Case No: 2001 Folio 492
Case No: 2001 Folio 616
Case No: 2001 Folio 625
 [2003] EWHC 302 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 27th February 2003
Before :

THE HONOURABLE MR JUSTICE LANGLEY
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Between :

	(1) GE REINSURANCE CORPORATION
(formerly known as “Kemper Reinsurance Company”)
(2) GREAT LAKES REINSURANCE (UK) PLC
- and -
(3) SPHERE DRAKE INSURANCE LTD
(formerly known as “Odyssey Re (London) Ltd”)
-and –
(4) ROYAL & SUN ALLIANCE INSURANCE PLC	

Claimants	
	-	and –		
	 NEW HAMPSHIRE INSURANCE COMPANY

- and –
WILLIS LIMITED
(Formerly “Willis Faber & Dumas Limited”)	Defendants/Pt 20 Claimants

Part 20 Defendants	

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Mr A. Schaff QC and Mr T. Weitzman (instructed by Messrs Barlow Lyde & Gilbert, Charles Rusell, and Herbert Smith) for the Claimants
Mr M. Howard QC and Mr S. Salzedo (instructed by Messrs Norton Rose) for the Part 20 Claimants/Defendants
Mr M. Hapgood QC and Miss H. Davies (instructed by Lovells) for the Part 20 Defendants

Hearing dates : 10th –13th February 2003
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Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

.............................The Hon. Mr Justice Langley

Mr Justice Langley : 
INTRODUCTION
1.	This is a film finance insurance case with a difference. It concerns insurance of the risk of default, by a start-up film distribution and production company, on repayment of sums due on notes issued to provide the capital of the company rather than the more usual insurance of a revenue shortfall on a specific film or slate of films.
2.	The insured were the Trustees for noteholders who provided US$ 100m. The notes were issued by a wholly-owned subsidiary of Destination Film Distribution Co. Inc. (“Destination”). The total sum insured was $118.75m (to include interest). The policy period was 14 October 1998 to 15 October 2003. The notes were issued on 15 October 1998 and were to be repaid on 15 October 2003. Destination is currently insolvent. Claims for non-payment of interest on the notes have already been made and there is little prospect of Destination repaying the principal sum of $100m when it falls due in October of this year.
3.	The Claimants in the three claims, which were ordered to be tried together, are the reinsurers of about 37% of the part (60% of 100%) of the risk written by AIG Europe (UK) Limited on behalf of the defendant “New Hampshire”. The balance of 40% was subscribed by Axa Reinsurance UK Plc (“Axa”). The reinsurers seek declarations that they are not liable under the reinsurance contracts made between them and New Hampshire. I shall refer to the reinsurers as Kemper, Great Lakes, Odyssey Re and R&SA. They allege breaches of two warranties: a warranty about the employment by Destination of a Mr Stabler and a retention warranty. New Hampshire counterclaims for declarations that reinsurers are liable under the contracts (and for sums due by way of interest on the notes). In the alternative, if reinsurers are not liable, New Hampshire claims damages from the Part 20 defendant (“Willis”). Willis was the broker who effected both the insurance and reinsurance. Willis admits it owed duties in contract and tort to New Hampshire to obtain reinsurance which was co-extensive with the liabilities of New Hampshire under the insurance contract and to obtain reinsurance which did not contain a retention warranty. In effect that is an admission of liability to New Hampshire should reinsurers succeed against New Hampshire on either ground on which they rely. Willis also contends that New Hampshire was contributorily negligent in not questioning the terms of the insurance and reinsurance.
4.	Despite the sums involved, it is a tribute to all parties that the issues were sufficiently defined that a statement of agreed facts was produced, oral evidence and submissions were limited to a concise minimum and were completed well within the estimated time allotted to the trial by the court.
THE REINSURANCE
The Reinsurance Slip
5.	The disputed reinsurance contracts are contained in a slip (“the reinsurance slip”) and an endorsement. The reinsurance slip was scratched by reinsurers on various dates in August and September 1998 with the exception of “Great Lakes” which wrote a 4% line on 27 November 1998 in place of “Deutscher Lloyd”. A 3% line on the reinsurance was written by General Star International Indemnity Ltd.(“Genstar”) which alone of the reinsurers is not a party to the claims.
6.	So far as material, the reinsurance slip provided :
TYPE: Contingency Reinsurance –As Original 
FORM: JI NMA 2037 and/or Companies equivalent
REINSURED: AIG Europe (UK) Limited ….
ORIGINAL INSURED: The Trustees … in respect of: finance provided under Destination … Distribution, Production and Acquisition Facility ….
PERIOD: To accept Film Declarations made under … Facility during the policy period of 5 years from date to be agreed – As Original.
INTEREST: To indemnify the Reinsured in respect of their obligations under original policy no MCC 1018.
ORIGINAL INTEREST: Whereas Destination intends to invest in various motion pictures …
….
Whereas Destination intends to raise USD 100m for their Distribution, Production and Acquisition Facility via a bond issue or bank financing ….
Now this Policy is to indemnify the Insured in respect of any shortfall in revenue necessary to satisfy the obligations due to the bond holders or lenders arising from the failure of recoupment of the approved films described within the “Operating Agreement” between Destination and Insurers.
ORIGINAL SUM INSURED: ….
SUM INSURED HEREON: 40% part of 60% part of 100% of Original Limits.
Ceding Company retains 20% (with Reinsurance). (My Emphasis).
As set forth in the original Policy and Operating Agreement.
CONDITIONS: 	
Full Reinsurance Clause
Simultaneous Settlements Clause
As per Original Policy to be issued.
Claims Co-operation Clause.
Film declarations and Prints and Advertising Expenditure falling outside of the parameters set forth in the “Operating Agreement” between Destination and the Original Insurers to be approved by Reinsurers.
In years two through five overhead will be deducted from revenue.
Contracts of employment in respect of Steve Stabler as Chief Executive Officer and Brent Baum as Chief Operating Officer to be maintained for the duration of the Policy.(My emphasis).
Reinsurers shall be entitled to their pro-rata proportion of the adjustment premium calculated at an amount equal to 5% of the Net Profit … as defined in the Operating Agreement….
Destination shall be entitled to roll revenues earned … into new projects to be declared hereunder subject otherwise to the approval of insurers.
….
ORIGINAL NET PREMIUM: USD 10,285,000
REINSURANCE PREMIUM HEREON: USD 4,114,000 being 40% part of 60% part of 100% of original net premium. 
OVER-RIDER COMMISSION: 5% of original net premium.
BROKERAGE HEREON: Nil
INFORMATION: All information as seen and agreed by Reinsurers hereon, as contained in the Original “Underwriting Information” package dated 5 August 1998.

The Stabler Wording
7.	The second of the two provisions of the reinsurance slip which I have emphasised gives rise to the first claim by reinsurers. The “condition” that a contract of employment in respect of Mr Stabler “be maintained for the duration of the Policy” (“The Stabler Wording”) is said to be a warranty requiring the continuation of Mr Stabler’s employment as CEO by Destination for 5 years. There is no dispute that on 8 November 1999 Mr Stabler ceased to be employed by Destination. It is also agreed that Mr Stabler “was a key individual in respect of the underlying transaction to be financed with the proceeds of the loan notes (i.e. the start-up of Destination)” and that Mr Stabler was “the creative mind” of Destination and intended to be in charge of production at Destination. 
The Retention Provision
8.	Reinsurers also contend that the first of the two provisions of the reinsurance slip which I have emphasised, namely “Ceding Company retains 20% (with Reinsurance)” required New Hampshire to retain 20% of the risk for its own account. There is no dispute that in early 1999 New Hampshire reinsured either the full 20% line (as reinsurers contend) or 19% of it (as New Hampshire contends). The reinsurer was Genstar.
9.	There is a threshold issue concerning the proper construction of the retention provision and in particular the words in parentheses “with Reinsurance”. Subject to that, there is also an issue as to the effect of the provision read in the context of the Policy “Form” stated in the reinsurance slip.
10.	Form JI NMA 2037 is a Lloyd’s non-marine form. It contains a retention provision which reads:
“Being a Reinsurance and warranted … that [the reinsured] retains during the currency of this Policy at least the amount stated in the Schedule as the retention … but, in the event of the retention being less than that stated in the Schedule [reinsurers] lines to be proportionately reduced.”
11.	Reinsurers say the “Companies Equivalent” to JI NMA 2037 was the LIRMA Reinsurance Policy form then in use which contains a retention provision in identical terms to JI NMA 2037. New Hampshire raised the possibility that the equivalent form was the “Insurance Companies Combined Policy (Reinsurance)”. This form contained no retention provision at all. At the relevant times Great Lakes, Odyssey Re and R&SA were members of LIRMA. So was Genstar. Mr Howard QC for New Hampshire (understandably and rightly in my judgment) showed a marked lack of enthusiasm for pursuing any form other than the LIRMA form.
The Endorsement
12.	Willis produced an endorsement to the reinsurance slip (identified as Policy No. MCC 1031) dated 12 October 1998 identifying the attachment date, period of cover, and amending the sum insured and reinsurance premium. The endorsement was scratched by reinsurers shortly thereafter. It recorded that “all other terms, conditions and exceptions remain unaltered”. On 27 November “Deutscher Lloyd” was replaced as reinsurer of New Hampshire by Great Lakes with retrospective effect. Great Lakes scratched the reinsurance slip and endorsement and Deutscher Lloyd’s scratches on them were cancelled.
THE INSURANCE
The co-insurance Slip.
13.	Between May and July 1998 Willis (largely by Mr Eaglestone) and working with Destination conducted a series of presentations with potential insurers. Until about mid-July there was no intention to place reinsurance and Willis’ concern was to obtain 100% subscription on a co-insurance basis on what has been referred to as “the co-insurance slip”.
14.	By 30 July 1998 the co-insurance slip had been fully subscribed with Axa Re subscribing 40%, New Hampshire 20% and reinsurers (including Deutscher Lloyd) subscribing for substantially the same percentages as they were subsequently to agree to write as reinsurers of New Hampshire. Some participations however, included “subjectivities”
15.	The co-insurance slip did not include any condition relating to the employment of Mr Stabler. It envisaged that a “risk manager” would be appointed to oversee the operations of Destination and that individual acceptance of films or slates of films by both insurers and the risk manager would be required.
16.	In late July 1998 it was decided that a risk manager would not be utilised and instead an Operating Agreement would be entered into between insurers and Destination.
Fronting
17.	In about mid-July to early August 1998, Destination decided that New Hampshire and Axa Re would be the only direct insurers on the insurance. The reason was that Destination’s investment bankers, Donaldson Lufkin & Jenrette (“DLJ”) wanted highly rated insurers to provide the security for the notes and Destination preferred to deal with only two insurers. New Hampshire, after discussion with Destination and Willis, agreed, in addition to its 20% line, to front up to 40% for the other insurers in return for a fee of 5%.
The Insurance Slip.
18.	Prior to 7 August 1998, Willis produced a revised insurance slip (“the insurance slip”). The insurance slip (MCC 1018) contained the Stabler Wording. Mr Eaglestone sent a copy of the insurance slip and a draft insurance policy to Mr Gumbrecht (the senior underwriter at AIG overseeing the writing of New Hampshire’s line) on 7 August. Willis also sent, on 10 August, the insurance slip, draft policy and an information package to Mr Green the underwriter for New Hampshire. On 11 August at a meeting between Mr Eaglestone and Mr Green, Mr Green put down a line of 30% on the insurance slip and signed the draft policy and information package. At some later date (which remains uncertain) Mr Green amended the New Hampshire line on the insurance slip from 30% to “60% with R/I”.
19.	Willis produced an endorsement to the insurance slip identifying the attachment date of cover as 14 October 1998, the period of cover, and amending the sum insured to $118.75m and the premium to $11.875m. Mr Green initialled the endorsement on 13 October.
The Insurance Policy.
20.	A draft of the insurance policy was provided by Willis to reinsurers probably in the first half of August. Between mid-August and October reinsurers were provided with and approved further drafts. Great Lakes was not at any relevant time provided with a copy of any versions of the insurance slip or the insurance policy. 
21.	The final version of the insurance policy was signed on behalf of New Hampshire on 13 October 1998 and further endorsed by it on 19 October. The Insured were the noteholders. The “Loss Payee” was the trustee. The policy was “to indemnify the Insured in respect of any shortfall in revenue necessary to satisfy the obligations due to the Insured in respect of the Note up to but not exceeding the Sum Insured”. The rest of the wording set out various definitions, the Claim Procedure, an “entire understanding” clause including agreement that the policy superseded “all previous discussions and understandings”, an exclusive New York jurisdiction clause and agreement that the policy should be governed by and construed in accordance with New York law.
22.	None of the versions of the insurance policy contained any provision relating to the employment of Mr Stabler, nor indeed any conditions or warranties of any sort. It was, to use Mr Howard’s expression, “entirely anodyne” no doubt as the noteholders had sought.
THE OPERATING AGREEMENT
23.	Again, commencing in mid-August 1998, the various drafts of the Operating Agreement were provided to and approved by reinsurers (save Great Lakes) as they were by New Hampshire. The Operating Agreement was made between Destination and New Hampshire and Axa Re. It was also governed by New York law. The final version was signed by New Hampshire on 13 October 1998. It was also signed by reinsurers (including Deutscher Lloyd) on various dates at about the same time.
24.	A Confidential Supplemental Agreement was agreed as a “supplement” to the Operating Agreement. It was also provided to and agreed by reinsurers (save Great Lakes). 
25.	The Operating Agreement (as supplemented) provided for the establishment by Destination of various accounts for the control of expenditure and receipt of funds. In very general terms, withdrawals up to $15m a film for print and advertising were “pre-approved” as were certain films which met stated criteria. Otherwise the agreement of insurers had to be obtained. Destination was required to “purchase and maintain key-man insurance” for Mr Stabler (and Mr Baum) in an amount of $5m each for a period of not less than 5 years.
Clause VI.4
26.	Section VI.4 of the Operating Agreement provided that:
“Employment Contracts. At the time of execution of this Agreement, Steven Stabler and Brent Baum shall have executed an employment contract.
The term of each employment contract shall not expire prior to the earlier of the final payments on the Notes or five years from the date of the execution of the respective contract.”
27.	The court had the benefit of the expert opinion of distinguished New York attorneys on the principles of construction a New York Court would apply to Clause VI.4. I hope I do not do injustice to their opinions when I say that an English court would readily recognise and apply in substance the same principles with the possible exception of the development of the implied obligation which New York courts recognise of “good faith and fair dealing on the part of each party” which is said to encompass promises “which a reasonable person in the position of the promisee would be justified in understanding were included” in the agreement. More readily recognisable would be an obligation on each party to refrain from taking any action that would “have the effect of destroying or injuring the right of the other party to receive the fruits of the contract”, albeit the starting point must be to identify the fruits in question. 
28.	The target of New Hampshire in adducing evidence of New York law was to persuade the court, first, that the proper construction of Clause VI.4 was to impose a wider obligation on Destination as regards Mr Stabler’s employment than the words of the Clause itself literally require and, second, to found an argument that the Stabler wording in the reinsurance slip should be construed as requiring no greater obligation. To achieve the first step the expert attorney instructed by New Hampshire (Joseph H. Perillo) gave his opinion as to the meaning a New York Court would ascribe to Clause VI.4. That may well go beyond the legitimate scope of opinion on such issues permitted by English law: Dicey & Morris, 13th Edition, paragraph 9-019 and Rouyer Guillet & Cie v Rouyer Guillet & Co Ltd [1949] 1 All ER 244. In the event I do not think it matters. 
29.	Mr Perillo’s opinion (and he sees no room for any other) is that as a matter of New York law “clearly” “it would have been a breach of contract for Destination to procure or permit the termination of Mr Stabler’s employment contract prior to the earlier of the retirement of the Notes or the expiration of five years from the date of execution of the employment contract” and that “it would be a breach of contract on the part of Destination for Destination to procure or permit the termination of Mr Stabler’s employment contract in circumstances where such would result in the loss to [New Hampshire] of its bargain with Destination that Mr Stabler’s employment contract would not expire within 5 years from the execution of the Operating Agreement”. Whilst I am prepared to approach this case on the basis that Mr Perillo is right I cannot construe the Stabler Wording itself in such a way. It is simply not what it says.
THE COVER NOTES
The Insurance cover note.
30.	Willis’ provided a cover note dated 14 October 1998 relating to the insurance. The covernote was sent by Willis London to Willis Chicago, the source of Willis’ original instructions on behalf of Destination. It was initialled on each page by Mr Eaglestone. The “Conditions” included the Stabler Wording. Mr Eaglestone said his intention was that all the Conditions shown (save for “As per Policy”) were intended by him simply to record the terms of the Operating Agreement which had been signed by New Hampshire the previous day. Whilst the matters recorded were summaries of some of the terms in the Operating Agreement, and whatever Mr Eaglestone’s intention, they appeared in a cover note which stated in its opening paragraph, as would in any event be usual, that it was provided to “confirm” that Willis had “effected the following Contract of Insurance subject to the terms and conditions of the Policy … to be issued” and asked that the cover note be checked carefully “to ensure that it follows your instructions”.
The Reinsurance cover notes.
31.	A cover note dated 17 November 1998 was provided by Willis to New Hampshire. It was also initialled on each page by Mr Eaglestone. It contained the same opening paragraph as the insurance cover note. It set out all the material terms of the reinsurance slip including the Stabler Wording and the Retention Provision.
32.	The 17 November cover note was cancelled and replaced by a cover note dated 1 December 1998 to reflect the replacement of Deutscher Lloyd by Great Lakes as security. Otherwise it was in the same terms. This cover note was also initialled on each page by Mr Eaglestone and provided to New Hampshire.
THE INFORMATION PACKAGE
33.	The Information Package dated 5 August 1998 was provided by Willis to reinsurers (including then Deutscher Lloyd) between about 5 and 14 August and stamped by them. It was a substantial document. It did not include the Policy Wording or Operating Agreement which were described as “related documents” and “under negotiation” at 5 August.
34.	The Information Package included a section entitled “Underwriters’ Question & Answer Summary”. The information stressed the “years of combined experience” and “track record” of Destination’s senior management. It stated that a number of insurers had expressed a preference for not having a risk manager “because of the comprehensive control structure contained in the Operating Agreement”.
35.	Under the heading “Employment Contracts” it was stated that:
“Queries were raised with regard to the retention of Destination’s principals should changes in their personal circumstances occur. As outlined in the Operating Agreement, employment contracts of five years will be required for both Steve Stabler as CEO and Brent Baum as COO”.
THE SUBMISSIONS
THE STABLER WORDING
36.	Mr Schaff QC for reinsurers submitted that the reinsurance contract can only be found in the reinsurance slip; the Stabler Wording in the reinsurance slip was a warranty, and the warranty was broken when Mr Stabler’s employment terminated on 8 November 1999. Both Mr Howard and Mr Hapgood QC, for Willis, submitted that the Stabler Wording in the reinsurance slip, read in the context of (i) the Insurance Policy and the Operating Agreement which reinsurers agreed, (ii) the fact that reinsurers were originally to be insurers and remained so or were treated as insurers in all but name after New Hampshire agreed to front for them, and (iii) the fact that it was intended that the insurance and reinsurance should be “back-to-back”, was properly to be construed to mean no more than the Operating Agreement should contain, or it was a condition precedent that it would contain, provisions for Mr Stabler’s employment which it in fact did. In the alternative Mr Hapgood also submitted that the effect of the approval of the insurance policy and Operating Agreement by reinsurers was to vary the Stabler Wording by deletion or “supercession” in the reinsurance.
THE RETENTION PROVISION
37.	Mr Schaff’s submission was that the retention provision, read with the appropriate Form, was also a warranty, broken by the reduction of New Hampshire’s retention to either 1% or nil in 1999 with the consequence that reinsurers’ exposure was also reduced to one twentieth of their original subscription or nil.
38.	Both Mr Howard and Mr Hapgood submitted that the retention provision properly construed did no more than record the fact that New Hampshire was reinsuring 40% of the 60% risk through the slip and/or that the words in parentheses “with reinsurance” were an express statement that New Hampshire did have the right to reinsure the 20%. Indeed it was Mr Eaglestone’s evidence (albeit I think plainly inadmissible as an aid to construction) that the words of the retention provision were included in the reinsurance slip because he knew New Hampshire was contemplating reinsuring the 20%.
CONTRIBUTORY NEGLIGENCE
39.	Mr Hapgood contends, on the basis that reinsurers succeed on one or both of their submissions, that New Hampshire negligently contributed to its own loss by:
i)	In the case of the Stabler Wording, failing to appreciate from its inclusion in the insurance slip (first sent to New Hampshire on 7 August 1998) that the reinsurance was also likely to include it and questioning Willis about this; and 
ii)	In the case of the Retention Provision failing to question its inclusion in the reinsurance cover note received at a time which, whilst it postdated the inception of the insurance, pre-dated the reinsurance arrangements made by New Hampshire with Genstar.
40.	Mr Howard submitted that in a context in which Willis owed a duty to New Hampshire to obtain back-to-back cover and Willis itself did not appreciate let alone alert New Hampshire to the differences in wordings and would have maintained there was no problem had New Hampshire raised either matter there was no fault on New Hampshire’s part nor could Willis prove that if there was it was causative of any loss.
41.	It should be noted that Mr Hapgood acknowledged that he was not in a position to prove that New Hampshire saw a copy of the reinsurance slip itself at any time before the insurance incepted and that he could not rely on the inclusion of the Stabler Wording in the cover note because that first came to New Hampshire’s attention on about 17 November after the insurance had incepted.
CONSTRUCTION
The Law.
42.	The general approach to construction of contractual documents is not in doubt. It is “to find the meaning which the document would convey to a reasonable person having all the background knowledge reasonably available to the parties, including anything which would have affected the way a reasonable man would have understood it, but excluding previous negotiations and statements of subjective intent”: I.C.S. Ltd v West Bromwich B.S. (H.L.) [1998] 1 WLR 896. Although it is open to a court in limited circumstances (see Lord Hoffmann at page 913) to conclude that the words or syntax used is wrong, the purpose remains to construe the words used. I would add that in approaching the construction of a commercial document such as an insurance or reinsurance slip to which there may be several parties who become bound by its terms on separate occasions and following separate negotiations there is an added reason for caution before seeking to deduce an objective intention which could result in ascribing a meaning to the words used other than the meaning they would normally bear. Mr Schaff used the position of Great Lakes in this case to illustrate that proposition. Great Lakes scratched the reinsurance slip and endorsement and previously saw none of the other documents on which New Hampshire and Willis rely for their construction arguments. True, Great Lakes were brought in to front for Deutscher Lloyd whose underwriter had seen the other documents, but, I cannot see how that could affect the terms of their contract with New Hampshire. As Mr Schaff submitted with force, the best evidence of what an insurer or reinsurer intended to write is and remains what he did write.
43.	Reference was also made to Vesta v Butcher [1989] 1 AC 852 in support of the submission of New Hampshire and Willis that the fact (which I accept is properly part of the background) that it was the expectation of all parties that the reinsurance and insurance should be back-to back entitled the court to construe the reinsurance slip so as to provide for just that, in effect so as to contain nothing about Mr Stabler’s employment at all. But, in my judgment, Vesta v Butcher is itself only an illustration of the general approach to construction which enables a court to resolve ambiguities of wording in a way which it is satisfied the parties objectively intended. In that case both insurance and reinsurance contained the same wording but the potential for inconsistency arose from the different systems of law to which the two policies were subject. That, in my judgment, is substantially different from a factual position where, as here, one policy is wholly silent on the relevant words which the other contains.
The Background
44.	I think the material background to consideration of the construction issues which arise in respect of the Stabler Wording is that there were inter-locking agreements, both the Insurance Policy and the Operating Agreement were referred to in the reinsurance slip, the fact that reinsurers were aware that New Hampshire had accepted a larger line on the insurance as a “front” for them and, as stated, the fact that it was the expectation of all parties that the insurance and reinsurance should be back-to-back.
45.	The other factors which I think to be of some relevance are: (i) the importance of Mr Stabler (and Mr Baum) to the risk being written; that is not in issue (see paragraph 7). In a real sense the success of Destination and so the payment of the notes depended on Mr Stabler; and (ii) as the project developed there was evident confusion about the nature of the risk, for example whether Destination was in a sense the assured. Mr Eaglestone acknowledged that this was an unusual and complicated transaction for him and the first of its type that he had ever done. In the context of a five year commitment with controls over expenditure in that period the language of “maintaining” a contract of employment is more understandable. 
46.	In relation to the Retention provision, I think the relevant background is the fact that reinsurers were originally contemplating writing the business (albeit in different terms) as insurers, were aware that New Hampshire agreed to “front” for them, and that there were none of the normal commercial reasons for reinsurers to require an agreement on the part of New Hampshire to retain any part of the risk for its own account (let alone all of it).
47.	It is of course the case with quota share treaties and the like where underwriters can be said to have “given away their pen” that the pen holder should be exposed to a real level of risk on the business he writes. But in this case no such considerations were relevant and indeed reinsurers had secured themselves the right in the “Conditions” of the reinsurance slip to approve film declarations and expenditure beyond the parameters in the Operating Agreement. It is thus difficult to see what purpose an obligation on New Hampshire to retain the risk could serve.
WARRANTY OR NOT
48.	Mr Schaff referred me to the judgment of Rix LJ (with which the other members of the court agreed) in HIH Casualty and General Insurance Ltd v New Hampshire Insurance Company and Others [2001] EWCA Civ 735 and in particular to paragraph 101. In that case the issue was whether or not a term in a conventional film finance insurance that six films would be completed was a warranty. Rix LJ said:
“In my judgment, once the six film term is established as a term of the insurance or reinsurance contract, the grounds for holding it to be a warranty are very strong. It is a question of construction, and the presence or absence of the word “warranty” or “warranted” is not conclusive. One test is whether it is a term which goes to the root of the transaction; a second, whether it is descriptive of or bears materially on the risk of loss; a third, whether damages would be an unsatisfactory or inadequate remedy. As Lord Justice Bowen said in Barnard v Faber, [1893] 1 QB 340 at p 344: “A term as regards the risk must be a condition.” Otherwise the insurer is merely left to a cross-claim in a matter which goes to the risk itself, which is unbusinesslike (ibid.; see also Ellinger & Co vMutual Life Insurance Co of New York, [1905] 1 KB 31 at p. 38). In the present case, the six film term would seem to answer all three tests. It is a fundamental term, for even if only one film were omitted, the revenues are likely to be immediately reduced. That will not matter if the revenues already exceed the sum insured, for in that case there can be no loss in any event. Where, however, the revenues fall below the sum insured, the loss of a single film may be the critical difference between a loss and no loss, and will in any event be likely to increase the loss. For the same reason the term bears materially on the risk. A cross-claim would be an unsatisfactory and inadequate remedy because it would never be possible to know how much the lost film would have contributed to revenues….”
CONTRIBUTORY NEGLIGENCE
49.	In The Superhulls Cover Case [1990] 2 Lloyd’s Reports 431 insurance and reinsurance of the construction of new-build vessels was intended to be back-to back, but was not, due to a mistake by the brokers. The reinsurance contained a clause (the 48 months clause) under which the period of cover terminated 48 months after the commencement of construction. There was no comparable clause in the insurance. The brokers relied on documents which passed between them and insurers in which they gave notice of the terms of the reinsurance they had obtained, including the 48 months clause, as a basis for a number of defences and as constituting contributory negligence. Phillips J held that the brokers were under a duty to inform the insurers of the 48 months clause but also that the damages suffered by insurers should be reduced by 20 per cent. In his judgment, at page 460, Phillips J rejected a submission by the insurers that they could reasonably rely on the brokers to perform their duties to inform them correctly of the reinsurance available and to procure it. He said:
“In the present case [insurers] were Lloyd’s agents. The personnel involved were marine underwriters of great experience. They admitted that they should have read carefully the terms of the cover on the three separate occasions when they received it. Those terms included a 48 month clause which did not reflect any provision of the original cover, which was in their experience unprecedented in a reinsurance cover on builders’ risks, and which was unclear, albeit on true construction a cut-off clause. In my judgment an insurer who was exercising reasonable skill and care in relation to the business he was conducting would have noticed the 48 month clause and would have queried its presence and effect with the brokers.”
50.	In the event that reinsurers succeeded in their claim, Mr Hapgood submitted that New Hampshire’s Part 20 claim for damages against Willis should be reduced by 20% on the same basis as applied by Phillips J.
THE STABLER WORDING
Construction.
51.	Reading the words alone, as a matter of ordinary language, they require that Mr Stabler’s contract of employment as CEO be maintained for the policy period. That did not happen. Both New Hampshire and Willis deployed a number of arguments in an attempt to avert this conclusion. Notably, however, no claim is made for rectification of the words actually used. Nor is it, or could it be, suggested that the contract of reinsurance is to be found anywhere other than in the terms of the reinsurance slip. Thus the words correctly record the bargain made.
52.	The main submission by New Hampshire and Willis is that the Stabler Wording was not a condition of the reinsurance at all but merely a statement of what should be included in the Operating Agreement and once that was executed in a form approved by reinsurers that, as Willis’ skeleton argument put it, was “the end of the matter”. The basis for the submission was the very fact that insurance and reinsurance were intended to be back-to-back, the careful process conducted by Willis to ensure that all reinsurers saw and approved the insurance policy and Operating Agreement, the wide meaning (by New York law) of Clause VI.4 of the Operating Agreement, and the commercial improbability of a term requiring an employment contract to be maintained for a period of years.
53.	However:
i)	The reinsurance slip is not worded in the way for which New Hampshire and Willis contend. The Operating Agreement is referred to specifically in other contexts.
ii)	The Stabler Wording appears as one of a number of “Conditions” which are in general exactly and plainly that: conditions of the reinsurance.
iii)	Despite the forensic skill with which it was presented, the submission of New Hampshire and Willis comes close to an argument that because insurance and reinsurance were intended to be back-to-back they must be construed to be so. That would indeed be a charter for brokers they would welcome but is not one which I think finds recognition in the ordinary principles of construction of contracts. In this case it also ignores the fact that the insurance slip and reinsurance cover notes also contained the Stabler Wording. Indeed the reinsurance cover notes were prepared and sent at a time when if New Hampshire and Willis were right the Stabler Wording had ceased to be part of the reinsurance because the Operating Agreement had been finalised and approved.
iv)	I accept that the Stabler Wording can fairly be criticised as imposing a condition which might operate uncommercially, albeit I think it would at least be arguable that it would not be broken in the case of Mr Stabler’s death or the like. But it could operate sensibly in circumstances in which expenditure on films required advance approval or the funds advanced were to be distributed over time and whilst in the event that was not the case I am far from certain that the parties appreciated it. Nor do I think the wording approaches the degree of absurdity which might enable the court to search for an alternative meaning let alone one which would result in the reinsurance slip making no provision at all for a matter of the importance of Mr Stabler’s employment.
54.	Nor do I think the variations on the main submission assist New Hampshire and Willis to a different conclusion. I cannot construe the Stabler Wording as an obligation undertaken by Destination and not a term of the reinsurance. I do think there was confusion about the structure of the transaction but it was confusion on the part of and engendered by Willis and is hardly a sound basis for construing words in an unnatural way. There was no contractual relationship between Destination and reinsurers. Nor is it unusual for a party to undertake performance of an obligation by a third party or the continued existence of a state of affairs. 
55.	The fact that one of the Conditions of the reinsurance slip was “As per Original Policy to be issued” also cannot in my judgment have the effect of deleting or superseding or rendering “provisional” the Stabler Wording. The “Original Policy” said nothing at all about Mr Stabler. It was not inconsistent with the Stabler Wording. This is not a case in which I think the approach in Vesta v Butcher is material: see paragraph 43. There were not “effectively identical” provisions in the insurance and reinsurance which could properly be construed to be identical: see also Groupama v Catatumbo [2000] 2 Lloyds Rep 350 at paragraphs 32 and 33 per Mance LJ.
56.	Nor do I think any term can properly be implied into the reinsurance contract that reinsurer’s liabilities would be co-extensive with New Hampshire’s liabilities under the Insurance Policy. If the reinsurance slip cannot (as I think it cannot) be construed in the manner for which New Hampshire and Willis contend I agree with Mr Schaff that the same result cannot be achieved by implication. An implied term cannot be inconsistent with an express term.
57.	Essentially, in my judgment, this is a case in which the parties’ intention, objectively ascertained, was that the reinsurance contract was to be on the terms of the reinsurance slip including the Stabler Wording as written.
58.	It was also submitted that there had been an agreed variation of the terms of the reinsurance slip. The basis for this analysis was the undoubted fact that reinsurers (except Great Lakes) approved the various draft and final forms of the Insurance Policy and Operating Agreement. But I do not think it possible to spell out from that fact an agreement by reinsurers to delete the Stabler Wording from the reinsurance slip at all let alone in circumstances in which the cover notes referred to the Stabler Wording. Moreover, as Mr Schaff submitted, there is a well-established method of recording variations to insurance contracts: endorsements. That was the method in fact used by Willis (see paragraph 12) and the terms of the endorsement are inconsistent with the submission of New Hampshire and Willis. For the same reasons, I do not think the principles of estoppel assist and indeed they were not pursued in submission.
59.	In my judgment, therefore, the Stabler Wording meant what it said and was broken.
Warranty?
60.	Mr Schaff submitted that the Stabler Wording met each of the various tests for a warranty summarised by Rix LJ in HIH v New Hampshire which I have quoted in paragraph 48. I agree. Indeed I think there is a fair analogy between the number of films in issue in that case and the role of Mr Stabler in this case. Mr Stabler’s role and involvement in Destination was crucial to its success, and so to the noteholders being repaid, and so to the risk of an insured loss. If reinsurers were to be limited to a claim for damages for breach that would be an unsatisfactory and inadequate remedy because it would never be possible to assess how Mr Stabler’s departure had affected Destination’s ability to repay the noteholders.
61.	In my judgment therefore the Stabler Wording was a warranty and its breach discharged reinsurers accordingly.
THE RETENTION PROVISION
Construction.
62.	The words of the Retention Provision I think contain an apparent ambiguity. As a matter of the normal use of language in reinsurance, there is a contradiction in terms between “retaining” a full line and “reinsuring” it. 
63.	Equally, if the words were intended to provide for a right to reinsure, then there was no need to use the words at all: if there is no obligation to “retain” there is an unfettered right to reinsure.
64.	Mr Schaff’s first submission was that the words “with reinsurance” should be read as acknowledging the general right of New Hampshire to enter into excess of loss protections as a means of managing their underwriting commitments in the manner to which Moore-Bick J referred in Kingscroft Insurance Co v Nissan Fire & Marine [1999] Lloyd’s Rep IR 249 at pages 621 to 624. But that was a case concerning a facility quota share reinsurance where the nature of the underlying insurance and the size of the agreed retention (50%) of the risks ceded made management of the account by the insurer by excess of loss insurance “standard practice”. But in this case I do not think the words can properly be construed as permitting some unspecified “reasonable and acceptable excess of loss or other non-proportional whole account protections” (to quote reinsurers skeleton submissions) either at all or in the context of a one-off risk of this type. The words “with reinsurance” are unqualified; the proposed construction is far too imprecise.
65.	Mr Schaff’s second submission was that the words should be read as shorthand for “with this Contingency Reinsurance of 40%” and would thereby have resolved any ambiguity as to whether the retention was to be 20% of the whole or 20% of 60% of the whole. Whilst I think this is a possible construction, it is not a satisfying one. I can see no compelling reason for adding the words “with Reinsurance” at all if that was the intention as I think the matter would be clear without them.
66.	Mr Howard and Mr Hapgood submitted that the words were included for the avoidance of doubt: to make it clear that New Hampshire could reinsure the 20% line in any way it might choose. But that also did not need to be said.
67.	If I had to decide what the words mean, and keeping in mind the commercial context in which any retention in the strict sense would not serve the usual purpose it is intended to serve (paragraph 47), I think they were intended to do no more than state the fact that the 60% line which was once to be co-insurance was to be insured by New Hampshire alone but with 40% of it reinsured on the terms of the reinsurance slip. That is a very similar construction to Mr Schaff’s second submission but it is to deprive the word “retains” of the technical meaning I accept it would normally have. I cannot pretend that I find this construction any more elegant than its rivals but I do think it also derives some force from the fact that the words appear in a part of the reinsurance slip entitled “Sum Insured Hereon” and I find it improbable both that any retention by New Hampshire would ever have been sought or agreed and that an obligation of the significance for which reinsurers contend would find itself expressed in such a way and in such a location on the slip. In my judgment, whatever construction is to be placed upon the Retention provision, in context I do not think it would be right to construe it in the manner for which reinsurers contend. An obligation to retain 20% of such a risk in the strict sense would in my judgment require a provision expressed with greater clarity than this one.
68.	It follows that the remaining issues which arise in relation to the retention provision can be addressed shortly.
Warranty?
69.	Read, as I think it must be if reinsurers were right on construction, with the LIRMA form the retention provision is a warranty albeit with the consequence of a proportionate reduction in the lines of reinsurers not avoidance.
19% or 20%
70.	On the evidence whilst it is accepted that at one time Genstar agreed to reinsure the full 20%, the eventual agreement was that it would reinsure 19%. That was the result of confusion between New Hampshire and Genstar about the size of line which New Hampshire had written without reinsurance. If the point had to be decided, I would have adopted the final agreement as the one which most fairly reflected the actual size of New Hampshire’s “retention” and thus have reduced reinsurers lines to a total of 1% but not 0%.
CONTRIBUTORY NEGLIGENCE
71.	In view of my decision thus far it is only necessary to address this issue in the context of the Stabler Wording. In any event had I decided that reinsurers were entitled to avoid liability because of the retention provision I would not have held that Willis was entitled to any reduction in its liability to New Hampshire for that reason. Not only do I think Willis would have discounted any query raised by New Hampshire by asserting, as Mr Eaglestone says was his intention, that the retention provision was to make clear that New Hampshire could reinsure the 20% but by the first time New Hampshire could have been alerted to the problem (on receipt of the 17 November cover note) the provision had already been agreed in the reinsurance slip and the reinsurance had incepted. On the evidence (no oral evidence was adduced by New Hampshire or reinsurers) I would not feel able to conclude that as a matter of probability reinsurers, if then asked, would have agreed to delete the retention provision nor that New Hampshire would have foregone the opportunity to conclude the portfolio transfer with Genstar, nor that reinsurers would have agreed to it.
72.	But I also do not think that Willis’ submission is much stronger in respect of the Stabler Wording. It is now accepted that at least it cannot be proved that New Hampshire saw the reinsurance slip before it came on risk on 14 October. The submission of Willis is that New Hampshire should have been alerted by the terms of the insurance slip to the possibility or even likelihood that the reinsurance slip would be in the same terms and so include the Stabler Wording. Subsequently, when the wording of the Insurance Policy was agreed in the form it was, it is said the discrepancy or risk of discrepancy should have caused New Hampshire to pursue the matter with Willis.
73.	In my judgment in a transaction of this novel type the onus on Willis “to get it right” and to alert insurers to any risks was such that it would not be fair to attribute fault to New Hampshire in failing to spot the problem. Unlike The Superhulls Cover Case New Hampshire did not receive notice of the terms of the reinsurance until it was too late. Willis has to rely on a failure to draw inferences as to those terms. Also, unlike The Superhulls Cover Case, there was no standard language in use for covers such as this and so no special reason for New Hampshire to be alert to any particular wording. It was Willis which not only saw but drafted the terms of both slips and failed to alert New Hampshire to any problem.
CONCLUSION
74.	In my judgment reinsurers are entitled to the relief they seek, namely that they are under no liability to New Hampshire under the reinsurance slip, and New Hampshire is entitled to recover damages from Willis for the loss it will suffer by reason of the failure of the reinsurance and to do so without any reduction for contributory negligence.
75.	I will hear the parties when this judgment is handed down on the form of any orders to be made, costs and any other ancillary matters which may arise.