On 20 May 2014 the Court of Appeal handed down judgement in Mitsui Sumitomo Insurance v Mayor's Office for Policing and Crime [2014] EWCA Civ 682, dismissing the Defendant's appeal and upholding Flaux J's finding at first instance that a gang of youths who broke into, looted and burned down a Sony distribution warehouse in Enfield were "persons riotously and tumultuously assembled" for the purposes of Section 2(1) of the Riot (Damages) Act 1886 ("RDA"). However, perhaps more significantly, in allowing the Claimants' cross appeal on the quantum of damages, the Court of Appeal held that the RDA covers consequential losses as well as property damage losses. This landmark decision therefore further exposes the public purse to losses arising from riots and while welcome for insurers, its effect may be short-lived. On 5 June 2014 the Government announced a consultation on reform of the RDA and that it intends to present a draft Bill later in the current parliamentary session. The indications are that any draft Bill will exclude cover for consequential losses.

This note follows our e-bulletin on the first instance decision of Flaux J.

Background

The case arose after a Sony distribution warehouse in Enfield was looted and set alight by a gang of 25 youths during the riots of August 2011 following the death of Mark Duggan. The attack lasted only three minutes but the fire burned for some ten days, with the warehouse and its contents being completely destroyed. The fire is said to have been the largest arson in Europe. Sony occupied the warehouse and its insurers paid out £49.5 million, including £9.8 million in respect of loss of profit caused by business interruption. The insurers of Cresta Ltd, the owners of the property, paid out £9.35 million, including £1.5 million in respect of loss of rent. The insurers (as well as third parties which had lost uninsured stock on the premises) sued the Defendant, being the statutory authority responsible for oversight of the Metropolitan policy, for compensation under the RDA.

The RDA provides compensation for losses caused by riot damage. Under section 2(1):

"Where a house, shop, or building in a police area has been injured or destroyed, or the property therein has been injured, stolen, or destroyed, by any persons riotously and tumultuously assembled together, such compensation as hereinafter mentioned shall be paid out of the police fund of the area to any person who has sustained loss by such injury, stealing, or destruction; but in fixing the amount of such compensation regard shall be had to the conduct of the said person, whether as respects the precautions taken by him or as respects his being a party or accessory to such riotous or tumultuous assembly, or as regards any provocation offered to the persons assembled or otherwise".

At first instance, Flaux J determined two preliminary issues: (1) whether the gang members had been "riotously and tumultuously assembled" under s.2(1) of the RDA, and the Defendant was therefore liable to compensate; and (2) whether the obligation to compensate under the RDA extended to consequential losses, namely the losses of profit and rent income.

On the first issue, Flaux J found that the gang of youths were in fact "riotously and tumultuously assembled". Most of the debate focussed on whether the group was gathered together "tumultuously", as well as riotously. The group's behaviour was agitated and volatile and the youths made no attempt the hide what they were doing. This was not a criminal enterprise akin to a burglary.  

On the second issue, Flaux J readily concluded that the RDA does not cover consequential losses. The answer was not to be found in section 2(1) itself, but rather the (repealed) preamble, which referred to compensation "for" property damage; and section 7, which contemplates loss "from" property damage "in relation both the building and property therein". 

The Defendant appealed the Judge's finding on the first issue, and the Claimants (insurers) cross appealed on the second issue.

The first issue on appeal: liability to compensate under the RDA

The Master of the Rolls, Lord Dyson, handed down the judgment of the Court of Appeal to which the other members of the bench, Moore-Bick and Lewison LJJ, had contributed.

In dismissing the appeal on the first issue, the Court of Appeal had no appetite to re-open Flaux J's findings on the facts. It recognised and applied the general rule that an appeal is limited to a review of the decision of the lower court and that appeal courts must not interfere with findings of fact by a trial judge unless compelled to do so. Flaux J had carried out an evaluative exercise on the basis of the facts that he found and directed himself correctly in law, such that the result of his evaluation was one to which he was entitled to come.

Counsel for the Defendant argued that a the gang had not been"riotously and tumultuously assembled", submitting that this required the gang to be: (i) of a considerable size; (ii) excited and emotionally aroused; and (iii) behaving in such an "agitated, volatile, noisy, angry and threatening manner" that it should be obvious to the police that something needed to be done. Such an assembly was to be contrasted with a group acting "secretly or furtively". The Court of Appeal rejected the third limb of this submission.

Following a review of the authorities, and in particular the judgment of Lyell J in JW Dwyer v Metropolitan Police District Receiver [1967] 2 QB 970, it reiterated that liability under the RDA is not based on any real or notional fault of the police. Whether persons are "riotously and tumultuously assembled" is a factual assessment and should not be turned into a counter-factual inquiry into whether the police force (or even a hypothetical police force) could have prevented the damage. Liability is predicated on the principle of communal responsibility and "suretyship" which underlay the RDA's eighteenth-century predecessors. That responsibility had originally rested with the local community (or hundred) but had later been transferred to the rate of the police district in which the property was situated – and following reorganisations of policing over time, to the Defendant as the compensation authority for the purposes of the Metropolitan police.

It is question of degree whether an assembly is riotous or tumultuous. As the Court of Appeal succinctly summed up, "the focus of the inquiry is whether property has been damaged or destroyed as a result of mob violence". It is not a prerequisite that there be any noise or a lack of furtiveness, nor must the assembly be actually or potentially confrontational. Riotous and tumultuous assembly is possible in private places, and violence is required only in respect of property.

The second issue on appeal: cover for consequential  loss

Flaux J had held that the RDA made police authorities liable to compensate the costs of physical damage only and not consequential losses. The Claimants (cross) appealed this point.

Section 2(1) of the RDA provides for compensation for "loss by such injury, stealing or destruction [to property]". Counsel for the Claimants submitted that such compensation ought to include loss consequential upon damage to property (subject to the normal principles of causation and remoteness), as well as the cost of the damage itself. The Court of Appeal considered that there is nothing in the wording of section 2(1) which supports the proposition that the loss sustained cannot include consequential loss.

At first instance, Flaux J had partly relied on the (repealed) preamble and section 7 of the RDA as guides to interpretation. He interpreted the preamble wording "compensation for such damage" as meaning only the cost of repair and diminution in value were covered. While accepting that the preamble could be used as an aid to construction, the Court of Appeal took the view that Flaux J had read it too restrictively and that the natural meaning of "compensation for such damage" included "all compensation necessary to make good the loss caused by damage". Furthermore, since the RDA is, like its predecessors, essentially a remedial Act, it ought to "receive a liberal construction". Section 7 of the RDA is directed to identification of who may be a claimant and does not prescribe what losses may be recovered.  The Court of Appeal was firmly of the view that neither the preamble nor section 7 supports the interpretation of section 2(1) as meaning that loss sustained by damage to a building may not include consequential losses.

Flaux J also considered that the legislative history behind the RDA could not be used as a guide to its construction. The Court of Appeal took a different approach, stating that it could be used as long as the relevant case-law was also considered. The object of predecessor Riot Acts was to entitle victims of property damage to recover all the damages which they could formerly have recovered from the trespasser. The RDA changed the mode of recovery but does not reflect any intention of Parliament to alter the right to recover consequential losses.

Consideration was also given to the original regulations made under the RDA which set out the procedure for making claims for compensation, and were drawn up very soon after the passage of the RDA (the "1886 Regulations"). The 1886 Regulations were not consistent with claims for consequential loss. Regulation 2 gave only 14 days to bring a claim. Regulation 5 required claimants to split the sums claimed across various categories, but contained no mention of consequential loss. Counsel for the Defendant submitted that the Regulations can guide construction of the RDA. The Court of Appeal rejected the submission, first, because the RDA itself was not ambiguous and therefore the Regulations could not be used for interpretation and, secondly, because the 1886 Regulations had not been scrutinised by Parliament.

The Court of Appeal was not convinced that there was any basis for limiting the extent of section 2(1) as Flaux J had done. While acknowledging that the judgment might no longer seem fair, it had no doubt that the law "provides a right to compensation for all heads of loss proximately caused by physical damage to property for which the trespasser is liable at common law, save to the extent that they are excluded or varied by the statute". The appeal was therefore allowed.

Comment

The case is significant in that it overturns the first instance judgment and generally perceived wisdom that the liability of police authorities to compensate stops short of covering consequential – or business interruption – loss. As we noted in our previous bulletin, however, the wording of the RDA does not exclude consequential losses and, in the absence of clear words in the statute, the proper construction of the RDA on this point is not black and white. Flaux J had been compelled to have regard to the (repealed) preamble and section 7, which the Court of Appeal rejected as driving a restrictive interpretation of the Act. Moreover, the Court of Appeal was exercised by the fact that the RDA covers the diminution in value of physical property, which may take into account loss of rent, thus covering consequential loss at least to that extent. That anomaly, it said, demanded an explanation and is most readily reconciled by construing the Act to cover consequential loss.  

The Court of Appeal's decision will be welcome (and perhaps slightly surprising) news to insurers as well as owners and occupiers of property to the extent not insured. It is understood that the Defendant is applying for leave to appeal to the Supreme Court.

In the background, however, the cogs of statutory reform are already in motion. In the wake of the 2011 riots which left the taxpayer facing compensation bills on an unprecedented scale, the Government commissioned an independent report into the law in the field which was published in September 2013. In light of this report, the Home Department opened an 8-week consultation on 5 June 2014 inviting comments on proposals for reform of the RDA.

The key proposals in the consultation paper include:

  • The exclusion of recovery of consequential losses;
  • A turnover-based cap on amounts insurers will be able to recover under the legislation. This may, if unduly restrictive, impact the availability, pricing or other terms of insurance against property damage caused by riot, particularly in high risk areas;
  • Extending the scope of compensation to cover damage to vehicles. However, the Government does not intend insurers to be able recover any claims paid out to vehicle policyholders;
  • Establishment of a central Riot Claims Bureau to process claims. The Government intends to set targets to speed up processing times for smaller claims;
  • Extending the time limit for making claims from 42 days to 90 days; and
  • Potentially allowing Police and Crime Commissioners (or the Deputy Mayor for Policing and Crime in London) to determine "riot areas" or "core riot areas" in their locality within 7 days of the event. This would reduce the need for argument over whether damage was caused by "riot" but might also increase the scope for fraudulent claims. The Government is unsure as to the practicality of this proposal and has asked for comment on a range of options rather than making any outright recommendation.

The effect of the Court of Appeal decision on recovery of consequential losses under the RDA may therefore be short-lived. The limitation of cost to the public purse is a key undercurrent to the Government's thinking. The Government's view is that the Act ought to exist as a "safety net"; not a quasi-insurance policy.