HOUSE OF LORDS
LORD BROWNE-WILKINSON, LORD WOOLF MR, LORD STEYN, LORD HOPE OF CRAIGHEAD AND LORD HUTTON
15, 16, 17 FEBRUARY, 25 MARCH 1999
Insurance - Society of Lloyd's - Premium trust deed - Lloyd's requiring names to execute trust deed - Trust fund including premiums and other monies belonging or becoming payable to names in connection with underwriting - Trust deed containing power of amendment - Lloyd's exercising power to bring litigation recoveries within trust - Whether litigation recoveries covered by unamended deed - Whether power of amendment properly exercised.
The Society of Lloyd's required all underwriting members (names) to execute the premium trust deed (PTD). Clause 2(a)(i) of the PTD provided that the fund would consist of 'all premiums and other monies whatsoever ... belonging or becoming payable to the Name in connection with the Underwriting ...' Cl 22 gave Lloyd's the power to amend the provisions of the PTD. In 1995 Lloyd's exercised that power in order to ensure that all litigation recoveries by names against managing and members' agents fell within the trust in cl 2(a)(i). Those recoveries included damages for negligent underwriting, and for negligent advice about stop-loss insurance and syndicate selection. However, in subsequent litigation Lloyd's contended that the PTD would have caught such recoveries even without the amendments. The Court of Appeal held that damages awarded to names for negligent underwriting by managing agents were caught by the unamended PTD, but that the amendments had been made ultra vires cl 22. The appellant name appealed against the Court of Appeal's holding on the scope of cl 2(a)(i), contending that the words 'in connection with' were too vague to catch damages for negligent underwriting. However, he sought to uphold the Court of Appeal's decision on the ineffectiveness of the 1995 amendments, contending that the power of amendment in a trust deed could not be exercised to extend the trust to other assets, but was confined to alterations to procedural rights and obligations. Lloyd's cross-appealed on the ultra vires issue, and also contended that the unamended PTD caught damages awarded to names for negligent advice in respect of stop-loss insurance and syndicate selection.
Held - (1) On its true construction, cl 2(a)(i) applied to damages for negligent underwriting. Such a construction was consistent with a central purpose of that clause, namely to protect policy holders in the interests of the integrity of the Lloyd's market. In contrast, the alternative construction would weaken that protection and would also mean that a name would be in a stronger position if he had recovered damages for negligent underwriting than if he had received his share of premium income produced by acceptable underwriting. Such a result was unacceptable since damages for negligent underwriting were the surrogate of receipts produced by proper underwriting, and it was therefore to be expected that the trust would not differentiate between the two categories of moneys. Accordingly, the name's appeal would be dismissed (see p 547
c d, p 551
b to
e j and p 556
b to
d, post);
Deeny v Gooda Walker Ltd (
in liq) (
No 2) (
IRC, third party) [1996] 1 All ER 933 considered.
545
(2) The words 'in connection with' in cl 2(a)(i) were too vague to catch receipts of personal stop-loss cover, and accordingly damages for negligent advice on the taking-out of such cover also fell outside that clause. Similarly, damages for negligent advice on syndicate selection fell outside the clause since the name's cause of action would be based on facts which pre-dated the commencement of the relevant underwriting business (see p 547
c d, p 552
j, p 553
b to
f and p 556
c d, post);
Society of Lloyd's v Morris [1993] 2 Re LR 217 followed.
(3) Although the power of amendment in a trust had to be exercised for the purpose for which it was granted, that principle did not preclude an amendment which altered rights or brought a new class of property within the scope of a trust, provided that such an amendment was in the reasonable contemplation of the parties. In the instant case, the trust had not been created by the bounty of a settlor, but as means of creating a form of security in favour of policyholders. The 1995 amendments fell within that purpose since they did not impose any new liability on names but merely provided for additional security for pre-existing obligations. It therefore followed that the amendments had been properly made and that all three categories of damages were subject to the trust in cl 2(a)(i). Accordingly Lloyd's cross-appeal would be allowed (see p 547
c d, p 554
g to
j, p 555
e and p 556
a to
d, post);
Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 considered.
Notes
For the Society of Lloyd's, see 25
Halsbury's Laws (4th edn reissue) paras 21-23.
For the exercise of powers under a trust, see 48
Halsbury's Laws (4th edn reissue) paras 845-850.
Cases referred to in opinions
 | Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656, [1900-3] All ER Rep 746, CA.
Deeny v Gooda Walker Ltd (in liq) (No 2) (IRC, third party) [1996] 1 All ER 933, [1996] 1 WLR 426, HL.
Graham Australia Pty Ltd v Perpetual Trustees WA Ltd (1989) 1 WAR 65, W Aust SC.
Hole v Garnsey [1930] AC 472, [1930] All ER Rep 568, HL.
Kearns v Hill (1990) 21 NSWLR 107, NSW CA.
Napier and Ettrick v R F Kershaw Ltd [1997] LRLR 1, CA; rvsg (14 May 1992, unreported), QBD.
Society of Lloyd's v Morris [1993] 2 Re LR 217, CA.
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Appeal and cross-appeal
The defendant, Wayne Kirk Robinson, appealed with leave of the Appeal Committee of the House of Lords granted on 9 March 1998 against an order of the Court of Appeal made on 30 July 1997 giving effect to the court's judgment delivered on 24 October 1996 (Nourse, Hobhouse and Pill LJJ) ([1997] 1 LRLR 1) allowing in part an appeal by the plaintiff, the Society of Lloyd's, from the decision of Sir Richard Scott V-C given on 17 May 1996 whereby he held that cl 2(a)(i) of the Lloyd's premium trust deed (PTD) did not extend to litigation recoveries by names. Lloyd's cross-appealed against, inter alia, the Court of Appeal's decision (Hobhouse LJ dissenting) that amendments to the PTD made on 3 March 1995 were ultra vires the power of amendment contained in cl 22 of that document. Mr Robinson, who was acting in a representative capacity on behalf of underwriting members of Lloyd's who had rejected its settlement offer, was substituted as defendant in place of David Laurence Woodard by order of the Court of Appeal on 30 July 1997. The facts are set out in the opinion of Lord Steyn.
546
| Nicholas Underhill QC and Adam Tolley (instructed by Grower Freeman & Goldberg) for the representative underwriter.
Jules Sher QC, John Child and Joanne Wicks (instructed by Simmons & Simmons) for Lloyd's.
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Their Lordships took time for consideration.
25 March 1999. The following opinions were delivered.
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 MR. 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 2(a):
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'Subject as hereinafter provided the Trust Fund shall consist of-(i)(1) all premiums and other monies whatsoever ... now belonging or payable or hereafter at any time belonging or becoming payable to the Name in connection with the Underwriting and ...'
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Clause 1(a) defines 'the underwriting business' as follows:
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'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 ...'
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'... 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 ...'
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On 3 March 1995, and purportedly acting in terms of cl 22, the Council of Lloyd's made amendments to cl 2. It was done by introducing into cl 2 a new para (d), the effect of which was to make all litigation recoveries by names subject to the trust in cl 2(a)(i).
The questions of interpretation arising on cl 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 cl 2(a)(i); (2) whether547 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 cl 2(a)(i); and (3) whether damages awarded to a name against a members' agent as compensation for negligence in advising on syndicate selection are caught by cl 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 cl 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 s 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 LR 217 at 218-219 (per Bingham MR) and in the judgment of Hobhouse LJ in the Court of Appeal in
Napier and Ettrick v
R F Kershaw Ltd [1997] LRLR 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 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 PTD. In May 1992 Saville J in
Napier and548 Ettrick v R F Kershaw Ltd (14 May 1992, unreported) held that cl 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 LR 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 cl 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 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 cl 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 (
in liq) (
No 2) (
IRC, third party) [1996] 1 All ER 933, [1996] 1 WLR 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 Sch D. The House answered that question in the affirmative. Lord Hoffmann made observations about the decision in
Napier and Ettrick's 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
Society of Lloyd's v Woodard (1996) Times, 24 May
. He held in favour of the names on all issues. He followed and applied the decision in
Napier and Ettrick's case. And he held that the 1995 amendments were invalid. (10) On the first day of the appeal in
Society of 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 and Ettrick's case. 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 and Ettrick's case
, with reasons to follow. The Court of Appeal reserved judgment in
Woodard's case
, where the issues were wider. On 24 October 1996 the Court of Appeal gave judgment in
Woodard's case, together with reasons for the decision in
Napier and Ettrick's case [1997] LRLR 1
. The Court of Appeal unanimously ruled that cl 2(a)(i) is apt to catch damages for negligent underwriting. Nourse and Pill LJJ felt unable to rule on the application of cl 2(a)(i) to damages for negligent advice about stop loss insurance and syndicate selection. Nourse LJ expressed the provisional view that cl 2(a)(i) did not apply to such damages. Hobhouse LJ ruled that cl 2(a)(i) does not cover such damages. The Court of Appeal held by a majority that the 1995 amendments were ultra vires. Hobhouse LJ dissented on this point. (12) At the beginning of
549 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 and Ettrick's case
, but the correctness of Saville J's ruling is raised in
Woodard's case
.
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 cl 2(a)(i). In
Napier and Ettrick's case Saville J decided that cl 2(a)(i) is inapplicable to such damages. His reasoning was as follows:
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'[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.'
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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 LR 217 the Court of Appeal in an obiter dictum approved the correctness of the decision in Napier and Ettrick's case. In Morris's case 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 (in liq) (No 2) (IRC, third party) 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 [1996] 1 All ER 933 at 940-941 and 935-936, [1996] 1 WLR 426 at 434-435 and 429 per Lord Hoffmann and Lord Browne-Wilkinson respectively. While Lord Hoffmann expressly refrained from saying that Napier and Ettrick's case was wrongly decided, his judgment undermined an important strand of the reasoning of550 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 and Ettrick's case 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 cl 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 cl 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 cl 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 LJ observed 'There seems to be no a priori reason for treating the replacement differently from that which it replaces' ([1997] 1 LRLR 1 at 5). These considerations show that from a commercial perspective the best construction is that cl 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 LR 217 the Court of Appeal of which I was a member expressly approved Napier and Ettrick's case. While the correctness of Napier and Ettrick's 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 Napier and Ettrick's case were not explored. In any event, now that the matter has been fully examined it would be wrong to perpetuate the error in Napier and Ettrick's 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 cl 2(a)(i) which has led me to conclude that Napier and Ettrick's case was wrongly decided.
In my view damages for negligent underwriting are covered by cl 2(a)(i).
Issue 2: damages for negligent advice on personal stop-loss insurance
The question whether cl 2(a)(i) covers damages for negligent advice about personal stop-loss insurance was directly in issue in
Morris's case. Stop-loss insurance cover is a form of reinsurance which reinsures aggregate losses of an
551 insured's underwriting in a given year and indemnifies him in respect of losses in excess of a certain limit. In deciding that cl 2(a)(i) was inapplicable to the receipts from stop-loss insurance Bingham MR observed ([1993] 2 Re LR 217 at 222):
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'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 suggests 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.'
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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's case [1996] 1 All ER 933, [1996] 1 WLR 426 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's case. 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's case. In any event in my view what Lord Hoffmann said about Morris's 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.
552
It is true that at issue in this case is not whether the receipts from stop-loss insurance are caught by cl 2(a)(i) but whether damages for negligent advice about personal stop-loss insurance are recoverable. Counsel for the names argued that, even if
Morris's case is correct on the point it decided, cl 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 cl 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 LJ ([1997] 1 LRLR 1 at 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 cl 2(a)(i). Moreover if the reasoning in
Morris's case 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.
Issue 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 cl 22. The Court of Appeal was divided on this issue. Nourse LJ relied strongly on s 83(2) of the Insurance Companies Act 1982, which is mentioned in the recitals of the PTD. Section 83(2) provides:
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'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.'
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'... the primary purpose of the PTD is to comply with s. 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 PTD was entered into. Its primary553 purpose having been to comply with s. 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 ...' (See [1997] 1 LRLR 1 at 6.)
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Pill LJ took a similar view. Hobhouse LJ disagreed. Counsel for the representative underwriter relied on the majority judgments.
Counsel for Lloyd's criticised the reliance of Nourse and Pill LJJ on s 83(2). His argument was as follows. The purpose of the PTD is wider than simply fulfilling the requirements of s 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 s 83(2). A name must execute a PTD not simply to comply with s 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 LJJ 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 cl 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] AC 472, [1930] All ER Rep 568. 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 LJ 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, [1900-3] All ER Rep 746 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 shareholder554 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 LJ said:
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'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.' (See [1900] 1 Ch 656 at 678, [1900-3] All ER Rep 746 at 753.)
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The judgment of Lord Lindley MR was to the same effect: see [1900] 1 Ch 656 at 671, [1900-3] All ER Rep 746 at 749. See also Graham Australia Pty Ltd v Perpetual Trustees WA Ltd (1989) 1 WAR 65 and Kearns v Hill (1990) 21 NSWLR 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 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 LJ observed:
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'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 cl. 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 insofar 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.' (See [1997] LRLR 1 at 17-18.)
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I am in complete agreement with this reasoning.
555
I would rule that the amendments were within the scope of cl 22 and were validly made. It follows that all three categories of damages identified earlier in this judgment are subject to the trust in cl 2(a)(i).
Conclusion
My Lords, I acknowledge the assistance I have derived from the analysis contained in the judgment of Hobhouse LJ. 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.
Appeal dismissed. Cross-appeal allowed.