A recent House of Lords decision could prompt a flood of
reinsurance claims, says Colin Peck.
At first glance, the recent House of Lords decision in Bank of Credit and Commerce (BCCI) v Ali (2001) does not appear to have anything to do with reinsurance, let alone reinsurance commutations (commutation is a settlement of all rights and liabilities passing between insurers and reinsurers). However, it has been suggested that, in certain circumstances, parties may use it to re-open a reinsurancecommutation.
The case was one of many spawned by the collapse of the BCCI in 1991. Ali, along with other employees including Naeem, had been made redundant as a result of a reorganisation at the bank in 1990.
In consideration of a payment from the bank, Naeem had signed an agreement stating the payment was "in full and final settlement of all and any claims, whether under statute, common law, or in equity of whatsoever nature that exist or may exist".
BCCI went into insolvent liquidation in 1991, amid well publicised allegations and subsequent findings of corruption and dishonest management. Naeem and other employees brought claims against the bank for damages arising out of the alleged stigma that was now attached to them as a result of their association with the bank and which, they argued, handicapped their search for future employment.
The BCCI argued that, by virtue of the general release contained in the settlement agreement, the employees were prevented from bringing any claims whatsoever, including claims that they were not aware of and/or that had not arisen when the agreement was signed. The employees argued that, both as a matter
of construction and in equity, the release could not apply to matters that were outside their contemplation at the time they entered into the agreement.
At first instance, Judge Lightman held that the general language of the release was sufficiently comprehensive to cover the claim that the employees now sought to pursue and hence found in the bank's favour.
On appeal, the majority of the Court of Appeal also held that, as a matter of construction, the wide nature of the language used in the release was sufficient to prevent the employees' claims.
However, the Court of Appeal also found that, in the circumstances, it would be somewhat excessive for the BCCI to be allowed to rely on the release, as the bank must be treated as having knowledge at the relevant time that it was engaged in a dishonest and corrupt business, which was concealed from the employees.
In a decision the House of Lords recognised might have wider implications, they held (by a majority of four to one) that, as a matter of construction, the release clause did not bar the employees' claims for stigma damages.
The majority held that in construing such general release clauses contained in settlement agreements, the court should give effect as to what the contracting parties intended, based on an objective judgment of their imputed intentions. The court should look at the contract as a whole, giving the words their ordinary natural meaning in the context of the agreement, the parties' relationship and all relevant facts.
The court accepted that, in a compromise agreement supported by valuable consideration, parties could agree to release claims or rights of which they were unaware and also of which they could not be aware, providing appropriate language was used to make it plain this was the intention.
On the facts, the court held that neither the bank nor the employees had contemplated, at the time they entered into the agreement, the possibility of a claim for stigma damages and accordingly the release could not apply to such claims.
What's in store?
So what impact is the judgment likely to have in relation to the re-opening of commutation agreements? There are several factors that ought to distinguish a commutation agreement from the type of settlement agreement with which the House of Lords was concerned.
Generally speaking, a commutation agreement will be one of two types. Either it will relate to specified contracts or a class of business, or it will be a global commutation in the sense of seeking to end all relations between the parties. In the former case, it should be clear to the parties (and the court) that the release, no matter how general the words used, only applies to those claims that relate to the specific contracts or class of business identified. As for the latter, the court should recognise that the parties' intention is to sever all links in respect of any insurance or reinsurance contracts between them, whether identified or not.
There is now the possibility, following the ruling, that the very basis of these contracts could be questioned in some way. This raises the question of whether one of the parties can seek to re-open the commutation.
Undoubtedly, the decision in BBCI v Ali suggests that, in some cases, this may be a possibility. However, there are certain aspects of the case, and of other authorities, that suggest the courts may be more reluctant to apply the decision to reinsurance commutations.
First, there is no doubt that the relative bargaining strengths of the bank and the employees played, to some extent, a part in the court's decision. This was amplified by the fact that it was accepted the BCCI must have had knowledge of its own wrongdoings at the time of entering into the agreement and that the employees did not.
The commercial reality of two insurance/reinsurance companies considering the extent of the business relations between them before entering into a commutation, no doubt carefully drafted by their lawyers, is likely to be viewed very differently by the courts, unless of course some wrongdoing can be established on the part of one of the parties.
Second, unlike Naeem who was paid out in full, there is an element of compromise in every reinsurance commutation, whether or not there is a dispute and/or proceedings have been issued. By entering into a commutation, both parties inherently recognise they have (or at least should have) undertaken a careful analysis of any likely future claims, both in terms of type and volume, and are taking a risk that no new claims will arise that might materially affect that analysis.
The mere fact that claims of a different type, or in larger numbers, subsequently arise under those contracts, should not constitute claims of a type that were not in the contemplation of the parties at the time they entered into the release.
Third, both the Court of Appeal and the House of Lords were clear that parties must be allowed to reach agreements that settle all claims, whether known or unknown, contemplated or not, as long as their intention is sufficiently clear from the wording.
Clarity is the key
As the House of Lords recognised in the earlier case of Jameson v CEGB and Ors (1999), there are very good public policy arguments to support finality in settlements and the law should discourage the re-opening of settlement agreements, as to do otherwise would create "an intolerable burden" on the courts themselves.
A simple way of ensuring finality is, of course, to draft the wording in such a way as to make it clear to the parties and the courts that all and any claims whether past, present or future and whether contemplated or not by the parties at the time, are intended to be excluded.