[HOUSE OF LORDS]

AND

[On appeal from LORD NAPIER AND ETTRICK V. R. F. KERSHAW LTD.]

Insurance - Lloyd's - Premium trust deed - Requirement for Lloyd's Names to pay receipts "payable . . . in connection with" underwriting into trust fund - Whether embracing damages awarded to Name as compensation for negligent underwriting - Whether embracing damages for negligent advice as to personal stop loss insurance and syndicate selection - Amendment to deed to bring litigation recoveries into fund - Whether valid

By clause 2(a)(i) of the premium trust deed which each underwriting member of Lloyd's was required to enter into pursuant to section 83(2) of the Insurance Companies Act 1982, "all premiums and other moneys . . . becoming payable to the Name in connection with the underwriting" were to be carried to a trust fund set up to ensure payment of liabilities arising under the contracts of insurance entered into on his behalf by the managing agent of his syndicate. The surplus belonged to the Name absolutely. After a period of unprecedented underwriting losses, a number of Names were awarded damages as compensation for negligent underwriting by their managing agents. In 1992 Saville J. held that such damages fell outside the ambit of clause 2(a)(i). The Society of Lloyd's did not appeal against that decision but in 1995, in reliance on the power conferred on it by clause 22 of the deed to "vary or amend . . . any of the provisions" of the trust, it inserted a new sub-clause (d), the effect of which was to make all sums recovered by Names in legal proceedings by way of damages for negligent underwriting by managing agents, or for negligent advice by members' agents as to the taking out of personal stop loss insurance policies or syndicate selection, subject to the trusts in clause 2(a)(i). It thereafter commenced proceedings by way of originating summons against a representative underwriter seeking a direction that the new clause (d) was a valid exercise of the clause 22 power and, by amendment, that in any event clause 2(a)(i) extended to all such litigation recoveries. The Vice-Chancellor, applying Saville J.'s decision, held that the litigation recoveries fell outside clause 2(a)(i) and that the use by Lloyd's of its clause 22 power so as to add selected assets to the trust fund went beyond the purpose for which the power was created. Lloyd's appealed and were given an extension of time to concurrently appeal against Saville J.'s decision. The Court of Appeal held that litigation recoveries in respect of negligent underwriting were caught by clause 2(a)(i) but made no order as to whether damages awarded for negligent advice in regard to syndicate selection or the taking out of stop loss insurance fell within the sub-clause. The court, by a majority, held that the 1995 amendments were invalid.

On appeal by the representative underwriter and cross-appeal by Lloyd's: -

Held, (1) dismissing the appeal, that the trust deed, as a commercial document, fell to be construed so as to give effect to the intention of the parties, and since a central purpose of clause 2(a)(i) was to protect policyholders in the interests of the integrity of the Lloyd's market, damages for negligent underwriting, as the surrogate of receipts which would have been produced by proper underwriting and which would have formed part of the trust funds, came within the ambit of clause 2(a)(i); that since stop loss insurance was a personal arrangement made by a Name the proceeds of which were not derived from the underwriting business, damages for negligent advice about stop loss insurance, as the surrogate for the proceeds of stop loss cover, fell outside clause 2(a)(i); and that, similarly, since the selection by a Name of a syndicate was distinct from the business of underwriting through that syndicate, damages for negligent advice as to syndicate selection also fell outside clause 2(a)(i) (post, pp. 758G-H, 762G-763A, 764F-G, 765B-C, 767H-768A).

Society of Lloyd's v. Morris [1993] 2 Re.L.R. 217, C.A. and dicta of Lord Hoffmann in Deeny v. Gooda Walker Ltd. (No. 2) [1996] 1 W.L.R. 426, 434-435, H.L.(E.) applied.

(2) Allowing the cross-appeal in part, that although a power of amendment reserved in a trust was not to be exercised beyond the reasonable contemplation of the parties, the contemplation of the parties to the Lloyd's trust deed had been to create a form of security in favour of policyholders, and in circumstances where there had been unprecedented losses by Names it was consistent and proper that the deed should have been amended to require litigation receipts to be paid into the trusts so as to ensure that there were sufficient funds to enable Names' liabilities to be met; and that, accordingly, the insertion of clause 2(d) was a valid amendment to the trust deed (post, pp. 758G-H, 766C-E, 767C-F).

Decision of the Court of Appeal [1997] L.R.L.R. 1 reversed in part.

The following cases are referred to in the opinion of Lord Steyn:

Allen v. Gold Reefs of West Africa Ltd. [1900] 1 Ch. 656, C.A.

Deeny v. Gooda Walker Ltd., The Times, 7 October 1994, Phillips J.

Deeny v. Gooda Walker Ltd. (No. 2) [1996] 1 W.L.R. 426; [1996] 1 All E.R. 933, H.L.(E.)

Graham Australia Pty. Ltd. v. Perpetual Trustees W.A. Ltd. [1989] 1 W.A.R. 65

Hole v. Garnsey [1930] A.C. 472, H.L.(E.)

Kearns v. Hill (1990) 21 N.S.W.L.R. 107

Lloyd's (Society of) v. Morris [1993] 2 Re.L.R. 217, C.A.

Napier and Ettrick (Lord) v. R. F. Kershaw Ltd. (unreported), 14 May 1992, Saville J.

The following additional cases were cited in argument:

Lloyd's (Society of) v. Leighs [1997] C.L.C. 759; [1997] C.L.C. 1398, C.A.

Owens v. The Queen [1900] 2 I.R. 513

APPEAL from the Court of Appeal.

On 31 March 1995 the Society of Lloyd's issued an originating summons in the Chancery Division to ascertain the validity of clause 2(d) of the premium trust deed made by its individual underwriting members, which clause Lloyd's had inserted in purported exercise of a power of amendment conferred on it by clause 22 of the deed and the purpose of which was, inter alia, to require members to pay into the fund set up under the deed the proceeds of any sums recovered in legal proceedings as damages for negligent underwriting by managing agents or negligent advice

by members' agents as to stop loss insurance or syndicate selection. David Laurence Woodard, an underwriting member, was joined as first defendant to represent in the proceedings those who wished to argue against the validity of clause 2(d), save on the ground that it was in breach of Community law in respect of which ground Antony Frederick John Wilson was joined as second defendant. On 29 March 1996 the summons was amended so as to raise the additional question as to whether such litigation recoveries were part of the fund in any event by virtue of clause 2(a)(i) of the deed. On 17 May 1996 Sir Richard Scott V.-C., applying the decision of Saville J. in Lord Napier and Ettrick v. R. F. Kershaw Ltd. (unreported), 14 May 1992 that clause 2(a)(i) did not apply to damages for negligent underwriting, made declarations that litigation recoveries fell outside the ambit of clause 2(a)(i) and that clause 2(d) was invalid. The Community law point was no longer live.

On appeal, during which Lloyd's were given an extension of time to concurrently appeal against Saville J.'s decision, the Court of Appeal (Nourse, Hobhouse and Pill L.JJ.) allowed Lloyd's appeal to the extent that litigation recoveries in respect of negligent underwriting were held to fall within clause 2(a)(i) ("issue 1"), but made no order as to the application of clause 2(a)(i) to damages for negligent advice about stop loss insurance or syndicate selection ("issues 2 and 3"), and, by a majority, upheld Sir Richard Scott V.-C. on the invalidity of clause 2(d) ("issue 4").

On 9 March 1998 the House of Lords (Lord Lloyd of Berwick, Lord Nolan and Lord Hope of Craighead) granted a petition by Wayne Kirk Robinson ("the representative underwriter"), who had been substituted as first defendant, for leave to appeal against that part of the Court of Appeal's decision relating to issue 1. Lloyd's lodged a petition to cross-appeal on issues 2 to 4, which was granted during the course of the hearing. There was no appeal in Lord Napier and Ettrick v. R. F. Kershaw Ltd.

The facts are stated in the opinion of Lord Steyn.

Nicholas Underhill Q.C. and Adam Tolley for the representative underwriter.

Jules Sher Q.C., John Child and Joanne Wicks for Lloyd's.

Their Lordships took time for consideration.

25 March. 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 ("P.T.D.") which each

underwriting member of Lloyd's, or Name, must execute. The relevant provisions of the P.T.D. are:

"2(a) Subject as hereinafter provided the trust fund shall consist of - (i) all premiums and other moneys whatsoever . . . now belonging or payable or hereafter at any time belonging or becoming payable to the Name in connection with the underwriting . . ."

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

"The underwriting business (whether current or past or future) of the Name at Lloyd's carried on through the agency of the members' agent or under arrangements made by or through the members' agent . . ."

Clause 22 provides:

"the Council may from time to time revoke and determine the trusts hereby constituted or (subject always to the prior approval of the Secretary of State) vary or amend all or any of them or any of the provisions hereof in such manner as the Council think fit and the Council shall notify the members' agent (and the members' agent in turn shall notify the Name) of any exercise of the powers conferred upon the Council under this clause."

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 P.T.D. 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 P.T.D. 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, 218-219, per Sir Thomas Bingham M.R., and in the judgment of Hobhouse L.J. in the Court of Appeal: Lord Napier and Ettrick v. R. F. Kershaw Ltd. [1997] L.R.L.R. 1, 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 R.H.M. 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 moneys were caught by the trust constituted by the P.T.D. In May 1992 Saville J. in Lord Napier and Ettrick v. R. F. Kershaw Ltd. (unreported), 14 May 1992 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's case was however a different one, namely whether receipts from personal stop loss policies were covered by clause 2(a)(i) of the P.T.D. 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. found in favour of the Names: Deeny v. Gooda Walker Ltd., The Times, 7 October 1994. Over the following 18 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" Lloyd's wanted litigation recoveries to be brought within the scope of the P.T.D. On 2 March 1995 the Council of Lloyd's amended the terms of the P.T.D. 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 P.T.D.: Society of Lloyd's v. Woodard. (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 P.T.D. 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 Society of Lloyd's v. Woodard. He held in favour of the Names on all issues. He followed and applied the decision in the Napier case. And he held that the 1995 amendments were invalid. (10) On the first day of the appeal in the Woodard case 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. 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 the Napier case, with reasons to follow. The Court of Appeal reserved judgment in the Woodard case, where the issues were wider. On 24 October 1996 the Court of Appeal gave judgment in Woodard, together with reasons for the decision in Napier. 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 the Napier case, but the correctness of Saville J.'s ruling is raised in Society of 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 the Napier case Saville J. decided that clause 2 (a)(i) is inapplicable to such damages. His reasoning was:

"[Underwriting means] the underwriting business of the Name at Lloyd's carried on by or through the members' agent and not just the underwriting in a more general sense. The money in question is clearly not a receipt of the underwriting business, for the business is one of underwriting at Lloyd's and not one of compensating Names for mistakes allegedly made by their agents in conducting the Names' business of underwriting at Lloyd's . . . It is not a profit of the underwriting business for the same reason, nor would it feature in the accounts of the Names' syndicate: and it should be remembered that a Name is only allowed to conduct underwriting business at Lloyd's through syndicates . . . What, to my mind, the money has to do with is not the Names' business of underwriting at all, but the rights and obligations existing between the Name and his members' and managing agents; and those rights and obligations are not part of the Names' business of underwriting at Lloyd's either, but part of the internal arrangements made between these parties as a means of enabling the Names' business of underwriting at Lloyd's to be conducted. That business is business of underwriting with third parties and not business between the Name and his agents. In my judgment, the money is payable in connection with the latter and not the former business within the meaning of the deeds."

It was implicit in this reasoning that a Name conducted more than one business at Lloyd's. Subsequently, in 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 the Napier case. 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 pp. 434-435, per Lord Hoffmann, and p. 429C-D, per Lord Browne-Wilkinson. While Lord Hoffmann expressly refrained from saying that the Napier case 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 "moneys . . . 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 P.T.D. 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 moneys payable to a Name. As Nourse L.J. observed [1997] L.R.L.R. 1, 5: "There seems to be no a priori reason for treating the replacement differently from that which it replaces." 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 Society of Lloyd's v. Morris [1993] 2 Re.L.R. 217 the Court of Appeal of which I was a member expressly approved the Napier case. While the correctness of the Napier case was touched on in argument in Morris's case, it is clear from the skeleton argument of the appellants in that case that the real difficulties inherent in the reasoning in the Napier case 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 Society of Lloyd's v. Morris [1993] 2 Re.L.R. 217. 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 p. 222:

"It seems to us that the argument advanced on behalf of Lloyd's stretches the language of clause 2(a)(i) beyond the limits which the context will allow. It must be remembered that a Name is a passive participant in the business of a syndicate. The managing agents and active underwriter take all underwriting and investment decisions. They are not obliged to take into account the individual wishes and circumstances of a Name but they must be guided by the best interests of the syndicate as a whole. All moneys derived from the business transacted by the managing agents and active underwriter in and about the affairs of the syndicate fall within the trust fund unless expressly excepted by the deed. In contradistinction the taking out of a personal stop loss policy by a Name is not syndicate business. The

Name is not obliged to take out a stop loss policy. The managing agent or active underwriter cannot require him to do so. And he is entitled to reject advice to do so. It is an essentially personal decision by the Name for his own protection, judged in the light of his assessment of his personal circumstances . . . All moneys derived directly or indirectly from the underwriting business clearly fall within clause 2(a)(i). It follows that the proceeds of syndicate reinsurances, reinsurances to close, salvage, and the like, form part of the trust fund. But the proceeds of the personal stop loss insurances are not money derived directly or indirectly from 'the underwriting.' Such moneys can only be said to be payable 'in connection with the underwriting' if one gives to that phrase the very wide meaning 'having something to do with.' Taken in isolation the words are capable of bearing such a meaning but the context suggest otherwise. Postulate, for example, the case where a Name recovers damages from a financial adviser outside Lloyd's who negligently advised him to join a particular syndicate. It is rightly conceded that such a recovery could not be caught by clause 2(a)(i). Yet such a recovery may in a sense be said to 'have something to do with' the underwriting. That would, however, be too wide a construction of those words in the context. Properly construed it seems to us that the words 'in connection with the underwriting' import the idea that the underwriting business must be the source of the funds. And plainly the underwriting business was not the source of the stop loss recoveries."

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 v. Gooda Walker Ltd. (No. 2) [1996] 1 W.L.R. 426, 435 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 the Morris case. In any event in my view what Lord Hoffmann said about the Morris case 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 the Morris case 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 predate the Name's commencement of the relevant underwriting business. Like Hobhouse L.J. [1997] L.R.L.R. 1, 13 I regard questions relating to the selection of syndicates as distinct from the business of underwriting through that syndicate. For this reason such damages are not caught by clause 2(a)(i). Moreover if the reasoning in Society of 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 to question 3 is "No."

Issue 4: the validity of the amendments

Given that I have answered issues (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 issues (1), (2) and (3)) being caught by the P.T.D. 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 P.T.D. Section 83(2) provides "Every underwriter shall, in accordance with the provisions of a trust deed approved by the Secretary of State, carry to a trust fund all premiums received by him or on his behalf in respect of any insurance business." Nourse L.J. concluded [1997] L.R.L.R. 1, 6:

"the primary purpose of the P.T.D. is to comply with section 83(2). That provision is in terms confined to premiums . . . In my judgment such an amendment cannot reasonably be considered to have been within the contemplation of the parties when the P.T.D. was entered into. Its primary purpose having been to comply with section 83(2), it cannot have been intended to be capable of embracing assets personal to the Name, even those which may be said to 'have something to do with' his underwriting business or the like. It was not intended, even to that limited extent, to be a means of attaching his personal assets as a fund for meeting the losses and outgoings of the business . . ."

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

Counsel for Lloyd's criticised the reliance of Nourse and Pill L.JJ. on section 83(2). His argument was as follows. The purpose of the P.T.D. is wider than simply fulfilling the requirements of section 83. Section 83 only requires premiums to be carried to a trust fund. But, the P.T.D. requires the Name also to carry to the fund "other moneys," 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 P.T.D. 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 P.T.D. 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 challenged 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 p. 678:

"A company such as this may undoubtedly by its articles of association provide for a lien on the shares of its shareholders in respect of any debts for the time being due from them to the company, and, if the original articles do not provide for the lien, the company may subsequently, by duly altering its articles, give itself such a lien; and the fact that the original articles did not provide for a lien would be in itself no ground justifying a shareholder who was indebted when the articles were altered in saying that he contracted the debt or that he took his shares in reliance on there being no lien, and that the new articles must not operate so as to make the lien thereby given extend to his existing debt. A shareholder must be taken to have known that the articles might be so altered as to give the lien. And certainly a

shareholder could not say as against the company that he was entitled to special rights because he did not pay his debts."

The judgment of Lord Lindley M.R. was to the same effect, at p. 671. See also Graham Australia Pty. Ltd. v. Perpetual Trustees W.A. Ltd. [1989] 1 W.A.R. 65 and 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 P.T.D. trust fund. Moreover, the amendments were required by an unprecedented crisis affecting Lloyd's. From the 1980s 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 [1997] L.R.L.R. 1, 17-18:

"In the present case the purpose of the trust deed is to impose obligations upon the Name and provide mechanisms for the purpose of facilitating the conduct of the Name's activities at Lloyd's including the discharge of his obligations within the market. In the exceptional situation which had arisen and the exceptional way in which the Names were having to enforce and obtain from their agents the financial consequences to which they were entitled arising out of their becoming Names and participating in the market, it is both consistent and proper that the Council of Lloyd's should have sought to amend clause 2 of the deed so as to bring the relevant litigation receipts within its scope and require the Name to pay such sums into the trust fund in so far as it is necessary to do so to enable his liabilities to be paid out of that fund. The situation which has arisen is exceptional. But the contemplation of the deed and the relationship between the parties to it is that the fund will be provided with sums of money which are sufficient to enable the Names' liabilities to be met by payments out of that fund, using the mechanisms provided for in the deed."

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.

Solicitors: Grower Freeman & Goldberg; Simmons & Simmons.

C. T. B.