This is an important document. There are three matters which should be noted. First, Mr Kemp says that the matter has been discussed "in great detail" with the Royal. Second, the Royal is to issue a certificate under the 1969 Act "notwithstanding the special arrangements which we have negotiated with them." Third, that is immediately followed by a reference to the discussions with the CBI and the fact that "the Regulations as now published meet the points that we made."
283. Read as a whole, it cannot simply record the Royal's willingness to issue a certificate. That would not have required discussions in great detail. Both sides must have proceeded on the basis that the Royal policy was the only EL policy which T&N had, and that it would be a criminal offence, not only of T&N itself, but also of officers such as Mr Kemp and Mr Atkinson, if T&N were not fully covered, without exclusions or an excess. Mr Owen said in the witness box that there were some other group policies as a result of recent corporate acquisitions by T&N, but he accepted that he was not aware of that at the time, and had derived the information from the documents in these proceedings.
284. The Royal submits that the reference to "special arrangements" is probably a reference to the arrangement whereby although the Royal did not insure claims under £1,000 it provided a claims handling service for them, or to the arrangements under which T&N did not enjoy traditional EL cover but handled and self insured all asbestos disease claims. But that does not make commercial sense in the context of the memorandum. What it says is that the Royal will issue "a full certificate notwithstanding the special arrangements which we have negotiated with them." T&N had not "negotiated" the pneumoconiosis exclusion in 1969.
285. In my judgment it must be a reference to special arrangements which have been negotiated after the discussions "in great detail," and is immediately followed by a reference to what must be Regulation 2(2) of the 1971 Regulations, which ties in with the letter of October 18, 1971 (which was shortly before or after the meeting between T&N and the Royal) from the CBI to Mr Atkinson (which was seen by Mr Kemp) referring to a policy available from Lloyd's achieving a result equivalent to the fronting arrangement.
286. What may have been one of the questions for discussion was whether the direct payment by T&N of claims could satisfy Regulation 2(2), since that appears to allow only a reimbursement process, and not an agreement for direct payment.
287. Consequently although the memorandum does not spell out any terms, it is strong support for T&N's contention that "special arrangements" had been negotiated in the sense that the Royal had agreed to grant full cover although T&N was to continue to deal with asbestos related claims, and the excess arrangements were still to apply. I do not accept the Royal's submission that the main focus of the conversation was the premium rates to be charged by the Royal for an increase in which Mr Kemp was seeking Mr Hardie's approval on October 22, 1971.
288. The minutes of the insurance committee of December 28, 1971 drafted by Mr Kemp record that:

"The Committee noted with approval that following strong representations to the Confederation of British Industry, the Regulations published in the Act, whilst requiring all such claims to be fully insured, permitted individual arrangements to be negotiated between the insurance company and the company. In consequence the Royal Insurance Group had agreed to issue a full certificate under the Act although asbestosis and similar claims would continue to be dealt with by T&N Ltd as hitherto and the company would continue to bear the cost of such claims and the first £1,000 (or other agreed excess) on all other claims. The satisfactory outcome of these difficult and delicate negotiations was noted by the Committee with approval."

289. There are four important relevant matters in these minutes. First, there is a reference to the "individual arrangements" permitted by the 1971 Regulations. This must also be a reference to Regulation 2(2). Second, "in consequence" the Royal had agreed to issue the certificate. This can only reasonably be regarded as a reference to "individual arrangements" of the kind envisaged by the Regulations. Third, notwithstanding the full certificate, T&N would continue to bear the cost of asbestos and similar claims, and the excess. Fourth, this was an outcome of "difficult and delicate negotiations." It does not support the Royal's contention that Mr Kemp was focussing exclusively on the need for a certificate. Much more likely is that Mr Kemp was treating "full certificate" as equivalent to "full cover."
290. Mr Kemp sent a memorandum to Ferodo on January 14, 1972:

"You will recall that there was at one time some doubt as to whether or not T&N would be able to continue as hitherto to maintain direct control over common law claims arising from asbestosis and kindred industrial diseases peculiar to the asbestos industry and also as to whether or not the Group could continue to exclude the first £1,000 of all claims from employer's liability insurance. These doubts have now been resolved by the publication of the regulations under the Employer's Liability (Compulsory Insurance) Act 1969 which, whilst requiring all such claims to be fully insured, permit individual arrangements to be negotiated between the Insurance Company and the Company. In consequence the Royal Insurance Group have agreed to issue a full certificate under the Act and copies of these will be issued …. Asbestosis and similar cases will continue to be dealt with by T&N as hitherto and the Company will continue to bear the cost of such claims …."

291. This memorandum closely follows the minutes, which were drafted by Mr Kemp as the secretary of the insurance committee, but also confirm that Mr Kemp was aware that the 1969 Act required T&N to be "fully insured," although "individual arrangements" could be negotiated. Mr Atkinson accepted in cross-examination that the memorandum confirmed his recollection that Mr Kemp's interest and what he thought amounted to compliance with the Act was to get a certificate to put up in the offices. Mr Owen accepted that the memorandum showed that Mr Kemp was under the impression that he had made an arrangement with Mr Owen and/or Mr Lloyd.
292. In April 1972 Mr Atkinson sent two memoranda to one of the group companies (Raybestos-Belaco Ltd) about a claim by an employee for state benefit on account of pneumoconiosis, which were referred to in the T&N skeleton, but which were not the subject of evidence by Mr Atkinson in his witness statement and or in the witness box. On April 18, 1972 Mr Atkinson wrote:

"I confirm that nothing more need be done at this stage, as we are not insured for claims on account of this disease so that the question of a report to the Royal does not arise."

293. But on April 24, 1972 he wrote a further memorandum to the same person as follows:

"I may have misled you in my earlier note of 18^th April when I said that we were not insured in respect of pneumoconiosis claims. Since the Employers Liability (Compulsory Insurance) Act was brought into force, it has been necessary to include these in our Royal cover although as a matter of practice we continue to deal with them internally without troubling the insurers either by completing an initial report form or otherwise."

294. This contemporary memorandum strongly supports T&N's case. Mr Atkinson wrote that since the 1969 Act "it has been necessary to include .. in our Royal cover" what had previously been the subject of an exclusion and an excess. Mr Atkinson could not have written it if he (and Mr Kemp) were under the impression that the issue of a certificate was all that mattered.
295. The insurance committee reported for the board meeting on April 27, 1972 that "the arrangements with the Royal Insurance Group, following the transfer of this insurance to them on 1^st October 1969 are operating satisfactorily with a marked improvement in the claims service". Mr Kemp's report went on:

"The Royal have agreed to issue a full certificate under the Employers' Liability (Compulsory Insurance) Act 1969 but common law claims in respect of asbestosis and kindred industrial diseases, not hitherto insured, will continue to be dealt with direct by Legal Department in conjunction with the Company's legal advisers in this field. Similarly, the first £1,000, or other agreed excess, of all other claims will continue to be paid by the Company as before."

296. The Royal submits that this document shows that when Mr Kemp uses the word "arrangements" he is referring to the system adopted in 1969, under which EL cover was provided in respect of the non-asbestos risk only and the Royal provided a claims handling service in relation to non-asbestos claims which it did not insure because they were below the £1,000 excess; and that he is concerned essentially about the issue of the certificate.
297. But Mr Kemp says that the claims which were the subject of the exception and the excess were "not hitherto insured." The plain implication is that Mr Kemp thought that they were insured at the date of his report. It is not credible that he thought that the issue of a certificate on its own was sufficient to enable T&N to comply with the 1969 Act.

1974/1977

298. There are no further relevant documents available until the period from 1974. The renewal date became January 1 with effect from January 1, 1974.
299. On August 16, 1974 Mr Kemp wrote an annual report for the executive committee, in which he referred to the Royal policy, and said that in compliance with the 1969 Act "this policy covers all claims by employees but, by special arrangement with Royal Insurance, asbestosis claims continue to be handled direct by T&N, who meet the full cost of such claims as well as the first £1,000 of all other claims." Here Mr Kemp is saying in terms that the policy covers all claims, subject to the "special arrangement."
300. Following a "World in Action" programme on Granada Television about the dangers of vinyl chloride, the Royal head office in Liverpool asked the Manchester branch for details of the exclusion of pneumoconiosis.
301. Mr Rollo at head office sent a memorandum on October 16, 1974 to the Manchester branch:

"We refer to our telephone conversation with Mr Hornsby regarding the programme 'World in Action' shown on Granada Television on Monday evening. We look forward to receiving a transcript of the programme as soon as possible.

In the course of our conversation you mentioned that you were under the impression that the firm's Employers Liability policy was subject to the exclusion of Pneumoconiosis and in this connection we would draw your attention to Circular HU.73/019 dated 18^th April 1973 when we raised the question of the exclusion of Pneumoconiosis and the application of the Employers Liability (Compulsory Insurance) Act 1969. Branches were asked to refer any cases subject to Endorsement A 448 to Head Office and we shall be interested to learn what action was taken as we cannot trace any correspondence regarding this matter on our file."

302. On receipt of the memorandum Mr Lloyd spoke to Mr Rollo and his note of the conversation is as follows:

"Spoke to Bob Rollo & explained Circular had never reached us. Agreed to submit this renewal having first spoken to Insured to get their reaction"

303. Mr Hanmer's evidence was that the circular referred to in the memorandum would have highlighted the implications of the 1969 Act in relation to exclusions in policies and in particular in relation to pneumoconiosis exclusions, and that it asked branches to refer all cases where there was a pneumoconiosis exclusion to head office in order to bring all of the cases to light in order that the issues could be resolved.
304. On November 19, 1974 Mr Kemp wrote a memorandum for the executive committee, in which he said:

"The Committee will recall that the risks associated with the use of asbestos are, by special arrangement with the Royal, dealt with direct by T&N and at its own expense, though the insurers provide the statutory certificate under the Employers' Liability (Compulsory Insurance) Act. Mr. J. M. Atkinson recommends that the VCM risks arising from the Group's plastics operations should be dealt with on a similar basis."

305. This document supports the Royal's contention that Mr Kemp's main concern was the statutory certificate rather than the scope of the cover. But again, Mr Kemp refers to the "special arrangement" and in my judgment the reference to the special arrangement suggests that the reference to the certificate is a shorthand for full cover. Mr Atkinson is recorded as recommending that vinyl chloride claims be dealt with on the same basis as asbestos related claims.
306. In a memorandum of November 20, 1974 to head office, Mr Lloyd stated that they had recently commenced renewal discussions with the insured and took the opportunity to mention the question of the exclusion of pneumoconiosis from the cover bearing in mind the 1969 Act. Mr Lloyd wrote:

"We recently commenced renewal discussions with the Insured, and took the opportunity to mention the question of the exclusion of Pneumoconiosis from the cover bearing in mind the Employers' Liability (Compulsory Insurance) Act 1969.

There is no doubt that the Turner and Newall Group, and this was borne out during our recent discussion, are very paternalistic and they have traditionally dealt with and settled all Pneumoconiosis claims themselves on the basis that they preferred to apply a more humanitarian approach than strict legal liability might allow. Consequently they wish to retain this authority, and have requested that we, in effect, front the cover by deleting the exclusion, to satisfy the Act, on receipt of a letter of indemnity from them. Frankly, we feel that this approach has much to commend it, particularly bearing in mind their commercial standing, and as we presumably have no real wish to directly underwrite the risk we trust you will agree to such course of action: we will in effect delegate to them the authority to handle all such claims."

307. The Royal relies on this memorandum to argue: first, there is no suggestion of any pre-existing agreement by the Royal to front the cover; second, if there had been such an agreement, Mr Lloyd would have mentioned it; third, it indicates that there was still an exclusion in the policy; fourth, the memorandum suggests that T&N is making a proposal for the future, and T&N would not have done so if there were already an agreement in place; and fifth (although the memorandum does not bear this out), Mr Lloyd had explained to Mr Kemp something that Mr Kemp had not previously realised, that exclusions were not permitted by the 1969 Act.
308. Mr Lloyd's memorandum does not deal with the fact that head office had already reminded the branch that exclusions were no longer permitted, and Mr Lloyd does not address this difficulty nor the fact that the branch had been issuing certificates from 1972. Nor is there is any indication of any reason why T&N should have initiated the request. But from this point on, the Royal proceeds on the basis that, although certificates have been issued, T&N was not on full cover.
309. On November 26, 1974 head office replied in a memorandum (prepared by Mr Don Lyon and approved and signed by Mr Hanmer) to say that they entirely agreed that, if T&N were to comply with the 1969 Act, there must be cover provided in respect of pneumoconiosis claims. Head office said that they would not be unhappy if T&N decided to continue to carry the risk itself, and that raised the question of how to comply with the Act.
310. The memorandum went on:

"3) The suggested arrangement whereby the Insured continue to deal with all Pneumoconiosis claims themselves, with us fronting that cover by deleting the exclusion and subject to a 'letter of indemnity' from them, means in practice that the Insured retain the primary liability for such claims themselves. However, the issue of a policy without the exclusion does place on us the ultimate liability for these claims and in practical terms this liability would only devolve on us if:-

(i) the Insured cancelled their 'letter of indemnity' or

(ii) the Insured went into liquidation.

The 'letter of indemnity' should therefore contain an undertaking obliging the Insured to give notice of cancellation and the period of such notice should exceed our policy cancellation condition period by at least 7 days. This gives us some protection against (i) but (ii) is tantamount to our providing a limited solvency guarantee. To enable us to consider this point, please arrange to obtain for us a copy of the Group's accounts for each of the last three financial years. If we agree to the arrangement this is an aspect for which we will need to make a charge which might be appreciable.

We shall have to have some idea of the likely liability for unsettled and I.B.N.R Pneumoconiosis claims as at a given point of time, bearing in mind that, in the event of the insolvency of the Insured, all these claims, (subject to the comment above concerning commencing date) would become our responsibility. We therefore need to know something of the number and amount of the cases handled by the Insured over each of the past, say, 5 years, the basis of settlement and the amounts held in reserve against unsettled and I.B.N.R claims. What would be the Insured's view of the maximum amount of our potential liability at any given point in time?

Another point which arises is that we believe that there is a risk that lung cancer could be contracted by members of families of employees through contact with the employees. Is there any danger that settlements made by the Insured with their employees on the present basis could prejudice our position with regard to these claims?

The V.C.M question is similar and would need to be dealt with in a similar way if the Insured propose to deal with claims on a non-liability basis. The difference, however, is that the risk has not been excluded from the policy and therefore, we have always been providing an indemnity in respect of legal liability for such claims. While we have not, in fact, obtained any premium for this in the past, there is a continuing risk and we assume that, if the present position remains unaltered, you will be obtaining some extra premium to cater for this additional risk."

311. It is clear from this memorandum that head office realised the implications of the proposal, and that the Royal was being asked to insure the insolvency risk. For that reason it required financial information and claims experience. The memorandum proceeds on the basis that a request had been received from T&N to enter into a fronting arrangement for the future. There is no evidence in any T&N document that supports this.
312. On December 20, 1974 Mr Kemp wrote to Mr Owen at the Manchester branch to say that, following their recent negotiations, he was writing to confirm the renewal of the policy from January 1, 1975. He said that he would be obliged if Mr Owen would arrange to distribute the 1975 certificates to all unit companies and went on:

"I confirm that we shall need to extend the arrangement covering asbestosis claims to include VCM claims as well, and Mr Atkinson and I will discuss this point with you when we meet at 11.30 a.m. on Thursday 9th January 1975 …"

313. The letter was put to Mr Owen, and his evidence was that the arrangement covering asbestosis claims to which reference was made was not the alleged agreement in 1971, but the exclusion of such claims from the policy. But he had no real answer to the point that, if Mr Kemp was simply talking about an exclusion, there was no need for the reference to an arrangement. What Mr Kemp is saying only makes sense as a suggestion that VCM claims be covered but that T&N deal with and satisfy claims. He cannot have been suggesting that VCM claims be excluded from the policy. He had known, ever since the discussions on the 1969 Act that this was not possible, but even on the Royal's case, he had known it since November 1974.
314. There was a meeting on January 9, 1975 between Mr Owen (and perhaps also Mr Lloyd) and Mr Kemp and Mr Atkinson. The purpose of the meeting was to take forward the concept of the letter of indemnity, and to deal with head office's request for claims experience.
315. Following the meeting, Mr Kemp wrote on February 24, 1975 to Mr Owen apologising for having been so tardy in letting him have the formal letter setting out the arrangements that they had discussed. He enclosed it and asked for comments.
316. The formal letter to which Mr Kemp referred was dated February 24, 1975 and stated:

"Employers' Liability (Compulsory Insurance)

Act 1969 Policy Number R10/6B3720

At your request we are writing to place on record certain assurances with regard to the above Policy pursuant to which you have issued certificates in accordance with the Employers' Liability (Compulsory Insurance) Act 1969 in respect of this Company and its Associated Companies as defined in the policy.

1. Notwithstanding the wording of the said Policy, as from 1^st January 1975 we undertake:-

(a) to pay the full cost and expense of handling and disposing of all claims based upon the allegation that employees or some employees of the Company or its Associated Companies contracted asbestosis or mesothelioma as a result of exposure to asbestos dust in the course of their employment with the Company or its Associated Companies

(b) to pay the full cost and expense of handling and disposing of all claims based upon the allegation that employees or former employees of the Company or its Associated Companies contracted angiosarcoma or acroosteolysis as a result of exposure to vinyl chloride in the course of their employment with the Company or its Associated Companies

(c) to pay the first £1,000 (one thousand pounds) of the cost and expense of handling and disposing of all other claims in respect of bodily injury or disease sustained or contracted by employees in the course of their employment by the Company or its Associated Companies and which would otherwise fall within the cover extended by the Policy.

2. We further undertake not, without your written consent, to cancel, amend or otherwise vary the above undertakings other than by not less than 60 days notice expiring on the renewal date of the Policy.

For the sake of good order, we shall be grateful if you will confirm the acceptability of the above by endorsing the enclosed carbon copy of this letter and returning it to us."

317. T&N's original position was that the letter of indemnity was an agreed document produced by the Royal. Mr Atkinson's evidence in his witness statement was that the letter of indemnity was not written by Mr Kemp, since it was not in his style. Mr Hanmer said that the letter was drafted by T&N. In cross-examination Mr Atkinson went some way to accepting that it might have been possible that he himself had drafted it, and I consider that that is probable. There is no evidence that the letter of indemnity was ever counter-signed or accepted by the Royal.
318. If Mr Atkinson was, as I think he was, the author of the letter, the "assurances" to which he refers are (as T&N contends) those he understood T&N gave in 1971/1972, or (as the Royal contends) assurances T&N was proposing in the course of the negotiations to give, as from January 1, 1975. I consider that it is likely that both interpretations are correct, and that the reference to January 1, 1975 is simply a reference to the start of the policy year which had been the subject of discussions since Mr Lloyd spoke to Mr Kemp in October 1974, following the intervention of head office.
319. With the letter of indemnity Mr Kemp attached details of the asbestosis claims and settlements for the year ended December 31, 1974. This showed an estimated liability of £1,220,000 for one hundred and thirty-four claims outstanding at the end of 1974 on account of asbestosis. This material was sent by Mr Lloyd to head office on March 7. Mr Kemp spoke to Mr Owen on March 21, and then sent what he described as a brief note of the asbestosis claims settlements over the previous 5 years. This was sent to head office on March 27.
320. The material sent in March gave the Royal head office considerable concern and led to the suggestion that further security such as a guarantee or trust fund would be required and the suggested indemnity wording improved if any fronting arrangement were to be considered.
321. In Mr Hanmer's memorandum of May 23, 1975 he told the branch that, in considering the matter in November 1974, head office had no idea that the potential liability in respect of the asbestosis claims would be anything like £1.25 million.
322. Mr Hanmer went on:

"On a general matter we have, since the earlier correspondence, been reconsidering our attitude to risks with a large excess or similar self-funding arrangement. We have in fact written to you recently on one or two cases setting out our general thoughts and in particular the solvency aspect. In dealing with a risk with the potential of claims in excess of £1m. for the asbestosis alone this is naturally of paramount importance. We therefore consider that in addition to the letter of indemnity we must look for a guarantee from a reputable bank or other insurance company indemnifying us without time limit against all sums which the Insured failed to pay for any reason and we consider that the minimum amount fixed for such guarantee should be £1½m. Perhaps you will discuss the matter again with your clients along these lines and we should be interested to learn of any further developments. Should your client have any difficulties in this regard please refer back to us immediately."

323. Mr Hanmer was asked about the other cases referred to, but he could not remember if the Royal had entered into arrangements with other insureds with large excesses or similar self funding arrangements. He accepted that Mr Lloyd was anxious that they were not going to upset one of his biggest connections, and Mr Simpson (Manchester branch) tried to persuade Mr Hanmer to accept the insolvency risk.
324. Mr Owen said in evidence that he was not aware of any other fronting arrangements, and he had no recollection of the one or two cases which were referred to. It did not suggest to him that the cases were necessarily at Manchester. But he then resiled from that and accepted they were in the Manchester branch, but did not know of the cases.
325. T&N submits that if the Manchester branch did, as it appears, enter into other self-funding or excess arrangements with other EL insureds, this corroborates its contention that an arrangement was reached with the largest and most financially sound company on the branch's books. The fact that Mr Owen is unable to recall any such cases may indicate that perhaps such technical matters were left by him to be handled by the underwriter, Mr Lloyd.
326. Mr Lloyd replied on June 13, 1975 to Mr Hanmer say that the Manchester branch was under no misapprehension as to the extent of the potential solvency risk attaching to asbestosis claims but it was reluctant to approach T&N for an indemnity from a bank or an insurance company, particularly an insurance company. Such a suggestion might lose T&N as a client. Mr Lloyd emphasised the value of the T&N business, which brought in about £236,000 per annum in premiums, of which the largest single item was £78,000 in respect of EL insurance.
327. On June 24, 1975 head office indicated that it wished to reach a reasonable solution to the problem, but said that the Royal did not transact solvency guarantee business and would not be willing to contemplate carrying this risk on the back of the EL account:

"...we ..wish to do all we can to reach a reasonable solution to the problem which now emerges. In a nutshell, this is that the Insured wish to comply with the Employers' Liability (Compulsory Insurance) Act 1969 by having a policy without exclusions of certain industrial diseases, but yet at the same time they do not wish the risk in respect of these diseases to be conventionally insured but prefer to handle them themselves. However, by virtue of the certificate we issue under the Act we would be ultimately liable for the settlement of all outstanding claims if by reason of financial difficulties the insured were to go into liquidation.

Despite your reluctance to take any steps which might have the effect of upsetting in any way the harmonious relations which you have established with the Insured, we are firmly of the view that the issues must be explored with them. As a matter of Group underwriting policy, we do not transact solvency guarantee business and would not be willing to contemplate carrying this risk on the back of the EL account."

328. This appears to be the first reference by the Royal to the certificate being the source of liability.
329. On July 9, 1975 the Manchester branch reported to head office that the question had been discussed with T&N, who accepted that it was a reasonable requirement and that while a bank guarantee would obviously seem to be the first approach it was very taken with the idea of a separate trust fund.
330. Mr Kemp's memorandum for the executive committee meeting of July 22, 1975 stated:

"T&N's statutory obligation to insure all employers' liability risks, including asbestosis claims from employees, is at present met by the Royal Insurance Group who issue the required certificate on the understanding that all asbestosis claims will be dealt with direct, as in the past, by the Company. The Royal make no charge for this service as premiums are calculated by reference only to common law claims other than those deriving from asbestosis, but they have recently expressed concern at the extent of their potential liability bearing in mind that outstanding claims are currently estimated at over £1m whilst actual payments in the first half of the current financial year have approached £170,000.

The alternatives to insuring against asbestosis claims in the ordinary way (which would be very costly indeed in terms of premium and highly undesirable in other respects), is to seek a banker's guarantee or to set up a Trust Fund to ensure, even if T&N were to become insolvent, that sufficient monies would be available to meet the Company's statutory obligations to the claimants.

Inquiries are being undertaken with regard to the respective merits and demerits of these courses and a further report and recommendation will be submitted to the next meeting."

331. Mr Kemp is saying that the Royal issues the certificate on "the understanding" that all asbestosis claims will be dealt with direct, and this document is consistent with T&N's position that there had been an agreement in place since 1971.
332. Mr Kemp's minutes of the meeting stated:

"The Committee considered a paper presented by Mr. J. Kemp setting out the current insurance position in relation to asbestosis claims made against the Company by employees and third parties.

As regards the former, for which there was a statutory obligation to insure, it was recalled that, by special arrangement with Royal Insurance, T&N continued to handle and settle all asbestosis claims by present and past employees, though the insurance company remained ultimately liable having issued the statutory certificate under their name. In view of the very considerable escalation in the cost of asbestosis claims settlements in recent years, Royal Insurance had suggested that their potential liability in this respect (and also in respect of outstanding common law claims generally) should be safeguarded by a bankers guarantee or by the setting up of a trust fund. The Committee agreed that, of these alternatives, a bank guarantee seemed likely to be the better solution, but it was noted that the whole matter was under close examination in conjunction with the Group Solicitor and the Group Treasurer and would be the subject of a detailed report and recommendation as soon as enquiries had been completed. In the meantime, Mr. J. M. Atkinson undertook to ascertain how Cape, who must be faced with the same problem, had dealt with the situation."

333. Mr Kemp is again stating his understanding that there was a "special arrangement" whereby T&N handled asbestosis claims, but he treats the issue of the certificate as the source of the Royal's ultimate liability.
334. There was a further meeting on August 6. A Schedule of "Asbestosis Claims Outstanding" was provided at this meeting. In what appears to be a T&N note for that meeting it is said:

"T&N has traditionally handled direct … common law claims arising from asbestosis and mesothelioma and the potential liability of the Royal in the event of the failure of T&N to meet such liabilities is confined to claims arising after the need to insure such claims became compulsory …"

335. On August 7, 1975 Mr Lloyd sent a memorandum to head office arguing for the alternative solution of the Royal accepting the solvency guarantee risk, and passed on the schedule of outstanding asbestosis claims. He said that out of a total of 104 claims only 31 related to persons employed by T&N subsequent to the 1969 Act

"i.e. we could not become involved in the other 73 in that employment with the Insured ceased (either through retirement or going to other employment) at a time when asbestosis was specifically excluded by our policy, and we assume the Act is not in any way retroactive."

336. This reflects Mr Lloyd's understanding that prior to the coming into force of the 1969 Act asbestosis claims were "specifically excluded by our policy," and consistent with T&N's case.
337. He also recorded that the concept of a trust fund might be impracticable and said:

"There is therefore a need for further detailed and extensive investigations by our clients, and recognising that this may take some time, which we as Insurers cannot afford, they have offered the alternative solution of our accepting the solvency guarantee risk for of course a consideration."

338. Mr Kemp's report for the executive committee on August 27, 1975, stated:

"Since the last meeting, Mr. J. M. Atkinson and I have examined in greater depth the implications of the insurance situation in relation to asbestosis claims arising both before and after the coming into effect of the Employers' Liability (Compulsory Insurance) Act 1972 and have also had further exploratory talks with Royal Insurance. Further discussions will follow when the data has been examined by the Royal, and the potential liability both of T&N and the Royal has been more fully assessed. Meanwhile, an encouraging start has been made to the talks and a full report on the courses of action open to the Company will be presented in due course.

Cape are in a similar situation as they also handle claims direct under cover of the Statutory Certificate issued by their insurers, but it has been established that their insurers have not yet drawn attention to the situation that might arise if Cape found themselves in financial difficulties.

….

The policy [with the Royal] as at present written specifically excludes asbestosis claims though the Royal provides full statutory cover under the Compulsory Insurance Act. It has already been agreed that T&N should deal direct with any claims that may emerge from the use of VCM and the Royal have been given a letter of indemnity in regard to their liability in these two areas, and also in respect of general claims up to £1,000. The legal/financial implications of this situation are currently under discussion with the insurers."

339. Mr Kemp is saying that the policy has an exclusion, but the Royal provides "full statutory cover."
340. On November 11, 1975 Mr Lloyd wrote a memorandum (or, as Mr Hanmer said, a briefing note) for Mr Curtin, the Manchester branch manager, in which he stated that to satisfy the 1969 Act the certificate bore no exclusion of asbestosis and the Royal was therefore liable for all such claims in the final analysis. The Royal had obtained a letter of indemnity from T&N and therefore had rights of recovery against T&N in respect of any claims that it settled. In practice T&N handled and settled all claims and the Royal in effect "front" the cover. The Royal could therefore only become involved in the event of T&N's insolvency, i.e. when its letter of indemnity would be worthless.
341. Mr Lloyd deals with the note in his witness statement, where he says that because the certificate bore no exclusion of asbestosis the Royal was liable for all such claims in the final analysis:

"This was true to the extent that the form of certificate was set down by law and made no provision for such matters. However, the 'pneumoconiosis' exclusion remained on the policy throughout. The fact that the exclusion remained on the policy reflected the ongoing agreement with T&N that they would be liable and not Royal for asbestos related claims. I am not qualified to say what effect the certificate has but again what comes across is a worry that some way or another we may be picking up liabilities because of the certificate."

342. Mr Lloyd also says that the statement that the Royal had obtained a letter of indemnity was not accurate, because the terms of the indemnity had never formally been agreed. He says that he regrets "to say that the note has a number of inconsistencies and errors of this kind… It suggests exclusions were prohibited which they were not."
343. Mr Hanmer's evidence was that, to the extent that Mr Lloyd's memorandum implied that indemnities had been given and that the Royal was fronting, he could only say that it was at odds with his own recollection and the prior and subsequent documents. "It is written in part as if these things had happened but at best is inconsistent and confused".
344. Mr Lloyd's memorandum reflects a position which is close to T&N's case. The reference to the certificate is in my judgment shorthand for insurance cover, and the explanations of Mr Lloyd and Mr Hanmer are unconvincing.
345. On November 23, 1975 Mr Kemp wrote a memorandum for the executive committee meeting on November 27, 1975 stating:

"The committee will recall that the Royal continue to afford the necessary statutory cover in respect of the asbestosis claims for which the Company itself accepts responsibility and their proposals for the regularisation of this situation are still awaited."

346. In this document Mr Kemp is again stating his understanding that the Royal is providing statutory cover.
347. On January 5, 1976 Mr Simpson of the Manchester branch wrote a memorandum recording that he had spoken to Mr Hanmer at head office and explained the reluctance of T&N to set up a trust fund because of possible problems with the unions, and asked if they could have one final look at the solvency problem before they told T&N that the only solution was for them to obtain a bank guarantee to cover their counter-indemnity. Mr Hanmer said that he had no authority to write the solvency risk but had made many inquiries in the market which all proved unhelpful. Mr Hanmer is recorded as having said:

"By issuing a Certificate we are liable to pick up any of these claims, irrespective of when they may manifest themselves. This is understood by the Solvency Insurers but they underwrite on the basis of their assessment of the financial standing of the Company i.e. T.&N.. and whilst this may be alright at a particular point in time, circumstances could change. In the event of the accounts revealing a serious down-turn they may well decline to renew and this, of course, would be just when we wanted the cover. If T.&N. went into Liquidation during the period of the cover the Solvency Insurers would, of course, pay."

348. Mr Hanmer is reported as having agreed that there was no immediate danger, but it was a problem which had to be resolved quickly. He agreed that, provided the policy excluded asbestosis and contained a £1,000 excess they could invite renewal, the fact that the certificate gave full cover was immaterial. It was also important that the letter of indemnity provided by T&N was amended as agreed earlier in the year.
349. Mr Kemp and Mr Atkinson had a meeting with the Manchester branch on January 19, 1976, and Mr Kemp reported to the executive committee meeting on January 27, 1976:

"The Group Solicitor and I have had further discussions with the Royal with the object of finding a solution to the problem presented by the fact that they issue an unqualified statutory certificate of insurance against a policy which excludes asbestosis claims and general claims under £1,000. No way out of the difficulty was found on this occasion but a further meeting is to be held in April when the asbestosis claims experience in the March quarter is known. In the meantime the Royal are pursuing enquiries into the practice of the insurance market in relation to this situation which is not peculiar to T&N."

350. Mr Kemp is here picking up the Royal idea that the issue of the certificate creates the liability.
351. On February 9, 1976 Mr Lloyd wrote to Mr Kemp to ask for further details of asbestosis claims from 1970 to date, and details were supplied by Mr Atkinson on April 2, and brought up to date by him on July 23.
352. On March 17, 1976 Mr Lloyd reported to head office that T&N's bankers had refused to provide a bank guarantee and took the view that it was more properly the subject of insurance cover; and that T&N had asked the Royal to reconsider the possibility of carrying the insolvency risk. By April 1976 there was plainly some concern at the Royal about the possible impact of US claims on T&N, and in a memorandum for head office on April 9, 1976 Mr Lloyd noted the options for a way forward, and ended by saying: "We confirm that the policy bears an exclusion of asbestosis together with a £1000 excess each and every other claim".
353. Mr Kemp retired in May 1976. Mr Pemberton's evidence was that, after Mr Kemp retired in May 1976, there was no transitional period of handover to Mr Pemberton. Prior to the meeting with the Royal in 1976 he was concerned that the Act was not being complied with by T&N because of the existence of an exclusion in the policy. He accepted that he must have been aware that Mr Kemp had taken a different view, although it was not a result of anything he was told, but that was the result of an inference he drew from the fact that Mr Kemp had allowed it to continue.
354. By the time this was discussed with the Royal on August 17, 1976 Mr Atkinson shared his view that there was a legal problem caused by the exclusions in the policy. He accepted, in cross-examination by Mr Walker QC for the Syndicate, that his view was that the issue of certificates trumped any exclusion in the policy.
355. Mr Pemberton attended a meeting with Manchester branch on July 5, when Mr Lloyd briefed him on the problems relating to asbestosis claims, and it was agreed that there would be a meeting at head office, to be attended by Mr Atkinson and Mr Pemberton.
356. In August 1976 the Royal were advised by Messrs Silverbeck & Co, solicitors in Liverpool, that the excess and the asbestosis exclusion in the T&N EL policy meant that the policy did not comply with the 1969 Act, with the result that T&N was in breach of the Act and liable to a fine, and that the certificate issued by the Royal was untrue.
357. On August 17, 1976 Mr Atkinson and Mr Pemberton met officials of the Royal (including Mr Hanmer, Mr Curtin and Mr Lloyd, but not Mr Owen, who had by then left the Manchester branch) at head office. Mr Hanmer's evidence is that the advice from Silverbeck & Co formed the basis for the discussion at the meeting.
358. There are different accounts of the meeting from Mr Hanmer and Mr Lloyd.
359. Mr Hanmer's record of that meeting states:

"However T&N were anxious to rectify the present situation which they accepted did not comply with the law and they recognised the difficult position which the Royal were in by virtue of the EL Certificate issued. In addition, whilst T&N were quite content with their financial position they recognised and appreciated the nature of the Royal's concern on the solvency angle in the context of a future timescale of ten or twenty or more years ahead when employees currently exposed may be putting forward claims."

360. Mr Lloyd's note of the same meeting states that the objective of the meeting was:

"To explore ways of solving the problem attaching to the present arrangement whereby Turner and Newall carry their own asbestosis E.L. Risk, but the 'Royal' stand to be responsible for such claims in the event of the inability or failure of Turner and Newall to meet their commitments; such responsibility is brought about by E.L. (Compulsory Insurance) Act which, in essence, doesn't allow exclusions to an E.L. Policy."

361. The differences in the notes reflect the differing agenda of head office and of the Manchester branch. By this time the line which head office was taking was that in the Silverbeck & Co opinion, namely that the policy did not comply with the 1969 Act because it contained the exclusion, but that the Royal was in difficulty because it had issued the certificates. Head office was endeavouring to depict the problem as the problem of T&N. The Royal relies on Mr Hanmer's note of the meeting as evidence of the continued application of the pneumoconiosis exclusion. T&N says that it was apparent from the evidence of Mr Pemberton that his source of information as to the continued incorporation of an exclusion in the T&N policy was in all likelihood his being told by the Royal that the exclusion was part of the policy, rather than his reaching that conclusion from his own researches. There had been no handover discussion with Mr Kemp and no subsequent dealings with him at all following his departure. But Mr Atkinson was adamant that he thought that the problem was that of the Royal.
362. Mr Lloyd's view was that the Royal was ultimately liable because of the 1969 Act. He does not deal in his witness statement with this part of his note.
363. On August 26, 1976 Mr Pemberton wrote a note for the executive committee meeting on September 1, 1976:

"The Royal however issue certificates which state that the Act is complied with and the continuance of this state of affairs is causing the Royal some anxiety.

Apart from the legal implications, their main cause of worry is based on the certainty that if T&N ever cease, for any reason, to settle asbestosis claims they will be called upon to do so on the strength of the certificates issued, and in spite of the exclusion clause in the policy.

The Royal's liability starts only from the time when they issue the certificates, that is to say 1972 … [T]hey cannot regard the possibility of T&N going out of business during the next twenty years as being so remote that it can be ignored."

364. Mr Pemberton's note is based on the view that the policy contains an exclusion, but the certificate creates the liability.
365. He then reported on the meeting of August 17 and said:

"If this fund can be established to the satisfaction of the Royal, it will enable them to issue a policy in compliance with the Act, even though no premium will be payable in respect of the asbestosis risk."

366. At a meeting on January 27, 1977 the Royal informed T&N of the decision made by the Royal the previous month that it wished to come off cover. The decision was taken by Mr Williamson, the general manager. The Royal asked T&N to find another insurer for EL liability by the end of February 1977, and the deadline was extended until the end of March.
367. On February 3, 1977 Mr Pemberton reported for the Board meeting on February 10, 1977 that the Royal "provide the certificates required by the Act, but the clause in the policy excluding asbestosis liability still remains."
368. It is important to note that two years later, on November 1, 1979, Mr Lloyd wrote to the international service division:

"The Insured had always carried their own E.L. asbestosis risk preferring moral rather than strict liability settlements. With the advent of the Employers' Liability (Compulsory Insurance) Act we were required to issue a Certificate of Insurance bearing no exclusion of asbestosis in order to comply with the Act. As you will appreciate we therefore had a legal duty to meet asbestosis claims with rights of recovery against the client, but such rights may have availed us nothing had the client run into financial difficulties. Several methods of overcoming the problem were explored, from

1) an approach by the client to his bankers for the latter to guarantee the client's letter of indemnity to us , to

2) the creation of a Trust Fund by the client by a substantial transfer of capital (claims hitherto having been met out of income)

but all to no avail. Consequently we came off cover, the client fully appreciating our reasons."

369. This is T&N's case. Mr Lloyd's statement indicating that they were required to issue a certificate bearing no exclusion was put to Mr Owen, and he said that at no time did he have any recollection of anything of that nature being discussed or arranged with T&N. At no time prior to his leaving the branch did anyone on the T&N side ever refer to there being an existing agreement.

7. Evidence at trial

Mr Atkinson

370. Mr Atkinson was a straightforward and satisfactory witness. Like all of the other witnesses he could not be expected to have any clear recollection of events of some thirty years ago unless they were the subject of contemporaneous documents. He was not at all familiar with the documents (particularly those produced late in the day), and was sometimes led in cross-examination into answers which are inconsistent with the contemporaneous documents.
371. His evidence was that Mr Kemp was "a meticulous man … careful in his affairs and in his work" who was always concerned to ensure that T&N complied with the Act.
372. In cross-examination, he said that he had no involvement in 1971/1972 with the Royal after October 18, 1971. He agreed that the memorandum of January 14, 1972 by Mr Kemp confirmed his recollection that Mr Kemp's interest and what he thought amounted to compliance with the Act was to get a certificate to put up in the offices. He was not (as I have said) asked about his memorandum of April 24, 1972, in which he had said that since the 1969 Act it had been necessary to include pneumoconiosis claims in the Royal cover.
373. He could not recall that anyone had ever suggested to him prior to his involvement in 1975 that there had been a fronting arrangement with the Royal. He agreed that in 1975 it emerged that Mr Kemp placed reliance, rather than on a contract of the sort that the CBI had been recommending, on an arrangement that the Royal would issue him with a certificate. He agreed that it was fair to say that his understanding when he did get involved was that Mr Kemp thought that if he had a certificate T&N would be all right. He accepted that when he became involved in 1974, he was concerned to reach agreement with the Royal that the excess and the exclusion would be removed from the policy in exchange for an indemnity.
374. He was quite clear that in 1975 he did not think that having a policy with exclusions and an excess caused legal difficulties for T&N. He thought that the Royal had the difficulty because they were issuing unqualified certificates. He refused to agree that T&N were not complying with the Act because their EL cover excluded certain risks: "My recollection is that I thought the problem was the Royal's rather than T&N's." He said at least three times that the problem was that of the Royal. But he did accept that it was his understanding that the certificate trumped any exclusion in the policy.

Mr Pemberton

375. Mr Pemberton was also a direct and satisfactory witness. In the witness box Mr Pemberton said that he did not discuss the matter with Mr Kemp when he became involved, but they had the certificates, and it was not immediately evident to him that there was any problem with the 1969 Act. He began to think that the policy did not comply with the Act and he was as concerned about it as the Royal was. The very existence of an exclusion in a liability policy seemed very strange to him. He knew in general terms that it was necessary for T&N to insure its whole EL risk. He accepted that the question at the meeting on August 17, 1976 was how the policy could be amended to remove the exclusion and the excess so that T&N complied with the 1969 Act.
376. He did not think that he ever gave much thought to any past infringement because that was in his mind water under the bridge. T&N was paying the asbestos related disease claims and would have paid them up to that time and rightly or wrongly he did not give the previous period much thought at all. But it was absolutely clear in his mind that the issue was the removal of the exclusion from the policy to give them a clean policy. The reason why the Lloyd's policy cured the problem was that it removed the exclusion.

Mr Owen

377. My impression of Mr Owen is that he is an honest man, with no direct recollection of the relevant events. But I consider that he is also very loyal to the Royal, and was well aware of the implications for the Royal of the T&N case. He was in my judgment evasive on some important questions, and I am unable to accept some of his evidence. It is important to set out some of the crucial passages in his cross-examination:

"Q. You would have realised, would you not, that even a excess under a policy, a small excess of £50, would not be permitted under the Act?

A. Yes, that is true.

Q. So that meant that there were two issues, were there not, that you were bound to have discussed with Turner & Newall in 1971 when this legislation was about to come into effect: The first one was what it was going to do about the £1,000 excess on the policy?

A. Yes.

Q. The second one is in the context of the Act what are we going to do about the pneumoconiosis exclusion?

A. Yes.

Q. I think you accept that Mr Kemp must have raised the issue with you, or you must have raised it with him?

A. We discussed the case when it came up, yes.

…

Q. It was put to you, was it not, that Turner & Newall would continue to be responsible for handling and paying for asbestos claims and that they would reimburse you, pay for the first £1,000 of every claim, but that you would give them the necessary cover they needed to comply with the Act; it must have been?

A. No, what we did, this discussion with John Kemp would have been on the question of this issuing the certificates and at that time they said they were going on with paying these claims, and at that time we were in the situation that we issued a policy, it was within a long-term agreement; it was still in cover at the time the renewal came up and we would issue a certificate; and we said we would issue a certificate. At no time did we actually consider Turner & Newall insuring the claims or, in fact, not paying them.

Q. A few point arise from that answer; the premium was up for grabs on this renewal, it was to be renegotiated, was it not?

A. That was always the case, yes.

Q. So whatever you say about the three year agreement, there was a renewal --

A. Of course, yes.

Q. -- and there was a renegotiation --

A. Yes.

Q. -- and you charged a higher premium?

A. Yes.

Q. The second point is, let us assume for the moment that he did ask you for a full certificate what did you understand that he was requiring you to do?

A. He wanted a certificate because he would obviously be interested and wish to have a certificate because that was what the Act said he should have to put on the premises.

Q. What was that Insurance Act certificate evidencing?

A. Only that we had issued a policy.

…

Q. If you were prepared to issue that certificate to Mr Kemp that your policy complied with the Act, you must have been contemplating, must you not, a policy which provided for full insurance with no excess and no excluded diseases?

A. Well, yes.

…

Q. The arrangement was that you would effectively agree to do that, but that Turner & Newall would have, as it were, a behind-the-scenes agreement with you, behind the policy agreement, that they would pay for the asbestos related claims and for the first £1,000 of all other claims; that was the arrangement you had with Mr Kemp, was it not?

A. I do not recall.

Q. It must have been?

A. I do not recall that that was the way I saw it at that time, no.

…

MR EDELMAN: You knew that T&N had no other employers' liability insurance arrangements, did you not?

A. That is not strictly correct. T&N had unit policies when they took over various firms. The one that comes to mind, if you refer to the minutes of the committee, which was December 1971, in that you will see that there is a company called EC Limited and EC Limited, I think it is something like "for contractual reasons" could not be transferred to Royal. So that policy, for instance, ran for a further year, and I cannot name them, but I have a strong belief that there were others, so there were other insurers.

Q. Other individual policies --

A. Policies, yes.

Q. -- which affected individual unit companies that you were aware of because --

A. We were not aware of them, I only picked that up from that minute.

Q. So far as you were aware the T&N group had no other employers' liability insurance because --

A. I can accept that, yes.

Q. So it was your policy or nothing to comply with the Act so far as they were concerned, and you?

A. Yes.

Q. And you knew that to comply with the Act the policy, as you have accepted, had to provide them with full insurance without an excess?

A. If that is the wording of it -- I do not actually recollect having any discussion on that because, but put to me like that I suppose I have to agree with you.

Q. That is certainly what you would have believed at the time whatever argument may now be made about what the Act said, that is what you would have believed at the time, is it not?

A. Yes.

Q. You would have had guidance on that from Head Office?

A. I have no recollection of that.

MR JUSTICE LAWRENCE COLLINS: I thought you said before that you would have had guidance.

A. Sorry, what I think was put to me before was we had a series of circulars from Head Office relating to that Act. Whether it was particular guidance on the point made I [would] not like to say.

…

Q. And [in relation to Mr Kemp's note of October 22, 1971, to Mr Hardie], the second page of this document, in the third line: "Royal have confirmed that no problems will arise in connection with the Employers' Liability Compulsory Insurance Act under which they will issue a full certificate notwithstanding the special arrangements which we have negotiated with them." So it looks as though you had reached some sort of agreement?

A. I cannot accept that, no.

Q. So you say this is wrong?

A. No, I do not. This is an internal report from T&N. I have no recollection whatsoever of any saying anything in that connection. If we were to insure or take on the full risk we would have had a full blown investigation into this and I cannot agree that we ever said anything to that effect to T&N.

Q. At the time T&N was a huge and profitable company, was it not?

A. Yes.

Q. The question of the prospect of insolvency of T&N just would not have entered into your mind at the time would it; they were one of the largest companies in the country?

A. We certainly would not expect them to go bust, no.

Q. Did your branch enter into any other fronting arrangements with people where they issued a certificate maybe with a large excess or something like that?

A. I am not aware of any. I have no recollection of any.

….

Q. Could you go to [the memorandum of May 23, 1975, from head office to Mr Lloyd] please?

[Q] This is a memorandum to Mr Lloyd. I know it is after you left the Manchester branch, but it seems to relate to something that happened before. In the second paragraph it says: "On a general matter we have, since the earlier Correspondence, been re-considering our attitude to risks with a large excess or similar self-funding arrangement. We have, in fact, written to you recently on one or two cases setting out our general thoughts and in particular the solvency aspect." Do you know what the one or two cases might have been that they were referring to?

A. I have no recollection of that.

Q. Do you accept that it looks as though there must have been some large excess or self-funding arrangements that Mr Lloyd had entered into with customers of the Manchester branch?

A. My understanding of what you have written there -- "we have, in fact, written to you recently one or two cases setting out our general thoughts and in particular the solvency aspect". It does not to me suggest that those case were necessarily at Manchester.

Q. Somebody has been doing it, have they not?

A. I cannot comment on that. I have no recollection of that whatever. But --

Q. They would have sent a circular, would they not? If it was at some other branch and they were concerned about branches doing it, they would have sent a circular; they would not write specifically to an individual, they would send a circular round to all the Royal branches?

A. This could well be because we had this arrangement they are saying, so far as I can understand from this, that we have in fact written to you recently on one or two cases setting out general thoughts and in particular the solvency aspect. In any event, I was not at Manchester at that time and I really could not comment on that.

MR JUSTICE LAWRENCE COLLINS: But you do now accept that it is very likely that the one or two cases were cases in the Manchester office in view of the way that sentence is put?

A. It is an opinion, yes, I do not know of the cases.

…

Q. [Mr Lloyd] was involved in all the renewal discussions as well, was he not?

A. Yes.

Q. Would it have been him primarily or --

A. It would be my responsibility, but he would be there because it is the underwriting side.

Q. So if there was an underwriting decision to be taken he would be taking it?

A. No, he would be there to advise on the underwriter side.

Q. You refer in paragraph 15 of your witness statement, on page 35 of B2, to the T&N minutes of 28th December. You will see in the quotation that you have given us that it refers not only to a full certificate but two lines above that it says: "The regulations published in the Act whilst requiring all such claims to be fully insured permit individual arrangements."

A. Yes.

Q. That would correspond, would it not, with your understanding of the Act that it required claims to be fully insured?

A. I do recall, I think I have said that John Kemp had mentioned the question of writing to the CBI and it was he who said that the individual arrangements could be negotiated between the insurance companies. That was never said by us.

…

Q. It looks as though certainly Mr Kemp was under the impression that he had made an arrangement with you and/or Mr Lloyd which provided him with full insurance which satisfied the requirements of the Act?

A. He may have thought that, but I can only assure you that if John Kemp had asked us to take over this risk, then we would have had to start from scratch again. John Kemp was a very particular man and a change of this magnitude would have been dealt with in writing. He, generally speaking, confirmed all the points that we discussed, and in this case we never had anything like this in writing, and I cannot understand or have any recollection of what he meant by it. But he did not, at that time, confirm that to the Royal.

Q. If he was a very particular man -- we have heard other witnesses saying he was a very particular man – one thing we would have wanted to be very particular about was making sure that his employers' liability insurance arrangement complied with the legislation?

A. By my experience of John Kemp, the first thing he would have done is to put that in writing to us, and certainly we would undoubtedly have had to put it in writing to him. You cannot change a policy just like that by a casual agreement.

…

Q. Are you suggesting that Mr Kemp went away empty handed from his discussions with you?

A. My recollection is that he wished to issue a certificate. At that time we had a policy with them and it was mandatory first to issue a certificate.

Q. Let us put aside the asbestos situation for the moment and focus on the £1,000 excess. How could you issue a certificate with a policy which contained £1,000 excess?

A. We had the policy already do you mean with £1,000 excess?

Q. The Act comes in, you have a policy with an excess in it, you know that an excess is prohibited, how properly can you issue a certificate with a policy which has an excess in it?

A. My understanding at that time, my recollection is that we did not -- I do not know the exact details, but we did not see a problem about issuing a certificate.

Q. That can only be because you had reached an arrangement with either T&N, or any other assured you did this deal for that they would, as it were, fund the excess?

A. No, I can say that we did not do any deals.

Q. So you were prepared to issue a certificate from a policy that said the policy conformed with the Act, when you knew it did not? … At the time were you prepared to issue a certificate for policies with an excess in them?

A. We issued a certificate for this one, there is no question about that, and my understanding at that time as that this was policy, we issued a policy, and we had to issue a certificate if that policy was in force, and we did so at the time.

Q. What if it did not comply with the Act?

A. I can understand what you are saying, but at that time I cannot recall exactly what was said.

MR JUSTICE LAWRENCE COLLINS: I think you are entitled to ask Mr Owen whether he thought at the time that a certificate could be issued even if there were an excess and if so why.

21 MR EDELMAN: Did you think you could issue a certificate saying that the policy conformed with the Act when it contained an excess?

A. We obviously did, yes.

Q. On what basis could you have thought that if you knew that the Act prohibited an excess --

MR JUSTICE LAWRENCE COLLINS: Not "could". On what basis did you.

MR EDELMAN: Did you think that -- I am only saying that because I am not expecting him to have, as it were, immediate recollection.

MR JUSTICE LAWRENCE COLLINS: I think that is precisely the point.

A. I do not recollect that, no.

Q. You do not recollect your thought process to justify that?

A. No.

…

A. I can say that there was no agreement with Mr Kemp because I had no authority and Dennis Lloyd had no authority to make that agreement. And your suggestion that we had not told Head Office about this private arrangement is definitely incorrect. We had made no agreement, we had no authority to make that agreement. We would have had to send everything to Head Office, we would have had to take a fresh look completely at the risk if we were going to have that arrangement.

Q. Did you think at any stage that as a result of issuing the certificate, Royal would be liable -- think at relevant time up to March 1975 -- that Royal would be liable if Turner & Newall became insolvent because you had issued the certificate?

A. I did not think that, no.

…

[Q] I just want to show you the first page. It is a note of Mr Lloyd's note of the meeting of 17th August. Can you see just against the first ring binder is a series of sub-paragraphs, 1, 2 and 3. It says: "90 plus per cent of Newall's insulation claims are by persons seeking to be ...(reading to the words)... prior to the Act 11/72 when we legally assumed ultimate responsibility." Did you understand that you had assumed ultimate responsibility? Mr Lloyd seems to have done. Did you?

A. No, that was written by Mr Lloyd. I have no recollection of agreeing that at all.

Q. As I think you have accepted, he was involved, was he not, in the conversations between you and Mr Kemp?

A. What we have here is this is Dennis Lloyd -- this is not necessarily something that he said at the meeting.

Q. No?

A. I would not accept that at all.

Q. I am not suggesting it was. That is his understanding at the time as to what the arrangement was with Turner & Newall.

A. If he has written it in here, that was his understanding at the time. It certainly was not mine.

Q. And he, as you have, I think, accepted, was the one who was involved in the meetings with Mr Kemp as well, was he not?

A. He was, but are you suggesting that he raised this at the meeting?

Q. I have already suggested to you that this was all discussed and agreed between you and Mr Lloyd on the one side and Mr Kemp on the other side.

A. I can say that at no meeting with Dennis Lloyd and myself would he say anything that he has written in here. We did not make any statements to Turner & Newall about legally assuming liability.

Q. … [Mr Lloyd] then says: "With the advent of Employers' [this is Mr Lloyd again, 1st November 1979] Compulsory Insurance Act we were required to issue a certificate of insurance bearing no exclusion of asbestosis in order to comply with the Act. As you will appreciate, we therefore had a legal duty to meet asbestosis claims. ...(reading to the words)... Such rights may have availed us nothing, had the client run into financial difficulties." Another reference by Mr Lloyd to the arrangements and I want again to give you the opportunity to comment on whether perhaps you may be mistaken about this, over the 31 years that has elapsed in the meantime, and you have forgotten what happened; and that what Mr Lloyd sets out reflects the arrangement with Turner & Newall.

A. No. At no time did Dennis Lloyd -- these are reports that he wrote, expressing what he thought. At no time have I any recollection of anything of that nature being discussed or arranged with Turner & Newall."

378. In re-examination, Mr Owen was asked when the problem about the exclusion and the 1969 Act arose. The question was: "The suggestion has been made by [Mr Edelman] numerous times that some agreement or arrangement was reached in 1971. We have seen a memorandum of November 1974 when the Royal first brought up the problem. I am asking you, as far as your recollection goes, when did the problem about the exclusions and the Act first arise with T&N?" Despite this delicate leading, Mr Owen answered: "The problems arose when the Act came in, 1972."
379. What emerges from his evidence is this:

(1) he knew that T&N could not have an exclusion or an excess, and the Royal policy presented a problem in both respects, and that he must have discussed the issues relating to them with Mr Kemp in the light of the 1969 Act;

(2) if the Royal was prepared to issue the certificate, he must have been contemplating a policy which provided full cover;

(3) he said several times that he did not recall any fronting arrangement, but he could not recall what was said at the time;

(4) he knew that T&N had no other EL cover, and accepted that his knowledge of group companies which were insured elsewhere was simply derived from his reading of the documents in the case;

(5) accordingly, he would have known that it was the Royal cover which would be the sole source of T&N's compliance with the 1969 Act;

(6) he knew that for T&N to comply with the 1969 Act the policy had to provide full cover;

(7) he had no recollection of the one or two fronting cases which involved the Manchester branch;

(8) he would have had guidance from head office that exclusions and excesses would not be possible if an insured was to comply with the 1969 Act.

380. He accepted in cross-examination that his role as production manager did not involve the actual technical detail of writing the policies. His role was to get in business and to develop and manage relationships with existing clients. He accepted that the account was one of the biggest at the Manchester branch. He did have some underwriting experience, involving EL business. His evidence was that Mr Lloyd would not have been taking the underwriting decision, but would be there to advise on the underwriting side.

Mr Hanmer

381. Mr Hanmer was an honest witness, but I am satisfied that his evidence was coloured by the fact that he knew well what the Royal's legal case was. As a result he gave some unrealistic and uncommercial answers.
382. In cross-examination, he accepted that no-one underwriting EL business could have failed to have been aware that the insured was not permitted to have a pneumoconiosis exclusion. He would have expected each local branch to have addressed the issues which arose with any insured affected by the changes.
383. In November 1974 he knew that the Royal had been issuing certificates to T&N, but he did not recollect that it would have alerted him to the fact that T&N was saying that there had been prior assurances in respect to their certificates. When it was put to him that he believed at the time that the issue of certificates by the Royal would result in them bearing ultimate liability as insurer, he answered that the Royal was uneasy about that possible interpretation but he did not believe that the certificates of insurance imposed any obligations on the Royal. But he accepted that at the time his perception was that the issue of certificates of itself created a problem for the Royal. Mr Simpson's record of January 5, 1976 of what Mr Hanmer said ("By issuing a certificate we are liable to pick up any of these claims") was not accurate in the sense that he would not have implied at all that the certificate would make them liable for the claims.
384. It was put to him that if the certificate itself did not make them liable and he had realised that, he must also have realised that the branch could only have made an arrangement with an assured that had previously had an excess and an exclusion in its policy to issue a full certificate under the 1969 Act if they had come to some arrangement about how the excess and the exclusion were to operate. He replied that he would not have associated the cover and the obligations on the Royal as being associated specifically with the certificate as opposed to the contract of insurance. But he accepted that the fact that the branch had issued a certificate would put him on notice that they must have made some arrangement with the insured to cater for the fact that there had been an excess and exclusion.
385. Mr Hanmer said in re-examination that his understanding on the problem caused by the certificate was that the Royal did not have a definitive legal opinion about the effect of the certificate at that time in relation to these matters. They were not convinced that the certificate imposed any obligation on the Royal, but felt a certain amount of apprehension that the Royal might be landed with liabilities subsequently through having issued a certificate which said that it had issued a policy which complied with the law. His answer that he assumed that somebody had arrived at some arrangement about T&N (in cross-examination) was followed by a question in re-examination as to whether anybody in any of his dealings with T&N ever suggested that they had an agreement affecting the contract or whether anyone ever suggested that the exclusions were not included in the contract. He said that no one ever had ever suggested that, and he did not know at the time of any suggestion internal to the Royal or external from T&N that an arrangement had been entered into which effected the contract. I then asked him how it was that the Royal was able to issue the certificate if there was no arrangement or amendment. He answered that they were statutorily obliged to issue a certificate in the prescribed form for every EL policy.

8. Conclusions

386. The persons who would have played a part in the conclusion of the agreement which is alleged are Mr Kemp, who is dead, and Mr Atkinson, who played only a marginal role, and Mr Owen, who gave a witness statement and was cross-examined, and Mr Lloyd, who gave a witness statement, but was too ill to attend the trial.
387. I am satisfied that the strong probability is that Mr Kemp came to an agreement or arrangement of contractual force with the Royal Manchester branch in about October 1971 that the Royal would provide full EL cover, and a statutory certificate, against T&N's undertaking to continue the existing arrangements for the exclusion and the excess. The policy was never re-issued, but the parties agreed that the exclusion and the excess would be subject to the agreement. I consider it likely that the arrangement was made with both Mr Owen and Mr Lloyd, but if it was only one of them, then it was with Mr Lloyd. The evidence which has led me to this conclusion consists mainly of the background, the contemporaneous documents, and the oral evidence of Mr Owen.
388. The position in October 1971 was that all parties knew that the 1969 Act was to come into force on January 1, 1972, and that (apart from certain provisions, including the obligation to display certificates) the 1971 Regulations were due to come into force then.
389. It hardly needed to be said, but Mr Owen accepted that he knew that the employer had to be fully insured, and that branches would have received guidance from head office on the 1969 Act, and would have realised that even an excess under a policy, a small excess of £50, would not be permitted under the Act. Mr Hanmer also accepted that no-one underwriting EL business could have failed to have been aware that the insured was not permitted to have a pneumoconiosis exclusion.
390. The insurance industry had taken part in discussions on the implications of the 1969 Act and the 1971 Regulations, and all involved must have known that Regulation 2(2) allowed reimbursement provisions (although not, as I have said, direct payment provisions).
391. Mr Hanmer also gave evidence that at the time of the 1969 Act coming into force, Royal would have sent out guidelines and circulars and that he would have expected such guidelines and circulars to have been received, read and considered by the Manchester branch.
392. Since the Royal (including Mr Owen) knew that the insured had to be fully insured, and that if the insured only had one EL insurer (as was the case with T&N, with the possible exception of recent corporate acquisitions), the EL policy could not contain an exclusion or an excess, and that criminal penalties could be imposed on T&N and its officers for non-compliance. The Manchester branch had received circulars from head office about the implications of the legislation.
393. T&N was not only the major client of the Manchester branch, but one of the leading companies in the United Kingdom, whose EL business was very valuable, since it had 20,000 employees. 1971 was several years before the implications of the US led asbestos claims became known. Mr Owen accepted that he did not consider that T&N's solvency was an issue. Subsequent documents show how keen Mr Lloyd was to keep T&N as a client, and Mr Owen, as a newly appointed business development manager, must have been just as keen in 1971. The Manchester branch undertook in this period one or two cases involving the incurring of the risk of the solvency of the client.
394. Mr Owen's evidence on Mr Hanmer's memorandum of May 23, 1975 indicating that the Manchester branch had written "one or two" other insurances on a "self-funding", as opposed to a conventional basis, was evasive. At first he endeavoured to distance them from the Manchester branch, and when he was unable to do so, said he could not remember them, although he did ultimately accept that it did look as though the branch must have been entering into other funding arrangements of a like nature to the arrangement which T&N say Royal had with T&N. I have no doubt that Mr Owen well understood the implications of the line of questioning on this document, and that it was unfavourable to the Royal case, but he could not sustain his evasion of it.
395. Mr Owen accepted in the witness box that the problem of the exclusion and the excess arose at the outset of the legislation, and also that he must have discussed with Mr Kemp the effect of the 1969 Act on the exclusion and the excess. It is not surprising that he (and also Mr Atkinson) has no clear recollection of the conversations of nearly 33 years ago. I attach particular weight to the answer Mr Owen gave in re-examination that the problems on the exclusion and the excess arose when the 1969 Act came in 1972, and refused to be led to the answer that it arose in 1974.
396. It is true that section 1(1) of the 1969 Act envisaged that the EL risk may be covered by one or more "authorised" insurers under one or more "approved policies". The Royal was an authorised insurer for the purposes of the 1969 Act, and "approved policy" for the purposes of the 1969 Act means (section 1(3)(a)) a policy of insurance which is not subject to any conditions or exceptions prohibited by regulation. Neither the exclusion nor the excess was ever a prohibited condition or exclusion. The Royal policy was therefore an approved policy, and Regulation 5 made it mandatory for Royal to issue a certificate in the form prescribed by the Schedule to the 1971 Regulations.
397. But since the Royal knew that it was T&N's only EL insurer, it must have issued the certificate on the basis that it was providing full cover. It is inconceivable that Mr Owen and Mr Lloyd, or Mr Kemp, would have proceeded on the basis that the Royal was simply allowing T&N to be in breach, provided the Royal policy did not contravene the Regulations and the Royal complied with its own obligations under the 1971 Regulations.
398. There is no doubt that there was some confusion between the concepts of full insurance and a full certificate. The 1969 and the 1971 Regulations do not envisage a "full" certificate, and I have no doubt that the expression "full certificate" was meant by those who used it to mean full cover. Neither Mr Owen nor Mr Lloyd in their witness statements explain how it was that they came to issue the certificates. In the end, after much difficulty, Mr Owen agreed with the proposition that if the Royal was prepared to issue a certificate that the policy complied with the 1969 Act, he must have been contemplating a policy which provided for full insurance with no excess and no exclusion. I do not accept that he could not recollect why he was able to authorise the issue of certificates if he considered that the exclusion and the excess were still operative. I do not accept his evidence that the certificate was issued because the Royal had a duty to issue a certificate even if the policy contained an exclusion or an excess. I consider that that answer (which was also put forward by Mr Hanmer) is uncommercial, unrealistic, and influenced by the legal arguments which the Royal is now deploying, and which were never mentioned at the time, either in 1971/1972 or from 1974.
399. In my judgment, the documents in the crucial 1971/1972 period speak with one voice. I accept that they are exclusively T&N documents, but no-one has suggested that Mr Kemp (or Mr Atkinson) was engaged on an exercise of creating self-serving documents. Not only is the evidence unanimous that Mr Kemp was a meticulous and careful person, but he could have had no conceivable interest in falsifying the record. Although Mr Owen was adamant that no such agreement was reached as T&N claims, he was careful to say often that he had no recollection of any such agreement. Mr Lloyd does not say that there was never any such agreement, but rather more cautiously says that he does not recall any such discussions, and in light of the discussions which took place between Royal and T&N from the end of 1974, it did not seem likely that any such agreement was reached in 1971.
400. The evidence of the documents in 1971/1972 is this:

(a) from at least August 1971 Mr Kemp had in contemplation "an arrangement whereby while fulfilling our statutory obligations under the new Act, we shall continue to enjoy much of the freedom of action which we have hitherto enjoyed under the existing arrangements." (August 27, 1971 memorandum to Mr Quayle of Ferodo)

(b) In October 1971 Mr Kemp and Mr Atkinson discussed the matter in great detail (and in full knowledge of Regulation 2(2)) with the Royal, who were going to issue a full certificate notwithstanding "the special arrangements" which they had negotiated with them (memorandum to Mr Hardie, October 22, 1971).

(c) The minutes of the insurance committee of December 28, 1971 record that in consequence of the fact that the Regulations permitted individual arrangements to be negotiated the Royal had agreed, following difficult and delicate negotiations, to issue a full certificate although asbestosis and similar claims would continue to be dealt with by T&N Ltd as hitherto and the company would continue to bear the cost of such claims and the first £1,000 (or other agreed excess) on all other claims. Mr Kemp made the same point in his memorandum to Ferodo on January 14, 1972, which also confirm that Mr Kemp was aware that the 1969 Act required T&N to be "fully insured", although "individual arrangements" could be negotiated.

(d) In his memorandum of April 24, 1972 to a group company Mr Atkinson said that since the 1969 Act pneumoconiosis claims had to be included in T&N's Royal cover although as a matter of practice T&N continued to deal with them internally.

(e) In his insurance committee report for the board meeting on April 27, 1972 Mr Kemp said that the Royal had agreed to issue a full certificate but common law claims in respect of asbestosis and kindred industrial diseases, "not hitherto insured," and the excess would continue to dealt with as before.

401. I am wholly satisfied that these documents show that T&N and the Royal were endeavouring to take advantage of the 1971 Regulations to continue the existing situation in practice, while the Royal was providing full cover under the policy. References to a full certificate (not a concept under the Regulations) must be understood as references to full cover.
402. I do not consider it surprising, when the matter was raised by the Royal head office, and subsequently taken up by the Manchester branch with T&N, that Mr Kemp did not then say that T&N had an agreement or arrangement. The cover was by then an annual cover, which was up for renewal as from January 1, 1975, and the Royal could have refused to renew (as it ultimately did). There would have been no practical point in T&N pointing to an agreement with the Manchester branch in 1971, which would only have served to drive a wedge between head office and the branch. But I consider it likely that it was the existing arrangements negotiated in 1971 to which Mr Atkinson was referring when he talked of "assurances" in the letter which he drafted for Mr Kemp to sign on February 24, 1975.
403. What is more surprising is that head office did not (at least as reflected in the available documents) ask the Manchester branch how it was that it came to issue certificates from 1972 onwards without discussing the implications with head office. The explanation is probably the same as Mr Pemberton gave in answer to the question why he was not concerned with the past, namely that the past was water under the bridge.
404. Mr Kemp's documents in the period after 1974 are generally consistent with those in the period 1971/1972. In his August 16, 1974 annual report for the executive committee, he referred to the Royal policy, and said that in compliance with the 1969 Act "this policy covers all claims by employees but, by special arrangement with Royal Insurance, asbestosis claims continue to be handled direct by T&N, who meet the full cost of such claims as well as the first £1,000 of all other claims." Other documents from Mr Kemp in this period are consistent with this view: especially his November 19, 1974 memorandum for the executive committee "the risks associated with the use of asbestos are, by special arrangement with the Royal, dealt with direct by T&N and at its own expense, though the insurers provide the statutory certificate"); his memorandum for the executive committee meeting of July 22, 1975 ("T&N's statutory obligation to insure all employers' liability risks, including asbestosis claims from employees, is at present met by the Royal Insurance Group who issue the required certificate on the understanding that all asbestosis claims will be dealt with direct, as in the past, by the Company") and the minutes of that meeting ("by special arrangement with Royal Insurance, T&N continued to handle and settle all asbestosis claims by present and past employees, though the insurance company remained ultimately liable having issued the statutory certificate under their name"); his report for the executive committee on August 27, 1975 ("The policy [with the Royal] as at present written specifically excludes asbestosis claims though the Royal provides full statutory cover under the Compulsory Insurance Act"); his memorandum for the executive committee meeting on November 27, 1975 ("the Royal continue to afford the necessary statutory cover in respect of the asbestosis claims for which the Company itself accepts responsibility and their proposals for the regularisation of this situation are still awaited.")
405. As I have said, from this point on the Royal head office documents generally proceed on the basis that there is an exclusion in the policy, that T&N is in breach of the 1969 Act and that the Royal is or may be fully liable under the policies because of the issue of the certificates. There are some documents suggesting that Mr Kemp eventually came to use this formulation, and certainly Mr Pemberton (who had had no discussions with Mr Kemp when he took over responsibility for insurance) proceeded on the basis that the problem was that the Royal had been issuing certificates notwithstanding that the policy still contained the exclusion and the excess.
406. I do not consider that this is evidence that there was no agreement in 1971. Mr Kemp, Mr Pemberton, Mr Owen, and Mr Lloyd were not lawyers (although Mr Atkinson, of course, was a lawyer). They were all engaged on an exercise of endeavouring to allay head office's concern about the consequences of certificates having been issued when the policy document still contained the exclusion and the excess, namely that the Royal might be liable in the event of T&N's insolvency.
407. What is striking about the Royal documents in this period is that the Manchester branch documents continue to paint a picture which is consistent with the T&N case. In his November 11, 1975 memorandum to Mr Curtin, the Manchester branch manager, Mr Lloyd had stated that to satisfy the 1969 Act the certificate bore no exclusion of asbestosis and the Royal was therefore liable for all such claims in the final analysis. The Royal had obtained a letter of indemnity from T&N and therefore had rights of recovery against them in respect of any claims that they settled. In practice T&N handled and settled all claims and the Royal in effect "front" the cover. The Royal could therefore only become involved in the event of T&N's insolvency, i.e. when its letter of indemnity would be worthless. His explanation in his witness statement (set out above at para 341) is not convincing, and bears the hallmark of legal advice given in the course of these proceedings. He says that his note "suggests exclusions were prohibited which they were not." That is of course true, but the context in which his note was written, and in which he dealt with T&N from 1971 to 1977, was one in which the Royal policy was the only EL policy taken out by T&N, and in that context it was not permissible for T&N to have a policy with an exclusion and an excess.
408. Mr Lloyd's note of the meeting of August 17, 1976, states that the objective of the meeting was: "To explore ways of solving the problem attaching to the present arrangement whereby Turner and Newall carry their own asbestosis E.L. Risk, but the 'Royal' stand to be responsible for such claims in the event of the inability or failure of Turner and Newall to meet their commitments; such responsibility is brought about by E.L. (Compulsory Insurance) Act which, in essence, doesn't allow exclusions to an E.L. Policy." His witness statement deals in detail with his note of the meeting, but ignores this passage.
409. It is very striking that two years later, on November 1, 1979, Mr Lloyd wrote to the international service division:

"The Insured had always carried their own E.L. asbestosis risk preferring moral rather than strict liability settlements. With the advent of the Employers' Liability (Compulsory Insurance) Act we were required to issue a Certificate of Insurance bearing no exclusion of asbestosis in order to comply with the Act. As you will appreciate we therefore had a legal duty to meet asbestosis claims with rights of recovery against the client, but such rights may have availed us nothing had the client run into financial difficulties…"

410. No comment was made on this document in Mr Lloyd's evidence.
411. In my judgment, therefore, a close analysis of the contemporary evidence and of the commercial realities leads me to a firm conclusion that T&N and the Royal Manchester did come to an arrangement, having contractual force, in the sense for which T&N contends. The policy was not re-issued after 1969, and the renewals from October 1971 were, in my judgment, subject to the 1971 agreement.

XII The Syndicate policy issues

1. The policies and the issues

412. The issues relate to what are described as "conditions" in the Syndicate EL policies, and are (a) whether the condition which provided that T&N would "pay" all asbestosis etc claims was, or was to be treated as, an exclusion under the policy;" and (b) whether the reference in that condition to "asbestosis or mesothelioma as a result of exposure to asbestos dust" should be interpreted to include other diseases caused by exposure to asbestos dust, namely dust reticulation, lung cancer, pleural plaques, pleural effusion, diffuse pleural thickening and bronchial carcinoma". In each case, the Syndicate relies on estoppel by convention, resulting from a shared and communicated assumption, as an alternative to its primary position on construction. In addition, there are miscellaneous issues on the Aggregate Excess Condition with which I deal at the end of this section.
413. The Lloyd's Employer's Liability Policy issued by the Syndicate from 1977 insured T&N against liability for bodily injury and disease sustained by its employees. The policy contained the following clause ("the Deeming Clause") under the heading "Employers' Liability Compulsory Insurance Clause":

"The indemnity granted by this Policy is deemed to be in accordance with the provisions of any law relating to compulsory insurance of liability to employees in Great Britain, Northern Ireland, the Isle of Man ......BUT the Assured shall repay to the Underwriters all sums paid by the Underwriters which the Underwriters would not have been liable to pay but for the provisions of such law"

414. The Schedule in its original form contained the following provision:

"It is a condition of this insurance that:-

(1) The Assured undertakes:-

a) to pay the full cost and expense of handling and disposing of all claims based upon the allegation that employees or former employees of the Company or its Associated Companies contracted asbestosis or mesothelioma as a result of exposure to asbestos dust in the course of their employment with the Company or its Associated Companies.

b) to pay the full cost and expense of handling and disposing of all claims based upon the allegation that employees or former employees of the Company or its Associated Companies contracted angiosarcoma or acroosteolysis as a result of exposure to vinyl chloride in the course of their employment with the Company or its Associated Companies.

c) to reimburse Underwriters for all other claims and claims expenses up to £375,000 in the aggregate in the policy period."

415. The first Syndicate EL Policy was issued on May 20, 1977 and covered the period from April 1, 1977 to December 31, 1977. Condition 1(a) (the "Asbestos Condition") was repeated and incorporated in the policies for all subsequent years (as was the Vinyl Chloride Condition (b)), the final year being May 1, 1994 to April 30, 1995. Condition 1(c) (the "Excess Condition") was substantially repeated (save that the amount changed, until it was £2.5 million in the final year) and incorporated in the policies for all subsequent years, with some modifications to the wording. In the 1980 policy "refund" was substituted for "reimburse" and the word "other" was not used to qualify "claims"; and similar wording was used until the 1993/4 policy, where for "refund" was substituted "pay all such sums as Underwriters shall expend" and that wording was repeated in the final policy.

2. Exclusion or condition: the Syndicate's case

416. The Syndicate's case is that the crucial distinction between the wording of the Asbestos Condition and that of the Excess Condition (in its various forms) is that the latter requires reimbursement, refunding or payment of sums which insurers have already paid, whereas the former stipulates for a primary obligation to pay the claims.
417. The Asbestos Condition is not a reimbursement provision. If the Asbestos Condition is not a reimbursement provision, and it is not contended by either party that it is a "pay to be paid" clause, it amounts to an effective exclusion.
418. There is no reason to adopt a forced interpretation of the Syndicate's policy wording in order to give effect to a presumed intention on the part of T&N to comply with the 1969 Act by taking out the Syndicate policy. The responsibility for complying with the Act rested on T&N and not on its insurers. T&N did not comply with the 1969 Act because it did not separately insure asbestos risks. But equally it did not comply with the 1969 Act before the Syndicate came on risk, nor did it do so after the Syndicate came off risk (when it took out EL insurance with New Hampshire which wholly excluded liability for asbestos related disease).
419. The exclusion and the excess complied with the 1969 Act because the policy was an approved policy within the meaning of section 1(3)(a), and they were not prohibited by the 1971 Regulations. If T&N had subscribed to another policy, with a different insurer, covering its liabilities for injury caused by asbestos related diseases and exposure to vinyl chloride: (a) it would properly have complied with its obligations under section 1 of the Act; and (b) it could not plausibly contend (and would not now be contending) that the effect of the Deeming Clause in the Syndicate policy was to override the Asbestos Condition and the Vinyl Chloride Condition. It would be odd if the Deeming Clause were to have a different meaning, according to whether or not T&N had complied with its statutory obligations by taking out another policy.
420. Mr Smith was told by the brokers that T&N were going to set up a captive to underwrite the asbestos risk and in July 1979 it was in fact told that T&N had set up a captive insurance company to deal with asbestos related claims.
421. The Syndicate's primary case is that the Asbestos Condition is unambiguous and operates as an exclusion. Alternatively, it contends that the factual matrix points to a common intention that it should operate as an exclusion.
422. The factual matrix indicates that it was never envisaged or intended by either party that insurers would handle or pay asbestos claims, and they never did. This is wholly consistent with the policy wording. It has not been (and cannot be) contended that the policy wording would bear one meaning for so long as T&N was solvent, but a different meaning in the event of insolvency.
423. The starting point is that at all material times T&N intended to (and until it became insolvent did) pay claims for asbestos related diseases out of its own resources. Accordingly while the question of whether there was an asbestos exclusion was important to insurers (who would, if there was not, thereby bear the risk of T&N's insolvency), it was of importance to T&N only to the extent that it affected the question of whether it was complying with its obligations under the 1969 Act. As Mr Atkinson said: "All T&N really wanted from EL Insurance was a certificate to put up in our offices and factories stating that we had insurance which complied with the 1969 Act, and a claims investigation service. The EL Insurance with the Syndicate provided both of these."
424. While T&N's desire to fulfil its obligations under the 1969 Act might be thought to support the inference that the policy wording would be designed to achieve that result, it is apparent that the wording in question was simply lifted from its own letter of February 24, 1975.
425. The evidence from the time of the Royal cover was that, provided the Syndicate was prepared to issue a "full certificate", the wording of the policy would have appeared to T&N to be of little, if any, significance.
426. The Syndicate relies on documents subsequent to the issue of the policy, not as aiding the question of construction but as being evidence confirmatory of the facts relied upon and as contradicting inferences sought to be drawn by T&N from documents such as Mr Pemberton's report of April 25, 1977, in which he reported for the board meeting on May 12, 1977 that there were no exclusions or excesses in the policy and that T&N merely agreed to pay the claims notwithstanding the wording of the policy.
427. The Syndicate also relies upon the fact that T&N (by its brokers) regularly sought alternative quotations for its EL insurance cover, and always did so on the basis of excluding cover for asbestos related diseases.
428. As a matter of law, what the parties subsequently said or did cannot be an aid to the construction of an agreement: James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] AC 583 at 603. The only evidential value of such material can be as tending to confirm, or contradict, the existence of facts which may themselves be relevant as part of the factual matrix, but which are in dispute. Thus, although Mr Smith was extensively cross-examined upon later documents what he said or wrote (especially in 1993) is not a legitimate aid to the construction of the policies.
429. If, contrary to its primary case, liability to indemnify for asbestos related diseases is not excluded by the terms of the policies, the Syndicate contends that T&N is estopped by convention from contending that the Syndicate's policy did not exclude asbestos related claims, both T&N and the Syndicate having conducted their dealings on the basis that the Syndicate's policies excluded liability for asbestos related diseases.
430. The convention or assumption made by the parties in this case was that liability for asbestos related diseases was excluded from the Syndicate's policies, and crossed the line in the course of meetings and written communications. Reliance is placed, in particular, on various memoranda produced by T&N, especially by Mr Pemberton. In all the circumstances it would be unfair or unconscionable to permit T&N to resile from that assumption.
431. The Syndicate also relies upon the evidence of Mr Smith and Mr Craig (the claims manager of the Syndicate) that (a) had it not been assumed that the Asbestos Condition operated as an exclusion (so that it was not assuming the risk of having to meet asbestos claims in the event the insolvency of T&N) it would have not have issued the policies; (b) it assessed and received premiums assessed without reference to potential asbestos claims; and (c) it only insured the T&N insolvency risk in relation to sums payable by T&N under the Excess and Additional Premium Conditions.

3. T&N's case

432. The Syndicate's contention that the wording of the undertaking operated as an "exclusion" of liability is untenable, as evidenced most clearly by what is said by the Syndicate's own expert underwriting witness, Mr Wilson, when he was dealing with the question of materiality for disclosure purposes. After setting out the terms of the policy he said:

"Thus whilst T&N was and remained solvent,

- the Syndicate were not going to be paying asbestos or vinyl Chloride claims;

- the Syndicate were not going to end up ultimately bearing the cost of any claims unless the Aggregate Excess...was exceeded..........

However, the position became quite different if T&N became insolvent. In that eventuality

- third party claimants would be likely to look to the Syndicate directly for payment of their claims and to argue that the Syndicate was liable to pay asbestos and vinyl chloride claims, notwithstanding the terms of the policy which required T&N to pay such claims; and

- the Syndicate would end up ultimately bearing the cost of claims both within and outside the Aggregate Excess, because their right of reimbursement and T&N's burning coat adjustment would be worthless."

433. That was essentially a forensic point, because not only is this a matter for the court, and not for an expert, but also because Mr Wilson (not very convincingly) resiled in cross-examination from what he had said.
434. T&N's submission was that insurers knew full well how to formulate an exclusion in a policy and the provision looks nothing at all like an exclusion.
435. If it had been intended to be an exclusion, it is surprising that it was included as one of a series of "undertakings" given to the Syndicate and that one of those undertakings involved T&N undertaking to reimburse the Syndicate for the stated aggregate sum. The fact that the undertaking could speak of T&N having to "reimburse" the Syndicate plainly shows that the undertaking was not intended to exclude the Syndicate's liability, as insurer, for the aggregate sum and the same intention must apply to the other undertakings (the word "pay" rather than "reimburse" being used because T&N was to be responsible for the handling of the specified disease claims).
436. To construe the provision as an exclusion would render it wholly inconsistent with the Deeming Clause, in that the policy would not, by virtue of the exclusion, be compliant with the 1969 Act, whereas to construe it in the manner in which T&N contends it ought to be construed (i.e. simply, as it says, as an "undertaking" by T&N to pay such claims, but with the Syndicate acting as insurer for all of T&N's liabilities in accordance with the insuring clause) would create complete consistency.
437. On its face it is a provision deliberately chosen to satisfy the requirements of the Act whilst at the same time keeping insurers off risk whilst T&N remained solvent. At that time (1977) there was no suggestion that T&N was facing or was likely to face insolvency.
438. T&N relies on the general principle that: "…Exemption clauses will …. be construed strictly, and the degree of strictness appropriate to their construction will depend upon the extent to which they involve departure from the implied obligations ordinarily accepted by the parties in entering into a contract of a particular kind:" Chitty, vol 1, para 14-005. The implied obligations ordinarily accepted by parties in entering into a contract of EL insurance in the United Kingdom are that the insurance provided will be full insurance in accordance with the Act. The court should therefore construe any provision said to detract from full statutory cover strictly against it having such an effect.
439. As regards the Syndicate's appeal to factual matrix, apart from the absence of evidence to support the Syndicate's case, it suffers from the same flaws as the Royal's factual matrix case, and in particular that on both aspects of the construction issue (the effect and the scope of the undertakings) the appeal is to some supposed subjective intent, the effect of which is to contradict the words used by the parties.
440. As regards estoppel by convention, T&N says that even if (which it does not accept) Mr Smith assumed (or agreed) that the policy would contain an exclusion, the evidence shows that T&N had no such intention, and that there is no evidence of any communication, written or oral, which would have led Mr Smith to the contrary understanding. Indeed, T&N says that the documents show precisely the opposite, namely that the shared and communicated agreement was that while T&N would continue to pay the claims, the policy would be one which would enable T&N to comply with the 1969 Act, and the Syndicate would retain the ultimate liability.

4. The documents

441. In this section I shall deal in some detail with the documents, and indicate my conclusions on what they indicate, although most of them are not admissible in relation to the principal point of construction.
442. Following the Royal's decision to come off cover, T&N's brokers, Hogg Robinson, approached the major insurance companies and Lloyd's. Only Eagle Star and Lloyd's were willing to accept the business. Mr Smith says that he did not know that the Royal had declined to continue cover. None of the other participants had any recollection of the discussions other than what they derived from the documents.
443. Mr Smith was approached by Mr O'Brart of Hogg Robinson early in 1977. Mr Smith's handwritten note is "Asbestosis/Disease exclusion applying as para.1 (a) and (b)." According to the Syndicate this shows that Mr Smith was first asked to quote in February 1977 on the basis of an exclusion, but this document clearly shows (by its reference to para 1(a) and (b)) that Mr Smith saw the extract from the T&N indemnity letter to the Royal of February 24, 1975. Read in the context of the extract (which refers to assurances given by T&N pursuant to which certificates have been issued, and to undertakings given "notwithstanding the wording of the policy"), it is plain that the word "exclusion" is to be read in the context of an endeavour to comply with the 1969 Act.
444. This is confirmed by Mr O'Brart's handwritten note of a telephone conversation with Mr Smith on March 1, 1977, which refers to "a counter indemnity", i.e. hold harmless for asbestosis etc. rather than Exclusion," and notes that Mr Smith would wish to buy a bond.
445. A handwritten note by Mr Mason of Hogg Robinson dated March 2, 1977 refers to a meeting with T&N and also to a further meeting with the underwriter (Brian Smith) to be arranged to satisfy the position re "Asbestosis claim handling (T&N wish to have present satisfactory arrangement through Chapman continuing)", "No exclusion on policy"; "letter of indemnity - ? Bond" and there is a reference to pursuing the captive idea.
446. Mr Holden of Garwyn wrote in a memorandum of March 3, 1977:

"DMM is inadequately informed by BRS without any claims experience etc. or other detail and most importantly it is uncertain whether we are to deal with asbestosis, mesothelioma and VCM disease claims which are presently excluded from the Royal cover. Apparently these disease claims are dealt with internally by the Assured's Legal Department."

447. In a paper of March 3, 1977, Mr Pemberton addressed the advantages and disadvantages of the cover which would be provided by each of the Syndicate and Eagle Star, and describes the Syndicate's insurance, as offering "an unconventional approach". In his witness statement he said:

"..the insurance with the Syndicate was referred to as 'unconventional' because although the policy would be deemed to be compliant with the 1969 Act and the Syndicate would bear the ultimate liability for all EL claims, there would be an arrangement between T&N and the Syndicate under which T&N:

(a) agreed to deal with all asbestosis and mesothelioma claims;

(b) agreed to reimburse the Syndicate for all other claims up to a high aggregate limit..."

448. When comparing the cover to be provided by the Syndicate with that to be provided by Eagle Star, the discussion includes the following point::

"7. In both cases, asbestosis claims would continue to be dealt with as now, but both insurers would issue policies in accordance with the Act."

449. On March 7, 1977 there was a meeting between T&N (Mr Atkinson and Mr Pemberton), Hogg Robinson (Mr O'Brart, Mr Mason, and Mr Hindle) and Garwyn (Mr Marchant and Mr Holden). At the meeting T&N confirmed that it favoured continuing the arrangement of handling asbestosis, mesothelioma and angio-sarcoma claims itself and leaving Garwyn to handle the more common EL claims. In cross-examination Mr Atkinson accepted that T&N did not want those diseases to be covered by the policy, because it wished to be self-insured as it always had been, and Mr Pemberton accepted that at that meeting it was made clear that cover was not being offered for asbestos related disease claims, and what he wanted was insurance which excluded asbestos diseases but which complied with the requirements of the 1969 Act.
450. The minutes of a meeting of the T&N insurance committee of March 9, 1977 record:

"Mr Atkinson and Pemberton were authorised to place the cover with Lloyd's on the best terms provided that on completion of their enquiries they were satisfied that ....the terms and conditions of the policy would comply with the requirements of the Employers' Liability (Compulsory Insurance) Act."

451. On March 10, 1977 Mr Holden (Garwyn) wrote to Mr Smith and Mr Marchant following a meeting in Manchester on March 9 with Hogg Robinson. He said:

"The Brokers now know enough about us to allay apprehension by themselves and Turner & Newall on capacity to cope efficiently with the claims and, I hope, on continuity but they remain apprehensive about effecting the solvency bond although I told them you had fixed so many now without hitch including some on companies about which one would expect much greater concern on solvency than Turner & Newall – who have just turned in a £50 million profit. Before Derek [Marchant] dealt with the solvency bond question at the meeting on 7 March it is clear Hogg Robinson Manchester were not aware that the quotation was subject to effecting a bond."

452. He also noted that T&N confirmed its desire to retain handling of asbestosis, mesothelioma and angio-sarcoma claims, which (he said) was obviously sensible, and T&N readily agreed that the Syndicate would want T&N to check periodically the reserves it was carrying for such disease cases as it was handling.
453. On March 21, 1977 there was a meeting at Garwyn. Present were Mr Atkinson and Mr Pemberton of T&N, Mr O'Brart, Mr Hindle and Mr Mason of Hogg Robinson, Mr Marchant of Garwyn and Mr Brian Smith. A note prepared by Mr Mason following the meeting states that the following matters were agreed:

"1. List required by Brian Smith each year on form to be agreed showing asbestosis cases – name, period of employment, amount, etc."

…

3. All handling charges and claims on asbestosis to be outside aggregate – James Chapman accepted to continue handling.

…

5. Policy wording incorporating letter of indemnity (same as Royal) accepted. B.S. confirmed DTI had approved type of scheme – letter available for perusal if required.

…

9. No separate letter of indemnity required."

454. The Syndicate argues that no-one who was present at the meeting now has any recollection of what was said, and that the note of what was agreed does not enable conclusions to be drawn as to whether asbestosis etc was to be excluded. I am satisfied that the strong probability is that what was agreed was what the document says was agreed, namely that the indemnity letter wording would be incorporated on the basis that it satisfied DTI requirements by not amounting to an exclusion. Mr Atkinson's evidence was that "the note confirms that the DTI had approved this type of scheme. I thought that if Brian Smith was happy with all his experience in insurance matters, then I was happy that the insurance complied as required."
455. On March 23, 1977, Mr Holden noted that a solvency bond for £400,000 would be likely to cost £2,000 and:

"Disease insured by agreement that the Assured reimburse the entire cost of asbestosis, mesothelioma and angio-sarcoma. All other diseases fall within the annual 1/2 million excess on conventional injuries"

456. In a note to Mr Smith of March 24, 1977, Mr Holden deals with standards of suppression of asbestos and the reporting of the relevant disease claims. He ended: "… unless you then specifically ask I am not required to check at any stage their claims handling or reserves against diseases attributable to asbestos or angio-sarcoma."
457. On about April 1, 1977 Mr Holden wrote a note about the policy:

"Terms: Excess £500,000 in the aggregate in any one year to be reimbursed by Assured on all claims except disease claims arising from Asbestos and V.C.M. where the claims are to be handled by the Assured who will also meet the entire cost. The policy insures technically as a 'long stop' and will be protected by a solvency bond."

458. A note dated April 5, 1977 by Mr Pemberton (which was also on the file of Garwyn) states:

"With effect from 1 April 1977 the Group E-L insurance is provided by Lloyds. The main difference between the cover provided by the Royal up to 31 March 1977 and the new terms arranged with Lloyds is that the Group is responsible for the payment of asbestosis claims, plus the first £500,000 of any other claims in aggregate in any one year, whereas under the Royal policy only the first £1,000 of each and every claim other than asbestosis was borne by the Group. The requirements of the Employees' Liability (Compulsory Insurance) Act are satisfied by T&N undertaking to reimburse insurers with the first £500,000, and for the full amount of claims arising from asbestosis, asbestos related diseases, and diseases arising from exposure to vinyl chloride. There is no actual excess in the policy. The premium (£40,000 in the first year) will be allocated to unit companies in proportion to manual wages."

459. In the minutes of the executive committee of April 4 this (quoting Mr Pemberton's note for the meeting) is described as "in effect ... a catastrophe policy" which "would enable the Company to have cover complying with the Compulsory Insurance Act."
460. On April 25, 1977 Mr Pemberton wrote a note for the board meeting on May 12, 1977 in which he stated:

"Lloyds offered full insurance cover complying with the Compulsory Insurance Act, but required an indemnity whereby T&N would agree to meet the cost of all claims arising from asbestosis and asbestos related diseases and from exposure to vinyl chloride and also the cost of other claims up to an aggregate of £300,000 in any one year. In effect Lloyds were offering catastrophe cover and leaving the Group to meet its own day to day liabilities. Discussions were held with the underwriter leading to an agreement to increase the aggregate for non-asbestosis claims to £500,000.

With the authority of the Insurance Committee cover has been placed with Lloyds with effect from 1 April 1977 at an initial premium of £40,000 per annum and arrangements have been made for a claims investigation service which will be an additional charge on Group companies. There are no exclusions or excesses in the policy, and the policy complies fully with the requirements of the Employers' Liability (Compulsory Insurance) Act, and T&N merely agrees to pay the above costs notwithstanding the wording of the policy."

461. The first policy was issued on May 20, 1977.
462. Mr Pemberton's annual report of May 1, 1979 states that "Asbestos related diseases and VCM diseases continue to be excluded from the policy." His report of April 10, 1980 states that "neither policy [i.e neither the Syndicate nor the Curzon policies] covers asbestos related and VCM diseases."
463. The documents record that from 1978 there were discussions with Hogg Robinson on the formation of a captive insurance company. It appears to have been agreed by a meeting of the insurance committee on December 12. 1978, and was effected as from July 1, 1979 by Curzon Insurance Ltd. confirming that they were holding cover with effect from July 1, 1979. Curzon agreed to indemnify T&N in respect of payments T&N might become liable to make to the Syndicate under the payment and reimbursement provisions in the policy conditions.
464. In August 1981 Mr Atkinson explained the arrangements to a colleague, Mr Bell, in the following terms:

"Mr. Scott is correct in believing that in effect we carry no insurance cover in respect of asbestos disease claims from our employees and former employees in the UK. I say "in effect" since although all employers are under a legal obligation to insure against employers' liability claims in this country, in practice T&N has a policy, the terms of which meet the statutory obligation, but at the same time result in our handling asbestos disease claims direct and making any compensation payments out of revenue. Naturally this is reflected in the premium."

465. The latest document on which reliance is made is a note dated April 26, 1993 made by Mr M Smith of Hogg Robinson, T&N's broker, of his discussions with Mr Brian Smith and of the things that Mr Brian Smith wished attended to. The document shows that there was a meeting between the brokers and Mr Smith on April 26, and that there was discussion about whether there had been any losses from asbestos that would have fallen under the Syndicate's years.
466. The note records: "Agreed not amend asbestos situation to an exclusion." T&N says that this is a clear recognition by Mr Smith that the condition had not been an exclusion. In cross-examination Mr Smith suggested that, because he had only put his scratch against the "waiver" provision one further item down, he had not agreed with what the broker had written about the exclusion. But I accept T&N's submission that the probability is that the note is an accurate record of the conversation and of what Mr Smith agreed, but in any event one of Mr Smith's deputies made the scratch at the top of the page, on April 30, 1993, agreeing, to renew at terms indicated on slip, without endorsing any disagreement with the "agreed not amend asbestos situation to an exclusion" provision, or, as can be done, crossing through it.

5. Conclusion on the condition/exclusion point

467. I am satisfied that as a matter of construction the Asbestos Condition is just that, and not an exclusion. I do not consider that any factual matrix is required to reach this conclusion. If it had been intended to be an exclusion, there was no reason why it should have been included as one of a series of undertakings given to the Syndicate and that one of those undertakings involved T&N undertaking to reimburse the Syndicate for the stated aggregate sum.
468. In any event the conclusion is supported by the relevant and admissible background, which consists of the evidence that all parties were, with the knowledge of the Royal cover and the terms of the letter of indemnity of February 24, 1975, endeavouring to produce a situation in which T&N complied with the 1969 Act, and in which the Syndicate policy, as the only T&N EL policy, allowed T&N to comply with it.
469. There can be no doubt that the documents show that T&N considered that the effect of the conditions was to provide fronting cover in accordance with what they understood (even though the Asbestos Condition was a payment, rather than a reimbursement, provision) to be the combined effect of the 1969 Act and the 1971 Regulations.
470. The argument based on shared and communicated assumption is, in my judgment, hopeless, because all the evidence points in the opposite direction, to a shared assumption that the condition was not to be an exclusion.
471. This appears from many documents created prior to inception of the cover in May 1977. First, there are several documents emanating from T&N or Hogg Robinson which show that there were discussions on the very point with the Syndicate, on which T&N acted, including (a) what Mr Pemberton said following Hogg Robinson's discussions with Eagle Star and Mr Smith about the reference to "unconventional" cover in his paper of March 3, 1977, and his statement "In both cases asbestosis claims would continue to be dealt with as now, but both insurers would issue policies in accordance with the Act"; (b) Mr Mason's note of what was agreed at the meeting on March 21, 1977: "5. Policy wording incorporating letter of indemnity (same as Royal) accepted. B.S. confirmed DTI had approved type of scheme – letter available for perusal if required. … No separate letter of indemnity required."
472. Second, the documents confirm that this was also the understanding of the Syndicate: (a) the note of March 1, 1977 records a discussion about cover being on the basis of a "counter indemnity i.e. hold harmless" for the diseases claims rather than an exclusion; (b) the notes of March 2, 1977 record a meeting with T&N and refer to the need to arrange a further meeting with Mr Smith "to satisfy the position re: … No exclusion on policy ...."; (c) Mr Holden's note dated March 23, 1977: "...Disease insured by agreement that the Assured reimburse the entire cost of asbestosis, mesothelioma and angio-sarcoma. All other diseases fall within the annual 1/2 million excess on conventional injuries ....."; (d) Mr Holden's undated "guidance note" made around April 1, 1977: "The policy insures technically as a 'long stop' and will be protected by a solvency bond...."
473. Third, there are many documents in which it was confirmed internally within T&N that full cover, which complied with the 1969 Act, without exclusions, had been placed with the Syndicate, on terms which required T&N to meet the cost of the specified diseases claims and the excess: e.g. minutes of the meeting of T&N's Executive Committee on April 4, 1997: "in effect .. a catastrophe policy" which "would enable the Company to have cover complying with the Compulsory Insurance Act." I repeat here what Mr Pemberton said in his report of April 25, 1977:

"Lloyd's offered full insurance cover complying with the Compulsory Insurance Act, but required an indemnity whereby T&N would agree to meet the cost of all claims arising from asbestosis and asbestos related diseases and from exposure to vinyl chloride and also the cost of other claims up to an aggregate of £300,000 in any one year. In effect Lloyds were offering catastrophe cover and leaving the Group to meet its own day to day liabilities. Discussions were held with the underwriter leading to an agreement to increase the aggregate for non-asbestosis claims to £500,000.

With the authority of the Insurance Committee cover has been placed with Lloyds with effect from 1 April 1977 at an initial premium of £40,000 per annum and arrangements have been made for a claims investigation service which will be an additional charge on Group companies. There are no exclusions or excesses in the policy, and the policy complies fully with the requirements of the Employers' Liability (Compulsory Insurance) Act, and T&N merely agrees to pay the above costs notwithstanding the wording of the policy."

474. I accept the submission of T&N that it is inconceivable that either Mr Pemberton or Mr Atkinson, who had meetings with both Mr Smith and Garwyn, at which the arrangements for the cover were discussed and finalised, could have communicated anything which could give rise to the shared assumption asserted by the Syndicate. In my judgment the documents emanating from T&N (such as Mr Pemberton's reports of May 1, 1979 and April 10, 1980) referring to an exclusion of asbestos related disease are to be read in the light of the practical working of the arrangements and not as a legal characterisation of the Asbestos Condition.
475. That this is the case is confirmed by many documents after the inception of cover, including the Hogg Robinson memorandum dated July 27, 1979, scratched by Mr Cooper (Mr Smith's deputy) on July 31, 1979, which stated: "We have recently received confirmation that Turner & Newall have now formed a captive Company known as Curzon and the captive will now insure the aggregate excess under the Employers' liability cover along with the Asbestosis claims on this cover."
476. Finally, the Hogg Robinson record of a conversation with Mr Smith in April 1993 which records "Agreed not amend asbestos situation to an exclusion" is powerful evidence against the Syndicate's case that there was an assumption on its part that the condition was intended to operate as an exclusion.

6. Meaning of "asbestosis and mesothelioma"

477. The Syndicate contends that the effect of the Asbestos Condition was: "...to exclude liability for all employees' claims for asbestos related diseases from the Syndicate's agreement to indemnify the insured Companies in respect of employees' claims for bodily injury disease or death resulting from their employment"
478. The Syndicate says that the reference to "asbestosis and mesothelioma" in the Asbestos Condition was "intended to, and did, cover all asbestos related diseases, including, but not limited to, asbestosis, mesothelioma, dust reticulation, lung cancer, pleural plaques, pleural effusion, diffuse pleural thickening and bronchial carcinoma."
479. Alternatively, the Syndicate contends that pleural plaques, pleural effusion and diffuse pleural thickening would all be understood to be within the generic term "asbestosis": See Industrial Injuries Advisory Council Report 1973, quoted in the Cape case [1999] PIQR Q212, at 236; and that lung cancer and bronchial cancer would also be so understood, as being perceived to be complications of asbestosis.
480. Secondly, if, contrary to its primary case, the words "asbestosis or mesothelioma" in the Asbestos Condition mean something less than "all asbestos related diseases," the Syndicate contends that T&N is estopped by convention from contending that the Asbestos Condition did not encompass all asbestos related diseases, both T&N and the Syndicate having conducted their dealings on the basis that the words "asbestosis or mesothelioma" covered all asbestos related diseases. In all the circumstances it would be unfair or unconscionable to permit T&N to resile from that assumption.
481. The Syndicate's position is that the meaning of these words in the context of the Lloyd's Policy falls for determination, whatever the decision on the meaning or status of the Asbestos Condition. If the Asbestos Condition is an exclusion, then the words are relevant to the extent of the exclusion. If the Asbestos Condition is a reimbursement clause, then it is relevant to the meaning of the words "other claims" in the Excess Condition.
482. Dr Rudd stated in his joint medical expert report that whereas asbestosis was encompassed within pneumoconiosis and vice versa, none of the other, various asbestos related diseases or injuries (in particular, lung cancer, pleural plaques, pleural effusion, diffuse pleural thickening, and bronchial carcinoma) could be said, as a matter of medical fact, to fall within or be encompassed by the conditions of "asbestosis" or "mesothelioma." The Syndicate accepts, following the report of Dr Rudd, that as medical terms the meaning of the words is indisputable, but argues that it does not follow that the meaning is the same in the context of an insurance policy.
483. The Syndicate's primary case is that the words used were intended to apply to encompass all asbestos related diseases. The Syndicate relies in particular upon the evidence from the period of the Royal cover on which the Royal relied, especially the evidence of Mr Atkinson and Mr Pemberton, and what it says are the innumerable documents showing that both before and after the inception of the Syndicate's first policy, T&N (a) never drew any distinction between the various asbestos related diseases, all of which were referred to under the rubric "asbestosis" (save where "mesothelioma" was referred to in addition to "asbestosis"), and (b) regarded the asbestos condition as applying to all asbestos related diseases.
484. The Syndicate relies, in relation to the period immediately before, and during, its cover, on various internal T&N memoranda or reports (especially by Mr Pemberton), including: memorandum of March 3, 1977 referring to "asbestosis claims", annual reports on insurance of March 7, 1978 (referring to "asbestosis"), April 24, 1979 ("excludes totally asbestos related diseases"), May 1, 1979 ("Asbestos related diseases and VCM diseases continue to be excluded from the policy"), April 10, 1980 and May 7, 1981 ("neither policy [the Syndicate policy and the Curzon policy] covers asbestos related and VCM diseases"; quotation proposal forms which refer to asbestos related health risks or diseases; and Hogg Robinson memoranda and correspondence between 1987 and 1993 stating or suggesting that asbestos risks were excluded from cover.
485. The wording of the Asbestos Condition was proposed by T&N (being transposed from its letter to the Royal of February 24, 1975). T&N clearly intended it to apply to all asbestos related diseases, since it had manifestly been intended to have that effect in relation to the Royal. It would simply have made no sense for T&N to wish to handle some cases of asbestos related disease, but not others.
486. Mr Smith's evidence was that in the 1970s his understanding of the medical terms associated with asbestos was minimal. He knew that there were two diseases caused by exposure to asbestos, namely asbestosis and mesothelioma, but he thought that they were similar types of disease. Mr Holden (who was the northern regional claims director of Garwyn) knew the distinction between the two diseases, but was not aware of other diseases associated with asbestos.
487. The Syndicate relies on the report of Mr Wilson, whose opinion was that in the relevant period the word "asbestosis" was a state of the art term adopted by the London insurance market to refer to all asbestos related diseases. But the 1980 document on which he relied appeared under cross-examination to suggest (if anything) the opposite, and I am satisfied that no market practice was proved.
488. I accept on this point T&N's argument that the Syndicate's contention is contrary to the clear meaning of the words used. "Asbestosis" and "mesothelioma" were separate and distinct, well known diseases, and did not, as a matter of fact, encompass, separately or together, "all (other) asbestos related diseases." As was the case with the Royal, the undertaking was worded by reference to specific, known conditions, rather than, as could have been done, being worded by reference to a catch-all expression such as "all asbestos related injuries or diseases". There is no evidence of a shared and communicated common assumption to the contrary.

7. Miscellaneous

489. There are some other Syndicate issues which arise on the pleadings. The Aggregate Excess Condition originally provided that T&N was "to reimburse Underwriters for all other claims and claims expenses" up to the aggregate limit in the policy period. From 1980 the word "other" was omitted, and there is an issue as to whether, under the policies from 1980 onwards asbestos related disease claims are to be taken into account in calculating the Aggregate Excess. An affirmative answer would be beneficial to the Syndicate in that it would accelerate the process of reaching the Aggregate Excess limit and triggering the Additional Premium. This issue was not the subject of argument, and the Syndicate accepts that there is no obvious reason why the parties should have wished to have brought about this change in the policy wording. I consider that T&N is right to say that the Syndicate could not, barring T&N's insolvency, ever have been required to expend any sums in respect of such claims, and so it would be a nonsensical construction of the post 1980 excess condition to contend that the costs and expenses of asbestosis or mesothelioma claims were to be taken into account in determining T&N's obligations to refund claims payments to the Syndicate. I am satisfied that the omission of the word "other" did not affect the meaning of the provision, and that the wording of the conditions as a whole leads to the conclusion that asbestos related disease claims were not within the Aggregate Excess.
490. There was a pleaded issue as to whether the policies require the Syndicate to pay T&N's costs and expenses incurred in connection with claims, as alleged by T&N, but this was not pressed by T&N.

XIII Set off

491. As a result of what the Syndicate claims are breaches by T&N of the Asbestos and Excess Conditions in failing to meet claims covered by the payment and reimbursement provisions of the policies, the Syndicate claims to be entitled to set off against any liability that it might otherwise have to indemnify T&N, T&N's liability to the Syndicate in respect of such claims, such that the Syndicate's liability is extinguished.
492. The Syndicate's position is that the Asbestos Condition cannot fairly be construed as imposing an obligation on T&N to pay the full cost of handling and disposing of the relevant claims only after insurers have met those costs (i.e. a reimbursement obligation). Accordingly, the Asbestos Condition, if not an exclusion properly so called, must amount to a free-standing obligation on T&N to pay the stipulated sums either (a) to underwriters; or (b) to the employee claimants.
493. In either event, to the extent that T&N fails to pay the stipulated sums, and underwriters are obliged by the terms of the policies to pay sums due to the employee claimants, T&N will have been in breach of contract and liable to the Syndicate in damages, the measure of which will necessarily be (at least) the amounts which the Syndicate is obliged to pay to those claimants.
494. In those circumstances the Syndicate is entitled to set off against its liability to T&N its entitlement to damages. The Syndicate would be entitled to assert both a common law set-off (as a claim which is liquidated or capable of being quantified by reference to ascertainable facts) and a transaction set-off (being a cross claim arising out of the same, or a closely related, transaction). The distinction was described by Hoffmann LJ in The New Vanguard [1995] 1 Lloyd's Rep 191, at 199-200:

"Independent set-off, as its name suggests, does not require any relationship between the transactions out of which the cross-claims arise... The only requirements are that the cross-claims must both be due and payable and either liquidated or capable of being quantified by reference to ascertainable facts which do not in their nature require estimation or valuation. Transaction set-off, on the other hand, is a cross-claim arising out of the same transaction or one so closely related that it operates in law or equity as a complete or partial defeasance of the plaintiff's claim."

495. If T&N (or any of the insured companies) were to go into liquidation the set-off would take place pursuant to the Insolvency Rules 1986, r.4.90. The set-off following liquidation is mandatory: National Westminster Bank Ltd v Halesowen Presswork and Assemblies Ltd [1972] AC 785 Re BCCI SA (No 10) [1997] Ch 213. If T&N was not in liquidation the right of set-off would exist under the general law. The fact that there would be a mandatory set-off in the event of a liquidation militates against there having been an implied term that set-off would not be available in the event of the Syndicate having to pay claims to employees, since the whole basis of T&N's case is that the Syndicate would only be liable in practice if T&N were insolvent and unable to pay claims directly.
496. T&N's response is that, if correct, the Syndicate's case would (a) give no effect to the Deeming Clause, and (b) be inconsistent with and/or repugnant to that and other terms of the policy and the provisions and policy of the 1969 Act and the 1971 Regulations. To apply a set-off would be to render the entire arrangement, insofar as it was supposed to be (as the Deeming Clause provided) an insurance satisfying the 1969 Act, for which a certificate of compliance with the Act could be and was issued, a sham. That cannot have been the intention of the parties.
497. Since the construction that is sought to be imposed by the Syndicate is wrong, no questions as to the applicability of Insolvency Rules 1986, r. 4.90 arise. There will be no mutual credits, debts or dealings between T&N and the Syndicate. In any event, T&N is in administration, not in liquidation.
498. In my judgment, T&N is right on this point. The whole purpose of the transaction , in my judgment, was to make the Syndicate liable under the policies if T&N were not in a position to meet claims covered by the Asbestos Condition. For the parties to have envisaged a set-off in these circumstances would have made the arrangement a sham, and I do not consider that they should be taken as having intended that. They intended the precise opposite, namely that the policy would be an effective long stop in the event of T&N's inability to comply with the conditions. In those circumstances this is a case where the parties must be taken to have impliedly excluded the right of set off.
499. The Royal and T&N did not address arguments on the Royal's plea that in so far as it is permitted by law so to do, the Royal would seek a set-off. I can see no distinction for this purpose between the position of the Royal and that of the Syndicate.

XIV Issues under the 1997 Settlement Agreement

1. Introduction: Wellington Agreement and the 1988 Settlement Agreement

500. In June 1985, as a result of asbestos related claims in the United States, a number of asbestos producers and their respective insurers agreed on how and when insurance policies should cover United States asbestos related disease claims. The arrangement was set out in an agreement with what were described as London Market Insurers entitled Agreement Concerning Asbestos related Claims dated June 19, 1985, which was known generally as the Wellington Agreement, because of the mediation of Professor Harry Wellington, then Dean of the Yale Law School. T&N was one of the asbestos producers which were parties to the Wellington Agreement. It is common ground that the Wellington Agreement did not apply to the Royal EL policies, or to Syndicate EL policies.
501. In 1987, under the Wellington Agreement, T&N sought to establish coverage against a number of London Market Insurers and pursued alternative dispute resolution (ADR) procedures before Dean Wellington. Among those disputes were: (1) the existence and applicability to the US asbestos related litigation of third party liability policies subscribed by Lloyd's underwriters and issued to T&N each year between 1934 and 1962; (2) the existence and applicability of third party liability policies subscribed by Lloyd's underwriters and issued to T&N each year between 1962 and 1975; (3) the applicability of Primary and Excess Umbrella third-party liability policies subscribed by Lloyd's underwriters and issued to T&N for the period August 1, 1966 to July 31, 1969.
502. The issues which arose included issues as to the existence and applicability of "missing policies" issued to T&N by London market insurers between 1934 and 1962. In so far as possible the various types of policies were listed in exhibits, but it was not possible to identify each and every insurer dating back to the 1920s and 1930s. None of the policies was an EL policy. The ADR culminated in a settlement of April 12, 1988 ("the 1988 Agreement"). The 1988 Agreement set out the various claims which had been brought by T&N by reference to the policies. The settlement extended to those Lloyd's syndicates and company insurers who were identified in the 1988 Agreement or later subscribed to it.

2. Disputes

503. The Asbestos Claims Faculty ("ACF") was set up by the Wellington Agreement to make payment to the asbestos claimants and to collect monies from participating members. T&N, like all other participating asbestos producers, was required to pay a percentage of each claim according to an agreed sharing mechanism. The ACF was subsequently replaced by the Center for Claims Resolution ("CCR") which operated along similar lines.
504. By late 1993/early 1994, arrears of payments due from Lloyd's and the London company market under such policies arose and T&N began to press for payment directly. Some insurers were failing to comply with their obligations under the 1988 Agreement, and others denied being parties thereto. This led to some proceedings against insurers, mainly in the United States. London Market Insurers were disputing their liability to pay, and London Market Insurers who were parties to the 1988 Agreement were claiming that they had overpaid T&N pursuant to that Agreement. T&N had been pursuing (mainly in New York) four sets of insurers who owed money to the CCR, namely Syndicate 190, Syndicate 990, NRG Victory and Sun Alliance.
505. The Lloyd's Specialist Claims Unit ("SCU") was created in 1994 to resolve long tail liabilities of Lloyd's Syndicates, especially asbestos, pollution and health-hazard claims. The SCU's aim was to achieve final settlements with policyholders of all potential claims.
506. In 1995 the SCU initiated attempts to settle the T&N disputes. The discussions were conducted mainly by Mr Harry Baines, who was then the Group Legal Adviser and Company Secretary of T&N, and Mr Howard Rabin, a US lawyer who was the Asbestos Direct Account Manager at the SCU (and who had previously worked with Mendes & Mount, a New York law firm which acted for London market insurers). When Equitas was introduced, on the restructuring of Lloyds in 1996, the Equitas Claims Unit ("ECU") replaced the SCU, and Mr Rabin was employed by Equitas, with the same responsibilities.
507. The discussions led to what was described as a "Confidential Settlement Agreement and Release" dated July 21, 1997 ("the 1997 Agreement").

3. The 1997 Agreement

508. The 1997 Agreement was made between T&N plc and what were described as "London Market Insurers".
509. It began with the following recitals:

"WHEREAS, London Market Insurers severally subscribed to certain liability insurance policies issued to T&N (the Subject Insurance Policies as defined below); and,

WHEREAS, T&N has incurred and may incur in the future certain liabilities, expenses and losses arising out of various Claims as defined below; and,

WHEREAS, in an effort to obtain an adjudication of its rights for coverage under the Subject Insurance Policies, T&N filed two actions captioned T&N Plc vs. Syndicate 990, NRG Victory Reinsurance Co and Mendes and Mount and T&N, Plc vs. Syndicate 190 (hereinafter referred to as the 'Declaratory Actions'); and,

WHEREAS, certain London Market Insurers are named defendants in both the Declaratory Actions; and,

WHEREAS, London Market Insurers have denied and continue to deny all substantive allegations and claims asserted against them in the Declaratory Actions; and,

WHEREAS, by this Agreement, the Parties intend to adopt, by way of compromise, and without prejudice to or waivers of their respective positions in other matters, without further trial or adjudication of any issues of fact or law, and without the London Market Insurers' admission of liability or responsibility under the Subject Insurance Policies, a settlement regarding the application of the Subject Insurance Policies to all Claims strictly as a business accommodation without regard to the merits of the claims and without prejudice to their respective positions on policy wording or any other issues in the Declaratory Actions, or any other action."

510. T&N was defined in Section 1.A to include all present and past group members.
511. London Market Insurers were by section 1.B:

"… all the Names, Underwriters, and syndicates at Lloyd's, London, and all the companies doing business in the London Insurance Market which severally subscribed, each in his or its own proportionate share, to one or more of the Subject Insurance Policies (such insurers are identified in Attachment B to this Agreement). London Market Insurers shall also include:-

all Names, Underwriters, and syndicates at Lloyd's, London, whether or not identified in Attachment B hereto, that subscribed to any liability insurance policies (a) the existence of which have not presently been established but which were issued to T&N or (b) the existence of which has been established but the identities of the Names, Underwriters and syndicates at Lloyd's, London are not presently known; …"

512. Subject Insurance Policies were (by Section 1E):

"(i) all liability insurance policies listed in Attachment A hereto and (ii) all known and unknown general liability, umbrella or excess insurance policies subscribed by the London Market Insurers and issued to T&N whether or not listed in Attachment A hereto."

513. A "Claim" was (by Section 1.F):

" … any and all known or unknown, past, existing, potential or future claims, demands, suits, actions or requests for relief or action or forbearance of any kind or description against T&N, by any person whatsoever, including without limitation:

(a) any claim or actual, alleged, threatened or feared personal injury, bodily injury, sickness or disease;

(b) any claim of actual, alleged, threatened or feared property damage including, without limitation, damage, destruction, loss of use, diminished value or any economic loss and any claim relating to actual, alleged, threatened or feared damage to, destruction of, or limitation or loss of use of natural resources;

(c) any claim seeking to compel (through injunctive or equitable relief or otherwise) the enforcement of federal, state or local statutes, rules, regulations, ordinance or government directive or the testing, study, investigation, prevention or remediation of actual, alleged, threatened or feared environmental pollution or any claim for such costs;

(d) any claim for nuisance, trespass, interference with quiet enjoyment of property, bad faith, sanctions, punitive or exemplary damages, statutory fines or penalties; or;

(e) any claim for costs or expenses incurred in order to comply with any environmental statute, rule, regulation, ordinance or government directive.

(f) The Parties agree that (a) through (e) above are worldwide in scope."

514. By Section 2.A each of the London Market Insurers listed in Attachment B was to pay T&N their shares (as set forth in Attachment D) of "the total settlement amount of £1,423,990."
515. By Section 4 (headed "Release"):

"Release of London Market Insurers by T&N. T&N, and any subsequently appointed trustee or representative acting for T&N, hereby remises, releases, and forever discharges: (a) each of the London Market Insurers; (b) each of the London Market Insurers' present and former officers, directors, employees, partners, limited partners, shareholders, members, subsidiaries, affiliates, representatives, attorneys and agents (i) in such capacity and (ii) in their individual capacity for acts, conduct or omissions relating to T&N; … from and against all manner of action, causes of action, suits, debts, accounts, promises, warranties, damages (consequential or punitive), agreements, costs, expenses, claims or demands whatsoever, in law or in equity, whether presently known or unknown, asserted or unasserted, in connection with any and all Claims. It is the intention of T&N to reserve nothing whatsoever hereunder with respect to Claims and to assure the London Market Insurers their peace and freedom from all Claims.

This Release extends to all those Underwriters at Lloyd's that subscribed to any of the Subject Insurance Policies which include both known and unknown policies. This Release also extends to all those London Market Companies identified in Attachment B and paying their share of the settlement as regards their subscription to any of the Subject Insurance Policies which include both known and unknown policies.

This Release also extends to Equitas Reinsurance Limited and Equitas Limited. Each of these entities is a third-party beneficiary of the terms of this Release.

The parties releasing claims expressly assume the risk that acts, omissions, matters, causes or things may have occurred which are not known or are not suspected to exist by one or more of them. The parties hereby waive the terms and provisions of any statute, rule or doctrine of common law which either: narrowly construes releases purporting by their terms to release claims in whole or in part based upon, arising from, or related to such acts, omissions, matters, causes or things; or, which restricts or prohibits the releasing of such claims."

516. By Section 9:

"This Agreement is the product of informed negotiations and involves compromises of the Parties' previously stated legal positions. Accordingly, this Agreement does not reflect upon the Parties' views as to rights and obligations with respect to matters or persons outside the scope of this Agreement. This Agreement is without prejudice with regard to positions taken by the London Market Insurers with regard to other insureds, and without prejudice with regard to positions taken by T&N with regard to other insurers. The Parties specifically disavow any intention to create rights in third parties under or in relation to this Agreement, except as provided in Section 4 regarding Equitas.

This Agreement is the jointly drafted product of arms-length negotiations between the Parties with the benefit of advice from counsel, and the Parties agree that it shall be so construed. As such, neither party will claim that any ambiguity in this agreement shall be construed against the other party."

517. By Section 16:

"This Agreement, including the attachments, constitutes the entire Agreement between London Market Insurers and T&N with respect to the subject matter hereof, and supersedes all discussions, agreements and understandings, both written and oral, among the Parties with respect thereto."

4. Marine's case

518. Marine's case is:

(1) the parties to the 1997 Agreement include "London Market Insurers" which by section 1.B include companies which have subscribed to one or more of the Subject Insurance Policies, which includes (by section 1.E) liability insurance policies listed in Attachment A (and such insurers are identified in Attachment B);

(2) Marine was one of the London Market Insurers party to the Agreement, by virtue of having subscribed to one of the Subject Insurance Policies, namely Policy 62HA5819T (for the period 1962/1963), and/or by virtue of being one of the insurers identified in Attachment B;

(3) in consideration of the release in section 4, the London Market Insurers agreed to pay T&N £1,423,990 as provided in section 2, and they performed their obligations under section 2;

(4) at the time of the Agreement, and at the date of the commencement of these proceedings and of the Part 20 claim, the Royal was a shareholder in and/or a member of, and/or an affiliate of Marine, by virtue of its ownership of 226,666 of the 266,666 issued shares in Marine;

(5) the claims made by T&N (and its associated companies) fall within section 4, because it provides that the release extends to "(b) each of the London Market Insurers' … shareholders, members … affiliates … in their individual capacity for acts, conduct or omissions relating to T&N … from and against all manner of action, causes of action … claims or demands whatsoever, in law or in equity, whether presently known or unknown, asserted or unasserted, in connection with any and all Claims." and provides: "It is the intention of T&N to reserve nothing whatsoever hereunder with respect to Claims and to assure the London Market Insurers their peace and freedom from all Claims."

519. T&N accepts that if the release extends to the Royal, then Marine can enforce the Agreement against T&N. T&N's defence is that the release discharged Marine, its shareholders, members, and affiliates in respect of Marine's actual and potential liabilities to T&N under the Subject Insurance Policies, and did not provide for the release and discharge of Marine's shareholders, members and affiliates in respect of their own liabilities (and not arising out of Marine's liabilities) under their own contracts of insurance with T&N, and the release and discharge only applies to such categories of person in so far as they might otherwise be liable through or as a result if the liability of Marine to T&N.

5. The Syndicate's case

520. The Syndicate's T&N EL policies are not listed in Attachment A to the 1997 Agreement, and the Syndicate is not one of the Syndicates listed in Attachment B (although some of its members are also members of some of those syndicates). The Syndicate knew nothing of the 1997 Agreement until 2002.
521. The Syndicate's position is that the 1997 Agreement released the Syndicate from any liability it had in respect of its T&N EL policies. Its case is this:

(1) the members of the Syndicate are parties to the 1997 Agreement, because they were within the description "all Names, Underwriters and syndicates at Lloyd's, London, whether or not identified in Attachment B hereto, that subscribed to any liability insurance policies (a) the existence of which have not presently been established but which were issued to T&N or (b) the existence of which has been established but the identities of the Names, Underwriters and syndicates at Lloyd's are not presently known";

(2) the combined effect of the definition of "Claim" in section 1.F and of section 4 is that the Syndicate is released from claims under the EL policies;

(3) Even if it is not a party to the 1997 Settlement, the combined effect of the section paragraph of section 4 and of the definition of "Subject Insurance Policies" is a release because the Syndicate subscribed to "Subject Insurance Policies", namely "general liability … insurance policies".

522. T&N's reply to the Syndicate denies that the Syndicate was one of the "London Market Insurers"; denies that the Syndicate's policies were "Subject Insurance Policies"; and disputes that the Syndicate is a party to the 1997 Agreement, or that it has any relevance to the present proceedings.

6. Relevant principles

523. The normal principles of construction apply to the interpretation of releases (subject to one point with which I deal below). In Bank of Credit and Commerce International SA [2001] UKHL/8, [2002] 1 AC 251, 259 (para 8) Lord Bingham said

"I consider first the proper construction of this release. In construing this provision, as any other contractual provision, the object of the court is to give effect to what the contracting parties intended. To ascertain the intention of the parties the court reads the terms of the contract as a whole, giving the words used their natural and ordinary meaning in the context of the agreement, the parties' relationship and all the relevant facts surrounding the transaction so far as known to the parties. To ascertain the parties' intentions the court does not of course inquire into the parties' subjective states of mind but makes an objective judgment based on the materials already identified. The general principles summarised by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912-913 apply in a case such as this."

524. Lord Nicholls (at para. 28, p.266) said:

"However widely drawn the language, the circumstances in which the release was given may suggest, and frequently they do suggest, that the parties intended, or, more precisely, the parties are reasonably to be taken to have intended, that the release should apply only to claims, known or unknown, relating to a particular subject matter. The court has to consider, therefore, what was the type of claims at which the release was directed. For instance, depending on the circumstances, a mutual general release on a settlement of final partnership accounts might properly be interpreted as confined to claims arising in connection with the partnership business. It could not reasonably be taken to preclude a claim if it later came to light that encroaching tree roots from one partner's property had undermined the foundations of his neighbouring partner's house. Echoing judicial language used in the past, that would be regarded as outside the 'contemplation' of the parties at the time the release was entered into, not because it was an unknown claim, but because it related to a subject matter which was not 'under consideration'."

525. It is for that reason that the courts have accepted that the factual matrix or background to which resort may be had in order to determine what claims are released may include evidence of negotiations. In Dattani v Trio Supermarkets Ltd [1998] ICR 872, at 882-883 (per Mummery LJ) the Court of Appeal approved this passage from Foskett, The Law and Practice of Compromise (now 5^th ed. 2002, para 5-14): "Although evidence of the parties' negotiations is normally inadmissible for the purpose of construing their agreement, it may be admissible … along with other extrinsic evidence, to show the disputes which the parties, by their agreement, were endeavouring to resolve." Mummery LJ also quoted (at 881), with apparent approval, the view of Foskett (now 5^th ed. para 6-04) that: "It is axiomatic that the analysis of these materials is an objective one, the subjective intentions of each party being irrelevant. An objective analysis of the 'factual matrix' that formed the background to the compromise is required to enable the disputes settled to be identified."
526. In the present case T&N places particular reliance on the recitals as an aid to interpretation. The recitals to an agreement are relevant as an aid to construction in the event of any ambiguity, but they cannot override the operative terms of an agreement, where they are clear: Re Moon, ex p. Dawes (1886) 17 QBD 275; Rutter v Charles Sharpe & Co. [1979] 1 WLR 1429; Chitty, para. 12-064.

7. Background to 1997 Agreement

527. Marine's position (on behalf of the Royal) is that the 1997 Agreement must be interpreted in isolation, because there was no consensus in the negotiations as to its ambit. The Syndicate's position is that the evidence of the negotiations is that a wide release of Lloyd's Syndicates was intended, not limited to the disputes under the 1988 Agreement. T&N's position is that the negotiations show that the release was intended to relate to disputes under the 1988 Agreement.
528. Because of these conflicting positions, in this section I set out in some detail the documents evidencing the background to the 1997 Agreement. But the evidence of the negotiations is only relevant in so far as it sheds light on what the parties were endeavouring to settle, and I do not consider that the court is entitled to engage on a detailed consideration of conflicting interpretations of the negotiations. If, however, they plainly indicate what disputes were under consideration, then they may be a very important guide to the extent of the release. In my judgment, nothing in section 16 (para. 517, above) prevents the use of evidence of negotiations for this limited purpose: section 16 is intended to preclude reliance on additional terms or collateral agreements which are not found in the agreement itself.
529. On January 2, 1996 Mr Baines wrote a memorandum to Mr Carruthers, the deputy chairman of T&N. Mr Baines informed Mr Carruthers that T&N had been pursuing four insurers who owed money to the CCR, namely Syndicate 190, Syndicate 990, NRG Victory and Sun Alliance.
530. Mr Baines reported that on December 21, 1995 he had attended a meeting with representatives of Syndicate 190, the Specialist Claims Unit at Lloyd's, and the London Market Claims Service ("LMCS", an information technology support provider to the London market) and that the ostensible purpose of the meeting had been to discuss the Syndicate 190 debt. He said: "After some discussions specific to Syndicate 190, I then discussed with the Lloyd's representatives an outline proposal intended to end Lloyd's involvement with T&N." He then outlined the proposals, and, in a paragraph which until trial had been withheld by T&N on the ground of privilege, he said that if they were to accept the Lloyd's proposal "… that will be the end of our insurance coverage in relation to T&N's United States disease claims expenditures."
531. On April 1, 1996 Mr Rabin wrote to Mr Baines with a proposal "for settlement of all T&N's disputes with London Market Insurers." He said: "Assuming you wish to resolve all disputes including those with NRG, we can offer £1,496,000 immediately which would bring T&N to the point of 100% realization of its insurance asset in London. (of course, you may wish to continue to pursue NRG independently, in which case we will offer only £496,000)." Mr Rabin's notes for the April 1, 1996 meeting refer under the heading "Benefit to T&N" to (a) "100% realisation of London Ins[urance]" (b) "Save Litigation Costs" (c) "No more bad decisions re: Wellington" and (d) "End the process".
532. In a letter of May 1, 1996 to Mr Baines, Mr Rabin proposed "… the following resolution to the entire London Market receivable situation … We agree to settle all outstanding disputes for 'net remaining limits' " i.e. a net sum of about £1.38 million, subject to final audit and agreement. In return the SCU would take an assignment of T&N's rights and defences against Syndicate 990 and NRG Victory Insurance Company as subscribers to the 1966-1968 London Market first excess and second excess policies issued to T&N. The SCU required that T&N's New York actions against Syndicates 190 and 990, and against NRG Victory be stayed.
533. On May 10, Mr Baines replied to say that the proposal was generally acceptable, subject to the amount to be paid being the remaining aggregate limits under the 1978/9 policy, plus the amounts in dispute with NRG Victory, Syndicate 190 and Syndicate 990.
534. On May 14 Mr Rabin wrote to Mr Baines:

"I am also attaching a list of syndicates (other than 990) which subscribed to the 1966 to 1968 Turner & Newall London Market Excess Policies. I propose that the Specialist Claims Unit, acting on behalf of those syndicates, act as assignee of Turner & Newall's rights and defenses against Syndicate 990 and NRG Victory Reinsurance Company.

…

Based upon the foregoing please advise me if you are prepared to discontinue the New York actions without prejudice to renewal."

535. On May 21, 1996 Mr Rabin wrote to Mr Baines:

"Let me simplify the matter. T&N is claiming entitlement to £1,183,440 of coverage under its 1966-1969 1st and 2nd excess coverage. These amounts are allegedly due from Syndicate 190 (£94,560) Syndicate 990 (£89,280) and NRG (£999,600).

If T&N will discontinue its New York actions and assigns its rights and defenses against NRG and 990 to those Syndicates subscribing to the 1966-1969 policies, then we will offset £1,183,440 against the Lloyd's overpayment on the 1962 to 1978 policy years.

This offer is open today only. At 10am New York time 22 May, Mr. Quinn is due to be deposed. When his deposition begins, our offer is rescinded without any need for further notice or writings.

If you wish to accept this offer, please advise your New York counsel to discontinue both New York actions today. Please contact me if you have any questions."

536. On June 3, 1996 Mr Rabin wrote enclosing a draft settlement agreement and asked Mr Baines to confirm that they had an agreement in principle based on his letter of May 14 and their discussions of the previous week. On June 5, 1996 Mr Baines wrote to say: "The draft … is agreed in principle. I may have some minor comments in relation to the wording of the document, but the basis of the document and the agreements recited therein are acceptable to T&N". Mr Rabin and Mr Teff (the general manger of the SCU) gave evidence that the draft settlement agreement was based on a draft model agreement for environmental pollution settlement which had been prepared by the SCU.
537. On June 30, 1997 Mr Rabin wrote to Mr Baines to say that "as a result of our review of all available documents in London, New York and at the CCR, we conclude that a further and final payment of £1,423,990 will exhaust all London policy obligations to T&N." He enclosed a settlement agreement (in the form ultimately dated July 21, 1997) "offering full and final settlement on the terms as set forth on the attached." Mr Baines wrote on July 14 to say that T&N was prepared to accept the offer "to resolve this long outstanding matter" and to say that he had signed the agreement.
538. Mr Baines' evidence was:

"All the discussions leading up to the 1997 Settlement Agreement related only to the 1988 Settlement Agreement policies. At no time was there ever any discussion of settling other policies such as Employers' Liability claims nor was any mention made of the Syndicate. This is not surprising as our discussions dealt solely with the difficulties being experienced in making effective recovery of the receivable due on T&N's behalf to the CCR by the London Market. Had anyone suggested to me that the 1997 Settlement Agreement covered more than certain insurers' liability under the 1988 Settlement Agreement policies, then I would have had to consider in detail with others at T&N the ramifications of this. No mention was made of this and, in particular, no mention was made that the Syndicate would be covered."

539. Mr Baines maintained this position in cross-examination, and confirmed that it was not his perception that Mr Rabin was trying to effect settlement of anything beyond the 1988 disputes.
540. Mr Rabin accepted in his witness statement that the dispute which precipitated the settlement discussions involved the litigation which T&N had commenced in New York, but said:

"My purpose in meeting with T&N was, in line with the SCU's policy in these matters, to try to achieve a final resolution of all potential claims T&N had or might have against any Lloyd's Syndicate or against the other named London Market Insurers pursuant to any liability policy which had been written by a Lloyd's Syndicate or by the other named London Market Insurers. As far as I was aware, T&N had the same objective in mind … I believe T&N wanted to be able to report that it had resolved all disputes with its insurers, including the London Market Insurers … [The] settlement discussions were on the basis of the London Market Insurers buying back all policies for a one-off payment, so as to eliminate the possibility of any future claims by T&N and to draw a line under T&N as a policyholder, forever. I recall telling Mr Baines at this meeting [April 1, 1996] that the payment the SCU was offering for such a settlement was 'the last dollar you will get from Lloyd's for asbestos' … As far as the SCU and Equitas was concerned, the Settlement Agreement ended all Lloyd's Names' liability (actual or prospective) to T&N under any liability policy which had been issued as at the date of the agreement … This was a full policy buy-back designed to give London Market Insurers their peace and freedom from further claims."

541. Most of what Mr Rabin says in his witness statement relates to the subjective intention of the SCU. In cross-examination he maintained that the SCU and Equitas had a broad agenda of fully and finally resolving all Lloyd's issues with T&N. But he accepted that it was the letters of April and May 1996 which resulted in the 1997 Agreement. The only communication with T&N on which he relies in his witness statement is (apart from the correspondence) his statement to Mr Baines that this was "the last dollar you will get from Lloyd's for asbestos." Mr Baines' evidence was that he had no specific recollection of the statement, but that it was the sort of thing which Mr Rabin would say.
542. Marine's position is that no assistance is to be derived from the background facts or the negotiations. There was no shared and communicated assumption that the 1997 Agreement was intended only to apply, and did only apply, to those policies in play in respect of the US asbestos losses, and had nothing whatsoever to do with UK EL losses. In particular, the effect of the combined evidence of Mr Baines and Mr Rabin demonstrates no more than that they approached the negotiations with different agendas and different intentions, and that at no time did they reach any consensus as to the intended scope and effect of the 1997 Agreement. What Mr Baines said, in effect, was that all that he was interested in doing was resolving the disputes which had arisen in relation to the 1988 Agreement. He said that he had no particular interest in any wider resolution. Whilst that might well have been his motivation in entering into negotiations with Mr Rabin, it is submitted that the evidence shows that Mr Rabin was interested not only in resolving the disputes which had arisen in relation to the 1988 Agreement, but also in buying off all long tail risks taken on by the London Insurance Market, and that Mr Baines was aware of Mr Rabin's wider agenda and was content to enter into an agreement which had a wider effect;
543. Accordingly, Marine contends that it is to the 1997 Agreement alone that Mr Baines should have looked, and the court should look, in determining what claims it was intended to release.
544. The Syndicate accepts that the main objective of the 1997 Agreement, at any rate from T&N's standpoint, may have been to settle disputes which had arisen out of the 1988 Agreement. But the terms of the 1997 Agreement are wholly inconsistent with the case that the 1997 Agreement did no more than seek to achieve this objective, and there are important elements in the factual matrix which demonstrate that a far wider release was intended. In particular:

(a) although the disputes which immediately led to the negotiations were those arising out of the 1988 Agreement, there had been many earlier disputes between T&N and Lloyd's;

(b) the SCU's aim was to achieve final settlements with policyholders of all potential claims, and the model agreement on which the 1997 Agreement was based was drafted for this very purpose;

(c) the inclusion of unknown policies in the model agreements was an essential feature of their objective;

(f) Mr Baines was well aware of the Lloyd's Reconstruction and Renewal Programme, and of the objectives of Equitas;

(g) the memorandum of January 2, 1996 from Mr Baines to Mr Carruthers clearly records that the proposal was "intended to end Lloyd's involvement with T&N".

545. T&N's primary position is that the 1997 Agreement, even if construed as it stands, is plainly confined in its ambit to the issues, policies and disputes to which the declaratory actions, to which reference is made in the Agreement, related. If there is any ambiguity on that point in the 1997 Agreement, the negotiations between the parties make it plain that those were the only matters which they had in mind and intended to settle.
546. T&N's position is that the correspondence confirms what is apparent from the 1997 Agreement itself, namely that it was intended to deal only with the disputes which had arisen from the 1988 Agreement. Mr Rabin's evidence was notable for the number of times that he had to resort to mere assertion in order to make out his contention that the 1997 Agreement had sought to, and did, extend to settle and compromise more than the disputes that had arisen out of the earlier 1988 Agreement. Even if it was at the time his purpose to try and settle all possible claims by T&N against Lloyd's from whatever policies, unless this was something that was shared with and agreed by Mr Baines or someone else at T&N, it amounts to no more than unilateral subjective intent which cannot avail the Syndicate in circumstances where the exchanges between the parties dealt exclusively with a defined area of dispute.

8. The position of Marine on construction

547. Marine accepts that there is little merit in its argument on behalf of the Royal, because its effect, if successful, will be that the Royal will receive a windfall from the wide drafting of a release clause in an agreement to which it was not a party.
548. Marine's very elaborate argument may be summarised in this way. First, this is a case for a literal interpretation of the 1997 Agreement. It is not a case for a robust purposive approach to the construction of a commercial contract, because (i) there was no prior consensus; (ii) the background to the agreement was not straightforward, and more than one aim might have been present in the minds of the parties; (iii) the draft agreement was put forward as an opening version for discussion and negotiation, but in fact was accepted without modification. The entire agreement clause in Section 16 confirms that the proper approach is to construe the 1997 Agreement as a stand-alone agreement, rather than to speculate about the presumed intentions of the parties.
549. The fact that (as was the case) after the 1997 Agreement the Royal continued to accept claims under the policy is not relevant because subsequent conduct is not a guide to interpretation.
550. Marine accepts that recital (6) states that the intention of the parties in relation to the principal subject-matter of the 1997 Agreement is to achieve as a business accommodation a settlement regarding the application of the Subject Insurance Policies to the Claims (i.e. claims against T&N: section 1.F), but argues that the recitals cannot reasonably be interpreted so as to mean that the general intention set out there should govern every operative provision of the 1997 Agreement, because such an overriding intention is inconsistent in a number of important respects with the intentions specifically ascribed to the parties in section 4. The primary purpose of recital (6) is to make clear that the settlement is not to affect the positions adopted by the parties in relation to the declaratory actions.
551. If the clear intention really was to release only claims under policies the subject of the 1988 Agreement, or even claims under Subject Insurance Policies and no others, the extended definition of T&N in section 1.A would be otiose, and the definition of "Claim" in section 1.F would not be "worldwide in scope."
552. The reference to "in their individual capacity" in Section 4 contemplates therefore that a shareholder/member such as the Royal may have a liability to T&N other than in its capacity as shareholder/member of a London Market Insurer. The words are not qualified in any way, nor are they unclear. They include liabilities which arise as a result of a direct relationship between T&N and a shareholder/member such as the Royal.
553. There is no suggestion that the release is limited, as T&N contends, only to liabilities which arise out of Subject Insurance Policies. The only sensible conclusion is that the intention of the parties was to give the London Market Insurers the widest possible release, which would include releases to anyone connected with them.
554. The provision in the second paragraph that the release "extends" to Underwriters who subscribed to the Subject Insurance Policies and to London Market Companies identified in Attachment B does not assist. The preferable construction is to read it as if it began with the opening words, "For the avoidance of doubt", so as to ensure that those classes of person most concerned to ensure that they are covered by the release are expressly covered. In any event, the words used are far from being sufficiently clear and unambiguous to operate so as to qualify, to a material extent, the width of the release conferred by the preceding paragraph, especially having regard to the parties' stated intention that the release should extend to all Claims.
555. The final paragraph of section 4 is intended to have the effect of demonstrating by clear words the joint intention of the parties that T&N is to release all Claims, whether known or unknown at the time of entering into the contract, and that a narrow construction of the release is not to be applied.
556. Nothing in section 9, paragraph 3, is intended as an aid to construction of the release, or actually assists in construing it. Its intention is to ensure that third parties not even mentioned in the 1997 Agreement should not obtain any benefit from it, and to ensure that – with the exception of Equitas – non-party beneficiaries of the release should not be entitled to enforce the release themselves.
557. Finally, a comparison of the 1988 Agreement and the 1997 Agreement shows that where the parties intended to exclude non-participating insurers from the scope of the agreement (as they did in the 1988 Agreement) they did so with clear language.

9. The Syndicate's position on construction

558. The Syndicate's T&N EL policies are not listed in Attachment A to the 1997 Agreement, and the Syndicate is not one of the Syndicates listed in Attachment B (although some of its members are also members of some of those syndicates). The Syndicate knew nothing of the 1997 Agreement until 2002, and accepts that it would be adventitious if it were able to take advantage of the release.
559. I have already set out above the Syndicate's position that the 1997 Agreement released the Syndicate from any liability it had in respect of its T&N EL policies, because (1) the members of the Syndicate are parties to the 1997 Agreement; and (2) the combined effect of the definition of "Claim" in section 1.F and of section 4 is that the Syndicate is released from claims under the EL policies.
560. The argument that the Syndicate is a party to the 1997 Agreement is this. First, the 1997 Agreement is not limited to tying up the loose ends of the 1988 Agreement, since it extends the definition of T&N and of the relevant insurance policies, which would otherwise be unnecessary. Second, the Syndicate subscribed to "any liability insurance policies". Third, their existence had not been "established", i.e. for the purposes of Attachment A to the 1997 Agreement. Fourth, the point of the definition is to extend the release to all persons or entities who either (a) subscribed to Attachment A policies but whose identities are unknown, or (b) subscribed to any liability insurance policies not identified in Attachment A. Fifth, the definition is not limited to policies which were the subject of the 1988 Agreement, and is not confined to the "Missing Policies" (as defined in Exhibit 1 to the 1988 Agreement).
561. If the Syndicate is a party to the 1997 Agreement, then the terms of the release in section 4 extend to it, because the release is not limited to claims, liabilities etc. under Subject Insurance Policies. The release in section 4 ends by expressing the intention of T&N to reserve nothing whatsoever thereunder with respect to Claims and to assure the London Market Insurers their peace and freedom from all Claims.
562. But if the Syndicate is not a party, then the second paragraph releases its liabilities. In that case the definition of "Subject Insurance Policies" is relevant, because the Syndicate's policies are "general liability" policies: "general liability policy" is not a term of art, and EL policies fall within it (as they would in the definition in the Insurance Companies Act 1982), or it means the same as liability policies and the word "general" is surplusage. The evidence of T&N's underwriting expert, Mr Outhwaite, goes no further than to opine that an EL policy would not be described as a general liability policy. But that is not the same issue as whether a reference to general liability policies would be understood to include EL policies.
563. The words in the second paragraph of section 4 are expressed to be words of extension (presumably to cover the possibility that there might be such Underwriters who, for some reason, did not come within the definition of London Market Insurers).
564. If the Syndicate was not a party to the Agreement, and if the words of the release are apt to exclude its liabilities, T&N will not be permitted to enforce such liabilities since to do so would be a fraud on the parties to the Agreement (who include the members of the Syndicate who were members of the Attachment B Syndicates): Hirachand Punamchand v Temple [1911] 2 KB 330. T&N does not dispute this.

10. T&N's position on construction

565. T&N's argument is, first, that the recitals show that the settlement is concerned with the declaratory actions in New York. Second, section 9 makes it clear that the purpose of the 1997 Agreement was to deal only with the disputes, issues and policies which had arisen out of the declaratory actions and that the only third party upon whom it was intended to confer any rights was Equitas (in its role as reinsurer of the Syndicate who had insured T&N under the relevant policies).
566. Next, the second paragraph of section 4 cannot have been intended as an extension to whatever release is contained in the first paragraph of section 4 because if, as is suggested by Marine, the first paragraph provides for a general release in the widest terms, no extension of that release could be possible. The second paragraph of section 4 can only make sense if it is operating so as to define the ambit of the release. That this must be the purpose of the second paragraph of clause 4 is supported by section 9, which also explains the purpose of the third paragraph of section 4.
567. As regards the specific Marine argument, T&N's answer is as follows. First, the release in section 4 of the London Market Insurers' "shareholders, ….affiliates …" etc, was only a release "in such capacity" (i.e. in their capacity as shareholder, or affiliate, and not in their own individual capacity) or "in their individual capacity for acts, conduct or omissions relating to T&N," which would not encompass their individual liability as insurers of T&N. The release cannot therefore be applicable to the Royal in its capacity as an insurer of T&N.
568. The purpose of the reference in section 4 to "shareholders ….. affiliates" etc. was simply to cater for the prospect of some inventive claim, which it was no doubt contemplated could not be ruled out in the US, against some associate of the insurer, the claimant seeking by that route to obtain further payment by reference to the policies the subject of the settlement, whilst the purpose of the broad definition of "Claim" was to ensure that the settlement of the relevant policies was, in effect, a final release of those policies.
569. The second paragraph of section 4 makes it clear that the release only extends to the identified London Market Companies "as regards their subscription to any of the Subject Insurance Policies". Those are defined in section 1.E to encompass the policies identified in Attachment A to the 1997 Agreement and "all known and unknown general liability, umbrella or excess insurance policies". The Royal policy is not a "general liability" policy because it does not cover liability in general, but only a specific liability, namely T&N's liability as an employer. It is plainly not an excess or umbrella policy. The recitals confirm that T&N's construction of the release and of the ambit of "Subject Insurance Policies" must be right because they make clear that the purpose of the 1997 Agreement was just to settle all claims under the "Subject Insurance Policies" and was to resolve the disputes which had arisen in relation to payments under those policies in respect of US asbestos related claims.
570. As regards the specific arguments of the Syndicate, T&N says, first, that the reference to missing policies and unidentified insurers in the definition of London Market Insurers in section 1.B corresponds precisely to the 1988 Agreement, whose exhibits 1 and 2 respectively referred to missing policies and policies where the insurers were not identified. Second, the Syndicate EL policies could not reasonably be described as policies "the existence of which have not presently been established" or policies "the existence of which has been established but [where] the identities of the Names, Underwriters, and syndicates at Lloyd's are not presently known". Third, as regards the definition of subject insurance policies, EL policies are not "general liability" policies.

11. Conclusions

571. I have no doubt that, to the extent that evidence of the negotiations is admissible to show the factual matrix or background in order to ascertain the subject matter of the release, it shows that the release was intended to relate to disputes under the 1988 Agreement. It is true that Mr Baines, when speaking of his meeting with the SCU in December 1995, referred to having discussed "an outline proposal intended to end Lloyd's involvement with T&N" but he added "… that will be the end of our insurance coverage in relation to T&N's United States disease claims expenditures." Mr Rabin's notes for the meeting of April 1, 1996 refer under the heading "Benefit to T&N" to (a) "100% realisation of London Ins[urance]" (b) "Save Litigation Costs" (c) No more bad decisions re: Wellington" and (d) "End the process". The correspondence in May and June 1996 is plainly concerned in the main with the pending actions arising out of the 1988 Agreement and their discontinuance.
572. The only material to the contrary is Mr Rabin's evidence of his subjective intentions. Even if he told Mr Baines that this was "the last dollar you will get from Lloyd's for asbestos," Mr Baines would have reasonably understood it in the context of the discussions for a settlement of the problems which had arisen from the 1988 Agreement.
573. The recitals confirm that the intention of the 1997 Agreement was to settle those problems. The second to fifth recitals refer to the fact that in an effort to obtain an adjudication of its rights for coverage under the Subject Insurance Policies, T&N filed actions against Syndicate 990, NRG Victory Reinsurance Co and against Syndicate 190 ( the "Declaratory Actions") and that the defendants had denied liability. The sixth recital states that the parties intended to adopt, by way of compromise, a settlement regarding the application of the Subject Insurance Policies to all Claims.
574. If the ambit of the release was limited to a final settlement of the subject matter of the 1988 Agreement, that would be an end to the contentions of Marine (on behalf of the Royal) and of the Syndicate. I do not in fact consider it necessary to rely on the negotiations or the recitals to determine the scope of the release, since I have no doubt that, even if the 1997 Agreement stood alone, their contentions would fail.
575. The Marine argument is dependent on the Royal coming within the category of "each of the London Market Insurers' …. shareholders, members … in their individual capacity for acts, conduct or omissions relating to T&N." I accept T&N's submission that the purpose of the provision must be taken as being to prevent circumvention of the release through actions against shareholders. If Marine were right, the release would extend to an employee of T&N who was also a shareholder in one of the insurance companies in Attachment B which was a public company.
576. In my judgment the Syndicate is not a party to the 1997 Agreement. The only basis for its argument is the provision that the parties include "all Names, Underwriters, and syndicates at Lloyd's, London, whether or not identified in Attachment B hereto, that subscribed to any liability insurance policies (a) the existence of which have not presently been established but which were issued to T&N or (b) the existence of which has been established but the identities of the Names, Underwriters and syndicates at Lloyd's, London are not presently known; …" I do not consider there is any reasonable basis for a conclusion that the existence of the Syndicate EL policies had not been established, or that the identities of the insurers were not known. They were established and known, but in the context of the 1997 Agreement they were irrelevant.
577. Nor do I consider that the Syndicate's alternative argument that, even if it was not a party, it is covered by the release, has any merit. This is dependent upon the Syndicate bringing itself within the second paragraph of section 4: "This Release extends to all those Underwriters at Lloyd's that subscribed to any of the Subject Insurance Policies which include both known and unknown policies." First, I do not consider that the phrase "this release extends" is intended to mean anything other than to confirm that the release applies to the London Market Insurers as defined in section 1.B. Second, and more important for this purpose, the Syndicate has to show that the EL policies were "Subject Insurance Policies" i.e., for present purposes, were "general liability … insurance policies.." (section 1.E).
578. There was some expert insurance underwriting evidence (adduced without objection by any party) on the technical meaning of some expressions in the 1997 Agreement, especially on the meaning of "general liability .. insurance policies" in section 1.E, and on whether it included EL policies. Mr Richard Outhwaite is a very experienced underwriter who prepared a report on the instructions of T&N. His evidence was that in 1997 there was no market custom or usage regarding the expression "general liability, umbrella or excess insurance policies" as a whole, but from his experience he would understand general liability policies to be policies which covered all the liabilities of the insured, subject to exclusions or limitations, rather than simply a defined liability only. This is in contrast to specific liability policies, which solely cover the specified liability. EL would be an example of the latter. In cross-examination he accepted that a general liability policy would or might cover EL, but "nobody would ever describe an employers' liability policy as a general liability policy."
579. In his report for the Syndicate, Mr Peter Wilson, who also had considerable underwriting experience, gave an opinion that a reference to "general liability insurance policies" would have been understood in the London market in 1997 to be a reference to all legal liability policies, whether contained in separate policies or in composite policies, as referring to all types of legal liability insurance, including EL. But Mr Christopher Williams (who had been an underwriter in several insurance companies and gave expert evidence for the Royal) in answer to a question in cross-examination by Mr Walker QC for the Syndicate, said that an EL policy would not be included within the description of general liability policy: "It is a specific liability policy because it relates specifically to accidents and injury arising out of or in the course of the business, but only to employees as against general members of the public."
580. I have no doubt that the evidence of Mr Outhwaite and Mr Williams is to be preferred, although even without expert evidence the natural meaning favours their interpretation.
581. By amendment made in the course of the trial the Syndicate pleads that those members of the Syndicate who were also members of the Syndicates listed in Attachment B were parties because they were "Names … which severally subscribed … to one or more of the Subject Insurance Policies."
582. I cannot accept this construction of the 1997 Agreement. The Agreement was drafted and put forward by persons who were familiar with the Lloyd's market, and would be commercially absurd for this result to have been intended, or understood to be intended. This is plainly not a matter for expert opinion, but I agree with Mr Outhwaite's description of the argument as "commercially ridiculous." He was asked whether he had ever come across a situation in which a Name on Syndicate A suggested that because he was a Name on Syndicate B, which had reached a particular agreement with an insurer, that they had compromised their rights against him as a member of Syndicate A, and he replied: "No, I would be amazed if it even occurred to anybody." That is not only common sense, but in my judgment accords with the proper construction of a commercial agreement drafted on behalf of Lloyd's, and entered into by parties who were familiar with the insurance market.

XV The Curzon policy issues

1. The issues

583. Curzon and the Syndicate have agreed that all issues in the Part 20 proceedings other than those relating to the entitlement of the Syndicate to the proceeds of the Curzon policies should be adjourned over until the trial of the substantive dispute between the Syndicate and T&N. Curzon provided insurance to T&N from 1979 to 1987. Although the policies were described as EL policies, they did not cover T&N's liability to employees, but rather to the Syndicate. The Curzon/T&N policies from their inception in 1979 each provide that Curzon

"will indemnify the Insured in respect of any and all payments they may become liable to make to Underwriters at Lloyd's by virtue of the agreement entered into with them and expressed in Policy No……..by virtue of the payment and reimbursement provisions under 'the Excess' clause contained in the conditions thereof, on the following bases…….."

584. The Syndicate asserts a right to the benefit of amounts due from Curzon to T&N. The claim is now put (the Syndicate having abandoned a claim to contribution as a co-insurer) on the following alternative bases. First, the Syndicate makes a claim under the Third Parties (Rights Against Insurers) Act 1930 ("the 1930 Act") on the basis that (a) T&N is insured by Curzon against liabilities to third parties (i.e the Syndicate); (b) T&N is in administration; and therefore (c) T&N's rights against Curzon are transferred to and vest in the third party to whom liability was incurred, i.e. the Syndicate. Second, it is said that, if the Syndicate is not entitled to the proceeds of the Curzon policies under the 1930 Act, then it is entitled to them (1) by virtue of being subrogated to T&N's rights under the policies, or (2) alternatively as beneficiary under a trust of the proceeds in the hands of T&N, since the express purpose of any payment by Curzon to T&N pursuant to the Curzon policies is the repayment by T&N to the Syndicate: Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567; Carreras Rothmans Ltd v Freeman Matthews Treasure Ltd [1985] Ch 207.
585. Although the declarations are sought against Curzon, the party financially affected is in fact T& N, since, if the Syndicate is not entitled to the proceeds of the policies, they will be retained by T&N and available for distribution to their creditors.

2. Claim under the 1930 Act

586. Section 1(1) of the 1930 Act provides (as amended)

"Where, under any contract of insurance, a person (hereinafter referred to as the insured) is insured against liabilities to third parties which he may incur, then (a) in the event of the insured becoming bankrupt or making a composition or arrangement with his creditors; or (b) in the case of the insured being a company, in the event of a winding up order or an administration order being made…. if, either before or after that event, any such liability as aforesaid is incurred by the insured, his rights against the insurer under the contract in respect of the liability shall, notwithstanding anything in any Act or rule of law to the contrary, be transferred to and vest in the third party to whom the liability was so incurred."

587. The 1930 Act was enacted in response to concerns expressed in road accident cases where an injured person obtained judgment against a careless motorist's employer who went into liquidation before satisfying the judgment. It was passed to remedy an anomaly displayed by two cases, Re Harrington Motor Co Ltd [1928] Ch 105 and Hood's Trustees v Southern Union General Ins Co of Australasia Ltd [1928] Ch 793 that the proceeds of a third party liability insurance held by a bankrupt or company in winding up went into the bankruptcy or winding up and the third party was remitted a dividend to which he might (along with other creditors) be entitled out of what assets might be left in the bankruptcy or liquidation.
588. The Syndicate points out that each of the Curzon policies describes itself as an Employers Liability policy, although the indemnity is expressed to be in respect of payments that T&N "may become liable to make" to Lloyd's Underwriters (rather than to the injured employees). Structuring the policy in this way, rather than as a conventional employers' liability policy, was presumably done in order to secure a tax advantage. If (as contended) the obligation in respect of the Asbestos Condition is to pay the claimants (rather than the insurers), since the Curzon policies express the obligation to be indemnified by reference to the underlying Lloyd's policy, that obligation nevertheless falls within the indemnity. But, in any event, in effect each policy is an EL policy and what triggers T&N's obligation to make any payment is an occurrence which gives rise to a liability on the part of T&N to an employee.
589. Curzon denies that the Curzon/T&N insurances are insurances against liabilities to third parties within the meaning of the Act and, accordingly, Curzon denies that there have been transferred to or vested in the Syndicate any rights under any of the Curzon/T&N insurances.
590. This issue depends largely on the scope, and correctness, of the decision of Toulson J in Tarbuck v Avon Insurance plc [2002] QB 571.
591. In Tarbuck Miss Valerie Nicholson, who ran a Natural Health Clinic in Islington, took out insurance with Avon Insurance, which included legal expenses insurance up to £50,000. She brought proceedings against her landlord for damages for breach of the repairing covenant, and the landlord counterclaimed for possession. She was granted relief from forfeiture on condition that she paid arrears of rent and costs. She failed to do so, and was subsequently adjudicated bankrupt. Mr Tarbuck was the solicitor who acted for her in those proceedings. The legal costs for which Miss Nicholson was insured included her solicitors' costs and experts' fees.
592. The issue was whether the solicitor could claim, by virtue of the 1930 Act, the balance of the indemnity available under the policy. It was held that "liabilities to third parties which he may incur" in section 1(1) of the 1930 Act did not include "liabilities voluntarily undertaken by that person, i.e. the payment of contract debts" [2002] QB at 577.
593. After referring to the origins of the 1930 Act, Toulson J held that the 1930 Act did not apply to the case (at 576-7):

"… there are difficulties … both historic and substantive, in construing 'liabilities to third parties which he may incur' as including a simple contract debt voluntarily incurred. As a matter of legislative history, it is improbable that the draftsman of the Act intended such a broad meaning.

…. I have to choose between construing the words 'where a person is insured against liabilities to third parties which he may incur' as limited to insurance against liabilities which may be imposed on that person by operation of law, whether for breach of contract or in tort, or as including the underwriting of liabilities voluntarily undertaken by that person, ie the payment of contract debts. I do not believe that the words were intended to include the latter.

… I do not regard the result as satisfactory but, in my view, the solution lies in amendment of the Act. I hope that this matter will therefore receive the attention of the Law Commission in its final report [on the 1930 Act]."

594. The decision did not go to appeal. But the Law Commission and Scottish Law Commission in their Report on Third Parties - Rights Against Insurers, Cm 5217, July 2001, paras 2.39-244, agreed with the Law Society that the decision would have a negative effect on confidence in the developing legal expense insurance market, and the draft Bill annexed to the Report reversed the effect of the decision by extending the operation of the legislation to insurance covering liabilities voluntarily incurred by the insured to third parties.
595. The Syndicate argues that that decision was based upon facts quite different from those of the present case, and the decision is therefore readily distinguishable. Alternatively, if necessary, the Syndicate contends that Tarbuck was wrongly decided.
596. In that case the liability of the insured to pay her solicitor was one which she voluntarily incurred during the currency of the policy, as opposed to being a liability imposed by law during that period. In the present case T&N's obligations (whether to pay the injured employees direct, or to pay the Syndicate in respect of sums payable to such employees) are not voluntarily incurred during the currency of the policy. They are imposed by operation of law. The law of contract and tort, if and insofar as their liability is to pay the employees; the law of contract insofar as their liability is to pay the Syndicate. The contingent liability was assumed under a contract, but it has never been suggested that the words "liabilities to third parties which he may incur" do not include contractual liabilities, and Toulson J expressly stated that they did: [2002] QB at 577.
597. In summary the essential distinction is between a "controllable obligation to make a payment voluntarily accepted under contract" (Stanbury, Legal expenses Insurance: Beware of Insolvent Insurers (1996) 92 BILA Journal 26) (as in Tarbuck) and an obligation to pay money which arises on the happening of an uncontrollable event, albeit the contingent liability to pay arises out of an antecedent contract. Tarbuck was not concerned with the latter type of case. Alternatively, it was said on behalf of the Syndicate that in the present case what triggers T&N's liability is negligence or breach of duty injuring its employee.
598. The argument of Curzon (supported by T&N) is that the 1930 Act was never intended to go further than tortious liabilities and contractual liabilities akin to tortious liabilities; those unlooked for and potentially unavoidable liabilities and torts for which the insured indemnity is as a matter of public policy to be recoverable by the third party, notwithstanding the insured's insolvency. The insurances in this case are like the insurances in Tarbuck in as much as they are insurances against a liability voluntarily incurred by T&N to the Syndicate.
599. It was not intended to cover the form of insurance entered into by T&N, pursuant to which T&N secured an indemnity against payments it had voluntarily accepted to make under a contract with the Syndicate. Indeed, there is no reason why the 1930 Act should protect the Syndicate simply because it is unpaid, when no other creditor of T&N can invoke the Act.
600. "Liability insurance" is conventionally understood as insurance covering liability for damage caused to another person by some fault of the insured and imposed on the insured by operation of law, whether for breach of contract or in tort. It does not include the underwriting of liabilities voluntarily undertaken by that person, i.e. the payment of contract debts, where the only "fault" of the insured would be the non- payment of the contract debt. In the event of an insolvency, the non-payment of a contract debt may be inevitable. The insolvent is obliged to treat his creditors pari passu. He cannot prefer one over another. Here, the non-payment of the Syndicate of a debt due under a contract between it and T&N is the same as the non-payment of any other contract debt.
601. I am satisfied that Curzon is right. I do not think that there is any principled distinction between this case and Tarbuck, which I consider to have been correctly decided. I agree that the history of the 1930 Act shows that it cannot have been intended to apply to liabilities voluntarily incurred, including the non-payment of contract debts, and that any extension of the 1930 Act should be left to Parliament.

3. Subrogation

602. Alternatively, the Syndicate argues that, if it is not entitled to the proceeds of the Curzon policies under the 1930 Act, then it is entitled to them by virtue of being subrogated to T&N's rights under the policies.
603. The argument is that, as soon as the Syndicate pays an asbestosis claim in excess of £750,000 or a claim within the Aggregate Deductible, T&N is obliged to reimburse the Syndicate in respect of that loss and has a contractual right against Curzon (pursuant to the Curzon policies) to be indemnified in respect of its liability (to the Syndicate) in respect of that loss. The right of indemnity against Curzon is a right which would diminish T&N's loss in respect of the claim paid by the Syndicate and is therefore a right to which the Syndicate becomes subrogated under the principle that, upon payment, subrogation obtains for the insurer the benefit of all rights of the assured which diminish the loss, and that those rights may include rights of action against third parties: Goff & Jones, The Law of Restitution (6^th edn) p.145. The fact that the Syndicate's claim is against another insurance company does not mean that the doctrine of subrogation is inapplicable: Austin v Zurich General Accident and Liability Insurance Co [1944] 2 All ER 243 (affd [1945] 1 KB 250). I should add at this point that, if anything, this case, which was a case of double insurance, suggests (at any rate in the Court of Appeal) that contribution rather than subrogation was the remedy.
604. The Syndicate says that if T&N were permitted to retain the proceeds of the Curzon policies, it would be unjustly enriched by a double payment (by the Syndicate and by Curzon), whilst the Syndicate would be out of pocket solely because of T&N's failure to comply with its obligations. It is this type of inequitable result which subrogation is designed to avoid - particularly on insolvency: Lord Napier & Ettrick v RF Kershaw Ltd [1993] AC 713, 737, 744.
605. I accept the submission for T&N that there is no right to subrogation in these circumstances. The classic case of Castellain v Preston (1883) 11 QBD 380 shows that the doctrine of subrogation is based on the fact that a contract of insurance is a contract of indemnity, and that the insurer is placed in the shoes of the insured in respect of claims whereby the insured loss is diminished, i.e. claims which entitle the insured to be put by third parties into as good a position as if the damage insured against had not happened: see pp. 386, 388, 392 per Brett LJ.
606. Accordingly, the right of subrogation is exercisable in respect of the loss against which the assured is insured. In this case that is the liability to the employee. Thus, the Syndicate is subrogated to T&N's rights of contribution against some other party which contributed to the development of the employee's disease by exposing him to asbestos dust. The Curzon undertakings insurances insure T&N in respect of its obligations to the Syndicate.

4. Purpose trust

607. The Syndicate's case is that if the proceeds of the Curzon policies are paid to T&N, they are held on trust by T&N for the benefit of the Syndicate. Since the express purpose of any payment by Curzon to T&N pursuant to the Curzon policies is the repayment by T&N to the Syndicate, the proceeds of such policies are impressed with a Quistclose purpose trust in favour of the Syndicate, which the Syndicate is entitled to enforce: Barclays Bank Ltd v Investments Ltd [1970] AC 567; Carreras Rothmans Ltd v Freeman Matthews Treasure Ltd [1985] Ch 207. These principles have been applied in an insurance context in Re English & American Insurance Co Ltd [1994] 1 BCLC 649; Hurst Bannister v New Cap Reinsurance Corp Ltd [2000] Lloyd's Rep IR 166.
608. T&N's short answer to this point, which is in my judgment well-founded, is that there is no pleaded basis for the existence of such a trust. Curzon did not undertake to pay T&N for the purpose of paying the Syndicate. If such a trust was to be imposed by law in this case there would be no reason for it not to be applied in any other case where an insured took out insurance against the risk of it having to honour obligations or being held liable to a third party. That such is not the law was made clear in Re Harrington Motor Co. Limited [1928] 1 Ch 105, 118, where Atkin LJ said:

"But the position in law seems to me clearly to be that a third party in a case like the present has no claim in law or in equity of any sort against the insurance company, or against the money paid by the insurance company, nor has he any claim against the person who injures him, the assured, to direct the assured to pay over the sum of money received under the insurance policy to him. The amount that the assured in fact received is part of his general assets." (p.118)

609. It was because there was no legal or equitable remedy which could secure the entitlement of a claimant to the proceeds of a defendant's insurance where those proceeds were paid by virtue of the claimant's claim against the defendant that the Third Parties (Rights Against Insurers) Act 1930 was enacted.

XVI Conclusion

610. I therefore find in favour of T&N and Curzon on the substantial issues before me, and I will hear argument if the form of the order cannot be agreed.