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You are here: BAILII >> Databases >> United Kingdom House of Lords Decisions >> Society of Lloyd's v. Robinson and Another [1999] UKHL 22; [1999] 1 WLR 756 (25th March, 1999)
URL: http://www.bailii.org/uk/cases/UKHL/1999/22.html
Cite as: [1999] WLR 756, [1999] 1 WLR 756, [1999] UKHL 22

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Society of Lloyd's v. Robinson and Another [1999] UKHL 22; [1999] 1 WLR 756 (25th March, 1999)

HOUSE OF LORDS

  Lord Browne-Wilkinson   Lord Woolf M.R.   Lord Steyn
  Lord Hope of Craighead   Lord Hutton

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT IN THE CAUSE

SOCIETY OF LLOYD'S
(RESPONDENTS)

v.

ROBINSON
(APPELLANT)
AND ANOTHER

ON 25 MARCH 1999

LORD BROWNE-WILKINSON

My Lords,

I have had the advantage of reading in draft the speech which has been prepared by my noble and learned friend, Lord Steyn. I agree with it, and for the reasons which he has given I would dismiss the appeal and allow the cross-appeal.

LORD WOOLF M.R.

My Lords,

I have had the advantage of reading in draft the speech which has been prepared by my noble and learned friend, Lord Steyn. I agree with it, and for the reasons which he has given I would dismiss the appeal and allow the cross-appeal.

LORD STEYN

My Lords,

This appeal by a representative Lloyd's underwriter and cross-appeal by Lloyd's is yet another phase in the seemingly endless litigation which has plagued Lloyd's in recent years. The issues all relate to the Premium Trust Deed (the PTD) which each underwriting member of Lloyd's, or Name, must execute. The relevant provisions of the PTD are as follows:

Clause 1(a) defines "the underwriting business" as follows:

On 3 March 1995, and purportedly acting in terms of clause 22, the Council of Lloyd's made amendments to clause 2. It was done by introducing into clause 2 a new sub-clause (d), the effect of which was to make all litigation recoveries by Names subject to the trust in clause 2(a)(i).

The questions of interpretation arising on clause 2(a)(i) of the unamended PTD are:

(1) Whether damages awarded to a Name against his managing agent as compensation for negligent underwriting are caught by clause 2(a)(i).

(2) Whether damages awarded to a Name against his members' agent as compensation for negligence in advising on the taking out of personal stop loss insurance cover are caught by clause 2(a)(i);

 (3) Whether damages awarded to a Name against a members' agent as compensation for negligence in advising on syndicate selection are caught by clause 2(a)(i).

Lloyd's contend that all three questions should be answered affirmatively. The representative underwriter makes a contrary submission in regard to all three questions. If Lloyd's are successful on all three questions that is the end of the matter. If all or any of the questions are answered in the negative, a further question arises, namely -

 (4) Whether amendments purportedly made to the PTD in 1995, which undoubtedly cover the categories of damages described in (1), (2) and (3) above, were validly made under clause 22.

Underwriting at Lloyd's

The Corporation of Lloyd's does not carry on insurance business. The function of Lloyd's is to manage and regulate the Lloyd's insurance market. Underwriting at Lloyd's is done by Names. A person desiring to become a Name at Lloyd's must first execute a General Undertaking in favour of Lloyd's and be accepted by Lloyd's. Names then join in syndicates which specialise in underwriting particular forms of risk. A syndicate is not a legal entity or a partnership. It is simply a group of Names who have joined a particular syndicate for a particular underwriting year. Each policy issued at Lloyd's consists of individual contracts made on behalf of individual Names. Each Name is only liable for his share of the risk but not for the share of any other Name: see section 8(1) of the Lloyd's Act 1982. A Name has unlimited liability to the extent of all his assets in respect of his insurance obligations at Lloyd's.

Names are obliged to act through professional agents. A prospective Name must employ a members' agent, who will advise him on his choice of syndicates and place him on the chosen syndicates. A members' agent will also advise on personal stop loss insurance cover. A managing agent is an underwriting agent who manages one or more Lloyd's syndicates. A managing agent employs an active underwriter to effect insurance business on behalf of Names on a syndicate. A managing agent will also obtain reinsurances, collect premiums and pay claims. Names are required to keep agents in funds for the purpose of meeting underwriting liabilities. Both members' and managing agents owe duties of care and skill and fiduciary obligations towards Names. Except for this brief outline, it is unnecessary to describe the way in which underwriting is conducted at Lloyd's: see a fuller account in Society of Lloyd's v. Morris [1993] 2 Re. L.R. 217, at 218-219, per Sir Thomas Bingham M.R.: and in the judgment of Hobhouse L.J. (now Lord Hobhouse) in the Court of Appeal: Napier and Ettrick v. R.F. Kershaw Ltd. [1997] 1 Re. L.R. 1, at 7-8.

The forensic saga

The circumstances in which the issues come before the House are complex. For the benefit of those who are interested in exhuming the origin of the present disputes I must describe the forensic saga. The position is as follows: (1)  In 1989 a large number of Names who were members of syndicates managed by RHM Outhwaite (Underwriting Agencies) Ltd. brought proceedings against their members' agents and managing agents for negligent underwriting. In early 1992 the proceedings were compromised by a payment to the Names of £116m. Before that sum could be distributed to the Names Lloyd's asserted that the monies was caught by the trust constituted by the PTD. In May 1992 Saville J. (now Lord Saville) in Napier and Ettrick and others v. R.F. Kershaw Ltd. and others held that clause 2(a)(i) does not cover damages for negligent underwriting. Lloyd's announced that it accepted Saville J.'s decision. (2) In Society of Lloyd's v. Morris [1993] 2 Re. L.R. 217 the Court of Appeal approved Saville J's reasoning and decision. The issue in Morris was however a different one, namely whether receipts from personal stop loss policies were covered by clause 2(a)(i) of the PTD. The Court of Appeal held that such receipts were not covered. (3) In the meantime a number of other actions had been commended by other groups of Names. The first action to come to trial was that brought by Names of the Gooda Walker Syndicates. On 4 October 1994 Phillips J. (now Lord Phillips) found in favour of the Names. Over the following eighteen months or so judgments were also given in favour of Names on several other syndicates. (4) In order to facilitate a plan for "reconstruction and renewal" Lloyds wanted litigation recoveries to be brought within the scope of the PTD. On 2 March 1995 the Council of Lloyd's amended the terms of the PTD by introducing a new clause 2(d) which was expressly designed to catch litigation recoveries. (5) When interim payments in respect of damages awarded to successful Names were due to be made, Lloyd's asserted a proprietary claim over such sums. By agreement the sums paid by the various judgment debtors were held in escrow accounts pending resolution of the validity of Lloyd's proprietary claim. (6) On 31 March 1995 Lloyd's started Originating Summons proceedings in order to resolve the issue as to the validity of the 1995 amendments to the PTD. (7) On 7 March 1996, the House of Lords decided Deeny v. Gooda Walker Ltd. (No. 2) [1996] 1 W.L.R. 426. The issue was whether damages recovered by a Name for negligent underwriting were chargeable to tax as a receipt of his business under Case I of Schedule D. The House answered that question in the affirmative. Lord Hoffmann made observations about the decision in the Napier case which Lloyd's believed supported an argument that it had been wrongly decided. (8) Lloyd's obtained leave to amend their Summons in order to raise the question whether litigation recoveries were caught by the unamended PTD. The issue raised by the amendment also covered damages awarded for negligent advice in regard to personal stop loss insurance and syndicate selection. (9) On 17 May 1996 Sir Richard Scott, V.-C., gave judgment in Lloyd's v. Woodard. He held in favour of the Names on all issues. He followed and applied the decision in Napier v. Kershaw. And he held that the 1995 amendments were invalid. (10) On the first day of the appeal in Lloyd's v. Woodard the Court of Appeal granted an extension of time for the hearing of an appeal by Lloyd's from the order of Saville J. in Napier v. Kershaw. The extension was granted on condition that no attempt was made to disturb the destination of settlement moneys. The two appeals proceeded in tandem. (11) On 31 July 1996 the Court of Appeal allowed the appeal in Napier v. Kershaw, with reasons to follow. The Court of Appeal reserved judgment in Lloyd's v. Woodard, where the issues were wider. On 24 October 1996 the Court of Appeal gave judgment in Lloyd's v. Woodard, together with reasons for the decision in Napier v. Kershaw. The Court of Appeal unanimously ruled that clause 2 (a)(i) is apt to catch damages for negligent underwriting. Nourse and Pill L.JJ. felt unable to rule on the application of clause 2(a)(i) to damages for negligent advice about stop loss insurance and syndicate selection. Nourse L.J. expressed the provisional view that clause 2(a)(i) did not apply to such damages. Hobhouse L.J. ruled that clause 2(a)(i) does not cover such damages. The Court of Appeal held by a majority that the 1995 amendments were ultra vires. Hobhouse L.J. dissented on this point. (12) At the beginning of September 1996 the necessary majority of Names had accepted a Settlement Offer. It was one of the terms of the offer that accepting Names should allow their litigation receipts then held in escrow to be released to Lloyd's. They ceased to have any interest in the outcome of the litigation. Mr. Woodard was one of those Names. However, several hundred Names who were entitled to litigation recoveries rejected the Settlement Offer. On 30 July 1997 the Court of Appeal allowed the substitution of Mr. Robinson for Mr. Woodard for the purpose of an application for leave to appeal. Mr. Robinson is a judgment creditor in two actions. He has not accepted the Settlement Offer. (13) In the event, the Court of Appeal refused leave to appeal but the House of Lords granted leave to appeal. There is no appeal before the House in Napier v. Kershaw, but the correctness of Saville J's. ruling is raised in Lloyd's v. Woodard.

Issue 1: damages for negligent underwriting

The first issue is whether damages awarded to a Name against his managing agent as compensation for negligent underwriting is caught by clause 2(a)(i). In Napier v. Kershaw Saville J. decided that clause 2 (a)(i) is inapplicable to such damages. His reasoning was as follows:

It was implicit in this reasoning that a Name conducted more than one business at Lloyds. Subsequently, in The Society of Lloyd's v. Morris [1993] 2 Re. L.R. 217 the Court of Appeal in an obiter dictum approved the correctness of the decision in Napier v. Kershaw. In Morris all the members of the court contributed to the judgment of the court. I was a member of the court and played a part in the drafting of the judgment.

In Deeny v. Gooda Walker Ltd. (No. 2) [1996] 1 W.L.R. 426 Lord Hoffmann in agreement with the other Law Lords hearing the case held that a Name does not carry on two businesses at Lloyd's but only a single business: see Lord Hoffmann, at 434C-435B and Lord Browne-Wilkinson at 429C-D. While Lord Hoffmann expressly refrained from saying that Napier v. Kershaw was wrongly decided his judgment undermined an important strand of the reasoning of Saville J. The reasoning of Lord Hoffmann on this point is clear and unanswerable.

Counsel for the representative underwriter submitted that the decision in Napier is supportable on the ground that the words "monies . . . becoming payable to the Name in connection with the Underwriting" are too vague to cover damages for negligent underwriting. And he invited attention to the use of these words in other clauses of the PTD. On reflection it seems to me that this interpretation makes too much of the niceties of the language employed. A contextual construction must take into account two substantial factors. First, a central purpose of clause 2(a)(i) is to protect policyholders in the interests of the integrity of the Lloyd's market. If damages for negligent underwriting are not caught by clause 2(a)(i), the protection of policyholders is pro tanto weakened. Moreover, on the interpretation put forward by the representative underwriter the position of a Name would be stronger if he recovers damages for negligent underwriting than if he simply received his share of premium income produced by acceptable underwriting: the former would be unaffected by the trust in clause 2(a)(i) but the latter would be caught. Such a result might puzzle a disinterested observer of the Lloyd's market. Secondly, damages for negligent underwriting is in law and in reality the surrogate of the receipts produced by proper underwriting. Prima facie one would expect no differential treatment under the trust of the two categories of monies payable to a Name. As Nourse L.J. observed "There seems to be no a priori reason for treating the replacement differently from that which it replaces": at 5. These considerations show that from a commercial perspective the best construction is that clause 2(a)(i) is apt to cover damages for negligent underwriting.

It is true that in Lloyd's v. Morris the Court of Appeal of which I was a member expressly approved the Napier case. While the correctness of Napier was touched on in argument in Lloyd's v. Morris, it is clear from the skeleton argument of the appellants in that case that the real difficulties inherent in the reasoning in Napier were not explored. In any event, now that the matter has been fully examined it would be wrong to perpetuate the error in the Napier case.

My Lords, Saville J. has unsurpassed experience of disputes regarding Lloyd's. I differ from him with great reluctance. I do so not on the basis of a theory of creative interpretation. Loyalty to the text of a commercial contract, instrument, or document read in its contextual setting is the paramount principle of interpretation. But in the process of interpreting the meaning of the language of a commercial document the court ought generally to favour a commercially sensible construction. The reason for this approach is that a commercial construction is likely to give effect to the intention of the parties. Words ought therefore to be interpreted in the way in which a reasonable commercial person would construe them. And the reasonable commercial person can safely be assumed to be unimpressed with technical interpretations and undue emphasis on niceties of language. It is such a commercial view of clause 2(a)(i) which has led me to conclude that the Napier case was wrongly decided.

In my view damages for negligent underwriting are covered by clause 2(a)(i).

Issue (2): damages for negligent advice on personal stop loss insurance

The question whether clause 2(a)(i) covers damages for negligent advice about personal stop loss insurance was directly in issue in Morris. Stop loss insurance cover is a form of reinsurance which reinsures aggregate losses of an insured's underwriting in a given year and indemnifies him in respect of losses in excess of a certain limit. In deciding that clause 2(a)(i) was inapplicable to the receipts from stop loss insurance Sir Thomas Bingham M.R. observed (at 222):

In other words, the proceeds of reinsurances arranged by a managing agent for a syndicate fall within the trust but receipts of personal stop loss cover taken out by a Name do not.

In Deeny this distinction and reasoning was expressly affirmed by Lord Hoffmann with the agreement of the four other Law Lords. It is not strictly part of the ratio decidendi of Deeny. But it was a carefully considered statement of the legal position by the House of Lords. On this ground alone I would refuse to depart from Morris. In any event in my view what Lord Hoffmann said about Lloyd's v. Morris was correct. It does not in any way involve saying that a Name conducts two businesses at Lloyd's. It depends on the entirely sensible proposition that the reach of the vague words "in connection with" do not extend to stop loss insurance recoveries which result from personal arrangements made by a Name.

It is true that at issue in this case is not whether the receipts from stop loss insurance are caught by clause 2(a)(i) but whether damages for negligent advice about personal stop loss insurance is recoverable. Counsel for the Names argued that, even if Lloyd's v. Morris is correct on the point it decided, clause 2(a)(i) does not cover damages for negligent advice about personal stop loss insurance. Counsel emphasised that damages for breach and the receipt of the proceeds of stop loss insurance are intrinsically different. For some purposes they no doubt are but in regard to the issue before the House I cannot accept the validity of the distinction. Damages for negligent advice about stop loss insurance are the surrogate of the proceeds of the stop loss insurance cover. In a rational scheme of things the two questions ought to be answered in the same way.

In my view the answer to question (2) is No.

Issue 3: damages for negligent advice about syndicate selection

The question is whether clause 2(a)(i) covers damages for negligent advice by the members' agent about syndicate selection. Membership of a syndicate is gained by entering into an annual contract. It is renewable year by year. Until an individual has joined a syndicate his underwriting business for the year has not commenced. The cause of action under consideration is negligent advice by a members' agent about the choice of syndicates. It is therefore based on facts which pre-date the Name's commencement of the relevant underwriting business. Like Hobhouse L.J. I regard questions relating to the selection of syndicates as distinct from the business of underwriting through that syndicate: at 13. For this reason such damages are not caught by clause 2(a)(i). Moreover if the reasoning in Lloyd's v. Morris is correct in respect of stop loss insurance, as I have held it to be, I would further hold that a fortiori the words "in connection with" are too vague to extend to damages for negligence about syndicate selection. After all, the connection between syndicate selection and a Name's underwriting business in the relevant year is more remote than the connection between the Name's personal stop loss insurance and the underwriting business in the relevant year.

In my view the answer the question 3 is No.

Question 4: the validity of the amendments

Given that I have answered questions (2) and (3) adversely to Lloyd's, I must now examine Lloyd's argument that the 1995 amendments effectively resulted in all three categories of damages (as identified in questions (1), (2) and (3)) being caught by the PTD. The question is whether the amendments were validly made under clause 22. The Court of Appeal was divided on this issue. Nourse L.J. relied strongly on section 83(2) of the Insurance Companies Act 1982 which is mentioned in the recitals of the PTD. Section 83(2) provides:

Nourse L.J. concluded (at 6):

Pill L.J. took a similar view. Hobhouse L.J. disagreed. Counsel for the representative underwriter relied on the majority judgments.

ˇKˇˇKCounsel for Lloyd's criticised the reliance of Nourse L.J. and Pill L.J. on section 83(2). His argument was as follows. The purpose of the PTD is wider than simply fulfilling the requirements of section 83. Section 83 only requires premiums to be carried to a trust fund. But, the PTD requires the Name also to carry to the fund "other monies," which undoubtedly include reinsurance recoveries and salvage. It also provides complex mechanisms for regulating the way in which Names' liabilities are discharged, which go beyond what is required by section 83(2). A Name must execute a PTD not simply to comply with section 83(2) but also to comply with Lloyd's membership requirements pursuant to the General Undertaking signed by a Name and the Membership Byelaw. Section 83 is therefore only one reason why Names are required to execute a PTD. I accept this answer to the reasoning of Nourse and Pill L.JJ. as correct in all essentials. This is, however, by no means the end of the matter.

In a careful argument counsel for the representative underwriter emphasised that the power of amendment was contained in a trust deed. He submitted that when a party to a trust deed containing a general power of amendment agrees that certain of his assets shall be subject to a trust it cannot be within the reasonable contemplation of the parties that the trust may be altered to extend to other assets. He argued that such a power of amendment must be confined to alterations to procedural rights and obligations. Moreover, counsel for the representative underwriter emphasised that the amendments were far reaching in their effect. In some contexts such arguments may be decisive. But the focus must be on the particular features of the present case.

The general propositions put forward by counsel must be qualified. First, it is true that clause 2(a)(i) uses the device of trust. But it is hardly a traditional trust created by the bounty of a settlor. It is a means of creating a form of security in favour of policyholders. It provides a guarantee that a Name will be able to meet his liabilities and it provides a mechanism for the payment of such liabilities. This is the context in which the amendments brought litigation recoveries within the scope of the trust. Secondly, it is true that there is a well established line of authority which holds that a power of amendment reserved in a trust must be exercised for the purpose for which it was granted: see Hole v. Garnsey [1930] A.C. 472. This principle is closely linked with the general proposition that the power must not be exercised beyond the reasonable contemplation of the parties on which Nourse L.J. founded his judgment. All this is hornbook law. But it is going too far to say that such a power of amendment may never be exercised to alter rights, or, specifically, to bring a new class of property within the scope of a trust. Thus in Allen v. Gold Reefs of West Africa Ltd. [1900] 1 Ch. 656 a company had altered its articles so as to give itself a lien on paid up shares in respect of the failure of the shareholder to pay calls on other shares which had not been fully paid up. The effect of the amendment was to alter the rights of the shareholder. The shareholder challenge the exercise of the power of amendment as being beyond the purpose for which the power was given. The Court of Appeal held that the amendment was valid. Romer L.J. said (at 678):

The judgment of Lord Lindley M.R. was to the same effect: at 671. See also Graham Australia Pty. Ltd. v. Perpetual Trustees W.A. Ltd. [1989] 1 W.A.R. 65; Kearns v. Hill (1990) 21 N.S.W.L.R. 107.

The 1995 amendments do not impose any new liability on Names. They do not require Names to pay more than they were already obliged to pay. They simply provide for additional security for pre-existing obligations. The amendments are therefore within the commercial purpose of the PTD trust fund. Moreover, the amendments were required by an unprecedented crisis affecting Lloyds. From the 1980's the Lloyd's market was beset by serious structural problems. There was a spiral of losses. Lloyd's Names apparently suffered losses of £8bn. in respect of the 1988 to 1992 underwriting years of account. By March 1995 when the amendments were introduced the unwillingness and inability of Names to settle their underwriting liabilities confronted Lloyd's with a crisis which imperilled its standing as an insurance market. Hobhouse L.J. observed (at 17-18):

I am in complete agreement with this reasoning.

I would rule that the amendments were within the scope of clause 22 and were validly made. It follows that all three categories of damages identified earlier in this judgment are subject to the trust in clause 2(a)(i).

Conclusion

My Lords, I acknowledge the assistance I have derived from the analysis contained in the judgment of Hobhouse L.J. I would dismiss the appeal and allow the cross-appeal.

LORD HOPE OF CRAIGHEAD

My Lords,

I have had the advantage of reading in draft the speech which has been prepared by my noble and learned friend Lord Steyn. I agree with it, and for the reasons which he has given I too would dismiss the appeal and allow the cross-appeal.

LORD HUTTON

My Lords,

I have had the advantage of reading in draft the speech which has been prepared by my noble and learned friend Lord Steyn. I agree with it, and for the reasons which he has given I too would dismiss the appeal and allow the cross-appeal.


© 1999 Crown Copyright


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