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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Desai & Anor v Wood & Anor [2025] EWCA Civ 906 (15 July 2025) URL: https://www.bailii.org/ew/cases/EWCA/Civ/2025/906.html Cite as: [2025] EWCA Civ 906 |
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ON APPEAL FROM THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS IN BRISTOL
INSOLVENCY AND COMPANIES LIST (ChD)
HHJ Paul Matthews (sitting as a Judge of the High Court)
IN THE MATTER OF BOSCOLO LIMITED (IN LIQUIDATION)
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
Strand, London, WC2A 2LL |
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B e f o r e :
LORD JUSTICE ARNOLD
and
LORD JUSTICE ZACAROLI
____________________
(1) DILIP DESAI(2) PARESH SHAH |
Appellants |
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(1) PAUL DAVID WOOD(2) NEIL FRANK VINNICOMBE |
Respondents |
____________________
Suzanne Chalmers (instructed by Thrings) for the Respondents
Hearing date: 1 July 2025
____________________
Crown Copyright ©
Lord Justice Zacaroli:
Desai and Paresh Shah, have asserted (but have not yet established) a claim for breach of contract and/or negligence against Boscolo Ltd (the "Company"). The Company had the benefit of a policy of professional indemnity insurance (the "Policy") with Royal & Sun Alliance Ltd ("RSA"). Shortly prior to the Company going into voluntary liquidation RSA paid to the Company the limit of indemnity under the Policy, £250,000 (the "Insurance Proceeds"), relieving them of any further liability in respect of the appellant's claim, and relinquished control of the claim. The appellants claim that the Insurance Proceeds (of which £246,000 remain in the hands of the Company's liquidators) are held on trust for them.
The facts
"9.1 The Designer shall obtain professional indemnity insurance in respect of the Services for not less than the amount stated in the Letter/Memorandum.
9.2 The Designer shall maintain such insurance until the expiry of the period stated in the Letter/Memorandum provided such insurance remains available to the Designer on commercially reasonable rates and terms, failing which the Designer will inform the Client in order that the parties can discuss the best means of protecting their respective positions in the absence of such insurance.
9.3 The Designer shall produce on request, evidence that the insurance required under the Agreement is in place and is being maintained."
"shall not exceed the lesser of the limit of liability specified in the Letter/Memorandum or the amount of the Designer's professional indemnity insurance "
"10. The Client and the Designer agree that, as referred to in clause 8.1 of the Conditions, no action or proceedings against the Designer arising out of or in connection with this Agreement shall be commenced after the period of [months/years] from completion of the Project or of the Services, which ever is the earlier. If no period is specified then the period shall be 6 years. It is also agreed that the same period shall apply in relation to the Designer's obligation to maintain professional indemnity insurance in accordance with clause 9.
11. The Client and the Designer have agreed that the Designer's limit of liability and the amount of professional indemnity insurance to be provided in connection with this Agreement (as referred to in clauses 8.2.1 and 9.1) shall be the amount/s of £ "
"In connection with any Claim against the Insured the Insurer may at any time pay to the Insured the Limit of Indemnity (after deduction of any sums already paid as damages or claimant's costs and expenses in respect of such Claim) or any less amount for which such Claim can be settled and thereupon the Insurer shall relinquish the control of such Claim and be under no further liability in connection therewith except for Defence Costs for which the Insurer may be responsible under this Insurance in respect of matters prior to the date of such payment."
"on making the payment, your Insurers will have no further liability in connection with the Claim. In other words, your Insurers will be released and forever discharged from any further liability to your company in respect of the Claim under the terms of the Policy.
Also, when making the payment, your Insurers will relinquish control of the Claim. We will, therefore, cease to act on your behalf and further you will be responsible for all Defence Costs from the date of the payment."
The case before the judge
The appellants' arguments on appeal in outline
"if [the Company] had reasonable grounds to believe that [the Company] might be unable to meet the Appellants' claim in due course from its other resources (the "Relevant State of Mind") it would not dissipate those insurance monies or use them to pay other creditors or for any purpose conflicting or inconsistent with the Paramount Purpose" (the "Paramount Purpose" being defined in the further alternative case referred to below)."
"if (A) the Appellants as clients made a professional negligence claim against [the Company], and (B) the claim was covered by [the Company's] insurance and (C) Insurers investigated the claim; and (D) Insurers decided to pay, and paid, insurance monies in respect of the claim to [the Company]; and (E) [the Company] had the Relevant State of Mind; then [the Company] would transfer the insurance monies to the client (or alternatively would in any event not use those insurance monies otherwise than for the paramount purpose for which the insurance was (compulsorily) required (and the insurance claim was paid) namely to secure that [the Company] was financially able to compensate its clients: see Impact Finding Solutions Ltd v Barrington Service Ltd [2017] AC 73 per Lord Hodge at [16]-[18] (the "Paramount Purpose")."
The rights of third parties in respect of liability insurance under the general law
" the right of a person to be indemnified under a contract of insurance against claims made against him by persons whom he might have injured was one personal to himself, and there was no privity of any sort between the injured person and the insurers. The injured person had no interest at law or in equity in the insurance money, either before or after it was paid by the insurers to their insured. If the insured became bankrupt or, being a company, went into liquidation the insurance money became part of the general assets distributable among creditors, and if the injured person had not already obtained judgment and levied execution in respect of his claim for damages his only right was to prove in the bankruptcy or winding-up."
"[T]he reason why the insurance money is paid to the liquidator is that over a period of time the company, now represented by the liquidator, have made an independent contract of their own and paid their own money to the insurance company, so that, if and when a liability on their part arose, there should be paid to them a certain sum of money."
"It is, perhaps, unfortunate that one should have to give a judgment which would, at first sight, appear to run counter to what I might call the common sense view of the proceedings. None the less, it is necessary for us to administer the law as it stands, and if any alteration is to be made in it that must be made by the proper authorities and by the proper means."
"I agree, that on the whole this is an unsatisfactory result of the application of legal principles which are very good, in themselves, but which I should like to be able to modify to meet the special facts of this class of case, which is, of course, a very common one. I notice, for instance, in this case, that the Commissioner of Police requires as a condition of the licence to a cab owner that he should have taken out a policy against third party risks in quite a large sum. It is quite obvious that that very reasonable and proper precaution is defeated in the very case in which it is intended to be of most use - namely, where the cab owner becomes insolvent "
Implied term
"It is enough to reiterate that the process of implying a term into the contract must not become the re-writing of the contract in a way which the court believes to be reasonable, or which the court prefers to the agreement which the parties have negotiated. A term is to be implied only if it is necessary to make the contract work, and this it may be if (i) it is so obvious that it goes without saying (and the parties, although they did not, ex hypothesi, apply their minds to the point, would have rounded on the notional officious bystander to say, and with one voice, 'Oh, of course') and/or (ii) it is necessary to give the contract business efficacy. Usually the outcome of either approach will be the same. The concept of necessity must not be watered down. Necessity is not established by showing that the contract would be improved by the addition. The fairness or equity of a suggested implied term is an essential but not a sufficient pre-condition for inclusion. And if there is an express term in the contract which is inconsistent with the proposed implied term, the latter cannot, by definition, meet these tests, since the parties have demonstrated that it is not their agreement."
"Whether the term sought to be implied is a term in fact or a term in law, it must be capable of being formulated with sufficient clarity and precision and it not infrequently happens that the court rejects the implication of a term on the ground that the difficulty in identifying the precise scope of the proposed term evidences that it is not a necessary ingredient of their contract. The vaguer the term, the less likely it is to be implied into the contract. But the point cannot be pushed too far. It may be that the lack of precision in the criterion to be embodied in the term is not fatal to any implication, since:
' it is no novelty in the common law to find that a criterion on which some important question of liability is to depend can only be defined in imprecise terms which leave a difficult question for decision as to how the criterion applies to the facts of a particular case.' [citing Shell UK Ltd v Lostock Garage Ltd [1976] 1 WLR 1187, 1204]
However, the more likely inference that the court will draw from the inability of the parties to formulate the term with precision is that no term is to be implied into the contract."
"There are two points to highlight about the nature and purpose of the policy. One is that the relevant terms replicate the minimum terms of the cover which Barrington was required to maintain under the Solicitors' Indemnity Insurance Rules 2009. As the House of Lords recognised in Swain v The Law Society [1983] 1 AC 598, 610, the paramount purpose of The Law Society being given statutory power to require solicitors to maintain insurance cover against professional liability was "the protection of that section of the public that makes use of the services of solicitors" (Lord Diplock)."
Implied trust
"It is of course correct that the agent is a fiduciary in relation to his principals and that the Lloyds regulations require him to effect E&O insurance (though only a minimum level is prescribed). No doubt the insurance is required not just for his own benefit but for the ultimate protection of his principals if the agent becomes insolvent. But it by no means follows that a trust attaches to the policy so affected or the proceeds of the policy or, if there is no trust, that the agent is under a fiduciary obligation to apply the proceeds of policy rateably among his principals.
First, there is nothing in the regulations or the policy or in any document governing the contractual relationship between the agent and his principal that is suggestive of a trust of the policy or its proceeds. There is nothing, for example, that requires the policy proceeds to be kept separate from other moneys held by the agent, which would be necessary if there were a trust."
Constructive trust
"The payment is made in accordance with the terms of Claims Condition clause 7 of the policy as set out in our letter to the company dated 19th August 2021. The only reference regarding the payment is that the insurers relinquish control of the claim (it does not dispose of the claim contrary to the statement in your e-mail) and it discharges any further liability our insurer client has in connection with the claim."
"Given the situation of [the agent] when the last payment was received, any reasonable and honest directors of [the agent] (or the actual directors had they known of it) would, I feel sure, have arranged for the repayment of that sum to the plaintiff's without hesitation or delay. It would have seemed little short of sharp practice for PSL to take any benefit from the payment, and it would have seemed contrary to any ordinary notion of fairness that the general body of creditors should profit from the accident of a payment made at a time when there was bound to be a total failure of consideration. Of course it is true that insolvency always causes loss and perfect fairness is unattainable. The bank, and other creditors, have their legitimate claims. It none the less seems to me that at the time of its receipt PSL could not in good conscience retain this payment and that accordingly a constructive trust is to be inferred."
"Bingham J's point of departure in the Neste Oy case was that the recipient of money may be liable to account for it as a constructive trustee if he cannot in good conscience assert his own beneficial interest in the money as against some other person of whose rights he is aware. As a general proposition this is plainly right. But it is not a sufficient statement of the test, because it begs the question what good conscience requires. Property rights are fixed and ascertainable rights. Whether they exist in a given case depends on settled principles, even in equity. Good conscience therefore involves more than a judgment of the relative moral merits of the parties. For that reason it seems to me, with respect, that Bingham J's observation in Neste Oy that any reasonable and honest director would have returned the sixth payment upon its receipt begs the essential question whether he should have returned it. It cannot be a sufficient answer to that question to say that it would be 'contrary to any ordinary notion of fairness' for the general creditors to benefit by the payment. Reasoning of this kind might be relevant to the existence of a remedial constructive trust, but not an institutional one."
"The difficulty about the decision in the Neste Oy case concerning the sixth payment is that Bingham J had rejected the argument that the agency relationship between the shipowners and [the agent] was such as to impose the status of a trustee on the agents, and had declined to find that the payments were subject to a special purpose trust. He had rejected these submissions mainly because the agent was not expected to keep the funds remitted to it by the shipowners separate from its own, but was entitled to treat them as part of its general assets: see pp 664665. It follows that in paying money to [the agent] the shipowners intended to part with any interest in the money, subject only to a purely personal obligation of [the agent] to account to them for what they had done with it and to repay any balance due as a debt."
Conclusion
Lord Justice Arnold
Lord Justice Moylan