|
QUEEN'S BENCH DIVISION (COMMERCIAL COURT) [1993] 1 Lloyd's Rep 96 HEARING-DATES: 16 April 1992 16 April 1992 CATCHWORDS: Practice -- Interim injunction -- Application to restrain members' agents issuing notices for unpaid cash calls -- Whether plaintiffs had good arguable case that member's agents in breach of duty. HEADNOTE: The plaintiff was a name at Lloyd's and the first defendants were underwriting agents referred to as a Members' Agent at Lloyd's. The plaintiff applied for an injunction restraining the first defendant from taking steps to pay, in respect of any outstanding cash calls made on him arising out of his membership of eight named syndicates at Lloyd's, any funds held on the plaintiff's behalf or in trust for him to call upon any security held or given by the plaintiff. Under the members' agent's contract the Name agreed that the members' agent should act as the underwriting agent of the Name at Lloyd's for the purpose of underwriting for the account of the Name and further agreed that the members' agent should have sole control and management of the underwriter business but could delegate to others the performance of these functions. The plaintiffs contended that they had an arguable case that in the circumstances the member's agents would be in breach of obligations or duties owed to the Name if they gave or purported to give the notices required in order to ultilize the Name's personal reserves and their securities deposited at Lloyd's for the purposes of meeting the unpaid cash calls. -- Held, by QB (Com Ct) (Saville, J), that (1) the submission that the members' agents had an implied duty or obligation to investigate the validity of cash calls made by the managing agents, or to do so if put on notice that there were matters which might render the calls invalid could not be sustained; as between the Name and the members' agent the called was to be treated as made by the members' agent in the course of his (the members' agent's) conduct of the underwriting business; there was no room or need for any implication that a member's agent should not investigate what was to be treated as his own call; and the submission that the member's agent should not give the relevant notices until this obligation had been performed and the agent was satisfied with the validity of the call would also be rejected (see p 97, cols 1 and 2); (2) under the contract the members' agent was given an unfettered discretion to determine from time to time what funds were required for the payment of the liabilities expenses and outgoings of the underwriting business and the Names agreed not to sue the agent unless he had first met the requirements of the agents for funds nor to seek injunctive or other relief for the purposes of preventing the agent from making or enforcing any such requirement; these provisions could not be construed so as to enable an agent lawfully to call for funds which he did not believe were required for such payments nor would they enable an agent lawfully to call for funds which on no reasonable view could honestly be required for those purposes but there was no reason why these provisions should be ignored or given less than their full effect (see p 97, col 2); (3) there was nothing on the material before the Court to justify the inference that those vested with authority from the Names had abused that authority by deliberately writing contracts for the purposes of generating brokers and profit commissions; the plaintiffs had failed to displace to the degree required the prima facie position that the funds in question had been used to discharge the valid obligations of the names under contracts written on their behalf (see p 98, col 2; p 99, col 1); (4) the plaintiffs had failed to demonstrate even to the degree required for interim relief that the calls for money to repay the trust fund were calls for funds which on no reasonable view could honestly be regarded as required for the purposes of the underwriting business (see p 99, col 2); (5) on the material before the Court legal basis for restraining the member's agents from enforcing calls by giving the requisite notices were unsustainable; the applications for the injunctions would be refused (see p 100, col 2). INTRODUCTION: This was an application by the plaintiff Mr Desmond George Boobyer and a number of other Names at Lloyd's for an interim injunction restraining their respective members agents from giving the notices required to utilize the Names personal reserves and their securities deposited at Lloyds' for the purposes of meeting unpaid cash calls. COUNSEL: Mr Michael Burton, QC and Miss Marion Smith for the plaintiff; Mr Neville Thomas, QC and Mr Rory Phillips for the first defendant; Mr AGS Pollock, QC and Mr Mark Havelock-Allan for the second defendant. PANEL: SAVILLE J JUDGMENTBY-1: SAVILLE J JUDGMENT-1: SAVILLE J: This is an application by a number of Names at Lloyd's for interim injunctions to restrain their respective members' agents from giving the notices required in order to utilize the Names' personal reserves and their securities deposited at Lloyd's for the purpose of meeting unpaid cash calls. The plaintiffs submit that they have an arguable case that in the circumstances the members' agents would be in breach of obligations or duties owed to the Names if they gave or purported to give these notices. It is thus necessary to start by examining the contractual arrangements existing between the Names and their respective members' agents. There is an old form and a new form of members' agent's contract. The plaintiffs submitted that when the new form was introduced in 1990 and signed by the Names it replaced for all or all material purposes the old form. In my judgment this submission is untenable. It seems to me that the new form only applied to the 1990 year of account and following years, and that the old form continues to govern the relationship between the parties in respect of years of account before 1990. I can find nothing in the evidence which begins to suggest that the parties agreed not only to change their contract for the future years of account but also for the past. Under the old form of contract the Name agreed that the members' agent should act as the underwriting agent of the Name at Lloyd's for the purpose of underwriting for the account of the Name. The Name further agreed that the members' agent should have sole control and management of the underwriting business, but could delegate to others the performance of these functions. In most cases of course it was known and expected that the members' agents would, as indeed they did, delegate such functions to managing agents, but as a matter of the parties' express bargain it seems to me to be clear that despite such delegation the members' agents were and remained directly responsible to the Names for the conduct of the underwriting business. They had contracted to do it, not merely to exercise care in choosing other people to do it or to oversee the conduct of those they had entrusted with the task. It follows from this that the suggestion that the members' agents had an implied duty or obligation under the old form of contract to investigate the validity of cash calls made by the managing agents, or to do so if put on notice that there were matters which might render the calls invalid, cannot be sustained, for as between the Name and the members' agent the call is to be treated as made by the members' agent in the course of his, the members' agent's, conduct of the underwriting business. There is simply no room or need for any implication that a members' agent should investigate what is to be treated as his own call. It also follows that the suggestion that the members' agent should not give the relevant notices until this obligation or duty has been performed and the agent is satisfied with the validity of the call, is also unsustainable. To my mind the vital question is simply whether the Name can successfully challenge the call as one which the members' agent is not contractually entitled to make. If such a challenge can be made then it could hardly be suggested that the agent is nevertheless entitled to give notices to utilize the personal reserves and securities for the purpose of meeting a call which, ex hypothesis the agent is not entitled to make. Equally, if such a challenge cannot be made, then I can see nothing in the members' agent's contract that would nevertheless entitle the Name to stop the agent from taking the necessary steps to enforce a call which on this hypothesis the agent is entitled to make. Under the old form of contract the members' agent is given an unfettered discretion to determine from time to time what funds are required for the payment of the liabilities, expenses and outgoings of the underwriting business, and the Name agreed not to sue the agent unless he had first met the requirements of the agents for funds, nor to seek injunctive or other relief for the purpose of preventing the agent from making or enforcing any such requirement. To my mind these provisions cannot be construed so as to enable an agent lawfully to call for funds which he did not honestly believe were required for the payment of the liabilities, expenses and outgoings of the underwriting business, nor would they enable an agent lawfully to call for funds which on no reasonable view could honestly be regarded as required for these purposes. However, short of this, I see no reason why these provisions should be ignored or given less than their full effect. Those joining Lloyd's as Names must appreciate that the system can only work if the business of underwriting is conducted by professionals who must be left to judge, among other things, and of course in good faith, what funds are required from time to time for the underwriting business. Were this not so and Names were entitled to withhold funding until personally satisfied that the money was needed, then in view, again among other things, of the numbers of Names involved, claims could not be settled promptly, nor could the attendant administrative expenses of the underwriting business be met and, in short, Lloyd's could not exist as an insurance market. This is not to say of course that the agent owes no duty or obligation to his Names to act with reasonable care and skill, and if he is negligent or otherwise defaults in underwriting for his Name, or in otherwise conducting the underwriting business for his Names, I can see nothing in the old form of contract limiting or excluding any such duty or obligation and the Name's corresponding right to redress, which to my mind must be implicit in the bargain made between the parties. This right exists, but in my view by the provisions to which I have referred the Name has agreed not to seek to set it up so as to impede cash calls or the utilization of funds or securities to meet unpaid cash calls unless he can demonstrate either that the agent is not acting in good faith, or that on no reasonable view can funds honestly be required for the underwriting business entrusted to the agent. To my mind in the context under discussion such provisions are entirely fair and reasonable. In the present case it is not alleged that the members' agent's acting under the old form of contract, or those for whom they are responsible under the old form of contract, namely the managing agents, have made the relevant calls in bad faith. The question therefore is whether the plaintiffs can demonstrate to the degree required for interim relief that on no reasonable view can the calls or any identifiable part of them be honestly regarded as required for the liabilities, expenses and outgoings of the under-writing business. There is material before me to show that large portions of the relevant calls are required in order to repay sums owing to the Lloyd's American Trust Fund. The plaintiffs allege that borrowing by the agents from this fund, which is primarily designed to hold premiums in trust for the payment of claims, amounted to a breach of the trusts on which the fund is constituted, that their agents had no authority from the Names to borrow by means of committing such a breach or breaches of trust, and that accordingly on no view can it be said that this part of the calls is required for the purposes of the underwriting business which the Names authorized the agents to conduct on their behalf. Assuming for the purposes of the argument that to borrow from the LATF constituted a breach of the trusts upon which the fund is held, it seems to me that if the borrowed money was used to discharge the obligations of the Names, they could hardly be heard to assert, or at least to rely on the point for the purposes of interim relief, that they were not obliged to reimburse those who provided the money, for the simple reason that the Names have benefited from the discharge of their obligations. The question therefore is whether or not the money borrowed was used for that purpose. On the face of it the Names have benefited since the money was borrowed, if that be the right term, for the LATF to pay sums falling due under insurances written in the names of the syndicates concerned. However, the plaintiffs submit that this is not or may not in fact be the case. Their contention is that the money, or a great part of it, was used to make payments under so-called excess loss reinsurances and retrocessions written in the London excess of loss market -- the LMX as it is usually called. They suggest the true position may be not that these contracts were written with a view to making underwriting profits for the Names, but simply for the purpose of generating brokers and profit commissions, that is to say, that what has been going on in the LMX market is a variety of what is known on the Stock Exchange as "churning". It is suggested that since such transactions would be in breach of fiduciary duties owed to the Names by the agents, they are voidable. Alternatively the Names suggest that such transactions are not really contracts of insurance at all but more akin to gambling transactions and are thus void. So far as the allegation of breach of fiduciary duty is concerned, this must amount to a suggestion not merely that the brokers were seeking to make commissions by generating business in the LMX market, but that the syndicates' underwriters concerned were privy and party to what must have been a fraudulent conspiracy to abuse the authority given to them by the names in order to make personal profits. There are undoubtedly features of the LMX which call for careful investigation, and which in fact are being presently investigated by Sir David Walker, at the request of Lloyd's itself. The so-called LMX spiral consists, at least on one view, of the same risk or different layers of the same risk going round and round the market with reinsureds eventually either reinsuring themselves or reinsuring in that which they had shortly before reinsured out, and with each of the large number of transactions generating brokers' commission with consequently ever-decreasing premiums available to set against the risks. On the material before me, however, there is nothing at present which to my mind would justify the inference that those vested with authority from the Names had abused that authority by deliberately churning. Without that material and with only at present assertion or innuendo, it is my view that the Names have at least to date failed to displace to the degree required in applications of this kind the prima facie position, namely that the LATF funds in question have been used to discharge the valid obligations of the Names under contracts written on their behalf in the LMX. Indeed, Mr Burton for the plaintiffs accepted that at present his clients did not have sufficient material to enable an allegation of fraudulent conspiracy to be made consistently with the rules and practices of this Court. It remains of course to note that if indeed churning did take place then the Names might well have claims not only against the under-writers involved but all those, including the so-called reinsureds, who have benefited from this fraudulent practice. I now turn to the argument based on the suggestion that the contracts were void, but I regret that I cannot follow the reasoning. It is suggested that the contracts in question were such that the underwriters concerned could not have made a proper assessment of the risk or a proper calculation of the necessary premium, or both, but in my view this does not render the contracts void. An underwriter who writes business without the means of properly assessing the risk or calculating the necessary premium may very well be underwriting without due care and skill, but I cannot see how it can be suggested that he is not underwriting or making any enforceable bargain at all. During the course of the submissions I suggested that the Names might be able to argue that the sort of business done by their agents in the LMX was so extraordinary that it fell out-side the scope of the sort of underwriting business which the Names had authorized the agents to conduct on their behalf, and that accordingly the Names were not bound by that business, that is to say, that it was not authorized by them at all, so that any payments made in respect of that business did not go to dis-charge any obligation of the Names. However, this is not the way the plaintiffs pleaded their case or put it in their affidavit evidence, and in my view it would not be fair to the opposing parties to the application to allow the plaintiffs now to advance this ground. Indeed they have not sought to do so. In these circumstances, even assuming in favour of the plaintiffs that there was some breach of trust with regard to the funds borrowed from the LAFT, and even making the further assumption that the LMX calls for inquiry, I am of the view that the plaintiffs have failed to demonstrate, even to the degree required for interim relief, that the calls for money to repay the LATF are calls for funds which on no reasonable view can honestly be regarded as required for the purposes of the underwriting business. It was argued that even if the Names were liable to reimburse the LATF, the true claimants for the funds borrowed from the LATF were the trustees of that fund, or possibly the beneficiaries under it, and not the agents. If there was any material to suggest that the agents would not pay over the sums called to the trustees of the LATF this point might have some merit, but the suggestion is not even made. The proposition is therefore that the Names are entitled to interim relief to restrain the agents from collecting the money to pay the party who, ex hypothesi, is owed the money by the Names. This does not seem to me to be a sound basis for granting such relief. The plaintiffs next asserted that in relation to the syndicates formerly, but not now, managed by the agents, Gooda Walker, there was material to show not only that these agents had wilfully deceived the syndicates' auditors, but also that there was a need, at least on one view, for very substantial financial adjustments between Names, syndicates and years of account. To my mind, however, this material provides no assistance to the plaintiffs on this application. The question, as I have already said, is whether or not the relevant calls, or a part of them, can be shown to the extent required for interim relief to be made for purposes which on no reasonable view could honestly be regarded as proper. If it could be shown, for example that what Gooda Walker did or failed to do in the past demonstrated that there was presently no need for available funds to discharge the current and anticipated liabilities, expenses and outgoings of the underwriting business, then matters might be different, but the material relied upon does not suggest to me either that there are funds readily available so that no call is required, or that the liabilities, expenses and outgoings, for which the call is made do not in fact exist, so that again no call can properly be required. The plaintiffs' final point was that in respect of one of the syndicates concerned the call was being made in order to provide funds to reduce or extinguish the indebtedness of another syndicate. It was common ground that such a call could on no reasonable view be honestly regarded as required for the payment of the liabilities, expenses and outgoings of the under-writing business of the Names being asked to pay. However, on the evidence and in the light of the undertaking given by Mr Pollock on behalf of his clients during the course of argument this morning for a further affidavit to be sworn deposing to the information he gave me, I can find nothing that suggests that the call or any part of it was made directly or indirectly for this purpose, as opposed to meeting the current and expected liabilities, expenses and outgoings of the business being conducted for the Names receiving the call. In my judgment the same conclusions are reached in those cases where the new form of contract is in use, albeit by a different route. Under the new system the Name not only makes a contract with the members' agent but also with the managing agent who is actually going to carry on the underwriting business. Under the latter agreement, but not the former, there are like provisions to those found in the old members' agent's agreement, to which I have already referred. It is accordingly argued that since an injunction is sought against the members' agents and not the managing agents there is nothing in the contract with the former which amounts either to an agreement to pay now and sue later, or to an agreement not to seek injunctive relief to prevent the enforcement of calls. This proposition is of course literally correct, but to my mind it takes the matter no further. If the managing agent makes a call which cannot be categorized as improper in the way which I have described above, it follows that that call is immediately due and payable as a matter of legal contractual obligation between the Name and the managing agent. Given that this is so, the proposition must be that under the member's agent agreement the members' agent nevertheless has the duty not to enforce what ex hypothesi is a valid and immediately enforceable call or, in other words, that the members' agent's duty to the Name is wholly inconsistent with the managing agent's rights against the Name. Since the members' agent's and managing agent's agreements refer to each other and clearly form part of an interlocking system of agreements governing the legal relationships created when a Name joins Lloyd's, it would be surprising, to say the least, to find such a fundamental inconsistency, nor have I been able to do so. Under the new members' agent's contract the agent does indeed have express, as opposed to implied, duties of care and skill and fiduciary duties, but to extend these so as to oblige the members' agents not to enforce valid calls and thus to give the Names the right not to have valid calls enforced seems to me to be an untenable proposition. For these reasons I am of the view that on the material presently before me the legal basis for restraining the members' agent's form enforcing the calls by giving the requisite notices is unsustainable. Accordingly it is not necessary to consider the balance of convenience or other factors which are called in aid by the respective parties as militating for or against the granting of an injunction. The applications are refused. DISPOSITION: Applications refused SOLICITORS: Michael Freeman & Co; Cameron Markby Hewitt; Elbourne Mitchell; Solicitors Dept Lloyds. |