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SOCIETY OF LLOYD'S v. DENNIS HUGH RLD LEIGHS; GEOFFREY HERBERT LYON and DAVID WALTER WILKINSON and CANADIAN NAMES Intervenors  EWCA Civ 2283 (31st July, 1997)
THE SUPREME COURT OF JUDICATURE
THE COURT OF APPEAL (CIVIL DIVISION)
APPEAL FROM THE HIGH COURT OF JUSTICE
Courts of Justice
31 July 1997
e f o r e:
- - - - -
SOCIETY OF LLOYD'S
DENNIS HUGH REGINALD LEIGHS
GEOFFREY HERBERT LYON
DAVID WALTER WILKINSON
- - - - -
Aided Transcript of the Palantype Notes of
Bernal Reporting Limited, 180 Fleet Street,
0171 831 3183
Shorthand Writers to the Court)
SIMON GOLDBLATT QC & MR VINCENT NELSON
(Instructed by Epstein Grower & Michael Freeman, London, W1H 8DQ) appeared
on behalf of the Appellants
ANTHONY GRABINER QC & RICHARD JACOBS
(Instructed by Messrs Freshfields, 65 Fleet St, London, EC4Y 1HS) appeared on
behalf of the Respondent
(Instructed by Warner Cranston, Pickfords Wharf, Clink St, London, SE1 9DG)
appeared on behalf of the Intervenors
U D G M E N T
approved by the Court
is the judgment of the Court to which all members have contributed. It is the
latest of a series of judgments in which the Courts have had to consider
challenges to the legitimacy of acts of the Society of Lloyd's. In a number of
them, including the two appealed against in this case, the history, structure
and manner of operating of the Society and the Lloyd's market have been
described in detail. In this judgment we have not found it necessary or
desirable to repeat the exercise that has been so adequately undertaken in
appeals raise fundamental questions as to the efficacy of the complex scheme
under which the Society of Lloyds ("the Society") has set out to resolve the
avalanche of litigation that was threatening to destroy the Lloyd's market and
many who traded in it. This scheme, described as the Reconstruction and
Renewal Plan ("R & R"), involves a voluntary global settlement of claims of
various descriptions made by and against Names in respect of business written
in or before 1992 coupled with a Reinsurance and Run-Off Contract, in the
nature of a global reinsurance to close, with a group of companies ("Equitas")
formed specifically for this purpose. We shall call this "the Equitas
Contract". The Society has, by a mechanism which we shall shortly describe,
purported to procure that all Names with actual or potential liabilities in
respect of non-life business written in or before 1992 are party to the Equitas
Contract. If the Society has succeeded in this, Names who have declined to
take part in the R & R settlement are, nonetheless, liable to pay premiums
for the reinsurance cover provided by Equitas. Equitas has assigned the right
to such premiums to the Society. In these three Actions, which are test cases,
the Society has sued three such Names for premiums assigned to the Society by
Equitas. The Names have pleaded a number of defences to these claims. In two
separate trials Colman J. has rejected these defences, giving declaratory
relief in favour of the Society under O.14 A RSC and summary judgment for the
premiums under O.14. Against those decisions the Names now appeal. 215
Canadian Names, who have also rejected the R & R settlement offer, have
been permitted to appear by Counsel by way of intervention both on the first
hearing before Colman J. and before us.
no means all the arguments that were advanced before Colman J. have been
advanced before us. Those we have heard have been both refined and elaborated.
In order to explain the defences raised, it is first necessary to outline the
nature of the Equitas Contract and the manner in which the Society has
purported to procure that Names who have not agreed to the R & R
settlement are nonetheless party to that Contract.
the Equitas Contract Equitas has undertaken to reinsure Names' liabilities
arising out of business written in and before 1992 and to run-off these
reinsured liabilities. The reserve necessary to enable Equitas to perform
these obligations has been calculated as has the premium to be paid by each
Name in order to produce this reserve. For those Names who have accepted the R
& R settlement offer, settlement funds of £3.2 billion have provided a
source of the premiums to be paid to Equitas. The minority of Names who have
rejected the settlement are liable to pay their Equitas premiums out of their
own funds - always provided that the Society has successfully compelled them to
be party to the Equitas Contract. The Society purports to have done so in the
of the Names entered into a standard form agreement with the Society, known as
the 1986 General Undertaking, whose provisions include an undertaking by the
Name to comply during the:
of membership with the provisions of Lloyd's Acts 1871-1982, any subordinate
legislation made or to be made thereunder and any direction given or provision
or requirement made or imposed by the Council or any person(s) or body acting
on its behalf pursuant to such legislative authority and shall become a party
to, and perform and observe all the terms and provisions of any agreement or
other instruments as may be prescribed and notified to the Member or his
underwriting agent by or under the authority of the Council."
Society contends that this General Undertaking has enabled the Council of
Lloyd's, by the use of its statutory powers, to procure that all Names are
party to the Equitas Contract.
6(2) of the Lloyd's Act 1982 gives the Council the power to:
such byelaws as from time to time seem requisite or expedient to the proper and
better execution of Lloyd's Acts 1871 to 1982 and for the furtherance of the
objects of the Society".
this power, the Council made Byelaw No 20 of 1983 which empowers the Council to
appoint a substitute agent to take over the whole or any part of a member's
underwriting business and to give directions to both the substitute agent and
the member in relation to the underwriting business taken over.
to this Byelaw, on the 3rd September 1996, the Council appointed a substitute
agent, "AUA 9", a company owned and indirectly controlled by Lloyds, to take
over all non-life business written in or before 1992 for all Names. AUA 9 was
directed to give effect to the R & R plan. Provision for that plan had
been made in the previous year by Byelaw No. 22 of 1995 ("the R & R
Byelaw"). More particularly, AUA 9 was directed to enter into the Reinsurance
and Run-off Contract with Equitas on behalf of each Name. This AUA 9
purported to do.
us the Defendants mounted three challenges, each of which they contended
provided an independent defence to the Society's claim:
& R was outside the "scope of the venture" that the Lloyds Acts authorised
the Society to undertake. The R & R Byelaw and the directions given
by the Council to implement the R & R plan were beyond the Council's
powers. Thus no valid authority was conferred upon AUA 9 to bind the
Defendants to the Equitas Contract.
of the Defendants was induced to enter into his agreement with the Society on
terms of the General Undertaking by fraudulent misrepresentations made by the
Society. Each of the Defendants has rescinded that agreement on the ground of
this fraud, with retroactive effect, so that at no time was any Defendant a
Name over whom the Society had any authority. Hence none of the Defendants was
party to the Reinsurance Contract with Equitas, concluded on behalf of those
Names over whom the Society had authority.
Defendant is entitled to set off by way of defence to the Society's claim the
precise amount of the premium alleged to be due to the Society, notwithstanding
the "No set-off" provision in Clause 5.5 of the Reinsurance Contract with
Names have further contended that, having regard to the fact that they have
cross-claims against Lloyds for fraud, there should in principle be a stay of
execution in respect of any judgment entered against them until their
cross-claims have been determined.
Scope of the Venture
Colman J. the Names advanced a number of grounds upon which they contended that
the Society's actions in setting up the R & R, including the Equitas
reinsurance, were beyond the Society's powers. Before us they have relied on
only one of these arguments. They contend that the scheme offends against a
fundamental principle of underwriting at Lloyd's, which is that it shall be
carried on without what has been described as "mutualisation". They contend
that this principle is recognised and imposed by Section 8(1) of the Lloyd's
Act 1982, which provides:
underwriting member shall be a party to a contract of insurance underwritten at
Lloyd's only if it is underwritten with several liability, each underwriting
member for his own part and not for one another, and if the liability of each
underwriting member is accepted solely for his own account."
the point made by the Names is that the Equitas Reinsurance and Run-off
Contract involves the pooling of reserves held by or on behalf of individual
Names to meet their individual liabilities, and of premiums levied on
individual Names, and the use of the pool to discharge the liabilities of all
the Names. At the end of the day a surplus may be shared out between the
Names, or some Names may find themselves under residual liability to policy
holders, but in neither case will the end result reflect each Name's individual
liability to policy holders in respect of the business written on behalf of
each Name. This, it is contended, offends against the prohibition of
mutualisation enshrined in Section 8(1) of the 1982 Act.
Names contend that the fact that the R & R scheme involves mutualisation
has been recognised both by the Society's legal advisers and by Brooke L.J. in
v. The Council of the Society of Lloyd's ex parte Susan Rachel Johnson
(Transcript 16th August 1996). The Names contend that Brooke L.J. wrongly
concluded that the mutualisation involved in the R & R scheme was
acceptable in the wider interests of Lloyd's when he should have held that it
violated a "fundamental principle of underwriting at Lloyd's" see Saville J. in
Society of Lloyd's v. Clementson
 CLC 71.
is important in this context to recognise the distinction between the
underwriting transactions concluded with policy holders by Lloyd's Names as
insurers or reinsurers, and the contracts and other arrangements that they make
which are ancillary to that business. It is the former to which Section 8(1)
of the 1982 Act applies and it was in relation to the former that Saville J.
at p.72 that:
has always been a fundamental principle of underwriting at Lloyd's that each
member is a sole trader and thus only liable for the specified share of any
Goldblatt Q.C. for the Names founded his argument on mutualisation upon the
contention that the Equitas Contract was in direct conflict with Section 8(1).
That argument is misconceived. Section 8(1) is directed solely to the writing
of insurance business at Lloyd's, not to contracts which the Names may conclude
thereafter which are ancillary to such business. The Equitas Contract is such
a contract. It has been concluded to make provision for the discharge of the
insurance liabilities undertaken by Names in and before 1992 in due conformity
with the requirements of Section 8(1). The Equitas scheme does not derogate
from the principle that each Name remains directly liable to policy holders in
respect of the business written by that Name and in respect of that business
is true, however, that under the Equitas contract assets of the Names are being
pooled in order to provide a fund to discharge their individual liabilities.
This can be said to derogate from a similar principle that each Name should be
responsible for his own liabilities and for those alone. Thus Counsel advising
the Society on the proposed R & R plan commented:
the R & R proposals had been put forward for the principal purpose of
achieving this quasi-mutualisation, there would be much concern as to whether
it would be possible to defend them as a reasonable exercise of the powers of
Lloyd's and the Council."
Brooke L.J. commented at p.90 that:
features of the plan might in a different context amount to unacceptable
would agree with both these comments. What we cannot accept is the submission
made in the skeleton argument submitted on behalf of the Names that:
question whether there is mutualisation has to be considered in isolation: if
the element of mutualisation is found, the underwriting business does not
become legitimate simply because Lloyd's had good reason for organising the
transaction in that way, or was otherwise acting reasonably."
would be unlikely to be acceptable to regulatory authorities if those who
insured with Lloyd's were exposed, pro tanto, to the risk of default or
insolvency on the part of individual Names. It has, accordingly, long been
necessary for Lloyd's to have had in place arrangements whereby the Names as a
whole have provided funds to provide cover against the risk of individual
defaults. This was one of the functions of the Central Fund, which thus
involved a degree of mutualisation. The same is true of the Mutual Guarantee
Policies that formed part of the security provided at Lloyd's between 1909 and
1982. In the United States, which is the source of over half Lloyd's business,
and in other foreign jurisdictions, trust funds have had to be set up to secure
the liabilities of Lloyd's Names. We cannot see that agreements or
arrangements which involve Names in making mutual provision against the risk of
individual default are in conflict with or outside the scope of the venture of
an insurance business in which each Name accepts liability solely for his own
& R, and in particular the Equitas scheme is not, of course, simply
designed to provide cover against the risk of individual defaults. It has a
much more fundamental object - to settle intractable litigation and to avoid
the need to put the whole of Lloyd's into run-off. In short, a primary object
of the scheme, if not the primary object, has been to save Lloyd's itself, for
the benefit of its members. We find it hard to see how it can be argued that
the scheme has not been "requisite or expedient to the proper and better
execution of Lloyd's Acts 1871 to 1982 and for the furtherance of the objects
of the Society."
are in no doubt that the R & R Byelaw falls fairly and squarely within the
Society's powers and that the directions given to implement it were validly
given. We agree with Colman J. that the defence based upon the scope of
the venture is not arguable.
Names allege that they were induced to join Lloyd's by misrepresentations
fraudulently made by the Society. The Society challenges this allegation, but
accepts that its claim to summary judgment must be advanced on the premise that
the allegation of fraud is valid. The Names claim that they have rescinded the
Contract under which they entered into the General Undertaking. The Society
contends that rescission is not possible and that the only remedy open to the
Names is to claim damages for deceit.
of the Names who rely on rescission have purported to rescind their membership
of the Society after the Equitas Contract was concluded. Others purported to
do so before that Contract was concluded. For reasons that we shall explain
we do not consider that any distinction falls to be made between the two
categories, but we propose first to consider those who have purported to
rescind after the Equitas Contract was concluded.
the Judicature Act both law and equity recognised that, in certain
circumstances, a person who had been induced to enter into a contract by a
misrepresentation could rescind the contract. The rules governing rescission
differed, however, in law and in equity. This renders difficult a precise
analysis of the remedy which has become generalised since the Judicature Act.
 3 All E.R.271 at p.288 Lord Wright observed :
the basis that the fraud is established, I think that this is a case where the
remedy of rescission, accompanied by
is proper to be given. The principles governing that form of relief are the
same in Scotland as in England. The remedy is equitable. Its application is
discretionary, and, where the remedy is applied, it must be moulded in
accordance with the exigencies of the particular case.
statement is to be contrasted with the statement of the law reflecting more
recent authority in Chitty on Contracts, 27th Ed., at paragraph 6-067:
it is common to speak of a court "setting aside" or rescinding a contract for
misrepresentation, it seems clear from this and other cases that the remedy is
not necessarily a judicial one. A representee is entitled to rescind for
misrepresentation without invoking the assistance of the court at all, although
the court now has a discretion to refuse to allow rescission in some cases. It
may well be, as a purely practical matter, that the representee will require
the assistance of the court in some cases, e.g. where rescission of an executed
conveyance is sought; but (as has recently been affirmed) "the process of
rescission is essentially the act of the party rescinding, and not of the
 Ch.302 310.
remedy of rescission is open to those induced to enter into contracts by
misrepresentation and is now governed by the Misrepresentation Act 1967. The
act of rescission avoids the contract retroactively ab initio - see Chitty
6-064 - and can only take place provided:
that it is possible to restore the parties to substantially the same position
that they were in before the contract was concluded and
that rescission will not harm the rights of third parties.
good example of the latter proposition is
v. The City of Glasgow Bank
(1879) 4 App. Cas. 615. In that case the plaintiff sought to rescind a
contract under which he had agreed to purchase stock in a bank on the ground
that he had been induced to enter into the contract by the fraud of the
directors. When he sought to rescind the bank had suspended payments on account
of insolvency and was about to be placed into winding up. It was held that, in
these circumstances, rescission was no longer open to the plaintiff, for it
would be to the prejudice of the creditors of the bank.
rights of third parties pose a particular problem to the contention that the
Names have rescinded their General Undertakings in the present case. They
contend that the effect of rescission has been to annul their membership of
Lloyd's ab initio. Yet in the course of that membership, and by reason of it,
the Names have entered into a host of contracts with third parties. They have
concluded contracts with Members Agents and Managing Agents. The Managing
Agents in their turn have concluded, on their behalf, contracts with policy
holders, and contracts of reinsurance. Finally AUA 9 has purported to enter
into the Equitas Contract on behalf of each of them.
argument Mr Goldblatt was somewhat ambivalent as to the effect of rescission on
these contracts. He was clear in his submission that the rescission avoided,
retroactively, the Council's authority to appoint AUA 9 as a substitute agent
on their behalf, and with it AUA 9's authority to make the Names party to the
Equitas Contract. He also submitted, at least at one stage of his argument,
that the effect of rescission was, retroactively, to withdraw authority from
the Managing Agents. So far as concerns the contracts of insurance with policy
holders concluded on behalf of the Names by the Managing Agents, he submitted
that these remained binding. He drew an analogy with the position where a
partner rescinds membership of a partnership. The partner's relationship with
the other members of the partnership has to be unscrambled so as to produce
restitutio in integrum, but he remains liable for the partnership debts
incurred while he was, "de facto" a member of the partnership - see
(1888) 13 App. Cas. 308.
scenario depicted by Mr Goldblatt, if correct, has the following consequences.
Equitas has neither the obligation nor the right to settle the liabilities of
those Names who have rescinded. Policy holders with claims against those Names
should, in theory, pursue those claims directly against the Names in question.
Were this the position in practice, the effect of rescission on policy holders
would be seriously detrimental. It would be wholly impractical for policy
holders to trace and bring claims against individual names for their
proportions of the relevant risks.
Goldblatt submits that these difficulties are theoretical. In practice,
Equitas will meet in full claims made by policy holders. The Society has
provided Equitas with funds to cover the premiums that should have been paid by
the dissenting Names. The only practical effect of the rescission is that the
Society will not be able to recover these sums in the present litigation.
Third parties will not be prejudiced.
are not persuaded that if Equitas meets the liabilities of the dissenting names
without the recovery of premiums from them, this will solely prejudice the
Society, rather than its present and past members. The Society did not provide
full funding to Equitas to cover the premiums of dissenting Names. It is
apparent from the affidavit sworn by Mr Sandler, the Chief Executive of Lloyd's
on the 18th December 1996, that recoveries of premiums from dissenting Names
will be for the benefit in part of the Society and in part of Equitas.
those premiums are not paid, those Names who have contracted with Equitas are
likely to suffer - either because the surplus to be distributed at the end of
the day will be smaller, or because the deficit will be larger. Thus, if
rescission were to have the effect contended for by the Names it would
prejudice third parties.
is not merely the fact that third parties would be adversely affected, but the
manner in which this would come about that we are unable to reconcile with the
principles governing rescission. The Names contend that the effect of
rescission was to withdraw, retroactively, the authority of AUA 9 to contract
for the Names so that contracts concluded by AUA 9 with Equitas at a time when
AUA 9 had authority are retroactively invalidated. We know of no case where
rescission has invalidated a contract with a third party in this way and we do
not believe that such a result can be accommodated within established legal
believe that there is a more general and equally fundamental reason why it was
not open to Names to rescind their General Undertakings. Membership of Lloyd's
is the foundation of the insurance business that has been carried on by Names,
and must necessarily be carried on by them until all their liabilities to
policy holders are discharged. As a matter of law, membership of Lloyd's is
essential if the Names are not to infringe the provisions of Section 2(1) of
the Insurance Companies Act 1982. These forbid unauthorised persons to carry
on insurance business in the United Kingdom. Authorisation has only been
granted to individuals who are members of Lloyd's. In practice, the Names have
only been able to conduct insurance business and will only be able to run-off
that business by taking advantage of the complex structure of the Lloyd's
market which enables policy holders to transact business as if with a corporate
entity rather than with a large number of individuals. The rules and
regulations of Lloyd's have enabled this business to be transacted on behalf of
and with the authority of the Names. It is fundamentally incompatible with the
business that has been carried on for Names to withdraw, retroactively, from
membership of Lloyd's. It is impossible to sever the contracts under which the
Names became members of Lloyd's from the business that has been carried on, and
the contracts that have been concluded, by virtue of that membership.
Restitutio in integrum is impossible.
far as rescission ab initio is concerned, these considerations apply just as
much to Names who purported to rescind before the Equitas Contract was
concluded as to those who did so after that event. We have considered whether
it is arguable that Names who purported to rescind their General Undertakings
before the Equitas Contract was concluded thereby terminated their membership
of Lloyd's so that the Council had no authority over or on behalf of them
thereafter. This possibility was considered by Colman J. at p.23 of his second
Judgment and rejected. In a passage dealing with a contract for services,
Chitty at paragraph 6-073 comments:
suggestion that a partly performed contract may be rescinded is attractive but
raises difficulties. One view might be that the contract is rescinded for the
future, leaving the services already rendered unaffected, but this would be
inconsistent with the normal view that rescission for misrepresentation is
rescission ab initio."
would endorse that comment. At paragraph 6-064 Chitty draws the distinction
between rescission of a contract ab initio and termination of the contract for
a subsequent breach. We are not aware of any principle of law which permits a
party to terminate a partly performed contract on the ground that the
conclusion of the contract was induced by fraud in circumstances where
rescission of the contract is impossible.
these reasons we concur with the Judge's conclusion that the Names have not
validly rescinded their General Undertakings and thereby avoided the contracts
with Equitas concluded on their behalf by AUA 9.
now turn to consider the meaning and effect of Clause 5.5 of the Equitas
Contract. This Clause provides as follows:
name shall be obliged to and shall pay his Name's Premium in all respects free
and clear from any set-off, counterclaim or other deduction on any account
whatsoever including in each case, without prejudice to the generality of the
foregoing, in respect of any claim against ERL, the Substitute Agent, any
Managing Agent, his Members' Agent, Lloyd's or any other person whatsoever and:
connection with any proceedings which may be brought to enforce the Name's
obligation to pay his Name's Premium, the Name hereby waives any claim to any
stay of execution and consents to the immediate enforcement of any judgment
Name shall not be entitled to issue proceedings and no cause of action shall
arise or accrue in connection with his obligation to pay his Name's Premium
unless the liability for his Name's Premium has been discharged in full; and
Name shall not seek injunctive or any other relief for the purpose, or which
would have the result, of preventing ERL, or any assignee of ERL, from
enforcing the Name's obligation to pay his Name's Premium."
is common ground that at the date of the Equitas Contract it was intended that
the right to the Name's Premium would be assigned to the Society; and indeed
this happened on the same day as the agreement was made, though the assignment
under seal was not executed until some four weeks later. Clause 5.8 contains
the express agreement of the Names that Equitas could assign the right to the
Name's Premium. It is also common ground that at the date of the Equitas
Contract it was known that some Names were making allegations that they had
been fraudulently induced by Lloyd's to join the Society or to continue their
question which arises is whether this Clause has the effect of preventing the
non-accepting Names from resisting payment to the Society, as assignee, of the
premium due from them, on the grounds that (on the assumption made) the Society
is liable to them in damages for fraud.
their skeleton written submissions the Appellants put forward an argument to
the effect that Clause 5.5 was itself a fraudulent device, inserted in bad
faith by the Society for the purpose of shielding itself from claims for
damages for fraud. In the course of the hearing we ruled that this argument
was not open to the Appellants or the Intervenors. Such an argument had not
been advanced at the hearing before Colman J, and there was no evidence
whatever to support it.
Appellants and Intervenors also submitted that since they had, as they put it,
been forced into the Equitas Contract against their will, since Clause 5.5 was
in the nature of an exceptions clause, and since it was now sought to be used
by an assumed fraudulent assignee, the Court should strive to construe it in a
way most favourable to the non-accepting Names.
are not persuaded that the first of these considerations has any real
substance. True it is that at the time the non-accepting Names refused to give
their assent to the Equitas Contract when it was proposed to them, but they are
bound to it because of the agreement that they did voluntarily make with the
Society when they became Names, at which time they agreed to be bound by the
legislative and regulatory regime of the Society. In this regard the Equitas
Contract is no different from the other agreements which the Names have had to
make in consequence of becoming members of the Society. Since we have rejected
the mutualisation and rescission arguments advanced by the non-accepting Names,
there is no question as to the validity of the Equitas Contract; and the
meaning and effect of Clause 5.5 is to be ascertained on ordinary principles.
are also far from persuaded that Clause 5.5 should be treated as an exceptions
clause. It does not purport to exclude or limit liability for claims of the
Names, but merely to regulate their effect on a claim for the premium made on
the Names. It is in truth a provision which, in the words of Neill L.J. in
Financial Corporation v Finsat Ltd
 3 WLR 849 at 855 defines the extent of the obligation to pay, in the
present case the obligation to pay the Name's Premium. Furthermore, the Clause
does not in fact deprive the non-accepting Names of a right that they would
otherwise have enjoyed, since without the Equitas Contract they would have been
faced with demands from their Agents to pay their underwriting liabilities, in
respect of which they would not have been able to set-off claims against the
to the assumed fact that the Society is liable to the non-accepting Names for
damages for fraud, this seems to us to raise no more than the question whether
the true meaning and effect of the Clause, read in its context, is such as to
prevent Names from setting up a fraud damages claim in answer to a claim for
the premium made by the Society as assignee.
these circumstances we turn to consider the specific arguments advanced by the
Appellants and the Intervenors.
first suggestion is that the Clause should be read and understood as only
applying to matters that could otherwise be raised in answer to a claim by
Equitas for the Name's Premium; and is not available to an assignee of the
right to recover that premium in respect of rights of the Name against that
our judgment this submission is ill-founded.
the first place, as we have already observed, the Clause defines the extent of
the obligation to pay the Name's Premium. It follows from this that the right
to the premium is defined as a right which is to be unaffected by any set-off,
counterclaim or other deduction on any account whatsoever. It is that right
which is assigned.
the second place, it is clear from the Clause itself that it is not confined to
claims against the assignor Equitas, since the Clause expressly includes not
only such claims, but also claims against, among others, Lloyd's.
the third place, it must be borne in mind that the Equitas Contract has the
Society as a party. Thus the Names have not only agreed Clause 5.5 with
Equitas, but also with the Society.
the fourth place, apart from the express consent to assignment to be found in
Clause 5.8, the Clause in question itself, in sub-paragraph (c), expressly
contemplates the assignment of the right to the premium.
these circumstances and bearing in mind the context in which the agreement was
made, we agree with Colman J. that it is absolutely clear Clause 5.5 does
operate so as to prevent the non-accepting Names from raising claims against
the Society in answer to a claim by the Society (as assignee) for the Name's
Premium. We should add that since Lloyd's were themselves party to the R &
R Agreement, the question to what extent a contracting party can confer a
benefit on an assignee which would not be available to the contracting party
itself, which was raised during the course of the oral argument, does not fall
to be considered.
is the fact that the claims of the non-accepting Names against the Society are
in fraud. To our minds this does not assist the Appellants' and Intervenors'
argument. As we have already observed, the agreement was made in circumstances
in which allegations of fraud were being made against the Society. In
addition, of course, is the fact that under Section 14 of the Lloyd's Act 1982
the Society is (with irrelevant exceptions) immune from liability at the suit
of Names unless the act or omission complained of was done in bad faith. To
our minds, given the all-embracing language used in the Clause, the fact that
(to all intents and purposes) the only claims of any relevance against the
Society by Names that could fall outside the statutory immunity would be claims
of acting in bad faith and the fact that allegations of bad faith were being
made by Names before and at the time the agreement was made, everything points
to the conclusion that the Clause was intended to cover such claims. We should
re-emphasize that the Clause does not seek to exclude or limit liability for
fraud. Its purpose, as Colman J. pointed out, is to insulate recovery of the
premium from claims by those who owe the premium. We know of no principle of
law that should lead us to construe the words of the Clause so as to exclude
from its ambit any claim based or allegedly based on fraud.
now turn to the second way the matter was advanced by the Appellants and the
Intervenors, which was that the claims for damages for fraud should properly be
categorised as a "pure" defence to the claim for the premium, so that the words
"set-off, counterclaim or other deduction on any account whatsoever" in Clause
5.5 did not prevent the non-accepting Names from defending the claim for the
premium on this ground. The submission was that since the amount of the Name's
Premium would, if paid, match and immediately be recoverable as damages for
fraud, the latter did not merely amount to a set-off or cross-claim, but to
something which actually reduced or extinguished the debt itself, just as
breaches of warranty by the seller or provider of services reduce or extinguish
the price that would otherwise be due for the goods sold or services provided.
In this regard, out attention was drawn to, amongst other cases,
 1 QB 233.
we are quite unpersuaded by this argument. The debt in question is one which
under the Equitas Contract, was owed to Equitas in consideration of the
provision of reinsurance cover. The claim for damages for fraud (unlike the
sale of goods and service contract cases) cannot be put on the basis that those
owing the money have not got what they should have got in return for that
money, quite apart from the fact that the claim for damages for fraud is
against the Society, not Equitas. Thus as between the non-accepting Names and
Equitas, there can be no question of the right to receive and the obligation to
pay the premium being reduced in the manner suggested. We find great
difficulty in following how, once the debt has been assigned, things somehow
change. The premium, albeit assigned, remains payable in return for the
reinsurance. The value of that reinsurance remains wholly unaffected. Thus
the suggested analogy with the sale of goods and service provision cases is
simply misconceived and to our minds, there can be no question but that the
claims for damages for fraud fall fair and square within the words of Clause
5.5. We should add that even if we were wrong about this, we consider that the
words "or other deduction on any account whatsoever" would probably be wide
enough to encompass the reduction or extinction of the premium by way of "pure"
defence. We should further add that we remain unconvinced of the premise upon
which the whole argument was based, namely that the damages for fraud "matched"
the amount of the Name's Premium. Assuming that the Names were fraudulently
induced to become or remain Members of Lloyd's, the premium due under the
Equitas Contract would, at best, form only one item in an account which would
have both debit and credit items, and which would have to be struck before the
recoverable loss sustained through the assumed fraud could be calculated.
the Appellants and Intervenors suggested that the Society did not need the
premiums in order to provide Equitas with the funds to provide the reinsurance,
in view of the fact that the Society has provided a non-recourse loan to
Equitas. We cannot see how this can make any difference to the clear words of
the Clause, or to the conclusion that we have reached on its effect.
these reasons we conclude that Clause 5.5 prevents non-accepting Names from
setting up their claim in fraud against the Society in answer to a claim by the
Society, as assignee, of the premium due under the Equitas Contract.
is common ground that the Court has jurisdiction to order a stay of execution:-
to R.S.C. Order 47 r.1(1)(a) if 'there are special circumstances which render
it inexpedient to enforce the judgment';
to R.S.C. Order 14, r.3(2) pending the trial of any counterclaim.
following matters have arisen with regard to the exercise of that discretion:-
effect of Clause 5(5) of the Equitas Contract: by Clause 5.5(a) the Names
waived any claim to a stay of execution and consented to the immediate
enforcement of any judgment obtained and by Clause 5.5(c) the Names agreed not
to seek any other relief for the purpose, or which would have the result, of
preventing Equitas, or any assignee of Equitas, from enforcing the Names'
obligation to pay their premiums. Whilst it is agreed that the clause cannot
oust the Court's jurisdiction, it has potent effect. The insulation of the
set-off and counterclaim was intended to achieve the speedy discharge of the
indebtedness, which intention would be avoided and the whole function of the
clause subverted by a stay of execution. As Parker L.J. held in
Illinois National Bank and Trust Company of Chicago v John Paul Papanicolaou
[l986] 2 Lloyd's Rep. 441, 445:
would defeat the whole commercial purpose of the transaction, would be out of
touch with the business realities and would keep the bank waiting for a
payment, which both the borrowers and the guarantors intended that it should
have, whilst protracted proceedings on the alleged counterclaim were litigated.
We do not doubt that the court has a discretion to grant a stay but it should
in our view be 'rarely if ever' exercised, as Lord Dilhorne said in relation to
claims on bills of exchange (in
(Jersey) Knit Ltd. v Kammgarn Spinnerei G.m.b.H
[l977] 1 WLR 713, 722)."
the fraudster: the submission is that if the contractual obligation would never
have arisen but for the fraud alleged against the Society then the court should
not allow the Society the benefits of the protection afforded by Clause 5.5.
It seems to us, however, that as allegations of fraud had been made by the time
of the Equitas Contract, the intention of the clause was that it should be wide
enough to cover even such a claim. The concession that the Society had to
proceed with the Order 14 application as if the fraud had been established, is
no admission of fraud for the purpose of the counterclaim. Consequently,
Clause 5.5 should serve its commercial purpose and the court should not deprive
the Society of the fruits of the judgment free and clear of any set-off by
staying execution until such time as this counterclaim will have been resolved.
of Vires: it is submitted that pursuant to Section 7 of the Lloyd's Act 1911,
as amended by Section 15 of the l982 Act, the Society is bound to hold its
funds and property only for the expressed permitted purposes including the
defraying of the costs, charges and expenses incurred by the Society. It is
submitted that it cannot be a proper purpose to engage in fraud and that
consequently it would be ultra vires for the Society to pay damages for fraud.
The suggestion is that this raises a real prospect that if monies are paid now
by the Names, they will never be recovered. This submission is without
foundation. That the 'Objects Clause' of the Society should be framed in terms
of lawful acts is no bar whatever to the judgment of the court being enforced
against it to recover damages for any unlawful act. It was not suggested in
the Court below that the Society would not have the means of satisfying any
judgment made against it.
Comity: here the submission is that if this court both upholds a 'pay now, sue
later' clause and allows the judgment to be enforced immediately, then courts
in a foreign jurisdiction will be so disenchanted with our assisting the
fraudster that this jurisdiction will no longer be regarded as the forum
conveniens to which the determination of these issues can be entrusted. We
reject that submission. This Court is bound to proceed in accordance with
settled principle and is not to be fettered by speculative regard as to how its
judgment may be received abroad.
Society's need for the money: the submission is that since the scheme is now
fully funded, there is no demonstrable need for the fruits of the judgment.
That is not a sustainable submission. Full funding has been achieved in part
by the Society borrowing or otherwise providing the share of those who have not
accepted the scheme and paid their premium. The Society should not be expected
in fairness both to the Society itself and to the 94% of the Names who have
paid up to provide reinsurance cover for the defaulting Names for nothing.
Practicalities: on behalf of the Defendants it is submitted that if their
already depleted funds are reduced even further by meeting the judgment debt,
then their ability to raise sufficient monies to fund the pursuit of their
counterclaim will have been imperilled. Thus they may never have the real
chance to seek redress from the courts for the grievous wrong allegedly
inflicted upon them. On behalf of the Society it is submitted that their
position would have been no different if the R & R scheme had never come
into being since they would have been required to meet the calls upon them, and
may indeed perhaps have been in even more parlous a position in that event.
There is force in that submission. Moreover, the financial pressure on the
defaulting Names serves only to emphasise another reality. The allegation of
fraud against the Society is based on facts known by 1991 and the claims are or
soon will be statute barred. There is no evidence that the defaulting Names
have so far managed to organise a group capable of funding the very expensive
litigation which would be involved in the trial of an issue of fraud. The
bleak reality for this unhappy group is that time is running out and the
pursuit of the counterclaim is becoming more and more impracticable.
Hardship: in the cases of Mr Lyon and Mr Wilkinson, the Society has offered an
undertaking (pending the outcome of the appeal) not to enforce the judgment if
it would have the consequence that they would lose their homes or any business
or have their household furniture taken from them. In the Court below the
Society indicated that it would not seek such ruination of a Defendant.
Personal hardship is, therefore, always a factor a Defendant may urge upon the
Court in seeking a stay and nothing that we have said in 1. to 6. above is
intended to deprive any individual Defendant of the right to apply for a stay
of execution on grounds of personal hardship.
result, which will come as a bitter blow to these defendants and those in their
position, is that the appeal must be dismissed.
dismissed with costs; respondent to be paid by the appellants and intervenors
jointly and severally on a numerical basis, such costs to be taxed; direction
that there be liberty to apply to all parties as to supplemental orders for
costs (applications for orders against persons not party to the actions); leave
to appeal to the House of Lords refused.
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