Chancery Division

Jones v Society of Lloyd's.

Standen v Same.

Before Mr Justice Rattee.

Judgment December 16, 1999

Lloyd's - settlement offer - underwriting liabilities not an unenforceable penalty

Underwriting liabilities not an unenforceable penalty

The true nature of the contracts between the Society of Lloyd's, Equitas, error and omissions insurers, underwriting agents, names and others, resulting from acceptances of Lloyd's 1996 settlement offer, was that each name was offered an option, either to pay (a) his true liabilities, less debt credits, by September 30, 1996 or (b) his full underwriting liabilities, without any such reduction, at some later date. Accordingly, the amount by which sum (b) exceeded sum (a) could not be regarded as an unenforceable penalty.

Mr Justice Rattee so held in the Chancery Division, when:

(i) dismissing an application by David Gareth Jones to set aside a statutory demand of Pounds 302,963, later reduced by a part payment of Pounds 123,044, in respect of the gross sum shown on his finality statement and

(ii) requiring Mervyn John Anthony Standen to pay the balance of a sum of Pounds 187,228 owed by him to Lloyd's pursuant to an agreement between him and Lloyd's dated August 22, 1996.

Appendix 2 of the Lloyd's settlement offer document, in effect incorporated into the settlement agreement, included in paragraph 9, that no name had any proprietary interest in the settlement fund, which included debt credits.

Paragraph 38 provided: "If an accepting name fails to pay ... his finality amount by the finality payment deadline, he will: (a) be in default; and ... (c) not be entitled to have applied for his benefit the amounts, if any, as set out in his finality statement from the combined litigation settlement funds and/or debt credits save to the extent that he has any entitlement pursuant to the terms of any action group settlement agreement."

Mr David Oliver, QC and Mr Richard Morgan for Mr Jones; Ms Catherine Mackenzie Smith for Mr Standen; Mr Edward Bannister, QC and Ms Lexa Hilliard for Lloyd's.

MR JUSTICE RATTEE said that Mr Jones had on August 22, 1996 accepted Lloyd's offer to settle his liabilities for Pounds 99,999, by selecting the option of paying Pounds 15,000 cash and covering the balance by a structured payment plan to be guaranteed by an acceptable financial institution.

What he had to do by September 30, in order to take advantage of the debt credits shown on his finality statement, was to pay the Pounds 15,000 to Lloyd's and provide an offer of such a guarantee. He did neither.

Correspondence ended with a letter from Lloyd's, which he denied receiving, of March 21, 1997,

warning him that if the Pounds 15,000 were not paid by April 1, his plan would be cancelled and he would be liable for the gross sum shown on his finality statement. On June 27, Lloyd's demanded that gross sum, plus interest, totalling Pounds 302,963.

Mr Standen had accepted his settlement offer on August 22, 1996, intending to pay in cash by September 30, but finding himself unable to do so. On September 2, 1998 Lloyd's served on him a statutory demand for Pounds 187,228.51.

His application to set it aside was dismissed on December 3 and on December 15 Lloyd's presented a bankruptcy petition. On September 14, 1999 he gave notice of opposition, on the ground that the difference between that and the net sum in his finality statement represented an unenforceable penalty.

The Penalty Argument

The plaintiffs, relying upon dicta of Lord Justice Nicholls in Jobson v Johnson ((1989) 1 WLR 1026,1038E), contended that the differences between the net sums in their finality statements and the sums now demanded bore no relation to any loss Lloyd's had suffered as a result of the plaintiffs' failure to implement the provisions of their own settlement agreements.

But essential to the character of those provisions was the nature of the secondary obligation, to be imposed in the event of breach of the primary one: see Thompson v Hudson ((1869) 4 HL 1, 27, 33), where the sum to be paid, in the event of failure to comply with a new agreement for security, was a sum contractually due to the appellants before the new agreement was entered into: namely, the reservation of an existing right, not the creation of a right that never existed before a breach of the new agreement.

Similar reasoning led to the conclusion that paragraph 38 of appendix 2 did not give rise to any penalty.

The Forfeiture Argument

The plaintiffs contended that paragraph 38 deprived them of an interest in the funds set up as part of the scheme to provide the debt credits, in the event of a breach of the names' obligation to pay the reduced sum by September 30, 1996.

Lloyd's short answer to that, was that that doctrine was applicable only where the alleged forfeiture was of some proprietary interest.

It was clear from paragraph 9 of appendix 2 to the settlement offer document that no name had any proprietary interest in the settlement fund, which included debt credits: see BICC plc v Burndy Corporation ((1985) Ch 232, 252A).

The Compliance Argument

Mr Oliver had contended, in the alternative, that his client had complied with his obligations by offering through his bank on October 28, 1986 a guarantee in the sum of Pounds 100,000 and leaving it to Lloyd's to produce such form of guarantee it required, and relying on a Lloyd's letter of November 4, 1996 which, clearly in error, had ignored Mr Jones's failure to pay his Pounds 15,000 by September 30 and could not effect any variation of the, multi-partite, settlement agreement.

Finally, Mr Oliver's argument, that that letter gave rise to some sort of estoppel against Lloyd's now enforcing its strict rights under the settlement agreement, failed for lack of evidence that Mr Jones had in any way acted, or failed to act, in reliance upon it.

The court's power to set aside a statutory demand derived from rule 6.5 of the Insolvency Rules (SI 1986 No 1925), namely: "(4) ... if - ... (b) the debt is disputed on grounds which appear to the court to be substantial; or ... (d) the court is satisfied, on other grounds, that the demand ought to be set aside" neither of which was satisfied.