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Richardson v Richardson [2011] EWCA Civ 79

Appeal against an ancillary relief order of HHJ Raynor QC sitting as a Judge of the High Court on the grounds that subsequent events constituted Barder events and /or demonstrated the order to have been vitiated by a common mistake of fact. Appeal allowed on the latter ground.

The Husband ('H') and Wife ('W) had been business partners during their 46 year marriage. The net matrimonial assets totalled £10.9million. There was an outstanding claim for damages against the partnership but no reference was made to this potential liability at the ancillary relief hearing. H assumed the potential liability was covered by an insurance policy.

W was awarded approximately 47.5% of the matrimonial assets including a lump sum payable by instalments. The order provided for W to resign from the partnership and H to indemnify her against all liabilities of the partnership.

The order was made in September 2009. In November 2009 W died of a heart attack. In December 2009 H learned that the insurance cover was limited to £2 million and that the insurers proposed to avoid the policy. His agents had been aware of this information since April 2009.

H appealed and sought to vary the order to reduce the outstanding balance of the lump sum by 50% of the aggregate of any damages and legal costs on the grounds that (i) W's unexpected death amounted to a Barder event; and (ii) the fact that the insurance cover was limited to £2 million and / or the insurer sought to avoid the policy meant that the order was entered into on the basis of mistake or those facts constituted a Barder event.

The appeal was heard by Thorpe LJ, Rimer LJ and Munby LJ who gave the lead judgment.

The appeal was allowed on the ground that the insurer's avoidance of the policy was a vitiating mistake.  The original order was varied so that the potential liability was borne equally.

The Court also held that:

Summary by Elise Kinnear, Barrister, Field Court Chambers

_____________________

Neutral Citation Number: [2011] EWCA Civ 79
Case No: B4/2010/0859
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
FAMILY DIVISION
MANCHESTER DISTRICT REGISTRY
HIS HONOUR JUDGE RAYNOR QC (sitting as a Judge of the High Court)
MA08D00066
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 8 February 2011

Before :
LORD JUSTICE THORPE
LORD JUSTICE RIMER
and
LORD JUSTICE MUNBY
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Between :

ERIC KEITH RICHARDSON Appellant

- and - 

FRASER RICHARDSON (Executor of HARRIET ANN RICHARDSON deceased)  
Respondent

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Mr Nigel Dyer QC and Ms Nikki Saxton (instructed by DWF LLP) for the Appellant
Ms Sally Harrison QC and Ms Lorraine Cavanagh (instructed by Pannone LLP) for the Respondent

Hearing date : 10 November 2010
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Judgment
 
Lord Justice Munby :
1. This is an appeal against a final order in ancillary relief proceedings made by His Honour Judge Raynor QC (sitting as a judge of the High Court) on 25 September 2009.

2. The appellant's leading counsel expressly disavows any attack on any aspect of Judge Raynor's judgment. The basis of his appeal is that two events which occurred after Judge Raynor had handed down his judgment and made his order constituted so called 'Barder events' – Barder v Calouori [1988] AC 20 – and that one of them also demonstrated the order to have been vitiated by a common mistake of fact: see Judge v Judge [2008] EWCA Civ 1458, [2009] 1 FLR 1287, paras [3], [59].

The background
3. At the date of the hearing before Judge Raynor in June 2009, the husband and the wife, as it convenient to refer to them, were both 70 years old. They had been married for 46 years, though separated since 2004. They had one child, a son, born in 1968. The wife issued her divorce petition and her claim for ancillary relief in January 2008.

4. The husband and the wife had for many years been partners in every sense in a property and hotel business. The matrimonial assets were worth something of the order of £40 million gross, but were subject to many mortgage and other liabilities. The net value of the assets was found by the Judge to be £10,906,734. Many of the assets were held by a company, Richardson Hotels Limited, and others by a partnership, the Richardson Group, in which the husband and the wife were, both in law and in fact, equal partners. Sensibly and appropriately, for the purposes of the ancillary relief proceedings no distinction was made between the spouses and these entities. All the assets, however held, were treated as matrimonial assets available for division in the ancillary relief proceedings.

5. As will be appreciated from the great discrepancy between the gross and the net values of the assets, the various businesses were very highly geared and most of the assets were subject to mortgages. The parties' non-business borrowings exceeded £2 million; the business borrowings exceeded £27 million. Perhaps unsurprisingly, given the state of the economy when the matter came on for hearing before the Judge, the value of much of the property portfolio was depressed. Thus, for example, part of the assets held by the Richardson Group comprised a number of flats in Manchester which were in negative equity and being operated at a loss.

6. Before the Judge there was no dispute but that this was clearly a case calling in principle for an equal division of the assets between husband and wife. The real issue was as to how this should be achieved. The wife sought an equal division of the assets in specie, on the basis that the parties would share the ongoing liabilities. The husband, taking the view that the wife would not realistically be able to service the highly geared borrowings if there was such a division, sought an order which gave the wife some of the properties, the balance being made up by a lump sum.

7. Judge Raynor circulated his judgment in draft on 11 August 2009. It was formally handed down on 25 September 2009 when he made his order, sealed the same day. Essentially he adopted the husband's approach to the division of the assets. He ordered two properties, subject to their mortgages, to be transferred to the wife. He awarded her a lump sum of £3,352,500 payable by instalments. All in all, the wife received £5,180,698. The husband was left with the rest, including the bulk of the property portfolio. All in all, he received £5,726,035. The order provided for the wife to resign from the partnership and for the husband to indemnify her against all liabilities of the partnership. On 9 October 2009 the husband and the wife executed a Deed to give effect to her resignation from the partnership; clause 5.2 of the Deed contained the indemnity.

8. The effect of the order was to give the wife approximately 47.5% of the matrimonial assets. Judge Raynor explained the basis of the order as follows:

"However, I do not consider that it would be fair to the husband to make an award (£3,763,565) which would allow the wife a full 50% of the net assets. The effect of my order will be to leave him with 9 blocks of loss making flats with negative equity (and secured indebtedness of approximately £10m exclusive of the early redemption penalty), which no-one contends could or should sensibly be disposed of forthwith … There are no grounds for optimism as regards to the recovery of the Manchester residential flat market any time soon, nor any guarantee that the flats would realise their agreed value if sold in the immediate future. The hotel business that he will retain has considerable potential for growth as well as inherent risk and whilst it is encumbered by substantial secured indebtedness, it is possessed of assets of a gross value very substantially in excess of this …

I have concluded that a settlement, fair to both parties, will be achieved by the award of a lump sum of £3,500,000 together with the assets mentioned above, which will result in the wife obtaining approximately 47.5% of the net assets …

Notwithstanding her objections, I am of the view that such an award in the circumstances will result in a fair outcome for the wife, as well as the husband. She will retain the hotel she is devoted to … ; she will be able if she chooses to discharge the mortgages on that hotel and her home, together with her debts, and will be secure  both as regards her capital and income positions … Alternatively, she may choose to invest in a new business, although I accept that probably not at rock bottom prices given the period of time for payment of the lump sum … True it is that the husband will have retained assets providing far greater potential for growth, but he will also have paid her a very substantial lump sum and accepted all of the risk-laden assets and assumed responsibility for the losses associated with the flats and SWAPS contract, in a situation where the wife was not in any event able to demonstrate that she was able to fund her proposals."

9. There is one other matter that needs to be referred to at this stage. On 1 July 2004 a little girl, then aged only 2, had fallen out of a first-floor window of one of the partnership's properties in Manchester, landing on her head. On 10 December 2008 proceedings had been issued on her behalf in the Stockport County Court. Although the claim form asserted that the claim was for £5,000 this was, as I understand it, merely a device to enable the claim to be issued in the County Court at a lower court fee than would have been payable had it been issued in the High Court. But the husband and wife knew that the girl had been seriously injured. The husband's evidence filed in support of this appeal shows that both he and the wife were aware as early as August 2004 that the child had suffered brain damage. Indeed, documents which were sent by her solicitors to the solicitors instructed by the insurer, and sent on by them to the partnership's insurance broker, Ms Downie, under cover of a letter dated 22 July 2009, include the child's hospital notes for the first few days after the accident. They recorded her as being "critical", on ventilation, with "dead areas in the brain", and marked as 'Do Not Resuscitate'. It was even contemplated that she might die overnight. Although, happily, she has made a significant recovery she remains seriously damaged by her accident.

10. The husband and the wife can have been in little doubt, both in 2004 and still in 2009, that if liability was established the damages might be substantial, possibly very substantial. However, no reference to this potential liability was made either in the schedule of assets and liabilities put before Judge Raynor or in his judgment. The husband (and the wife also, he says) assumed that it was covered by their insurance. By the time the order was made it was no longer of any concern to the wife (at least as between her and him) because the husband, as we have seen, was assuming responsibility for the liabilities of the partnership. The husband's evidence is that he told the wife that the insurer had been notified and "reassured her on a number of occasions that we were protected against any claims brought by [the child] by our insurance policy."

Subsequent events
11. On 25 September 2009, as we have seen, Judge Raynor finalised his judgment and made his order. On 4 November 2009 the wife died of a heart attack. The son is the sole executor and sole beneficiary of her estate. On 18 December 2009 the husband became aware for the first time that the insurer had avoided the policy, receiving that news in letters from the claimant's solicitors dated 16 December 2009 and from Ms Downie dated 17 December 2009, the latter being supplemented by an email sent to him by Ms Downie on 18 December 2009.

12. On 10 February 2010 the husband notified the wife's solicitors of his intention to appeal out of time. On 14 April 2010 he applied to this court for permission. On 7 May 2010 Thorpe LJ gave permission.

13. The order had provided for payment of the lump sum of £3,352,500 by instalments. The instalments of £1,002,500 due on or before 2 October 2009 and of £750,000 due on or before 30 June 2010 have been paid (the latter after this court had on 29 July 2010 lifted the stay granted on 7 May 2010: [2010] EWCA Civ 1060). The further instalments of £1,203,830 due on or before 31 December 2010 and £396,170 due on or before 30 June 2011 (a total of £1,600,000) have not been paid.

14. Putting the matter in broad terms, the object of the husband's appeal is to set aside his obligation to pay the remaining balance of £1.6 million, which is, as it happens, one-half of the £3.2 million which on one view of the facts might, he suggests, be the total amount of the exposure in the County Court proceedings. Specifically, and as refined during the course of argument before us, the husband seeks a variation of Judge Raynor's order by substituting for the order that he pay the two instalments of the lump sum totalling £1.6 million an order that he pay the sum of £1.6 million less such sum as represents 50% of the aggregate of (i) any damages that may be ordered to be paid to the claimant in the County Court proceedings and (ii) the costs incurred in defending the action and of prosecuting any third party claims (against either the insurer or the broker) that may arise in the action; such sum to be paid within 28 days of the conclusion of the action. He concedes that any such liability to the estate should be secured and suggests that a suitable amount might be paid into court.

15. The appeal was heard on 10 November 2010. The husband was represented by Mr Nigel Dyer QC and Ms Nikki Saxton and the executor by Ms Sally Harrison QC and Ms Lorraine Cavanagh. I am grateful to them for their focussed, lucid and realistic submissions. We admitted in evidence two affidavits by the husband, two affidavits by the executor, an affidavit by Ms Downie, and an affidavit by the Richardson Group's accounts manager, Mr Plant. At the end of the hearing we reserved judgment.

16. I turn to consider the two grounds of appeal, dealing first with the issues arising from the unexpected death of the wife less than 6 weeks after Judge Raynor had made his order.  

The death of the wife
17. There is no need to spend much time on the law. The principles are set out in the passage in the speech of Lord Brandon of Oakbrook in the eponymous case, Barder v Calouori [1988] AC 20, page 43, which is so well-known that it hardly requires quotation.

18. It is well recognised that the unexpected death of one of the spouses can be a Barder event. Barder itself was such a case (wife killed children and committed suicide five weeks after the ancillary relief order). There have been others in which the claim has succeeded: Smith v Smith (Smith and Others Intervening) [1992] Fam 69 (wife committed suicide within six months); Barber v Barber [1993] 1 FLR 476 (wife died of liver disease within three months); Reid v Reid [2003] EWHC 2878 (Fam), [2004] 1 FLR 736 (diabetic wife with high blood pressure died within two months). But it is not enough to show that one of the parties died unexpectedly very shortly after the hearing. What has to be shown, to quote Lord Brandon, is that the death "invalidate[s] the basis, or fundamental assumption, upon which the order was made". Now where, as in all the cases I have mentioned, the wife's future needs had been a central or critical factor in assessing the quantum of her award, it may not be very difficult for the surviving husband to bring his case within Lord Brandon's test. After all the needs of a wife who in the event has lived only a matter of weeks are very different from – much less than – the needs of the same wife as assessed on the footing that she will live for years rather than weeks. But in the present case the wife's award was based not on her needs but, as Judge Raynor recognised, on dividing the available assets equally between the parties.

19. The magnetic, indeed overwhelming, factor in this case, which in my judgment dominates above all else, is that the wife, by her labours over many years, both as a wife and as the husband's active business partner, had earned her equal share in the matrimonial assets. True it is that the matter inevitably and appropriately came before the court as a claim in the Family Division for ancillary relief and not by way of a claim in the Chancery Division for relief under either the Partnership Act 1890 or the Trusts of Land and Appointment of Trustees Act 1996, but this forensic incidental must not blind us to the underlying realities. This was a wife who had earned her share and was entitled to have that recognised by the Family Division, as it correctly was by Judge Raynor. And what I have called the underlying realities are highlighted by the fact that if she had died shortly before rather than shortly after the hearing before Judge Raynor it is idle for the husband to imagine that he could have escaped a very substantial claim by the estate in the Chancery Division.

20. In such a case the unexpectedly early death of the wife very soon after the ancillary relief order has been finalised does not entitle the surviving husband to re-open the matter. The death is simply not a Barder event, because the calculation of and obligation to pay the amount awarded is not referable to the wife's needs or to her future expectation of life. Being referable solely to what the wife has earned by her past endeavours, the award does not look to the future; it looks to the past. So the death of the wife, whenever it occurs, and however soon after the court has made its order, does not "invalidate the basis, or fundamental assumption, upon which the order was made". As Ms Harrison succinctly put it, the wife's death does not change or alter the husband's needs or the wife's entitlement to share equally in the assets.

21. In my judgment the husband is not entitled to re-open the order because of the unexpectedly early death of the wife.

22. Mr Dyer was therefore right, in my judgment, not to place that much weight on the fact of the wife's early death. The real focus of his attack was based on what had emerged in relation to the insurance.

The insurance
23. Mr Dyer's case is based on two matters which, he submits, go to show, separately or together, that the parties and the court entered into the order on the basis of mistake, alternatively that what he says was the subsequent revelation of the true state of affairs constituted a Barder event. The first is that the insurance cover was in any event limited to £2 million, whereas the damages, if the claim succeeds, may be for a sum in excess of £3 million. The second is that the insurer has avoided the policy, with the consequence that the claim may be wholly uninsured. For reasons which will become apparent in due course the two matters require, in my judgment, to be considered separately.

The insurance –  limit of liability
24. The possibility of liability under the claim was, to adopt Secretary Rumsfeld's well-known language, a 'known unknown': cf Judge v Judge [2008] EWCA Civ 1458, [2009] 1 FLR 1287, para [44]. The parties knew that a claim had been made which might or might not be made good and which, if it was established, would require the payment of damages in an amount that had not yet been quantified. In that sense the parties were faced with the same kind of forensic problem as that presented by the latent tax liabilities in cases such as Penrose v Penrose [1994] 2 FLR 621 and Judge v Judge [2008] EWCA Civ 1458, [2009] 1 FLR 1287.    

25. We were taken to various authorities. It is convenient to take them in chronological order starting with Edmonds v Edmonds [1990] 2 FLR 202. In that case a property which the court had found to be worth £70,000 was sold by the wife six months later for £110,000. Dismissing the husband's appeal, Butler-Sloss LJ observed (page 206) that although he had asserted throughout the proceedings his belief that the valuation should be much higher he had "failed to adduce sufficient evidence to rebut the expert evidence called by the wife." She added (page 207):

"the valuations relied upon by the registrar were never properly tested by the husband. It does not lie in his mouth today to seek to rely on that absence of expert evidence. Further, in none of the cases cited by Lord Brandon, nor on the facts of Barder itself, did the party applying for relief have the opportunity to avoid the false assumption."

Nourse LJ agreed, saying (page 210):

"the husband, having omitted to call expert evidence and thus to take the only step which could have questioned the assumption beforehand, cannot afterwards say that it has been invalidated".

26. Worlock v Worlock [1994] 2 FLR 689 was another case where a spouse, in that case the wife, sought to appeal on the basis of a subsequent increase in the value of a property. Dismissing the appeal, Sir Stephen Brown P said (page 694):

"it is apparent that the essential facts were available to the wife and her advisers at the time of the registrar's order. When I say 'the essential facts', I mean all the relevant information which it would be necessary for them to have in their possession to enable them to investigate and assess the complete position."

27. Stuart-Smith LJ and Mann LJ agreed.

28. In Penrose v Penrose [1994] 2 FLR 621 this court refused to treat as a Barder event the fact that a tax liability assumed at the date of the original hearing to be no more than £175,000 turned out to be about £400,000. The husband, as Balcombe LJ put it (page 632), "must have known the underlying facts", and

"If in those circumstances he puts before the court figures for his prospective tax liability which prove, in the event, to be much too low, … he can only have himself to blame." 

29. Nourse LJ agreed, saying (page 636):

"… the party seeking to impugn the order cannot rely on an event that could have been established in evidence by him or, which may come to much the same thing, that could with diligent enquiry have been ascertained beforehand; see the decisions of this court in Edmunds v Edmunds [1990] 2 FLR 202 and Worlock v Worlock [1994] 2 FLR 689 … I remain wholly unconvinced that the husband could not, with due diligence, have ascertained and established in evidence in April 1992 the likely extent of his own tax liability for a series of fiscal years ending with 1987/88."

30. In Judge v Judge [2008] EWCA Civ 1458, [2009] 1 FLR 1287, a tax liability which it had been thought might be as great as £14 million turned out to be only £600,000, after it emerged that the husband was able to establish what was referred to as the 'conditionality' defence. The wife's application to set aside the order (which had provided for the husband to bear the whole of the liability) on the basis that both spouses and the court had been labouring under a substantial mistake as to the extent of the husband's exposure was rejected by the judge. And her appeal from that rejection was dismissed by this court.

31. Wilson LJ said (para [31]) that at the time of the original hearing there had been material before the court "which suggested that a defence of conditionality might be able successfully to be developed". He continued (para [37]):

"In the event there was no attempt by either side to explore with the husband in oral evidence whether he might be able to claim that his gifts to the charity were conditional; and no further reference was made at the hearing to the possibility of the defence. But it seems to me that the makings of the defence were there for all to see and further to have explored had they had any appetite to do so."

Explaining why, in his judgment, the order was not vitiated by mistake (para [44]), Wilson LJ said:

"In the proceedings in 2001 the size of the liability was, in Mr Seabrook's phrase, a known unknown and the judge found that the spectrum within which it might possibly fall was vast … In those proceedings the makings of a conditionality defence, which would dramatically reduce exposure to the charity albeit not to the Revenue, were there for all to see and further to have explored."

Yet the fact was that neither party had sought to do so. Lawrence Collins LJ and Longmore LJ agreed, Lawrence Collins LJ observing (para [61]) that

"the possibility that there might have been no liability was in the arena."

32. Finally, there is Walkden v Walkden [2009] EWCA Civ 627, [2010] 1 FLR 174, where a wife sought to plead as a Barder event the fact that certain shares had subsequently been sold by the husband at a substantially higher value than, she said, had been anticipated. In the alternative she argued the case as being one of mistake. She failed on both grounds. Thorpe LJ said (para [49]):

"The argument advanced is simple; all proceeded on a mistaken premise, namely that the husband's shares were worth the sum which, although not certain, was on the husband's evaluation, about 10% of what they fetched 3 months after the order. That contention is unpersuasive for the very simple reason that there was no consensus as to the value of the shares. Throughout years of effort to enhance her share of the assets, the wife had emphasised the potential and the high field of the possible value of the shares. Inevitably the husband had countered that, stressing that a sale was possible anywhere between £1m and £1. This was the area in which the parties and their solicitors most regularly fenced and in reaching a compromise in January 2007 each must have taken a view as to this dominant unknown and each must have been satisfied that the highly speculative value of the shareholding was duly reflected in the compromise."

33. He added (para [51]) that there was plainly no Barder event, observing (paras [52]-[53]) that the supervening event in the case, the sale of the husband's shares shortly after the agreement between the parties, involved no dramatic and unexpected turnaround in the company's performance and was itself neither unforeseen nor unforeseeable. Wall LJ and Elias LJ agreed, Elias LJ commenting in relation to Barder that (para [89]) "It was plainly foreseeable that an asset of this nature might fluctuate dramatically."

34. In relation to the argument based on alleged mistake Elias LJ said this (paras [90]-[92]):

"As to the mistake argument, there seem to me to be two inter-related problems. The first is that there never was any agreement as to the value of the shares … On the contrary, there was a clear recognition that the parties were at odds over the true valuation …

A second and related problem is that the possibility that the shares may be sold at a higher price was foreseen at the time. In my judgment, that is as much an answer to a claim in mistake as it is to a claim based on the Barder principle. In Edmonds v Edmonds [1990] 2 FLR 202 a consent order was made on the assumption that a house was worth £70k. That figure was identified after the judge had heard expert evidence from the wife. The husband contended that the house was worth significantly more but did not obtain his own expert evaluation. Subsequently the house was sold for £110k and he sought to have the settlement reopened, either on Barder grounds or mistake. The action failed. Butler Sloss LJ, with whose judgment Nourse LJ agreed, noted that the husband had been in a position to influence the valuation but he had chosen not to obtain the relevant evidence. In those circumstances he could not challenge the value placed on the property by the judge. Similarly here; it is true that no value was ever placed on the shares at all either by the parties or by the judge when he made the order in April, but in my view, the wife cannot be in a better position because she was prepared to reach a settlement without any formal figure being assessed at all. The parties took their chance on the value but that is quite different from saying that they were mistaken about it."

35. In the light of these authorities it is clear, in my judgment, that the husband cannot rely upon the fact that the insurance cover was no more than £2 million either as vitiating the order on the ground of mistake let alone as amounting to a Barder event.

36. The parties knew about the claim and the consequent possibility that there might be a substantial liability to the little girl. But neither of them sought either to explore the matter or to bring it into account in the ancillary relief proceedings, the husband because he assumed it was covered by insurance, the wife either for the same reason or because the liabilities were all to be assumed by the husband. Even assuming that there was any consensus on the point, and the husband in my judgment has not established that there was, the fact is that the potential liability was there for all to see and to explore if they wished. Neither did. It was a 'known unknown' which neither party sought to explore let alone to bring into account. Moreover, the inadequacy in the insurance cover was there to be discovered, even assuming it had been forgotten, by the asking of the simplest and most obvious questions. In my judgment any reasonably prudent businessman in the position in which the husband found himself when faced with the damages claim, and when considering whether or not to bring it into the reckoning in the ancillary relief proceedings, would have asked himself and his advisers three very obvious questions: What are the prospects of the claimant succeeding on liability? If she succeeds on liability, what is the possible quantum of the damages we may have to pay? Given that figure, is our insurance subject to any relevant limit of cover? The answers to these questions (none of which, it may be noted would have required recourse to the insurer, for the answer to the third would be apparent on the face of the policy itself) would have been: Possibly yes; Possibly in excess of £3 million; A ceiling of £2 million.

37. The reality is that the husband, to adopt Sir Stephen Brown's words, knew "the essential facts" and by the exercise of due diligence could – would – have discovered the limit of the insurance cover. He has only himself to blame for the fact that he did not take these obvious steps. Faced with a known unknown he chose to proceed without further inquiry or investigation. He cannot now be heard to say that he was mistaken. There was no vitiating mistake he can rely upon. And just as in Walkden v Walkden, he cannot be heard to say that his discovery of the true position in relation to the limit of cover amounted to a new or Barder event. It quite plainly was not. In this case as in that the reasons which deny him relief under the one head serve equally to deny him relief under the other. But the reality is that this was simply not, and never could have been, a Barder event. The 'problem' – the limit of the indemnity under the policy – had been there all along. Its belated discovery by the husband was not a new event; it reflected no more than his failure at the proper time to ask obvious questions about the existing state of affairs. In this case, as in both Judge v Judge and Walkden v Walkden, the husband either succeeds in mistake or not at all. For the reasons I have given he has no claim based on mistake; and that is the end of it. 

38. Accordingly, in my judgment, the husband's claim insofar as it is based on his discovery of the true position in relation to the limit of cover must fail.

The insurance – avoidance by the insurer
39. So far as concerns the husband's claim based upon the insurer's avoidance of the policy, matters seem to me to stand in a very different position. This was not a known unknown. As Mr Dyer puts it, it was simply an unknown. To adopt Secretary Rumsfeld's much derided but nonetheless useful terminology, it was an 'unknown unknown': something the husband did not know he did not know.

40. Mr Dyer puts his case in two ways. Founding himself in particular on the letter from the insurer dated 30 October 2009 in which it announced that it was proposing to avoid the policy (see further below), his primary submission is that the revelation that the partnership was or might be completely uninsured was a Barder event. In the alternative, he says, there was a vitiating mistake, both parties having, when Judge Raynor made his order, believed that the claim was insured and that, accordingly, the net assets were £10,906,734 and not (as on this argument may turn out to be the case) only £8,906,734. The latter issue logically has to be considered first; only if that ground fails is it necessary to consider whether there has been a Barder event: Walkden v Walkden [2009] EWCA Civ 627, [2010] 1 FLR 174, at para [47].

41. Ms Harrison disputes that the letter of 30 October 2009 was a new fact or a Barder event. The husband, she says, was aware before Judge Raynor made his order of the risk that the insurer might avoid. So far as concerns the alternative plea based on alleged mistake, she submits that the evidence adduced by the husband does not support his assertion that it was the common assumption of the parties that the policy would provide cover. And in any event, the husband because of what, she says, he knew, cannot even establish that he himself was mistaken. He knew there was a risk but chose not to place the issue before the court.  

42. Ms Harrison says – and this cannot be gainsaid – that the husband was aware of the accident from July 2004, aware by February 2009 that proceedings had been issued and aware in April 2009 that they had been served. So, she submits, he could and should have made all reasonable and appropriate enquiries of his insurer and, if he had done so, he would, she asserts, have discovered by (say) April 2009 that it was considering avoiding the policy. And if he did not do this then he cannot say that the subsequent revelation was an unforeseen or unforeseeable event: cf Cornick v Cornick [1994] 2 FLR 530, page 536. On the contrary, it was both foreseen and foreseeable. The husband could and would have established what was going on if he had made diligent enquiry.

43. Mr Dyer accepts that the question is whether, prior to 25 September 2009, the husband, with the knowledge he actually had, took whatever steps were reasonable to make enquiries about indemnification, and whether he could with reasonable diligence have found out more. He says that the question must be answered in favour of the husband. In particular, nothing had happened, and no information had come to his attention, which would have raised any legitimate worry or concern or which, taking a sensible view, could or would have given him any inkling that the insurer was even considering avoiding the policy, let alone which would have prompted him to make any enquiries. After all, the insurer had been insuring his business over the years without ever refusing indemnification. And although the insurer had been promptly notified of the accident in July 2004 it was not until more than five years later that it avoided the policy. There was, Mr Dyer says, simply no reason at all for the husband to enquire of the insurer whether there was any problem with the policy. He was entitled to assume that he was covered by the policy.

44. Ms Harrison begs to differ. I agree with Mr Dyer.

45. In this connection it is necessary to set out the relevant sequence of events in a little more detail. A file note by Ms Downie dated 22 May 2009 but relating to a meeting between her and a representative of the insurer on 9 April 2009, and in fact repeating in large part matters recorded in an earlier file note dated 9 April 2009, records the insurer's representative as saying that the insurer "could not at this point confirm liability under the policy" and as mentioning that the limit of liability under the policy was £2 million. The note continues:

"If this is a valid claim on which liability is admitted, it could be for considerably more than £2m and Mr Richardson would need to consider his position. It was agreed that this would be mentioned to the Insured. I spoke to David Plant about this and it was agreed that he would take this up with Mr Richardson."

The husband's evidence is that Mr Plant did not tell him about this. Mr Plant in his evidence does not assert that he did.

46. Another file note by Ms Downie dated 14 September 2009, recording a telephone conversation between her and the solicitors acting in the claim on the instructions of the insurer, shows that the insurer had still not accepted liability under the policy.

47. A further file note by Ms Downie dated 16 October 2009 records a discussion between her and the husband about the merits of the child's claim. It is noteworthy that there is no reference in this to anything to do with the policy. The file note records that the husband was about to go to the USA and would be back "mid December".

48. On 30 October 2009 the insurer wrote to the husband (copying the letter at the same time to Ms Downie) saying that it proposed, subject to anything he might draw to their attention, to avoid the policy. The letter was received while the husband was in the USA. He had left on 20 October 2009 and returned from the USA on 11 December 2009. The letter was opened by Mr Plant on 3 November 2009 – the day before the wife died. Mr Plant subsequently discussed matters with Ms Downie but did not tell the husband what had happened or send him the letter. Nor did Ms Downie, until she wrote on 17 December 2009.

49. The factual position, therefore, is perfectly clear. Not until 18 December 2009 did the husband himself have any actual knowledge of what had been going on or the slightest inkling that there was any possibility of the insurer avoiding liability under the policy. On the other hand, two of his agents, his insurance broker, Ms Downie, and his accounts manager, Mr Plant, had known since April 2009 – well before the hearing before Judge Raynor – that avoidance was on the cards.

50. Ms Harrison says that the fact that the husband did not have actual or direct knowledge of what had been going on is immaterial. Well known principles of agency law mean that the husband is to be treated as having constructive knowledge of whatever was known to Ms Downie and Mr Plant. His attempt to avoid the principles of constructive knowledge by differentiating matrimonial proceedings from other civil proceedings is, she submits, without merit.  

51. Mr Dyer submits that this appeal should not be determined on the basis of what he calls the strict application of the law in relation to agency. The principles of agency law applicable to cases where there is a claim by a third party seeking a remedy against a principal having dealt with his agent are not, he says, relevant to the very different circumstances arising in this appeal, where the question is whether an ancillary relief order should be set aside as between the husband and the wife's estate. Strict application of the agency principle of constructive knowledge in this case would create a legal fiction, not least because the application of the principle would carry with it the imputation of the relevant knowledge not only to the husband but also to the wife, who was, as a partner at the time, also the principal of the two agents. We should, he submits, look at the reality of the situation, recognise that both Ms Downie and Mr Plant failed in their duty as agent to keep the husband informed of what was going on and ask the simple question: What actual as opposed to constructive or imputed knowledge did the husband have on 25 September 2009 about the insurer's stance on indemnification under the policy? The answer to that question is, as he rightly says: None.    

52. I agree with Mr Dyer.

53. I do not want to be misunderstood. The Family Division is part of the High Court. It is not some legal Alsatia where the common law and equity do not apply. The rules of agency apply there as much as elsewhere. But in applying those rules one must have regard to the context, and the relevant context here is the law of ancillary relief and, more particularly, as Mr Dyer has correctly said, the rules which apply where the question is whether an ancillary relief order should be set aside as between the husband and the wife's estate. And in that context the relevant legal principles are those to be found in the authorities to which I have referred. Someone in the husband's position is to be treated as knowing what, with the exercise of due diligence, he would have discovered. But in this context there is not to be imputed to him something of which he was entirely unaware merely because it was within the knowledge of an agent or employee.

54. In these circumstances it seems to me that the revelation of the insurer's stance to the husband on 18 December 2009 – something of which he had no previous inkling and which due diligence on his part would not have uncovered any earlier – is a matter which he is entitled to rely upon. It is a nice question whether this is because it amounts to a vitiating mistake or to a subsequent Barder event. Initially, I preferred the latter view, though I thought and remain of the view that it makes little difference in the particular circumstances of the case. My reasoning was as follows: The husband, as I have already said, has not established that there was any consensus on the point, and in any view, on the facts as I have analysed them, the problem emerged only after Judge Raynor had made his order. I have since had the opportunity of reading in draft the judgments of Rimer and Thorpe LJJ and am persuaded by them that my initial view was wrong and that the correct analysis is, as they say, that there was a vitiating mistake. I should add that in any event I agree entirely with the powerful observations of Thorpe LJ in paragraph 86 below.

55. Accordingly, in my judgment, the husband has established that the revelation in December 2009 that the insurer had avoided the policy is a vitiating event which in principle entitles him to relief. I should add that there is no basis for denying him because of delay whatever relief he would otherwise be entitled to. He discovered the true position on 18 December 2009 and notified the wife's solicitors of his intention to appeal less than two months later on 10 February 2010.

Relief
56. It has been said that in a Barder case the court has to reach a fresh decision, applying the criteria in section 25 of the Matrimonial Cause Act 1973 to the facts as they are now known but otherwise putting itself in the position of the judge: Smith v Smith (Smith and Others Intervening) [1992] Fam 69, page 76, Barber v Barber [1993] 1 FLR 476, page 479. Sometimes that exercise can be done by this court; sometimes the court will direct a re-hearing at first instance, Where what is in issue is a vitiating feature – either non-disclosure, as in Kingdon v Kingdon [2010] EWCA Civ 1251, or mistake – it may suffice merely to repair the defect without embarking upon a complete re-hearing.

57. There may be dangers in an over-refined analysis in a context where everything depends on circumstances which may vary infinitely and where the determination of whether, correctly analysed, the case is one of vitiating mistake or a subsequent Barder event may not be entirely obvious. In my judgment the proper approach is that indicated by Thorpe LJ in Williams v Lindley [2005] EWCA Civ 103, [2005] 2 FLR 710, para [23]:

"In supervening event cases the law is clear thanks to the speech of Lord Brandon in Barder and the subsequent decision of this court in Smith. However how the court undertakes the determinations required by those two cases should not be too rigidly prescribed. Great flexibility is necessary to accommodate the widely differing facts and circumstances that inevitably arise. Much will depend upon the impact of the supervening event."

58. At the end of the day, as Wilson LJ observed in Kingdon v Kingdon [2010] EWCA Civ 1251, paras [36]-[38], the court has a discretion which must be exercised in a way which deals with the case justly and proportionately.

59. In my judgment there is no need to remit the matter for a further hearing before Judge Raynor, something that would expose the litigants to yet further delay and costs. We can justly and fairly, and if we can justly and fairly then we should, deal with it ourselves.

60. There is no conceivable justification for disturbing Judge Raynor's division of the assets in specie nor for departing from his decision that the net assets should be divided in the proportions 47.5% to the wife and 52.5% to the husband. The only question is whether, in all the circumstances as they are now revealed, and if so how, his award should be adjusted to reflect the fact that there may – and I emphasise may – be an unexpected liability of £2 million.

61. Mr Dyer submits that this potential liability, being a liability of the partnership and something which, if it crystallises, will reduce the matrimonial assets pro tanto, should be apportioned equally between the parties. Ms Harrison says that the entire burden should be borne by the husband – reflecting, she would say, the fact of his acceptance, and Judge Raynor's order, that he would bear the liabilities of the partnership and indemnify the wife against them. Alternatively, she submits, the liability should be borne in the proportions of 47.5% and 52.5% and the estate's obligation to contribute should be limited to any damages awarded to the child and should not extend to any of the costs of the litigation. She justifies that last submission by suggesting that the husband has more reason than the estate to fight the claim all the way. 

62. At this point it is necessary to return to consider in rather more detail the County Court proceedings. There are, for present purposes, two striking features of this litigation.

63. The first is its dilatory progress and the spasmodic and largely ineffective way in which it has hitherto been case managed. The accident took place on 1 July 2004. The claim form was issued on 10 December 2008 (with particulars of claim to follow) but not served until 9 April 2009. Time for service of the particulars of claim and the supporting medical evidence was extended until 10 August 2009 by an order made by the District Judge on 9 April 2009 and further extended until 10 February 2010 by another order of the District Judge on 5 August 2009. In the meantime another District Judge had made an order on 27 July 2009 directing that the matter was to be listed on 6 August 2009 for what was described as an 'infant settlement hearing' but which, we are told, did not take place. A further order made by yet another District Judge on 8 February 2010 (but which we have not been shown) apparently gave yet a further extension of time. The Particulars of Claim, dated 7 June 2010, and an 'Advisory Paediatric Neurology Report' from a Consultant Paediatric Neurologist dated 4 March 2010, were eventually served in June 2010. The prayer for relief included claims for personal injury damages in excess of £1,000 and damages exceeding £300,000. A Schedule of Loss served at the same time identifies a number of conventional headings but without providing any figures; all are stated as 'to be assessed'.

64. The other, and for present purposes more important, feature of the litigation is that both the wife, and since her death the executor, seem to have assumed that it was of no concern to her (or, now, her estate). Accordingly neither she nor the executor appears to have taken any part in the proceedings. This approach, in my judgment, is dangerously misconceived.

65. The fact is that the accident in 2004 took place in a building which it is admitted was owned by the partnership – the Richardson Group – of which at the time the wife was one of the partners. As against the claimant, the fact that the wife subsequently retired from the partnership on 9 October 2009 on the terms of the Deed executed the same day in accordance with the order dated 25 September 2009, and the fact that the very widely drawn indemnity given to her by the husband in clause 5.2 of the Deed plainly extends as a matter of construction to any liability there may to the claimant, are neither here nor there. So the claimant is entitled to look as much to the wife (or, now, her estate) as to the husband for the damages she seeks. And in this connection it must be remembered that a successful claimant is in principle entitled to levy execution on any of the defendants, without necessarily being required first to have recourse to the others. Given that pursuant to Judge Raynor's order much of the husband's wealth is tied up in a property portfolio which may not be easily or quickly realised, whereas the wife took her share very largely in cash, a successful claimant looking for ease of recovery might find the wife's estate a more attractive target, even if the husband has not become insolvent, as he fears and as might perhaps happen.

66. Furthermore, the first and second defendants to the claim (the third defendant being the local authority) are, respectively, the husband and "The Richardson Group". So, although she seems not to have appreciated this, the wife (and, now, her estate) is a defendant to the proceedings: see CPR PD 7A, para 5A. Yet it would seem that she (and now the executor) have been content to leave the conduct of the proceedings entirely to the husband, whose legal representatives – not those acting for him in this appeal – have served both what is described as "Defence of First and Second Defendants" and, against the insurer pursuant to CPR Part 20.7, what is described as "First and Second Defendants Additional Claim against Third Party, Third Party Particulars of Claim". Neither of those documents is dated, and we have not been told when they were served, but the insurer's defence to the Part 20 claim is dated 8 October 2010. It pleads in the alternative that the insurance policy was void from its inception and that the insurer was entitled to and has avoided the policy.   

67. The practical consequence therefore is that, like it or not, the estate is a party to the action (subject only to the formality of the claimant applying for an order to carry on the action in that manner); that the estate, and thus the executor qua beneficiary, are accordingly directly concerned in the outcome; and that the executor qua executor, and also personally, has, it might be thought, an interest in ensuring that the defence of the claim is properly conducted both as concerns the estate and so far as concerns him personally. 

68. Now it may be, as the husband's ancillary relief lawyers have been told, that a claim of this kind by such a young child is unlikely to be capable of settlement until she reaches her mid to late teens, not least because, so it is said, it is very difficult to estimate quantum and any figure that might be suggested at this stage is likely to be nothing more than an educated guess. But that is no reason at all why the proceedings should continue to slumber.

69. It is not for us to advise the parties how best to defend the action. But it might be thought that it is in the interest both of the husband and of the estate to know as soon as possible (a) whether the claimant can establish liability and (b) whether the insurer can avoid the policy. Indeed, given the nature of what is alleged to have happened as long ago as July 2004 – now over six years ago – it might be thought that an early trial of the issue of liability would be in the interests of everyone. This is the kind of delay that does no credit to any acceptable system of justice and which the reforms ever to be associated with Lord Woolf were intended to eradicate.

70. We were told that it might take (say) six months to resolve the issue with the insurer and (say) 12 months to resolve the issue of liability with the claimant. I have no means of knowing whether these estimates are accurate – the weary would probably protest that they are still too long whilst the cynic might predict that they are unduly optimistic – but they are the best material we have. I propose to proceed, therefore, on the footing that the question of whether or not there is an uninsured claim (by which I mean uninsured as to the policy limit of £2 million) will have been answered by the end of 2011.

71. I return to the question of whether, and if so how, Judge Raynor's award should be adjusted to reflect the fact that there may be an unexpected liability of £2 million.

72. I cannot agree with Ms Harrison that there should be no adjustment, that the entire burden should be borne by the husband. Had this potential liability been known about at the time it is clear, in my judgment, that the husband would never have agreed and, more to the point, Judge Raynor would never have ordered that it should be swept up with all the other liabilities being assumed by the husband. This was a discrete and very different kind of liability and, moreover, one which might amount to over 18% of the net assets. Judge Raylor would have made a different order; we must make an appropriate adjustment.

73. Nor can I accept Ms Harrison's submission that the liability should be borne in the proportions of 47.5% and 52.5%. Those were the percentages which Judge Raynor applied when deciding how to divide up the matrimonial 'pot' – the net assets – so logic determines that this potential diminution in the size of the pot should be borne equally. Nor, logic apart, can I see any sensible reason, factoring what we now know into the overall structure of Judge Raynor's award and the basis of his reasoning, for adopting any other approach. Justice and fairness requires that the potential liability should be borne equally.

74. Moreover, I cannot accept that the estate should be required to contribute only to the damages rather than to the costs. Whatever concerns I might otherwise have had about the potential unfairness of tying the estate's ultimate award to the outcome of uncertain and potentially expensive litigation being run by others are dissipated here by the fact that the estate is both interested in the outcome of and a party to the proceedings. The estate has the same interest as the husband in defeating both the child's claim and the insurer's attempt to avoid the policy.

75. In my judgment, therefore, Mr Dyer is correct when he submits that we should vary Judge Raynor's order by substituting for the order that the husband pay the two instalments of the lump sum totalling £1.6 million an order that the husband pay the sum of £1.6 million less such sum not exceeding £1 million as represents 50% of the aggregate of (i) any damages that may be ordered to be paid to the claimant in the County Court proceedings and (ii) the costs incurred in defending the action and of prosecuting any third party claims against either the insurer or the broker.

76. The husband was due to pay the third instalment of £1,203,830 on or before 31 December 2010. As to £600,000 of that amount there is no reason why it should not be paid to the estate. The estate's potential liability of £1 million should in the circumstances be attributed to the balance of that instalment – £603,830 – which together with the final instalment of £396,170 due on or before 30 June 2011 amount in the aggregate to £1 million. The husband is entitled to proper security to ensure that, if the occasion arises, he can indeed have recourse to the estate's share of the liability. On the other hand, I can see no reason why the estate should not have the interest on those two sums; after all, the £1 million is truly only security for future performance and, so long as it is in place, the interest earned must surely be for the party providing the security.

77. There are, no doubt, different ways in which the award might be structured. The solution which I propose is for the husband to pay the estate outright £600,000 of the £1,203,832 due on 31 December 2010 and to pay the further sums of £603,830 due on 31 December 2010 and £396,170 due on 30 June 2011 into court or into an account in the joint names of both solicitors on terms that the interest is paid to the estate, the ultimate destination of the funds in the account to abide the outcome.

Lord Justice Rimer :
78. I have had the advantage of reading in draft the judgments of Munby and Thorpe L.JJ. I agree with the disposition of the appeal proposed by Munby LJ and, subject only to what follows, do so for the reasons he gives.

79. There was one minor divergence of view between Munby LJ and Thorpe LJ. Whereas Munby LJ was initially inclined to regard the insurer's avoidance of the policy as a 'Barder event', Thorpe LJ regards it as a 'vitiating mistake'. As my Lords observe, the distinction, at any rate for the purposes of this appeal, appears to be an academic one. For my part, however, I respectfully agree with Thorpe LJ that it should be regarded as a 'vitiating mistake'.

80. Munby LJ explains, and I agree, why down to the delivery by His Honour Judge Raynor QC of his judgment on 25 September 2009 neither the husband nor the wife had actual or other relevant knowledge that there was a risk that the insurers might avoid the policy. That risk was, therefore, not something to which either could or should have disclosed to the court. What instead happened was that the trial proceeded down to judgment on the tacit assumption of both parties that the policy was an asset in the nature of an unflawed chose in action that would, if necessary, give the parties the benefit of an indemnity against any liability in the child's damages claim up to the limit of the cover.

81. In fact, the policy was not an unflawed chose in action, because at the time of the trial the insurers were already considering whether to avoid it. Had the parties known that, they would or should have disclosed it to the court and it is probable that Judge Raynor's order would have been adjusted (perhaps by the inclusion of some contingent provision) to cater for the risk that the policy would be successfully avoided.

82. In the event, and following Judge Raynor's order, the insurers have claimed to avoid the policy. That event has falsified the tacit assumption upon which the parties proceeded before Judge Raynor. In my view it is analogous to the type of event that Hale J (as she then was) identified in Cornick v. Cornick [1994] 2 FLR 530, at 536F, example (2), and which, in Judge v. Judge [2009] 1 FLR 1287, at paragraph [3], Wilson LJ explained would nowadays be regarded not as a Barder event but as 'vitiating mistake'.

Lord Justice Thorpe :
83. I have read in draft the careful and comprehensive judgment of Munby LJ.  I am in complete agreement with his conclusion and the steps by which that conclusion is reached.

84. I agree with the view expressed in paragraph 54 that it matters not whether the one factor that unlocks the award of Judge Raynor is categorised as a vitiating mistake or a Barder event. However my preference is to label it 'mistake' rather than a Barder event.

85. The origin of the unlocking factor is the omission of the potential liability by both parties from their Forms E and subsequent disclosures. Both should have brought the risk to the judge's notice to enable him to discharge his statutory duties comprehensively. From that mistaken presentation, for which each was separately responsible, the unlocking factor develops.

86. Cases in which a Barder event, as opposed to a vitiating factor, can be successfully argued are extremely rare, should be regarded by the specialist profession as exceedingly rare, and should not be thought to be extendable by ingenuity or the lowering of the judicially created bar.