Guernsey Law Reports 2009-10 GLR 131
WOODBOURNE TRUSTEES LIMITED v. GENERALI WORLDWIDE INSURANCE COMPANY LIMITED
ROYAL COURT (Collas, Deputy Bailiff): April 8th, 2009
Civil Procedure—trial of preliminary issue—factors to be considered—party seeking trial to circulate precise draft of issue to court and other parties at or after first case management conference and well before proposed hearing—court only likely to proceed if issue specific and properly formulated
Trusts—powers and duties of trustees—duty to exercise judgment—decision to liquidate insurance investments if insurer’s fees become not “substantially competitive as judged by trustee” requires exercise of trustee’s subjective judgment—since not objective question, no need for expert witnesses as to relevant state of market at time exercises judgment
The plaintiff trustee company brought an action against the defendant insurer to recover fees it alleged had been improperly deducted from the proceeds of surrendered policies.
The plaintiff was the trustee of three trusts, the assets of each of which included an annuity contract or a life insurance policy issued by the defendant. After the policies had been issued, the fees payable to the defendant were renegotiated and the reduced fees recorded in an endorsement to each of the policies. If the funds remained invested for five years, the reduction was to continue to apply unless certain specified events occurred, including that “fee levels do not remain substantially competitive with market competition as judged by the trustees.”
The plaintiff soon decided that the fee levels were not competitive, basing its decision on a report prepared by insurance specialists commissioned by the settlor. It gave notice to the defendant to surrender the
2009–10 GLR 132
policies, intending to use the proceeds to acquire new policies from different insurers. The defendant disagreed that the fee levels were not competitive and, before remitting the proceeds of the policies, deducted fees not at the reduced rate but at a higher rate (on the assumption that the plaintiff was not justified in giving early notice of surrender).
The defendant pleaded that it was an implied term of the policies and the endorsements that the plaintiff would not exercise its judgment “unreasonably, perversely or in bad faith” and that it had in fact done so “unreasonably.” It asserted that the test to be applied was analogous to Wednesbury unreasonableness and that it was an objective test which would require the court to hear extensive expert evidence as to the market conditions at the time of the decision to surrender the policies. The plaintiff replied that the public law Wednesbury principles as to reasonableness should not be imported into commercial contracts and that the test was subjective, requiring reasonableness to be assessed only by reference to the information available to the plaintiff at the time of making its decision, without the need for costly expert evidence.
At a case management conference, the plaintiff applied to limit the scope of the expert evidence to be adduced at the trial and, at the request of the court and in accordance with the Royal Court Civil Rules 2007, r.38(1) and (2), specifically formulated as a preliminary issue of pure law, the question whether the court was entitled to interfere with a party’s exercise of its contractual discretion if its conclusion was “unreasonable in the sense of being arbitrary, perverse or capricious as it had no basis for reaching its decision.”
The defendant opposed the application to hear the preliminary issue, denying that it was a matter of pure law and maintaining that, since any implied term had to be viewed in the context of the parties’ contractual relationship, it could therefore only be resolved after hearing evidence.
Held, refusing to order the trial of the preliminary issue:
(1) As formulated, the preliminary issue did not disclose a genuine question of law to be tried. The phrasing of the endorsement made it clear, by the inclusion of the words “as judged by the trustees,” that the test of whether the fees remained substantially competitive with market competition was subjective in nature. The plaintiff had to judge their competitiveness according to its own criteria and the question of whether its judgment was objectively valid at the time it was exercised did not arise. It followed that it would not be relevant to receive expert evidence as to the general state of the insurance market at the relevant time and to that extent the plaintiff’s original application to limit such evidence would be granted (paras. 19–21).
(2) It was proper for the court to require the plaintiff to formulate specifically and precisely the issue it wished to have decided as a preliminary issue. A party seeking to have a question decided as a preliminary issue should circulate a precise draft of the issue to the court and the other parties well in advance of the proposed hearing, since if the
2009–10 GLR 133
court agreed to proceed, it was likely to do so only on the basis that the issue was specific and properly formulated, thereby avoiding later debate as to the precise scope of what was to be decided (paras. 8–9).
(3) There remained in the present case an issue as to the manner in which the plaintiff should have reached its decision and whether any terms should be implied into the written endorsement to guide the making of such a decision. The defendant had pleaded that it was an implied term of the policies and the endorsements that the plaintiff would not exercise its judgment unreasonably, perversely or in bad faith but had suggested no factors that the plaintiff should either take into account or ignore as not relevant—despite submitting that the plaintiff had relied on material on which it should not have relied and that the report on which it had relied had failed to address the relevant questions. The criteria for implying a term in a contract were well established: it had to be (a) reasonable and equitable; (b) necessary to give business efficacy to the contract; (c) so obvious that it “went without saying”; (d) capable of clear expression; and (e) not contradictory of any express term of the contract. What the implied term (if any) should be in the present case and how it should be interpreted could therefore not be resolved as a preliminary issue since it would still be necessary at the trial to hear evidence about the surrounding circumstances in order to understand if a term could be implied and what the parties would have intended it to mean had it been drawn to their attention at the time (paras. 22–24).
Cases cited:
(1) Associated Provncl. Picture Houses Ltd. v. Wednesbury Corp., [1948] 1 K.B. 223; [1947] 2 All E.R. 680; [1948] L.J.R. 190, referred to.
(2) BP Refinery (Westernport) Pty. Ltd. v. Shire of Hastings (President &c.) (1978), 52 ALJR 20, followed.
(3) Gan Ins. Co. Ltd. v. Tai Ping Ins. Co. Ltd., [2001] 2 All E.R. (Comm) 299; [2001] EWCA Civ 1047, referred to.
(4) Lymington Marina Ltd. v. Macnamara, [2007] 2 All E.R. (Comm) 825; [2007] Bus. L.R. D29; [2007] EWCA Civ 151, considered.
(5) Philips Elec. Grand Public S.A. v. British Sky Broadcasting Ltd., [1995] E.M.L.R. 472, dicta of Bingham, M.R. applied.
(6) Socimer Intl. Bank Ltd. v. Standard Bank London Ltd., [2008] 1 Lloyd’s Rep. 558, dicta of Rix, L.J. considered.
Miss A.M. Ozanne for the plaintiff;
C.H. Edwards for the defendant.
1 COLLAS, DEPUTY BAILIFF: The facts of this matter have been pleaded at some length but they can be adequately summarized for the purposes of this application in a few sentences. The plaintiff is in the business of providing trust services and the matter concerns three trusts known as the Spring Trust, the Summer Trust and the Winter Trust, of which the plaintiff was appointed trustee following the removal from
2009–10 GLR 134
office of another trust company. Each of the trusts owned either an annuity contract or a life insurance policy issued by the defendant (together “the policies”). After the policies had been issued, the fees payable to the defendant were re-negotiated and the agreed, revised, fees were recorded in an endorsement to each of the policies (known as Endorsement No. 1). The material wording of each endorsement was identical. The agreed fee reductions were to apply on condition that the funds remained invested for five years unless a specified event occurred, including that—
“this condition will no longer apply in the event of the occurrence of any of the following:
. . .
Fee levels do not remain substantially competitive with market competition, as judged by the trustees.”
2 The plaintiff alleges that in May 2003, shortly after being appointed trustee of the trusts, it decided that the fees were not competitive with market competition. Its decision was, apparently, based upon a report prepared by the National Insurance Consulting Group of Deloitte & Touche (located in Boston) who were engaged by the settlor of the trusts to assess the fees. Early in 2004, after the plaintiff had established that the policies could not be transferred in specie, it gave notice to the defendant to surrender the policies with the intention of using the proceeds to acquire new policies from new insurers. The defendant disagreed that the fee levels were uncompetitive and, before remitting the proceeds of surrender, it deducted fees calculated not in accordance with the agreed reduced rates but the higher level of fees to which it would be entitled were the plaintiff unjustified in giving early notice of surrender.
3 The present application arose out of an application by the plaintiff, in a case management conference, to limit the scope of expert evidence to be adduced at the trial. Skeleton arguments were produced on that issue for a hearing in December that was re-scheduled for January 19th. At that hearing, I had three written arguments: two from Advocate Ozanne for the plaintiff dated August 29th and September 25th, respectively; and one from Advocate Edwards for the defendant, dated September 5th.
4 The defendant has pleaded (in paras. 11 and 12 of its defences) that:
“11. It was an implied term of the policies and/or of Endorsement No. 1 that the plaintiff would not exercise its judgment unreasonably, perversely or in bad faith.
12. . . . Moreover, the defendant denies that—
. . .
ii(i) the plaintiff exercised any judgment at all;
2009–10 GLR 135
i(ii) alternatively, that any purported exercise of judgment by the plaintiff was reasonable and/or that the plaintiff had any material on which to make any such purported judgment; and
(iii) the fee levels being charged at the time were not substantially competitive with market conditions within the meaning of Endorsement No. 1.”
5 At the hearing on January 19th, there was argument on the question of what “unreasonable” means in this context. The defendant submitted that the implied term required the plaintiff to take account of all relevant factors (whatever they may be), ignoring all irrelevant factors, and to take its decision “honestly, in good faith, with genuineness and without arbitrariness, capriciousness, perversity and unreasonableness” and submitted that was analogous to Wednesbury unreasonableness. The plaintiff disagreed and said the plaintiff was required to exercise its judgment “without arbitrariness, capriciousness, perversity and unreasonableness such that no trustee would have reached that decision.” (There is also an issue as to whether the plaintiff exercised any judgment at all. However, that is a question of fact to be determined at the trial and is not relevant to the present issue.) The plaintiff argues that public law principles of unreasonableness and, in particular, Wednesbury concepts should not be imported into commercial contracts.
6 On January 19th, there was also argument as to whether, at the substantive hearing, the court will have to hear evidence of what the market conditions were at the time of the decision to surrender the policies, as the defendant alleges. Or, whether the reasonableness of the plaintiff’s decision is to be assessed only by reference to the information that was then available to the plaintiff and whether matters of which it was unaware are irrelevant, as the plaintiff alleges. If the former is the correct test, it will involve expert witnesses in having to investigate the state of the competitive market at that time, thereby incurring expense in a, no doubt, time-consuming exercise that could be avoided if the latter is the correct test.
7 Advocate Ozanne, on behalf of the plaintiff, submitted that r.38(2)(c) of the Royal Court Civil Rules 2007, which specifies that the court’s duty to manage cases, includes “deciding promptly which issues need full investigation and trial and accordingly disposing summarily of the others”, which required that I decide this issue now in order to save expense and in the hope that it might lead to a speedy resolution.
8 I did not disagree with the need to try to control the costs that are being incurred in these proceedings, which are already considerable, but my concern was that in effect I was being asked to decide, as a preliminary issue, a matter that seemed to go to the heart of the dispute. I referred counsel to Part 60 of the Civil Procedure Rules and the Technology and Construction Court Guide, 2nd ed. (2005, rev. 2007), which in
2009–10 GLR 136
my opinion gives helpful guidance as to the hearing of a preliminary issue and states, for example (2 Civil Procedure 2009, section 2C–95, para. 8.6, at 429):
“8.6.1 If a party wishes to seek a PI hearing, either at the first CMC or thereafter, the party must circulate a precise draft of the proposed preliminary issues to the other parties and to the court well in advance of the relevant hearing.
8.6.2 If the court orders a PI hearing, it is likely to make such an order only by reference to specific and formulated issues, in order to avoid later debate as to the precise scope of the issues that have been ordered.”
9 I was concerned that the issues had not been formulated with the required degree of clarity. I therefore invited Advocate Ozanne to consider whether she wanted to pursue the matter at this stage, and if so, to formulate the issues and to apply to have them heard in advance of the trial. The hearing was adjourned to enable her to do so.
10 Advocate Ozanne then issued an application dated January 30th in the following terms:
“[The plaintiff applies] in accordance with Royal Court Civil Rules 2007, r.38(1) and (2) (b) (c) (d) (h) and (l) for an order that the following issue be heard as a preliminary issue of pure law in this matter:
‘Whether the correct legal test to apply to the facts to establish whether a decision maker (not being a public body) exercised its contractual discretion in a manner that was “unreasonable, perverse or capricious” (i.e. in bad faith) thus entitling the court to interfere with that decision is:
“[T]hat the decision maker came to a conclusion unreasonable in the sense of being arbitrary, perverse or capricious as it had no basis for reaching its decision.”’”
11 The application was supported by a written skeleton argument dated January 30th, to which Advocate Edwards responded with a written argument received at the Greffe on February 9th. Advocate Ozanne urged me to consider this as a preliminary issue in furtherance of the overriding objective in r.1 of the 2007 Rules. She submitted that the costs and time associated with compiling evidence to satisfy the wider test put forward by the defendant would be avoided and she informed me that her proposed expert had estimated the saving in costs to be a minimum of £44,000 and potentially as much as £100,000, before allowing for any costs that would be incurred in dealing with requests for further information and investigations after exchanging his opinion with the other side.
2009–10 GLR 137
12 Advocate Edwards opposes the application to take this as a preliminary issue. The crucial difference between the two advocates is the question as to whether the correct interpretation of the implied term is a matter of pure law or whether it has to be viewed in the context of the parties’ contractual relationship and hence can only be determined after hearing evidence.
13 Advocate Ozanne has referred to the decision of the Court of Appeal in Lymington Marina Ltd. v. Macnamara (4). The appellant (“LML”) developed land at Lymington to form a marina and in order to finance the project it issued 52 debentures for £4,000 each and granted each debenture holder a 98-year licence to berth a yacht in the marina. One such licence was issued in 1973 to Mr. R.S. Armitage, who transferred it to Air Commodore Macnamara; after his death, following a protracted dispute, his executor assigned the licence to the eldest son of Air Commodore Macnamara who wished to grant a sub-licence to his two brothers and sought permission for the sub-licence from LML. LML declined to give its approval on the ground that the proposed sub-licensee had not yet taken up residence. According to LML, one of the original reasons for setting up the marina was to provide a regular clientele and a source of income for the adjacent repairing business. LML feared that sub-licensees would be casual users of berths in the marina and hence less likely to use the repairing facilities and it had a concern that sub-licensees would not fit into the ethos of the marina.
14 The proposed sub-licensee challenged LML’s refusal to approve the sub-licence. A number of arguments were put forward by LML in the trial at first instance, including an argument that it had an absolute discretion whether or not to approve a sub-licence to a third party subject only to a restriction that it should act honestly and in good faith. In his judgment, Patten, J. held that LML had been wrong in taking the view that it could refuse consent on the ground that the sub-licence would be one of a number to be granted successively. He then held that LML’s decision was invalid on the test propounded in Associated Provncl. Picture Houses Ltd. v. Wednesbury Corp. (1), namely that a public body which misconstrues its own powers acts unlawfully and it is no answer to say that it acted in good faith. So, he held that LML’s decision was also invalid on this principle.
15 He rejected the argument that LML was entitled to act as it did because its belief as to the scope of its power to refuse approval was held in good faith. He rejected this argument on the ground that the refusal of approval in the circumstances would be outside the scope of the power of refusal. Alternatively, the exercise of the discretion to refuse in the circumstances would be unreasonable in the Wednesbury sense.
16 The issues raised in the appeal included on what grounds LML could refuse to approve a third party as sub-licensee: Was its refusal in fact for
2009–10 GLR 138
reasons that were permitted under the terms of the licence agreement? and, Was a refusal on good faith but in error as to the permitted grounds for refusing approval a valid refusal?
17 In her judgment on appeal, with which the other two appeal judges agreed, Arden, L.J. said ([2007] 2 All E.R. (Comm) 825, at para. [37]):
“[37] In my judgment, the judge was in error in using public law principles in this context, and so the declaration in para. 4 of the judge’s order requires amendment. The right approach was to ask whether any term should be implied into cl. 3(k)(ii) so that, even if LML exercised the power for reasons related to the identity of the proposed sub-licensee, the exercise of the power could still be set aside if the grounds for refusal of approval were, for instance, in bad faith or wholly unreasonable. A term is only to be implied into a contract in this type of situation if it is so obvious that reasonable parties would not have thought it necessary to include it or if the implication of the term is necessary to give the contract business efficacy: see Chitty on Contracts, (29 edn., 2004), vol. 1, pp. 774–776 (paras. 13–004 – 13–007).”
18 Having held that the grounds on which approval may be withheld are limited to those which relate to the proposed sub-licensee himself and which arise out of his proposed use of the marina, she considered whether there was any constraint on how LML exercises its powers within those limits. Is the decision valid provided LML did not act wholly unreasonably or is a higher standard to be implied? She held (ibid., at para. [42]):
“[42] . . . There can be no doubt that LML must act in good faith. But, leaving aside the obligation on LML to consider the application in good faith and to exercise the power within its proper scope, there is a range of possibilities. At one end of the spectrum, it may be said that the proper implication into the licence is that LML can only withhold approval if its decision is objectively justifiable. At the other end of the spectrum, it may be said that the only term to be implied is a term that LML should not act arbitrarily. There is a practical difference between these two ends of the spectrum, which is illustrated by the following example. Suppose that LML refuses to approve the grant of a sub-licence to X on the ground that it genuinely and on the basis of some material, but nonetheless mistakenly, considers that X’s understanding of English is poor, and that this could lead to an accident when X is manoeuvring his yacht into or in the marina. The licence holder may respond that LML has failed to make any appropriate investigations into X’s ability to speak English and that X is in fact able to understand and speak English sufficiently well. If LML has to establish that its decision is objectively justifiable, it may have to make investigations in this situation
2009–10 GLR 139
as to X’s ability to speak English. If its only obligation is not to act arbitrarily, then it need only have some basis for its decision.
[43] I have already set out the test for implying terms into a contract (see the end of [37] above). To apply that test, the power of approval in cl. 3(k)(ii) has to be considered in the context of the operation of the licence as a whole. The implication of a term that any refusal of approval should be objectively justifiable would be onerous to LML and therefore cannot be so obvious that the parties to the licence would not have thought it necessary to mention it. Likewise, and this is relevant to the question of business efficacy, the provisions of cl. 3 can work even if under cl. 3(k)(ii) LML’s rejection does not have to be on objectively justifiable grounds. If LML refuses its permission, the licence holder cannot go ahead with the sub-licence and that decision will no doubt result in inconvenience, but it will not as such impose any liability on either him or LML to prevent the licence holder making another application. In those circumstances, I do not consider the term could be implied that consent can only be withheld on objectively justifiable grounds.
[44] Nonetheless, I consider that there has to be implied a term that the power to withhold approval should be exercised in good faith and that the approval will not be withheld arbitrarily.”
19 In the present case, the funds were to remain invested unless “fee levels do not remain substantially competitive with market competition, as judged by the trustees.” In my view, the addition of the words “as judged by the trustees” adds a significant qualification. If the qualification had been omitted, I believe the question of whether the fees remained substantially competitive with market conditions would have been an objective test. But the qualification suggests a subjective, not objective, test. What the trustees may regard as competitive may not be what someone else would regard as competitive; the trustees may take account of factors that another person might disregard; or the trustees might regard some factors as being more significant than another person would judge them to be and the trustees may attach less weight to factors that another might regard as important. Adopting the reasoning of Arden, L.J. (ibid., at para. [43]), I believe that if it was intended that the trustees were to be able to justify their judgment on objective grounds, the parties to the endorsement would have had to have said so. Instead, what the endorsement states suggests that the trustees were to judge the competitiveness according to their own criteria.
20 In her judgment (ibid., at para. [44]) Arden, L.J. quoted a paragraph from the judgment of Mance, L.J. in Gan Ins. Co. Ltd. v. Tai Ping Ins. Co. Ltd. (3). The Gan case concerned the interpretation of a claims co-operation clause in a facultative reinsurance policy which provided that no settlement and/or compromise should be made and liability admitted
2009–10 GLR 140
without the prior approval of reinsurers. In the passage cited by Arden, L.J., Mance, L.J. held ([2001] 2 All E.R. (Comm) 299, at para. [76]):
“[76] In summary, the right to withhold approval was, here, Gan’s, and no-one else’s. It is a right to be exercised in good faith after consideration of and on the basis of the facts giving rise to the particular claim, and not with reference to considerations wholly extraneous to the subject matter of the particular reinsurance or arbitrarily. It is to be exercised by considering the claim as a whole. The court cannot substitute its own view of the reasonableness of a reinsurer’s decision to withhold approval under sub-clause (c).”
In my view, similar considerations apply in the present case and it would not be for the court to substitute its judgment of market competitiveness for that of the trustee.
21 In reaching that conclusion, I believe I have arrived at an answer to the question I was first asked by Advocate Ozanne, namely that it would not be relevant to receive expert evidence as to the general state of the insurance market at the relevant time or to decide whether, in absolute terms, the defendant’s fees were objectively competitive with the market.
22 There remains an issue as to the manner in which the plaintiff should have reached its judgment and what terms in that regard, if any, are to be implied into the written endorsement. In Socimer Intl. Bank Ltd. v. Standard Bank London Ltd (6) ([2008] 1 Lloyd’s Rep. 558, at para. 105), Rix, L.J. approved the judgment of Bingham, M.R. (as he then was) in Philips Elec. Grand Public S.A. v. British Sky Broadcasting Ltd. (5) in which he set out what Rix, L.J. called a “useful and authoritative modern restatement of the relevant principles upon which terms may be implied and of the rationale of doing or not doing so.” He included the following passage from BP Refinery (Westernport) Pty. Ltd. v. Shire of Hastings (President &c.) (2) (52 ALJR at 26), a decision of the Judicial Committee of the Privy Council:
“In [their Lordships’] view, for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.”
The Master of the Rolls added ([1995] E.M.L.R. at 481–482):
“This passage . . . distils the essence of much learning on implied terms. But its simplicity could be almost misleading.
The courts’ usual role in contractual interpretation is, by resolving
2009–10 GLR 141
ambiguities or reconciling apparent inconsistencies, to attribute the true meaning to the language in which the parties have expressed their contract. The implication of contract terms involves a different and altogether more ambitious undertaking: the interpolation of terms to deal with matters for which, ex hypothesi, the parties themselves have made no provision. It is because the implication of terms is potentially so intrusive that the law imposes strict constraints on the exercise of this extraordinary power . . .
The question of whether a term is to be implied, and if so what, almost inevitably arises after a crisis has been reached in the performance of the contract. So the court comes to the task with the benefit of hindsight, and it is tempting for the court then to fashion a term which will reflect the merits of the situation as they then appear. Tempting, but wrong. For, as Scrutton, L.J. said in Reigate v. Union Manufacturing Co. (Ramsbottom) Limited, [1918] 1 K.B. 592, at 605:
‘A term can only be implied if it is necessary in the business sense to give efficacy to the contract; that is, if it is such a term that it can confidently be said that if at the time the contract was being negotiated someone had said to the parties, “What will happen in such a case”, they would both have replied, “Of course, so and so will happen; we did not trouble to say that; it is too clear”. Unless the court comes to some such conclusion as that, it ought not to imply a term which the parties have not themselves expressed . . .’”
23 Advocate Edwards submits that the plaintiff relied on material which it ought not to have relied upon in making its decision and that the report produced was fundamentally flawed in that it failed to address the relevant questions. Yet the defendant has not pleaded that there was any express or implied term as to any factors that the plaintiff was required to take into account or any factors that it was to ignore on the grounds that they were not relevant.
24 The issue in the present case about implying a term into the endorsement includes argument about how the implied term is to be interpreted, including what the word “unreasonable” means in this context. In my view it is not going to be possible to resolve that issue as a preliminary issue because it will be necessary to hear evidence about the surrounding circumstances in order to understand what term can properly be implied and what the parties would have intended it to mean if it had been drawn to their attention at the time. I therefore feel it would be wrong for me to attempt to order the hearing of a preliminary issue as requested in the application before me.
Application refused.
2010
Law Report
None
Guernsey Law Reports 2009-10 GLR 131