Charman v New Cap Reinsurance Corporation Ltd

A contractual premium review clause has no effect merely because a triggering event occurs. The party relying on it must invoke the clause by notice. The notice must objectively leave a reasonable recipient in no doubt that the right is being exercised and identify the relevant ground. An invocation made for one contract year does not ordinarily operate as a continuing or prospective invocation for later events. The clause must be invoked within a reasonable time after the relevant year. Waiver or estoppel cannot excuse these requirements without a pleaded and evidenced basis. The appeal succeeded because the reinsurer did not invoke the clause for the later extraordinary claims development within time. The three-year reinsurance cover therefore remained in force.

John Robert Charman, representing members of Lloyd’s Syndicates 488 and 2488, appealed from a decision of Morison J in the Commercial Court. The judge held that the reinsurance policy was a three-year contract, that extraordinary claims development had not been established for 1997 but had been established for 1998, and that the reinsurer’s 1997 invocation of the premium review clause was a continuing act sufficient to affect the 1999 premium. The reinsurer had not expressly invoked the clause in respect of the 1998 events and had not nominated a new premium until the trial. The appeal concerned whether the clause had been invoked for the third year and what consequences followed from the absence of a timely invocation or premium nomination.

Appeal allowed. Rix LJ gave the leading judgment. Holman J and Potter LJ agreed with it.

1. The premium review clause had no effect merely because extraordinary claims development occurred. The reinsurer had to invoke its contractual right. Otherwise the parties would remain in an uncertain position.
2. Invocation required notice construed objectively and in context. The notice had to give the reasonable recipient clear guidance that the contractual right was being exercised and identify the ground relied upon. The court adopted the approach in Mannai Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, including its application to commercial contractual notices.
3. The communications in 1997 could not be construed as a continuing or prospective invocation for extraordinary claims development in 1998. The clause contemplated historical events, not speculation about future claims developments. Even assuming that the 1997 communications validly invoked the clause for 1997, they did not invoke it for the 1999 premium. The first reference to the 1998 events in May 2002 was outside a reasonable time.
4. There was no pleaded or evidenced waiver, estoppel or similar basis for excusing invocation. The Syndicates were entitled to reject the alleged 1997 extraordinary claims development and cancellation while seeking to keep the policy in force. It was the reinsurer that insisted the contract had ended.
5. The court did not need to decide whether valid invocation automatically caused the policy to lapse or whether nomination of a new premium was a condition precedent. Rix LJ indicated obiter that the wording and three-year structure suggested consensual machinery for determining an objectively fair increased premium, potentially with arbitration in the event of dispute, rather than an unfettered unilateral power to impose any premium. Any required nomination would also have had to be made within a reasonable time. The court separately observed that the presumption used in damages cases that a repudiating party would exercise a favourable option is generally factual, may not apply to options dependent on extraneous events, and does not apply where the contract remains open for performance.

The reinsurance cover subsisted for three years. The reinsurer was obliged to indemnify the Syndicates under the policy and was not entitled to nominate a new increased premium for the second or third years. The orders were varied accordingly, with provision for agreement or further application concerning third-year paid claims and interest. The reinsurer was ordered to pay the appeal costs.

• Court of Appeal (Civil Division): In [2003] EWCA Civ 1372, the appeal was allowed and the Commercial Court order was varied.
• Queen’s Bench Division, Commercial Court: Morison J held that the policy was a three-year contract, that extraordinary claims development existed in 1998 but not 1997, and that the reinsurer’s 1997 invocation continued for the 1999 year. The Court of Appeal rejected that conclusion.