Before: The Hon. Mr. Justice May
 
 

B E T W E E N

JUDGMENT
 
DATED: 2 May 1996

MAY J

I am giving this judgment in open court at the request of both parties.

The plaintiffs claim damages for negligence by the defendant valuers alleging that they over-valued a property for mortgage purposes. The defendants gave a valuation on 23.1.91 of £500,000 for a property known as Welford Grange, Sulby, Northamptonshire, upon the security of which the plaintiffs lent money. The plaintiffs' case is that this valuation was negligently inaccurate, the open market value being £350,000. The defendants deny negligence. They say that the valuation was accurate or within a reasonable range of the true open market value. The trial is due to begin on 17.6.96.

This is an application by the plaintiffs to strike out para 12(b) of the Amended Defence under RSC Order 18 r. 19(1) (a) and under the court's inherent jurisdiction upon the submission that the allegation there is bound to fail. They also want to be relieved from answering some interrogatories which depend on this sub-paragraph. By the sub-paragraph, the defendants seek credit, on a quantification of damages if they are held liable, for:

"the value of any sums received by the plaintiff under a mortgage indemnity guarantee policy of insurance taken out in relation to the alleged advance".

No evidence is admissible on the application under Ord 18 r. 19(1) (a) and none has been admitted upon this application, but it appears that there was such a policy since the plaintiffs claim the premium as part of their loss. It was a common acceptance in the submissions of both parties that lenders in the circumstances of the plaintiffs habitually take as security a charge over the mortgaged property and a personal covenant from the borrower. They may also sometimes effect mortgage indemnity guarantee ("MIG") insurance against the risk that the borrower defaults and the value realised on sale of the property is too small to repay the full capital sum advanced.

As the law presently stands, if the plaintiffs establish that the defendants were negligent and that the transaction would not have proceeded if the defendants had not been negligent, they are entitled as damages to the net loss which they have sustained as a result of entering into the transaction - Banque Bruxelles Lambert SA v. Eagle Star Insurance Co Ltd [1995] QB 375. They have to give credit for what they have recovered, eg. for the net proceeds of sale of the mortgaged property. The defendants submit that this credit should include proceeds of any MIG policy. The principle in the BBL case is currently under consideration by the House of Lords whose judgment is awaited. It is possible that, when the decision in that appeal is given, the issue before me may cease to be relevant or need to be reconsidered upon altered principles. But I am persuaded that I should not for this reason defer making a decision on this application and I am confident that the impending trial can accommodate, if necessary, any contingent adjustment which might be needed.

A plaintiff who has recovered part of his loss from a third party normally has to give credit for what he has already received. The plaintiffs submit that proceeds of insurance policies are an established exception to this. This, they say, is because (1) the insurance proceeds are a benefit which has been paid for by the plaintiff and they should not become a benefit of the defendant and (2) the proceeds are not payable because of the defendants' breaches of duty but because the plaintiffs insured against whatever peril has happened. This does not result in double recovery because of the insurer's right of subrogation or because damages recovered from the defendants have to be returned to the insurers if they have already made a payment to the insured plaintiffs.

The principle on which the plaintiffs rely is to be found in Bradburn v. The Great Western Railway Co (1874) 10 LR Exch. 1 and Parry v. Cleaver [1970] AC 1. In Parry v. Cleaver, Lord Reid said at page 14E:

"As regards moneys coming to the plaintiff under a contract of insurance, I think that the real and substantial reason for disregarding them is that the plaintiff has bought them and that it would be unjust and unreasonable to hold that the money which he prudently spent on premiums and the benefit from it should enure to the benefit of the tortfeasor. Here again I think that the explanation that this is too remote is artificial and unreal. Why should the Plaintiff be left worse off than if he had never been insured? In that case he would have got the benefit of the premium money: if he had not spent it he would have had it in his possession at the time of the accident grossed up at compound interest."

Lord Pearce said at 35A:

"One must, I think, start with the firm basis that Bradburn v. Great Western Railway Co was rightly decided and that the benefits from a private insurance by the plaintiff are not to be taken into account. That case was accepted in this House in British Westinghouse Electric and Manufacturing Co Ltd v. Underground Electric Railway Co of London Ltd [1912] A.C. 673, a case on a different point. Viscount Haldane L.C. there said (at p. 690):

'The reason of the decision was that it was not the accident, but a contract wholly independent of the relation between the plaintiff and the defendant, which gave the plaintiff his advantage.'

In The Yasin [1979] 2 Lloyd's Rep 45, Lloyd J rejected an argument that insurance should only be left out of account where the plaintiff himself pays the premium.

The plaintiffs submits that the proceeds of MIG insurance can only be seen as for the benefit of the lender, and not for the borrower nor for a valuer or solicitor who may be held liable for the lender's loss. They rely on what Staughton LJ said in The Mortgage Corporation v. McNicholas (1992, unreported):

"... it seems to be inconceivable that any insurance company would be stupid enough to provide insurance in favour of individuals in the event of their not paying their debts. It would be a licence to claim money. So I do not accept that the mortgage indemnity policy provides any ground of appeal to Mr McNicholas [the Borrower]."

The same point was made by Waller J in Woolwich Building Society v. Brown (1995, unreported) and by Judge Charles Harris QC in Household Mortgage Corporation plc v. Abbott and Collins (1994, unreported). In Portman Building Society v. AB & Co (1995, unreported) in which the defendant solicitors claimed credit for the proceeds of MIG insurance, Ian Kennedy J said:

"If this were to be seen as a dispute between insurers, the insurers of the plaintiffs' security on the one hand and the errors and omissions insurers of the defendants on the other, then the question would be which insurer was on risk for the relevant misfortune? So viewed, the answer would be clear beyond argument."

There are at least eight cases, including those to which I have already referred, in which the point at issue in this application has been decided in favour of the lender. The additional cases are:

Banque Bruxelles Lambert SA v. Eagle Star (1993, unreported, Phillips J)

MTL Funding (Berkeley) Ltd v. Greenslade Hunt (1995, unreported JP Wadsworth QC)

Cheltenham & Gloucester BS v. Manico & Panton (undated, Anthony Hooper QC)

Hypo-Mortgage Services Ltd v. SL & AG (1996, Judge Hallgarten QC)

In the BBL case, Phillips J said:

"The first basis upon which Mr Lamb contends that BBL's insurance cover is relevant is on the basis of a Latin rubric that he has invented, namely, that the insurance is 'res inter has partes'. The argument goes as follows: Lewis & Tucker's valuation was sought for two interrelated purposes, first, as the basis for the amount of the loan facility that BBL would be prepared to advance and, secondly as a basis for the insurance cover which BBL had to obtain as a precondition of making the loan. In hese circumstances, if Lewis & Tucker's services procured valid insurance cover, BBL cannot disregard this when contending that Lewis & Tucker's breach of duty has caused loss and to the extent that BBL have lost the benefit of their insurance cover through their own fault they cannot recover damages from Lewis & Tucker.

I accept Mr Lamb's argument that part of the object of his clients' valuation was to assist in the procurement of insurance cover. I do not accept, however, that the consequence of this fact is that Lewis & Tucker are entitled to rely on BBL's rights under this cover as a relevant factor when assessing the damages cause to BBL by being induced by the valuation to grant the facility.

This, in my judgment, is precluded by the fundamental principle of English law that insurance is 'res inter alios acta' - see Bradburn v. Great Eastern Railway [1874] L.R.Exch. 1, Parry v. Cleaver [1970] A.C. 1, The Yasin [1979] 2 Lloyd's Rep 45 and Smoker v. London Fire Authority [1991] 1 A.C. 502, [1991] 2 All ER 449."

Phillips J then said that the principle was subject to exceptions and referred as an example to Mark Rowlands Ltd v. Berni Inns [1986] 1 QB 211, where the conclusion was that the defendant was entitled to the benefit of the contract of insurance although not named as an assured. That was not the position in the case before him, and he could not see any other basis for arguing that justice required that he should have regard to the fact of BBL's insurance cover when assessing the damages flowing from Lewis & Tucker's breach.

Apart from cases where insurance proceeds have been allowed without argument as a credit against lenders' losses, there is one first instance case only in favour the defendants' contention. This is Alliance & Leicester BS v. Edgestop (1994, unreported) in which, on an application for an interim payment under Ord 29, Knox J considered whether payments under MIG policies should be taken into account and said:

"Mr Purle relied on what Phillips J. decided in the BBL case to the effect that insurance monies did not have to be brought into account because the policies were res inter alios acta. This was a statement of the effect of an earlier ruling which he had given of which I have not see a transcript. I am not persuaded that it would be right for me to apply that analysis because I am not satisfied that on the facts of the transactions here in issue the insurance can be accurately described as res inter alios acta. On the contrary the indications are that it was a term of the fraudulently induced transactions that the insurance should be effected. On that basis it seems to me to be more like res inter eosdem facta, more significantly something for which on an application such as that before me I should require credit to be given".

None of the cases to which I have referred which were decided after the Alliance & Leicester case followed Knox J's decision - see MTL Funding, Portman Building Society, and Hypo-Mortgage Services. However, a paper application for leave to appeal against the decision in MTL Funding was allowed by Hirst LJ whose brief written reasons were the he considered the point of law raised in the Notice of Appeal - which I have not seen - was reasonably arguable "particularly in the light of the decision of Knox J. in Alliance & Leicester Building Society v. Edgestop, referred to in ground 2 of the Notice of Appeal and (somewhat dismissively) on pages 4 and 5 of the judgment [i.e. in M.T.L. Funding]". It looks as if this appeal did not proceed to a hearing.

Mr Evans-Tovey has before me advanced a very thorough and carefully constructed and presented submission to the effect that, notwithstanding the battery of apparently adverse decisions, Knox J's decision should be seen as correct for the facts of this case and that accordingly para 12(b) of the Amended Defence should not be struck out. I summarise what I understand to be the essence of his submissions thus. Damages quantified in accordance with the judgment of the Court of Appeal in BBL require credit to be given for all sums received as a result of entering into the loan transaction. An insurance policy effected before and independently of an event which gives rise both to liability of a defendant to a plaintiff and to indemnity under the policy in favour of the plaintiff is to be distinguished from an insurance policy effected as a result of the event which gives rise to such liability. The former is subject to the Parry v. Cleaver principle: the latter may not be and is not on the facts of this case. This is because the Parry v. Cleaver Principle depends essentially on causation and public policy. Questions of subrogation may arise but the Parry v. Cleaver principle is not dependent on considerations relating to subrogation. Where the insurance is effected independently of and before the event giving rise to liability, the insurance proceeds do not result from the event but from an independent or collateral transaction and are to left out of account. Where the insurance is effected as a result of the event, the insurance proceeds do result from the event, are not independent or collateral and are to be taken into account. That is what Knox J decided and he is right, submits Mr Evans-Tovey. The other decisions are wrong in so far as they dealt with policies effected as a result of the alleged breach of duty. Hirst LJ considered that there was a reasonable argument that Knox J was correct. There are no policy considerations suggesting that the court should hold otherwise. The submission is reinforced by the fact that the plaintiffs are claiming the cost of the premium from the defendants as part of their loss.

Mr Evans-Tovey submits that this is a case where it is not difficult to conclude that the making of any MIG insurance was directly attributable to the alleged breach of duty. The whole transaction, including the MIG insurance, followed directly upon the valuation and was the result of it. He submits that there are no public policy considerations against credit being given. On the contrary, it would be unjust for the plaintiffs to recover both the cost of the premium and the proceeds of the insurance from the defendants. The MIG insurance is to be seen as indistinguishable from the other forms of security which a lender takes and for whose proceeds credit is to be given under the BBL decision, ie. the borrower's covenant and the legal charge. As to subrogation, Mr Evans-Tovey submits that subrogation is essentially an equitable doctrine designed to prevent unjust enrichment. Whether the doctrine of subrogation applies in this case depends, not upon matters of public policy, but upon the other factors referred to in Mr Evans-Tovey's submission and whether as a result of those other factors the MIG is wholly independent of the alleged breach. If the MIG is wholly independent of the alleged breach, the doctrine of subrogation will not be available to insurers.

Mr Evans-Tovey also submits that the question at issue should not be decided against the defendants without discovery of documents relating to the MIG policy. He says that the issue cannot be determined without investigating upon evidence the details of any policy and how it came to be made - whether it gives insurers a right of subrogation against the valuers and whether it may properly be said to be collateral in so far as that is a question of fact. He makes no concessions about these matters. He also suggests that the court could permit the deletion by amendment of the words "policy of insurance" from sub-para 12(b) 50 as to leave the defendants' contention as simply dependent on a "mortgage indemnity guarantee". I am not persuaded by these submissions. In my view, I have to decide the application upon the substance of what the defendants themselves plead. The deletion of "policy of insurance" does not change that substance. As to investigating the details upon evidence, it seems to me that what is alleged is bound to embrace as minimum features something in the nature of insurance or guarantee effected by the plaintiffs by payment of a premium which did not derive from the defendants which entitled the plaintiffs to indemnity if the borrower defaulted and other security for the loan proved insufficient. The same questions relating to subrogation will arise whatever the details.

It is correct that the Parry v. Cleaver principle has been expressed in terms of causation, although Lord Reid in Parry v. Cleaver itself may be read in the passage which I have already quoted as saying otherwise. In Bradburn, Pigott B said (at p 3):

"He does not receive the sum of money because of the accident, but because he has made a contract providing for the contingency; an accident must occur to entitle him to it, but it is not the accident, but his contract, which is the cause of his receiving it."

In British Westinghouse Electric v. Underground Electric Railway [1912] AC 673, a leading case on the subject of mitigation of loss, the injured party purchased machinery of a different type and kind which resulted in a pecuniary advantage to the injured party. It was held that in the circumstances there was to be no exception to general principle and that the injured party had to give credit for the pecuniary advantage. I have already quoted what Viscount Haldane LC said of Bradburn as part of Lord Pearce's opinion in Parry v. Cleaver who also discusses the issue in terms of causation at p. 36. Of the British Westinghouse case itself Viscount Haldane LC said (at p. 691):

"I think the principle which applies here is that which makes it right for the jury or arbitrator to look at what actually happened, and to balance the loss and gain. The transaction was not res inter alios acta, but one in which the person whose contract was broken took a reasonable and prudent course quite naturally arising out of the circumstances in which he was placed by the breach. ... it formed part of a continuous dealing with the situation in which they found themselves, and was not an independent or disconnected transaction."

Mr Evans-Tovey also refers to the opinions in Parry v. Cleaver of Lord Wilberforce at p. 42 and of Lord Pearson at pp. 46-50 concluding with the words (at p 49H):

"In my view those judgments were saying, in effect, though the phrases were not used, that the item of insurance money was too remote and collateral to be properly deductible from damages payable for the Plaintiff's injuries and detriment to his business which arose directly and naturally from the accident."

He submits that Lord Reid's explanation in Parry v. Cleaver of the principle, which I have already quoted, ie. that insurance proceeds are disregarded because the plaintiff has bought them and it would be unjust and unreasonable to hold that the proceeds were for the benefit of the tortfeasor, should be seen in the context of a case where premium was paid before the event and where the plaintiff could not claim the premium from the defendant as part of his loss.

In Hussain v. New Taplow Mills [1988] 1 AC 514, Lord Bridge said, at p 527, that financial gains accruing to the Plaintiff which he would not have received but for the event which constitutes the Plaintiff's cause of action are prima facie to be taken into account in mitigation of losses which that event occasioned to him; and that in many, perhaps most, cases both losses and gains will come into the calculation. He referred to two established exceptions, ie. receipts under insurance policies where the plaintiff had paid the premium and receipts from benevolence and said of these:

"But in both cases the common sense of the exceptions stares one in the face. It may be summed up in a rhetorical question: why should the tortfeasor derive any benefit, in one case, from the premiums which the plaintiff has paid to insure himself against some contingency, however caused, in the other case, from the money provided by the third party for the sole intention of benefitting the injured plaintiff?"

He then said that there is a variety of borderline situations to which there is no obvious answer and said:

"Many eminent common law judges, I think it is fair to say, have been baffled by the problem of how to articulate a single guiding rule to distinguish receipts by a plaintiff which are to be taken into account in mitigation of damage from those which are not."

I accept that a preponderance perhaps of the authority referred to expresses the Parry v. Cleaver principle in part at least in terms of causation. For myself I find this an elusive concept in this context, since there is just as much linguistic sense in saying that MIG insurance proceeds result from a valuer's breach of duty as that they result independently from the plaintiff's prudence in effecting the insurance. I have difficulty in seeing the intrinsic difference in borderline cases between an event which is causative and one which is merely an antecedent necessity. The fact that in other instances insurance may be effected before the breach of duty relied on does not in my view affect the problem nor change the character of the proceeds of that insurance. I respectfully agree with those who believe that the continued use of latin gobbets by English lawyers in the last years of 20^th Century is unhelpful when many, perhaps most, younger people cannot now even construe them with confidence and when their use tends to obscure by imprecision or misunderstanding any principle or concept which they may be used to state. Nor do I consider that the problem is readily answered by inquiring whether the insurance transaction is, or is not, independent of or collateral to the breach of duty, since those expressions are by themselves capable of such a wide spectrum of possible meaning that, without further definition, an answer cannot be reached. In my view, it is the nature of the transaction, not its temporal or consequential relation to the breach, which should be looked at. The nature of the transaction is one of insurance or guarantee and I consider that the critical questions here are whether the insurance or guarantee was effected for the benefit of the defendant and whether the insurer or guarantor has, or would in appropriate circumstances have, rights of subrogation against the defendant valuers. These are really two facets of the same question and they are, I believe, at the heart of Lord Reid's reason for the rule in Parry v. Cleaver and Lord Bridge's explanation in Hussain v. New Taplow Mills of why the "common sense of the exceptions stares one in the face."

If the insurance or guarantee was not effected for the benefit of the defendant, then it is obvious common sense that he should not receive the benefit of it. In my judgment, there is no basis for contending in this case that any insurance or guarantee of the kind which the defendants assert in their para 12(b) was effected for their benefit and that applies whatever the precise incidents of such a transaction may be. They did not pay or contribute to the premium and although the plaintiffs claim the premium as part of their loss in these proceedings, it does not follow that that claim will succeed. That remains to be seen. Even if it does, I do not see that that would entitle the defendants to the benefit of the proceeds, since they would be paying the premium, not as a premium to insurers, but as an expense incurred by the plaintiffs. And insurers, even if they recover in full under a subrogated claim, will still have provided the cover and undertaken the risk for which the premium was paid.

I do not accept Mr Evans-Tovey's submissions on subrogation. It is clear, in my view, that MIG insurers do have a claim by subrogation against the defendants to the extent that the plaintiffs have a claim. The MIG insurance covers within the terms of indemnity or guarantee loss resulting from breach of the borrower's covenant. That is the same loss as in the current state of the law is recoverable for breach of duty established against the valuer. Although one aspect of subrogation is that an insured who has been indemnified has to account to the insurer for losses recovered from third parties, another aspect is that the insurer is entitled by subrogation to prosecute the insured's claims against third parties. That in my view applies here to any insurance or guarantee of the kind which the defendants assert in their para 12(b). It seems inconceivable that any insurer would be stupid enough (to adopt Staughton LJ's words) to forego subrogation rights against third parties when neither they nor the insured had any interest in doing so.

For these reasons, in my judgment the Parry v. Cleaver principle applies to what the defendants allege in sub-para 12(b) of their Amended Defence. I respectfully agree with Hirst LJ that the point taken by Mr Evans-Tovey is reasonably arguable but, having heard full argument, I consider that the contention is bound to fail. Mr Evans-Tovey sensibly invited me to decide the point rather than to permit the pleading to remain simply on the basis that it was reasonably arguable, although he did preserve his procedural points. Having dealt with the procedural points, I do decide the main point in favour of the plaintiffs and that therefore the subparagraph should be struck out. The plaintiffs should also be relieved from answering those interrogatories which depend on this allegation.