Absalom v TCRU Ltd

A commercial contract must be construed objectively, by reading its language in the context of the whole document and the admissible background available to both parties. The court does not first assign an isolated clause a literal meaning which another party must then displace.

Business common sense informs that contextual inquiry. Evidence arising after the contract was made cannot establish its meaning. Where a deposit premium forms part of the total premium, brokerage expressed as applicable to the deposit premium and the minimum or adjusted premium does not permit commission to be charged twice on the deposit element.

A reinsurance broker appealed from the determination of Aikens J in the Commercial Court, [2005] EWHC 1090 (Comm). The dispute concerned four excess of loss reinsurance contracts and seven burning cost contracts. Their brokerage clauses provided for 15% brokerage on, or applicable to, the deposit premium and the minimum premium or rate.

The judge held that the broker could charge brokerage when the deposit premium became payable and on the later adjusted premium after accounting for that deposit. The broker could not charge twice on the deposit element.

The central issue was whether, on the proper construction of the contracts, brokerage was payable both on the deposit premium and on the entire adjusted premium without deducting the deposit already paid.

1. Appeal dismissed unanimously. Longmore LJ, with whom Jacob and May LJJ agreed, held that the brokerage clauses did not entitle the broker to receive commission twice on the deposit element of the premium. The preliminary issue was answered in the same way as it had been by Aikens J.

2. The natural and ordinary meaning of contractual language must be determined in the context of the whole document and the admissible background. There was no preliminary burden on the reinsured to displace a supposedly literal, cumulative meaning of the word “and”. The court could determine the words’ ordinary meaning directly from their context.

3. The premium clause showed, particularly through the words “in all”, that the deposit premium formed part of the total premium. A deposit was the first instalment or part payment of the greater sum eventually payable. When the adjusted premium became due, the deposit coalesced with that greater amount. The deposit was not paid twice, and the associated brokerage was likewise not payable twice.

4. This construction accorded with business common sense. An interpretation granting double commission on the deposit was commercially surprising and unrealistic. If the parties had intended more generous remuneration, a different brokerage rate or basis would have been a more natural means of providing it. Jacob LJ regarded the cumulative construction as unrealistic. May LJ added that “and” is not invariably cumulative and was not cumulative in these clauses.

5. The softness of the reinsurance market was potentially part of the admissible background, but it was only a slender aid to construction. A party’s favourable negotiating position did not require its interpretation of remuneration provisions to be preferred. Calculations said to demonstrate under-remuneration were also impermissible because they depended on material arising after the contracts were made and did not account for the wider programme.

6. The same construction applied to the later excess of loss contracts. Under the burning cost contracts, where the fixed-rate option had been exercised, the broker was entitled to 15% of the actual premium, including its deposit part, but not to an additional commission on that deposit.

1. Court of Appeal (Civil Division): Permission to appeal was granted during the hearing. The appeal in [2005] EWCA Civ 1586 was dismissed unanimously, and the answer given to the preliminary issue by Aikens J was affirmed.

2. High Court, Queen’s Bench Division (Commercial Court): Aikens J, in [2005] EWHC 1090 (Comm), held that the broker could receive brokerage on the deposit premium and on the later premium adjustment after accounting for the deposit, but could not receive commission twice on the deposit element.