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	England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Callaghan v Hedges [1999] EWHC 846 (Comm) (03 November 1999) URL: http://www.bailii.org/ew/cases/EWHC/Comm/1999/846.html Cite as: [2000] Lloyd's Rep IR 125, [2000] CLC 360, [1999] EWHC 846 (Comm)

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IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Court 4, St. Dunstan's House
		3rd November 1999

The Hon. Mr. Justice David Steel

03 November 1999

The Claimants were the owners of a discotheque called Stage 3 in Sheppey, Kent. The Defendants were a Lloyds Underwriting syndicate which used to specialise in night club business. A substantial proportion of the syndicate's business came through a group of companies that I shall call Manson. Indeed, Manson held a limited binding authority granted by the Defendant. Since Manson were not Lloyd's brokers, this authority was accorded under an umbrella agreement with Brown Shipley Insurance Brokers Ltd.

In 1989, Manson were approached by producing brokers Anderson Insurance Services Ltd ("Anderson") with a view of obtaining cover for the discotheque then insured with other underwriters. Manson duly issued a slip pursuant to the binder holding the Claimants covered for 14 day spending rating and acceptance by the Defendants. In the result, the Defendants' deputy underwriter, Mr. James, accepted 50% of the risk on behalf of the syndicate. The balance was subscribed by the company market. The cover was up to a figure of £1,987,000 in respect of buildings, machinery and stock and up to £660,000 in respect of consequential loss of gross profit. The rated premium inclusive of commission was £16,720.50. The terms of the cover included a reinstatement provision whereby the loss payable would be by reference to reinstatement if, but only if, reinstatement was effected. Otherwise the loss payable was to be on an indemnity basis.

During the currency of the policy, the discotheque suffered a disastrous fire on the 20th September 1989. That same day, a Mr. Mariconda of Manson was requested by Mr. James to instruct Messrs Thomas Howell Selfe & Co (THS) as loss adjusters and Messrs R.B.Hawkins & Associates Ltd (Hawkins) as consulting scientists on the Defendants' behalf. The following day, the Claimants instructed Messrs Harris Assessors PLC (Harris) as their loss assessors and Messrs Geoffrey Hunt & Partners (Hunts) as consultant scientists.

On the 22nd September, THS made a preliminary report to the Defendants dispatched via Manson. This recommended a reserve of £1,542,000 on the basis that, whilst there was a total loss, the original valuations were exaggerated. As the investigation proceeded, THS reported to Manson on the 25th September that it appeared that the fire might have been caused by temporary halogen light erected for the purpose of repair work which had overheated and exploded. Manson passed this information on the Defendants. Since the remains of the building were unsafe, THS formed the view that further investigation was unlikely to be fruitful. Accordingly, Hawkins were stood down.

Site demolition had become a priority and on the 3rd October, the Defendants and the company market indicated that they were prepared to meet the costs of demolition but without an admission of liability. The reaction of Harris was to write to THS on the 6th October saying:-

"We note with regret, however, that there is no admission of policy liability and would urge early clarification of same, so that extensive reinstatement procedures required of our client to implement (sic) can be processed".

Manson presented Harris's report to the Defendants on the 15th October with the faxed request:-

"I await your urgent instructions as to whether it is in order for adjusters to proceed in the normal manner".

There is a note on the Manson file to the effect that Mr. James had in response "Agreed OK to proceed: written confirmation to follow". No such written confirmation appears to have been sent. But on the 19th October Manson's office at Waltham Abbey sent a fax to Manson's office in Liverpool saying:-

"As discussed, please instruct THS to proceed. Adjuster's further report awaited in due course".

This instruction was passed on in the form of a fax dated the 23rd October to the effect "Please proceed to settlement". This was in turn picked up by THS in a letter dated 25th October to Harris to the effect that "We have now received confirmation from underwriters that they are prepared to deal with this claim under the terms of the policy in force".

By a report dated the 7th November, THS made a recommendation to the Defendants via Manson for a payment of £10,000 by way of interim payment. Under the heading "Supposed Cause" the report said "Fire – cause not positively established despite detailed investigation". On the 15th November, Manson presented a collection form in respect of this interim payment to the Defendant and the company market together with an application for payment of Hawkins's account. The payments were duly authorised by underwriters who all scratched a copy of the THS interim payment report. The relevant collection forms were filed with the LPSO on the 23rd November.

By the 27th November, Harris's were already pressing THS to recommend a further interim payment. By now, however, the attention of Mr. James was focused on the question whether the assured was going to reinstate or whether the Claimants might be minded to accept a cash settlement at a lower figure.

The position from the Defendant's perspective is revealed in a file note of Mr. James dated the 15th January:-

John Leonard (THS) phoned today and asked if he would make an interim payment of £25,000 as insured was having difficulty in meeting certain commitments with the bank and a leasing company regarding his car. Both were applying pressure for money off of him.

I was concerned as I thought that this would prejudice our position regarding the building being over insured and have said in my opinion the building was grossly over insured and I commented I thought it was worth no more than £600,000 at most. JL agreed.

He did say that the insured however had acted on his broker's advice and had an independent valuation done. I have asked for a sight of this. Also JL said that the insured had insured the building for £!,675,000 and paid a premium for this therefore he was bale to claim this amount on insurance. I disagree as I cannot see why you can over insure your building and get the amount if there is a loss. I am taking a legal opinion on this – John Leonard is submitting a report to Mansons asking for an interim payment of £25,000".

It does indeed appear that about this time Mr. James instructed Mr. Perry of Messrs Pickering Kenyon to act as the Defendant's solicitor. Nonetheless THS's report of the 16th January duly made a recommendation for payment of £25,000 on the basis that whatever indebtedness may have been incurred by the Claimant, the indemnity value of the lost fixtures and fittings would alone exceed that figure. THS informed Harris by their letter dated the 16th January that "We have spoken with underwriters at Lloyds who are, in principle, agreeable to processing a payment on account of £25,000". Harris responded by return urging an expedited settlement. Manson presented THS's report together with a collection form on the 22nd January. Mr. James thereupon telephoned Mr. Mariconda of Manson. Mr. Mariconda's note of that telephone conversation reads:-

"Spoke to Bob James re interim payment. He advised that he is currently trying to arrange a meeting with the insured firstly to try and establish the insured's intention re reinstatement and secondly to discuss the possibilities of a compromise cash settlement. Until he has had this meeting then he is not going to agree any further payments".

Mr. James met with THS on the 27th February to discuss the claim. By now Mr. James was contemplating replacing THS. During the course of the meeting, Mr. James expressed surprise that THS thought that liability had been admitted. His attention was drawn to the Manson fax of the 23rd October referred to the above advising THS to "proceed to settlement". Mr. James took the view that this went further than his instruction which was for adjusters "to proceed in the normal manner".

The bulk of the meeting was taken up with a discussion at the level at which the claim might be settled. A figure of £500,000 was indicated by Mr. James. The next day someone at Manson telephoned Mr. James to find out how the meeting had gone. Mr. James brought Manson up to date, repeating that he was not minded to release any further money until an agreement on settlement was reached. Mr. James went on to urge that the fact of the meeting should not be disclosed to Harris or Anderson. However, by the 2nd March when Mr. James was at Manson's office, he received a telephone call from THS to the effect that THS had discovered that both Harris and Anderson had learnt of the meeting. THS in the circumstances recommended that the interim payment of £25,000 be released to ease the settlement discussions.

Accordingly, Mr. James immediately scratched the second interim payment report of THS and the relevant collection form for £12,500 being the Defendant's proportion. The scratch was made "WP", a fact that was duly notified to the following company market.

The collection claim form was duly lodged by Manson with the LPSO whose Chatham office processed it on the 14th March. The system was such that this would lead inexorably to payment to Manson on the next settlement day (23rd March) and an advice card to that effect was dispatched to the Defendant's box.

By the 14th March the Claimants were getting restive about the part payment and, via their newly appointed solicitors, threatened proceedings. They were assured by Mr. James that the Lloyds share would be paid by Thursday 22nd March from the company market share by Friday 23rd.

Manson also got in touch with the LPSO that same day and learned that the money would be through by Friday the 23rd. On being told that a special (e.g. expedited) settlement needed the underwriters scratch, Manson decided to leave matters as they were.

On the morning of the 21st March, Harris and THS duly met. Harris put forward a claim of £1.8m (inclusive of a figure of £1.1m for the buildings) albeit indicating that a figure of £1.55m would acceptable as a "deal". Later on that day, THS met with Mr. James who suggested a figure of £750,000. THS's note of that meeting went on to record as follows:-

"I told him that in my view the loss was not capable, at this time, of being settled in this sum as, to some degree, we were negotiating from a disadvantaged position as liability had been admitted and it was the insureds prerogative as to whether you reinstated or otherwise. Mr. James stated that he had had a meeting with his solicitors and it was possible that they would be repudiating liability. This statement took us somewhat by surprise. We ascertained that the basis was:-

1. The insured had over insured the building.

2. The insured had literally taken "pound notes" to the brokers in Preston to pay the premium.

3. They were not satisfied with the circumstances surrounding the fire.

I explained to Bob that in my view they would be estopped from repudiating liability at this late stage, particularly taking in consideration the fact that they made two payments and further the insured had attained a valuation on the building prior to insuring it and they were not being asked to make payment for the full sum insured. The aspect of the broker paying in cash the premium was not, in itself, startling and all that repudiation would do would be to promote proceedings from the insured which would have the effect of delaying any payment until the matter came to trial, but inevitably they would be faced with costs and interest charges".

That same day, although whether before or after the meeting just referred to is not clear, Mr. James had another meeting with representatives of Messrs Brocklehurst, a firm he was contemplating should be invited to replace THS. The content of this latter meeting later became a matter of considerable dispute (see below) but in any event Mr. James was convinced that it would be appropriate to instruct Brocklehurst to investigate the matter further. His instructions in that respect were duly effected on the 30th March. In the meantime, the interim payment reached Manson on the 23rd March and on the 30th March Manson drew a cheque in favour of the Claimant's bank which was received by the Claimant's solicitors on the 2nd April.

The Claimant's solicitors had meanwhile written on the 28th March as follows:-

"Our clients are concerned that promises for a further interim payment have not been kept and that there is very considerable delay in obtaining the necessary authorities from your clients to instruct the various contractors and experts required to prepare a proper specification for the rebuilding works required following the fire suffered by our clients. That fire took place on the 20th September last over six months ago. Your clients have made one very modest payment on account of the claim for payment of £10,000. Their adjusters have indicated that underwriters are "Are prepared to deal with this claim under the terms of the policy" but no other useful progress has been made.

We require an unconditional acceptance of liability under the policy from your clients …"

In the absence of satisfactory response, the writ in this case was issued on the 10th April with a Statement of Claim a week later. The relief sought was a declaration that the Defendants were liable to indemnify the Claimants, together with payment of the claim.

Contemporaneously, Brocklehurst reported to Mr. James of the outcome of their investigations. This was to the effect that the First Claimant had been convicted under the name of O'Callaghan at the Old Bailey in January 1976 of robbery and of possession of a firearm with intent. He had been sentenced to 7 years and 3 years consecutively but on appeal the terms were made concurrent.

On the 16th May the Defendant's solicitor wrote to Claimants as follows:-

"In the course of investigations by Messrs Brocklehurst and this firm we have in the last few days established that your client Anthony Callaghan was on the 20th January 1976 at the Central Criminal Court convicted of armed robbery and sentenced to 7 years imprisonment. This is not a sentence covered by the Rehabilitation of Offenders Act and not disclosed by your clients on the proposal form. It is plainly a material non-disclosure.

Consequently on behalf of our clients we hereby give you notice of avoidance ab initio of this insurance policy on the grounds of the said non disclosure …".

Following the pleading of this case in the form of the defence served on the 23rd May and the service of a reply sometime in July which admitted the conviction but denied its materiality, the action then went to sleep.

On the 1st February 1995 the Claimants gave notice to proceed, presumably, as the Court of Appeal observed in a judgment referred to below, in the light of the House of Lords decision in Pan Atlantic [1995] 1 A.C. 501. Then in March 1995, the Claimants jointed the producing brokers Anderson the Second Defendants on the basis that they had failed to give the Claimants proper advice as to what material facts and matters needed to be disclosed. In February 1996, however, the Defendant underwriters had taken the initiative and obtained summary judgment on the counter claim that the insurance had been validly avoided.

The Claimants appealed. At the hearing before May J. in March 1996, the First Claimant appeared in person. He was unable to persuade the judge that there was any arguable issue as to whether the non disclosure of his conviction had in fact not induced the Defendant to accept the risk. But the judge was persuaded that, in the light of a statement obtained by the Claimants from a Mr. Spoor, that it was not "entirely incredible that information [about the conviction] may have come to the First Defendant's knowledge earlier than the 2nd April 1990 [that being the date of receipt of the second instalment by the Claimant's solicitors]". The judge ordered the trial of a preliminary issue of fact namely "upon what date the First Defendant insurer knew of Mr. Callaghan's 1976 conviction". If the conclusion was a date on or after the 2nd April that would be the end of the matter; if earlier, then as the judge put it "more complicated questions could arise".

The preliminary issue came on before HHJ Wilcox sitting as a judge of the High Court between the 16th and 23rd May 1996. Judgment was given the following day in the Claimant's favour. It was to the effect that the First Defendant knew of the conviction on or about the 21st March when a member of Brocklehurst told Mr. James about it during a long lunch that day having derived the information from solicitors to the Metropolitan Police. The illegitimacy of that source, the judge held, prompted Mr. James not to act on it (or even mention it to his solicitor) until the information was proved independently.

It was now the Defendants' turn to appeal. In a judgment handed down on the 16th January 1998, the appeal was dismissed. This was similarly on the basis that, as a result of information from Brocklehurst given at the lunch, "Mr James knew that the cover could be repudiated but was restrained from disclosing the fact of conviction until further proof was obtained".

As appears from the content of the judgment of the Court of Appeal, during the hearing an alternative plea was raised by underwriters to the effect that, whilst the information was persuasive enough to lead to Brocklehurst being instructed, it was not enough to amount to knowledge for the purposes of waiver. In this context, Evans LJ cited from a then unreported judgment of Mance J. in Insurance Corporation of the Channel Islands –v- Royal Hotel (see now [1998] L.L.R. (Insurance & Reinsurance) 151:-

"At the other extreme, knowledge is not to be aquatinted with absolute certainty; itself an ultimately elusive concept. The impossibility of doubt which is found only in the maxim "I think therefore I exist" is not the criterion of legal knowledge. For practical purposes knowledge pre-supposes the truth of the matters known and a firm belief in that truth as well as a sufficient justification for that belief in terms of experience, information and or reasoning".

The judgment of Lord Justice Evans then went on:-

"No question as to the degree of knowledge that is necessary was raised either as part of the preliminary issue nor before May J. nor at the hearing before his HHJ Wilcox nor in the course of this appeal until the matter was raised by the Court. The judge's finding is straight forward. In answer to the question he posed he found that Mr. James knew of the 1976 conviction on the 21st March. Underwriters and Mr. James in particular having denied this, on the grounds that nothing was said, it is difficulty for them now to say "Well something was said but it was not enough to constitute knowledge of the material facts … …".

…"The information was given to Mr James with a sufficient degree of certainty, to make him decide that Brocklehurst should be instructed and that Thomas Howell Selfe's instruction should be withdrawn. This seems to me to be a sufficient knowledge of the material fact upon which underwriters claim to and did rely. But the present issue is a factual one only. It is a straight forward question "When did the underwriters first know of the 1976 conviction. In my judgment that question was answered correctly by the judge … If any further issue remains as to materiality or otherwise then it seems to me that would be a matter for the judge at the trial which theoretically will take place some time in the future. The questions which the judge will have to consider will include whether the underwriters should be permitted to raise any further issues as to the degree of knowledge after the preliminary issue has been defined and ruled upon as it has been".

Following that judgment the parties pleaded their case on waiver. The essence of the Claimant's pleaded case is encapsulated in their amended reply at paragraphs 3A and 3B:-

3A. "The First Defendant learnt of the first named Plaintiff's convictions … before the 2nd April 1990. On the 2nd April 1990 with knowledge of said conviction or convictions the First Defendant made an interim payment of £25,000 to the Plaintiffs in respect of their claim for an indemnity for the loss and damage sustained for the reason of the fire.

3B. If as to which no admission were made the First Defendants had been entitled to avoid the said contract of insurance by reason of the failure of the Plaintiffs to disclose either or both convictions … the First Defendant by reason of the matters set in para 3A above waived such entitlement and affirmed the said contract of insurance".

The Defendants served a rejoinder to the effect that the payment on the 2nd April was made by the Claimant's own agents and in any event was the outcome of the authorisation given on the 2nd March and which could not be cancelled after the 19th March which date was before any knowledge was obtained. In amplification of matters then pleaded in a surrejoinder, I allowed the Claimants leave to the course of the hearing to run further or alternative cases to the effect that:-

"If Mansons were the Claimants' agents, the Defendant's failure to inform the Claimants' or its agents between the time of the meeting on the 21st March and the time that the cheque was despatched by Mansons on the 23rd March that they were repudiating liability under the contract constituted, given the reasonable period thus afforded, an election to affirm. Further or in the further alternative if Mansons were the Claimants' agents, the Defendant's failure to inform the Claimants in the period from the 23rd March until the 16th May of their intention to avoid was an election to affirm".

The only other matter of background that perhaps merits some comment is that since the hearing before HHJ Wilcox and the Court of Appeal, the underwriting file of Mr. James has been found and disclosed. This contains a number of his own notes including one referable to the meeting with THS on the 21st March 1990. This document might well have been of some assistance in resolving the issues as to the sequence of the meetings that day as well as the content of the discussions with Messrs Brocklehurst. But this is now water under the bridge.

Manson's Status

At the forefront of the Claimant's case was the proposition that Mansons were the agents of the Defendants and in that capacity collected the interim payment, drew the cheque in favour of the Claimant's bank on the 30th March and forwarded the same on the 2nd April by which time the Defendants knew of the conviction. The essential basis of this submission is that, with the authority and approval of the Defendants, Manson had acted as an intermediary between the Defendants and THS, giving instructions, receiving reports, obtaining approval of interim payments and paying fees. This was only consistent, it was contended, when taken with the terms of the binder, with Manson being the agents of the Defendants.

There was, in my judgment, nothing remarkable or unusual about Manson's role or status. The firm operated, as outlined above, under an umbrella agreement with Brown Shipley so as to enable them to broke business to the Lloyds market. A definition of such an arrangement is set out in the judgment of Bingham J. in Johns –v- Kelly [1986] 1 Lloyd's Rep 468 as follows:

"An arrangement between a Lloyds broker and a non Lloyds broker whereby business is transacted at Lloyds by the directors, partners or employees of the non Lloyds broker, acting as if they were directors, partners or employees of the Lloyds broker itself, using the Lloyds broker's slips".

It follows, that in conducting business under such an arrangement, Manson's status was as agents of the insured, both in respect of placement of risk and collection of claims; Rozanes –v- Bowen [1928] 32 L.L.R. page 98, Pryke –v- GHC [1991] 1 Lloyd's Rep 602 and Johnson –v- Leslie & Godwin [1995] Lloyds Reinsurance L.R. 472. This status remained unaffected by the existence of the binder which rendered by special agreement Manson the agent's of the Defendants for some limited purposes see Pryke –v- GHC supra and Deeny –v- Walker [1996] Lloyds Reinsurance L.R. 276.

Nor is it to the point that Mansons were used by the Defendants to instruct and obtain reports from the loss adjusters acting for the underwriters. This practice has been roundly criticised by the courts: see Anglo African Merchants Ltd –v- Bayley [1969] 1 Lloyd's Rep 268 and North and South Trust Company –v- Berkeley [1971] 1 WLR 470. The basis of the criticism is not to the effect that the brokers thereby have to be treated as agents of the insurers but in accepting such instructions, the brokers are in breach of their retainer by the insured given the conflict of interest that thus arises.

In fact, in the present case, when dealing with some of the potentially sensitive aspects of the case, Mr. James often dealt directly with THS rather than through the medium of Mansons. Further, when Mr. James sought to place Mansons in the invidious position of not disclosing to Anderson or their ultimate client the proposed meeting between Harris and THS, the word got out very quickly perhaps by virtue of Mansons duly disclosing the true position. In any event there is nothing in the present case which impinges on Mansons normal role in collecting the interim payment. They followed the normal practice of obtaining the underwriters' scratch on the report contained in the recommendation and on the collection forms. They did so as agents of the insured and I do not think the contrary is arguable. It follows that the cheque for £25,000 was drawn and sent by the Claimants' own agents and cannot as such have constituted a communication of anything on the part of underwriters, let alone an unequivocal election to affirm the contract of insurance.

Election by failure to notify

On the basis that Manson were, as I found, agents of the insured, the Claimants sought to argue in the alternative that the Defendant's failure to notify the Claimants before the 23rd March (or alternatively before the 10th May) of their intention to avoid the policy constitutes an election to affirm it. For this purpose reliance was placed on the decision in Simner –v- New India Assurance Company Ltd [1995] Lloyds Reinsurance L.R. 240 when HHJ Diamond considered an alternative case on affirmation in the following way:-

"The next question, however, is whether if Mr. Patel did not elect to affirm the contract when he signed the documents on September 28th he should be held to have elected at a later stage when he appreciated the effect of the documents and failed to countermand the endorsement. In my view the position is that, having made an unequivocal representation that the information placed before New India had been amended in the respects set out in the schedule and bordereaux,, Mr. Patel was obliged to retract that representation if he did not intend New India to be bound by it, once Mr. Patel had appreciated the effect of the documents and had obtained knowledge of the facts given rise to the right to elect, I would hold, therefore, that, once Mr. Patel had obtained such knowledge and had failed within an reasonable time to countermand the endorsement, he must be held to be making a continuing representation on behalf of New India that the information material to the reinsurance was as set out in the schedule and bordereaux and that, by doing so, he elected not to exercise the right to avoid the contract on the basis of such information".

This does not seem to me to have any analogous bearing on the present case. By definition, no unequivocal representation had been made by underwriters in the period following ascertainment of the conviction. There was, on this alternative case, no such representation to countermand or retract. The silence of the underwriters could only be construed as equivocal, particularly where there is no suggestion that there was any delay in verifying the facts of the conviction: see The Leonidas D [1985] 1 Lloyd's Rep 18 and Unisys International Services –v- Eastern Counties Newspapers [1991] 1 Lloyd's Rep 538.

These conclusions render it strictly unnecessary to consider the other issues in this case but since they were fully argued I will seek to do so.

Knowledge

It is, of course, common ground that an election whether to affirm or rescind a contract can only be irrevocable if the party concerned has knowledge of the facts and of the right thus afforded to elect: Peyman –v- Lanjani [1985] 1 Ch D. 457. It was argued by the Defendant that, whilst they had news of the First Claimant's conviction on the 21st March, they reasonably embarked on the task of verifying that news and that they reasonably waited until they had done so before electing to avoid.

In this context I was referred to McCormick –v- National Motor and Accident Insurance [1934] 49 L.L.R. 362 in which Scrutton LJ said at page 365:-

"You are not bound the moment the statement is made to you to make up your mind up at once; you are entitled to a reasonable time to consider – to a reasonable time to make enquiries".

It was submitted on the Defendant's behalf that the information provided by Brocklehurst on the 21st March was of a character which cried out for verification. It came from a source which could not be revealed. It was unsupported by any admissible evidence. There was doubt whether the conviction was of a man called Callaghan rather than O'Callaghan. In all it was submitted that immediate action would have involved a risk of prejudice arising from undue haste in an area which really called for a mature and measured response.

This submission immediately rubs up against the decision on the preliminary issue. It is perhaps, on reflection, an example of where a preliminary issue in fact can store up difficulty if it is decided in way which does not bring the proceedings to an end. As I understand the judgment of the Court of Appeal, it was left open whether the underwriters where thereby shut out from raising further issues as to the degree of knowledge imparted on the 21st January which was raised so late in the day.

Given the grave nature of the information, its antiquity, the absence of material verifying it, I have come to the conclusion that the underwriters were entitled to a reasonable time to investigate and then decide whether to avoid or not. It is not suggested that the period up to their letter of the 16th May was unreasonable for that purpose. I conclude that, however one categorises the degree of knowledge on the 21st May, it was not such as to render any apparent election in the form of distributing a previously authorised part payment as irrevocable.

Payment without prejudice

The Claimants contended that, although the report of THS recommending the second interim payment was scratched "WP", this merely reflected the leading underwriter's concern to keep open the issue of quantification as between reinstatement and a cash settlement, liability having been admitted.

In my judgment, the Defendants had not made an admission of liability. It is true that Manson were invited to tell the adjusters "To proceed in the normal manner" in October and this was passed on as an instruction "To proceed to settlement" which in turn THS communicated to Harris as indicating that underwriters were "prepared to deal with this claim under the terms of the policy in force".

This latter phrase was consistent with an admission of liability but to the extent that it did it went further than Mr. James had authorised as is apparent from Mr. James' note to the file of the 15th January. In his telephone call of the 28th February, Mr. James expressed his concern to Mansons as regards the fax saying "Proceed to settlement" following his meeting with THS.

Against that background, the notation of "WP" made by Mr. James whilst at Manson's offices must be construed as a complete reservation of rights. Indeed, it must have been perceived as such given the absence of any suggestion in the correspondence thereafter or even in the pleadings that liability had been admitted by that stage.

The authorisation of a payment without prejudice cannot, in my judgment, constitute an unequivocal election to affirm.

Awareness of informed choice

Even on the assumption that Manson were the Defendant's agents, that at the time of the interim payment the Defendants knew of the conviction and that they had had a reasonable time to verify and act upon it, it was the Defendant's case that the fact (which is accepted by the Claimants) that the Claimants were unaware that the Defendants were making an informed choice to affirm rather than avoid is fatal to the affirmation argument.

The Claimants challenge this proposition. It is convenient to quote from Mr. Bailey's skeleton argument on this aspect:-

"There are two separate concepts: election and affirmation. Election requires knowledge before the choice can be made. Affirmation requires communication. The question of principle is whether affirmation requires the innocent party to communicate the fact that he has made an informed choice to treat the contract as alive (the informed choice) or whether it is sufficient that he communicates the fact he is treating the contract as alive (the choice i.e. the result of the choosing").

The emphasis was thus put by the Claimants on the proposition that the other party merely needed to know that the contract was alive and not that there had been an election not to treat it as terminated.

I am unable to accept the Claimant's submission. Approaching the matter without reference to the authorities, it seems to me that an unequivocal demonstration of an intention to proceed with a contract can only be exhibited if the other party appreciates that a choice has been made. It would not for instance constitute affirmation if a party learning of a misrepresentation justifying avoidance decides simply in his own mind not to avoid and then be the author of a letter to the other party which is consistent with the contract being alive. That letter would not exhibit to the other party any election or choice at all.

I recognise that this may permit, say, an underwriter to keep an entitlement to avoid up his sleeve. But as a practical matter, to do so would almost inevitably lead to an estoppel. Any potential injustice would thus be prevented; see Yukon Line Ltd –v- Rendsburg Investments [1996] 2 Lloyd's Rep 604 at 608. Common sense suggests to me that only the realisation by the other party that an informed choice has been made could make the relevant act or statement unequivocal and thus "clear the air".

This approach seems to me to be entirely consistent with the authorities starting with a decision of the House of Lords in Scarf –v- Jardin [1882] 7 App.Cas 345:-

"The principle, I take it, running through all the cases as to what is an election is this; where a party in his own mind has thought that he would choose one of two remedies, even though he has written it down on a memorandum or has indicated in some other way, that alone will not bind him; but so soon as he is not only determined to follow one of his remedies but has communicated it to the other side in a such a way as to lead the opposite party to believe that he has made that choice, he has completed his election and can go no further; and whether he intended to or not, if he has done an unequivocal act – I mean act which would be justifiable if he had elected one way but would not be justifiable if he had elected the other way, the fact of his having done that unequivocal act to the knowledge of the persons concerned is an election".

In three later decisions of the House of Lords the need in this field for the elector to demonstrate the fact he is making a choice has been emphasised:-

"If he has knowledge of the facts which give rise in law to these alternative rights and acts in a manner which is consistent only with his having chosen to rely upon one of them, the law holds him to his choice even though he was unaware this would be the legal consequence of what he did".

Per Lord Diplock in Kammins Company –v- Zenith Investment [1971] A.C. page 850 at page 883

"It is trite that in such circumstances to constitute "an election" to pursue one remedy so as to preclude the person making the election from subsequently resorting to the other remedy there must be an unequivocal act or statement by him communicated to the person against whom the two mutually exclusive remedies are available and showing that he intends to pursue of them".

Per Lord Diplock in China Trade Corporation –v- Evlogia Shipping Company [1979] 1 WLR 1018 at page 1024:

"(Election) can be communicated to the other party by words or conduct; though, perhaps because a party who elects not to exercise a right which has become available to him is abandoning that right, he will only be held to an answer if he has so communicated his election to the other party in clear and unequivocal terms".

Per Lord Goff in The Kanchenjung [1991] 1 L.R. 391 at page 398.

In the meantime the point had been developed in somewhat greater detail in the judgment of Lord Justice Slade in Peyman –v- Lanjani supra:-

"A person who has the right to rescind a contract cannot be treated as having elected to affirm it unless and until he has done an unequivocal act, or made an unequivocal statement, which demonstrates to the other parties to the contract that he still intends to proceed with it, notwithstanding the relevant breach. …".

This conduct of the Plaintiff on the 22nd February 1979 undeniably indicated that, at least for the time being, he intended to proceed with the restaurant agreement. In my opinion, however, this does not by itself suffice to indicate any relevant final choice on his part. The question is whether his conduct on the 22nd February 1979 would have led the First Defendant and his legal advisors reasonably to infer that he did not intend to object to the particular defect in title which had risen through the first impersonation.

On my part I do not think the First Defendant or his legal advisors could reasonably have drawn any such inference for the following reasons amongst others:

1. Neither the First Defendant nor anyone acting on his behalf had informed the Plaintiff as the First Defendant should have done of the first impersonation that had been perpetrated by his agent ….

2. … The evidence shows clearly that at this the First Defendant was indeed badly in need of money …. The payment of the £10,000 was not made by Plaintiff in exercise of any rights under the restaurant agreement. It was made at the First Defendant's request, and solely for the First Defendant's convenience and benefit. Whilst the First Defendant could reasonably infer from the payment that is was the Plaintiff's present intention to proceed with the restaurant agreement he could not, in my opinion have reasonably inferred from it that the Plaintiff was abandoning any right to object to the as yet undisclosed defect in the First Defendant's title …."

It follows in my judgment that the challenge that the Claimants make to the conclusions of law in this field of Mance J. in Insurance Corporation of the Channel Island –v- The Royal Hotel supra fails. The relevant passage from the judgment reads as follows:

"Where the circumstances justify an avoidance and the choice is to avoid, the requirement of an unequivocal communication creates no problem. The claim to avoid demonstrates of itself one of the same time awareness of the choice in its making. Where it is said there has been an election to affirm rather than to avoid, the position is more problematic. Is it sufficient for affirmation that there is knowledge and a communication by words or conduct for which, assuming such knowledge, demonstrates an unequivocal choice? Or must the communication itself or the surrounding circumstances demonstrate such knowledge to the other party? In principle, it seems to me that the latter approach is correct in the context of communication. The communication itself or the circumstances must demonstrate objectively or unequivocally that the party affirming is making an informed choice".

In my judgement that approach was correct and present another basis upon which the Claimant's claim would inevitably fail in the present proceedings even if I am wrong on the other matters.