Jaffray & Ors v Society of Lloyd's

For deceit, a claimant must prove a material false representation of existing fact, fraudulent knowledge or recklessness, an intention that the representation be understood in its false sense and acted upon, actual reliance, and resulting loss.

A document’s representations are determined objectively from its language, purpose, audience and surrounding circumstances. The question is what a reasonable person in the representee’s position would understand. Contractual implication tests do not apply.

An auditing system may be represented as rigorous and capable of reasonably estimating unknown liabilities even though individual estimates are not guaranteed to be accurate. Proof that the system failed does not establish deceit without proof that the representor knew this, lacked honest belief, or was reckless as to the truth.

Former underwriting members of Lloyd’s alleged that brochures and global accounts issued between 1978 and 1988 fraudulently misrepresented the adequacy of Lloyd’s auditing and reserving arrangements for asbestos-related and other long-tail liabilities. A preliminary trial before Cresswell J was confined to the threshold fraud issue, with reliance also considered for three sample members. The judge determined that issue for Lloyd’s.

The members appealed on limited grounds and sought permission to argue that procedural irregularities had denied them a fair trial. The central merits questions were whether the publications contained actionable representations, whether those representations were false, and whether Lloyd’s knew of or was reckless about their falsity.

1. Appeal dismissed. In a joint judgment delivered by Waller LJ, the court held that Cresswell J had correctly determined the threshold fraud issue for Lloyd’s, although his conclusion that the brochures contained no relevant representation was wrong.

2. The brochures objectively represented that a rigorous auditing system existed which involved making reasonable estimates of outstanding liabilities, including unknown and unnoted losses. They also represented that Lloyd’s believed such a system was in place. Later brochures conveyed substantially the same meaning despite omitting the word “rigorous”. The broader pleaded assurances that Lloyd’s would safeguard members’ interests or ensure accurate syndicate accounts were too vague or wide. The global accounts contained no relevant representation because they included substantial warnings about asbestos-related and general-liability losses.

3. The auditing-system representations were false. Although a regulated system existed, hindsight demonstrated that incurred-but-not-reported liabilities had been grossly underestimated and that the system did not produce reasonable estimates throughout the relevant period.

4. Deceit nevertheless failed. Applying Derry v Peek, the members had to prove that Lloyd’s knew or believed the representations were false, lacked honest belief in them, or was reckless whether they were true. The evidence fell short of the demanding standard appropriate to allegations of fraud. The Murray Lawrence and Randall letters instructed underwriters and auditors to make proper assessments, contemplated leaving accounts open, and advised informing members. Subsequent monitoring, auditing and reserving activity did not prove that those at Lloyd’s ceased honestly to believe the system was capable of working.

5. The court therefore found it unnecessary to decide the difficult corporate-attribution issue or finally determine reliance by the sample members.

6. Permission to appeal on unfair-trial grounds was refused. Equality of arms requires a reasonable opportunity to present a case without substantial disadvantage, assessed from all the circumstances. The extensive case-management, disclosure and confidentiality arrangements were fair. The represented members had not sought an adjournment or appealed the relevant interlocutory rulings.

1. Court of Appeal (Civil Division): The appeal on the threshold fraud issue was dismissed. Permission to appeal on the ground that the trial was unfair was refused.
2. High Court, Queen’s Bench Division, Commercial Court: Cresswell J determined the threshold fraud issue adversely to the claimant members by an order dated 3 November 2000. The lower court citation is not stated in the judgment.