Deeny and Others v
Gooda Walker Limited; Arbuthnott and Others v Fagan and Another; Henderson v
Merrett Syndicates Limited; Arbuthnott and Others v Feltrim Underwriting
Agencies Limited
Court of Appeal
(Civil Division)
The Independent 14
December 1993, (Transcript:John Larking)
HEARING-DATES: 13
December 1993
13 December 1993
COUNSEL:
G Vos QC and D Lord for the Gooda Walker Names;
B Eder QC and C Butcher for the Gooda Walker Members Agents; B Eder QC and D
Foxton for the Feltrim Names; A Temple QC and J Rowland for the Merrett
Syndicates; C Edelman for the Other Defendant Underwriting Agents listed in the
Schedules to all the Merrett Writs (save for JH Minet Agencies Limited)
PANEL: Sir Thomas Bingham MR, Hoffmann, Henry LJJ
JUDGMENTBY-1: SIR THOMAS BINGHAM MR
JUDGMENT-1:
SIR THOMAS BINGHAM MR: There are several appeals
before the Court. They arise in actions now awaiting trial in the Commercial
Court. In each action the plaintiffs are Underwriting Members (Names) at
Lloyd's. In each the defendants include the Names' Underwriting Agents, some of
these being Members' Agents, some Managing Agents and some both.
These actions are but a few of those now
proceeding in the Commercial Court. In order to simplify and shorten the trial
and preparation of these cases, Saville J ordered, with the consent and
co-operation of the parties, that a number of issues of principle common to
many of the actions be determined as preliminary issues. These issues, largely
directed to deciding whether Underwriting Agents (and if so, which) owed a duty
of care to their Names, were plainly fundamental to the outcome of the actions.
Saville J heard argument on the issues and gave
judgment on 12 October 1993. He ruled in favour of the Names. The Underwriting
Agents now appeal. Having heard argument in this Court, I find myself in
agreement with the judge, for the reasons which he very clearly and succinctly
gave.
Background
A Name who is not a professional underwriter has
at all material times been required to appoint an Underwriting Agent to conduct
the underwriting on his behalf. Such Agents are known as Members' Agents and
the appointment is made under an Underwriting Agency Agreement. The actual
underwriting is done on behalf of the Name through a Syndicate of which the Name
(with other Names) is a member. Such Syndicates are managed by Managing Agents,
who employ a professional ("active") underwriter. Sometimes the
Underwriting Agent is both the Members' Agent and Managing Agent : the Name is
then called a direct Name, because he is in direct contractual relations with
the Managing Agent. Sometimes the Members' Agent does not combine these roles,
but appoints a Managing Agent under a Sub-Agency Agreement to conduct the
actual underwriting : the Name is then called an indirect Name, because he has
not been thought to have a direct contractual relationship with the Managing
Agent.
Before 1987 there was no prescribed form of
agreement between Name and Underwriting Agent. Some variation in the terms of
these agreements was accordingly to be found. But to a large extent the terms
of these agreements were standard and there was in practice a high degree of
uniformity. We have before us what is accepted as being a typical pre-1987
agreement. It was made in October 1982 between a Name and Merrett Syndicates
Limited as Underwriting Agent. This company in fact combined the roles of
Members' Agents and Managing Agents and so, under this agreement, the Name was
a direct Name. But had the Underwriting Agent been a Members' Agent only, the
same form of agreement would have been used; then, however, the Members' Agent
would have entered into a sub-agency agreement with a Managing Agent. We have a
sample of such a sub-agency agreement before us, dated March 1978. It can be
treated as typical.
In 1985 the Council of Lloyd's exercised its
statutory powers to make The Agency Agreements Byelaw. This prescribed a
standard form of agency agreement and a standard form of sub-agency agreement.
Subject to transitional provisions (to which reference must be made below) the
Byelaw prohibited the underwriting of insurance business at Lloyd's after 31
December 1986 save under the standard form of agency or sub-agency agreement.
Thus the form of agreement became mandatory and standardised. But the structure
described above remained intact. If the Underwriting Agent was to combine the
roles of Members' Agent and Managing Agent, the Name entered into one agreement
only, the Standard Agency Agreement. He remained a direct Name. If, however,
the Underwriting Agent was to act as Members' Agent only, the Name entered into
the Standard Agency Agreement with the Underwriting (Members') Agent and the
Underwriting (Members') Agent entered into the Standard Sub-Agency Agreement
with the Underwriting (Managing) Agent. The Name remained an indirect Name.
The distinction between direct and indirect
Names came to an end in 1990. The Name himself then entered into a Members'
Agents' Agreement and a Managing Agents' Agreement, and the Sub-Agency
Agreement which had been made under the 1985 Byelaw was replaced by a different
form of Agreement between Members' and Managing Agents. For present purposes it
is not necessary to examine the detail of these Agreements, since no issue
arises on them. It is enough to note that there was no longer a distinction
between direct and indirect Names.
In considering what, if any, duties were owed to
Names by different types of Underwriting Agents at different times, it would be
logical to begin with the pre-1987 agreement between Names and Underwriting
Agents acting as Members' Agents only. This is a live issue between the Merrett
Names and the Merrett Members' Agents. But it was agreed that Saville J should
not rule on the obligations owed to the Merrett Names by their Members' Agents
before 1987, and there is accordingly no appeal before us on that point. It is
agreed that anything said in relation to any other issue which bears on that
point is not to bind the Merrett Names and the Merrett (pre-1987) Members'
Agents.
Issue 1
The first issue which the judge ordered to be
tried concerned the liability of Managing Agents to Names under the forms of
agreement in force before 1987. The declaration which he made was in these
terms :
"(1) That Managing Agents of syndicates at
Lloyd's did owe a tortious duty of care to Names (whether direct or indirect
Names) to conduct the underwriting business for the account of Names with
reasonable care and skill for the 1979 to 1985 underwriting years of account
(inclusive), including a duty of care in relation to the assessment or
effecting of any RITC and in fixing the premium therefor.
(2) That the terms of the pre-1985 Byelaw
Agreements (and, in particular, the true and proper construction of the
expression "absolute discretion" in clauses 6(a) and 7(e) of such
Agreements) did not have the effect that any cause of action or remedy in
damages or otherwise concerning decisions taken by a Managing Agent in the
management and conduct of the underwriting business for the 1979 to 1985
underwriting years of account (including decisions to accept risks and
decisions taken in effecting an RITC) was precluded from arising save insofar
as alleged and shown that the decisions were taken in bad faith or dishonestly,
or were totally unreasonable."
Both the issue as framed and the declaration as
made relate to both indirect and direct names. But the arguments are not
exactly the same in relation to each, and for convenience of analysis I shall
separate them.
Q1 Did Managing Agents (who were not also
Members' Agents) owe Names a duty under the pre-1987 forms of agreement to
carry out their underwriting functions with reasonable care and skill?
It was argued for the Merrett Managing Agents
that they did not, for two main reasons :
(1) because the Managing Agents had absolute
discretion in the acceptance of risks and settlement of claims and this
excluded any duty other than a duty to act honestly, rationally and loyally;
and
(2) because the law of tort did not impose on
the Managing Agents a duty in tort not to cause economic loss to the Names.
These points require separate consideration.
Absolute discretion
The pre-1987 agreement between Name and
Underwriting (Members') Agent contained the following terms relevant for
present purposes :
"1. The Agent shall act as the Underwriting
Agent for the Name for the purposes of underwriting at Lloyd's for the account
of the Name policies and contracts of insurance reinsurance and guarantee
relating to all classes of insurance business which with the sanction of the
Committee of Lloyd's may be transacted at Lloyd's by the Syndicate.
.....
4. The Agent shall have full power and authority
to appoint and employ the Sub-Agent to carry on or manage the underwriting and
to delegate to or confer upon the Sub-Agent all or any of the powers
authorities discretions and rights given to the Agent by this Agreement.
.....
6.(a) The Agent shall have the sole control and
management of the underwriting and absolute discretion as to the acceptance of
risks and settlement of claims whether such claims shall in the opinion of the
Agent be legally enforceable or not.
.....
(d) The Name shall not in any way interfere with
the exercise of the aforesaid control or management or discretion.
7. The following provisions shall apply
concerning the Accounts of the underwriting:-
.....
(e) The Syndicate Account of any calendar year
shall not be closed before the expiration of the two calendar years next
following the calendar year in question and in order to close the Syndicate
Account of any year the Agent may:-
(i) re-insure all or any outstanding liabilities
in such manner and by debiting such Account with such sum as the Agent shall in
the absolute discretion of the Agent think fit as a premium for reinsurance and
crediting the reinsurance premium to the Syndicate Account of the next
succeeding year or
(ii) re-insure all or any outstanding
liabilities of such Account into the Account of any other year then remaining
open or in any other manner which the Agent thinks fit or
(iii) allow the whole or part of a Syndicate
Account of any year to remain open until its outstanding liabilities shall have
run off
.....
12.(a) The Agent may from time to time retain
out of the profits of the underwriting which would otherwise be payable to the
Name any moneys which the Agent may in the absolute discretion of the Agent
(subject to any requirements prescribed by Lloyd's) think desirable to carry to
reserve and such moneys may be placed on deposit at any bank or discount house
or public or local authorities or building society or may be invested in such
stocks funds shares or securities (including bearer securities) in any part of
the world as the Agent may determine and the Agent shall not be responsible for
any loss of principal or interest on such deposits or investments. Interest or
dividends earned on any such deposits or investments shall be credited to the
Name in respect to the Name's due proportion thereof."
The form of sub-agency agreement between
Members' Agent and Managing Agent which is accepted for present purposes as
typical contained these relevant terms :
"2. The Sub-Agent agrees and is retained
and authorised to act as Underwriting Sub-Agent for the Agent for the purpose
of Underwriting at Lloyd's in the names and for the account of each of the Names
policies and contracts of insurance reinsurance and guarantee relating to all
classes of insurance business which with the sanction of the Committee of
Lloyd's may be transacted as Insurance Business and of carrying on for each of
the Names the business of Marine Underwriter at Lloyd's and the appointment of
the Sub-Agent shall take effect in respect of each of the Names on and from the
date specified in the second column of the Schedule hereto opposite the name of
each of the Names.
.....
5. The Agent delegates to the Sub-Agent the
exercise of all such powers authorities discretions and rights conferred upon
the Agent by the Underwriting Agency Agreement as it may be in any way
necessary for the Sub-Agent to have to enable the Sub-Agent or any Underwriter
or agent appointed by the Sub-Agent to carry on the underwriting for the Names
and to close the accounts of the Names.
6. Subject to the provisions of Clause 7 hereof
the Underwriting shall be conducted and the accounts thereof shall be kept and
made up and the profits ascertained in such manner as the Sub-Agent may for the
time being think fit and the Sub-Agent shall have the sole control and
management of the Underwriting and sole discretion as to the acceptance of
risks and the compromise or settlement of claims.
.....
8. All questions relating to the investment of
premiums and other monies not required for the current service of the
Underwriting and to the time and manner of paying over profits and the placing
of sums to a reserve shall be decided by the Sub-Agent and subject as aforesaid
the Sub-Agent shall pay over the profits of the Underwriting to the Agent for
distribution to the Names."
There is some difference in the language of the
two agreements but no significance has been said to attach to that.
It was argued for the Managing Agents, in
reliance on the terms of the first agreement particularly, that where an
agreement conferred on an agent a power to be exercised in his absolute
discretion, the donor could not challenge the agent's exercise of that power
save by alleging bad faith or perhaps that the exercise of the power had been
wholly unreasonable or in breach of a duty of loyalty. Any challenge based on
lack of due care and skill was, it was said, inconsistent with the breadth of the
discretion conferred on the agent. Reference was made to a number of cases said
to support this submission.
I do not think it necessary to review this
authority because none of it arose from facts at all close to those before us
and the meaning and effect of an expression such as "absolute
discretion" are in my judgment closely governed by the contractual context
in which the expression appears.
The crucial clause here is clause 6(a) of the
agreement between Name and Members' Agent. This makes plain, because it says,
that the Agent alone is to have control and management of the underwriting. It
also makes plain, in my judgment, that in accepting risks and settling claims
(a) the Agent's authority is not limited and (b) the Agent is not subject to
the directions of the Name. There is, however, nothing in the language to
suggest (what would, if spelled out, have surely been unacceptable) that in
exercising the power conferred on him the Agent was absolved from the duty
ordinarily binding on any professional agent to exercise reasonable care and
skill.
I cannot improve on the reasons given by the
judge for rejecting this submission at page 6 line 18 to page 7 line 22 of his
judgment, which it is unnecessary to repeat. I would, however, observe that any
successful claim against the Agent in negligence would, as in any other case,
have to show a failure to show the standard of skill and care reasonably to be
expected of such an Agent at the time and with the knowledge that he had or
should have had. His judgment could not be impugned simply because events
showed it to be wrong. A decision taken under clause 7(e)(i) could not easily
be challenged.
Tortious duty not to cause economic loss
The Managing Agents' argument on this point
assumed what, as I have explained, we cannot decide, that under the pre-1987
agreements the Members' Agent owed the Name a contractual duty of care. So, it
was said, this was another case in which the parties had constructed a
contractual chain under which the indirect Name looked to his Members' Agent
and the Members' Agent alone looked to the Managing Agent. Authority showed the
extreme reluctance of the courts to recognise a tortious duty to take
reasonable care not to cause economic loss. There was no authority which
justified doing so in a case such as the present. The fact that the Names faced
limitation problems in pursuing claims in contract against those with whom they
were in contractual relations provided no warrant for imposing a duty on those
with whom they were not in contractual relations.
To state the argument is enough to indicate that
one is entering the Flanders of the modern English law of tort. Recent and very
familiar authority makes plain that the principled approach to problems of this
kind based on Anns v Merton London Borough Council [1978] AC 728, [1977] 2 All
ER 492, is no longer to be followed. Foreseeability of damage to the plaintiff
is still an essential requirement; so is the existence of a proximate
relationship; but the court will not impose a duty on a defendant to take
reasonable care not to cause a plaintiff purely economic loss unless satisfied
that it is in all the circumstances fair and just to do so. In making this last
decision, the court will have regard in particular to whether the case falls within
any established class of case in which a duty has been recognised. If not, and
an extension is sought beyond established classes of case in which a duty has
been recognised, the court will accede, if at all, only by taking small and
cautious steps.
I do not, again, think it necessary to make any
detailed review of the many authorities on this subject, nor the abundant
academic commentary. For to my mind it is clear, despite the contrary arguments
of counsel and despite the existence of a contractual chain, that the Managing
Agents did owe a tortious duty to the Names to take reasonable care not to
cause them economic loss. I cannot, again, improve on the judge's reasons,
which on this occasion I quote:
"To my mind the relationship between an
indirect Name and the Managing Agents provides a classic instance of a
relationship in which a duty to exercise reasonable care and skill is imposed
by law upon the latter in favour of the former. The relationship is a
professional one. The Managing Agents are in effect paid by the Name to use
their special expertise for the purpose of conducting underwriting business at
Lloyd's on behalf of the Name, with, as I have pointed out, the widest possible
powers and discretions. They assume responsibility for underwriting for the
Name at Lloyd's. They act directly for the Name, who relies (to an unlimited
extent and as the Managing Agents must realise) upon the skill and expertise of
the Managing Agents in committing the Name to contractual obligations to third
parties and in otherwise conducting the affairs of the Name at Lloyd's in
relation to the Syndicates in question. In truth the Name is the client of the
Managing Agents, for the latter conducts the underwriting business for the Name
rather than for the Members' Agents. To my mind the classic tests of
foreseeability, proximity and fairness and reasonableness are more than met in
the present circumstances."
The judge held that the present case fell within
an existing category which had already been clearly established, as exemplified
by cases such as Punjab National Bank v De Boinville [1992] 1 Lloyd's Rep 7,
and added :
"There is a business relationship between
the parties in which the one party for reward provides professional services to
the other for financial and investment purposes and where the latter relies and
is known to rely on the skill and expertise of the former in providing those
services".
This statement was criticised as being too wide,
and it may be so. The suggestion that the Punjab National Bank case exemplified
a category into which this case falls was also criticised. The question whether
case A falls into the same established category as case B is capable of
becoming somewhat scholastic and sterile. It is certainly true that the Punjab
National Bank case involved insurance brokers, not Lloyd's underwriting agents,
and the duty was held to be owed to the bank as prospective assignee. Staughton
LJ said (at page 36):
"In those circumstances it seems to me a
justifiable increment to hold that an insurance broker owes a duty of care to
the specific person who he knows is to become an assignee of the policy, at all
events if (as in this case) that person actively participates in giving
instructions for the insurance to the broker's knowledge."
These words cannot be applied directly to the
present facts. But just as the Court in that case gave effect to the commercial
common sense of the situation, so in my view the judge rightly did in the
present case. For the reasons which the judge gave it is not easy to think of a
non-contractual commercial relationship in which a duty of care more obviously
ought to exist than the relationship of Managing Agent and indirect Name.
There was some argument before us, as before the
judge, relating to fiduciary duty. He did not refer to this matter in his
judgment, and I share his view that it does not advance the argument. I am very
willing to accept that the Managing Agents' relationship with the Names can be
described as fiduciary. But the finding of such a relationship does not
preclude the finding of a duty of care. It makes such a duty, if anything, more
likely, not less. So I do not think this helps the Managing Agents.
Q2 Did Managing Agents (who were also Members'
Agents) owe Names a non-contractual duty under the pre-1987 forms of agreement
to carry out their underwriting functions with reasonable care and skill?
This question concerns the direct Names, those
in direct contractual relations with the Managing Agents. It is the existence
of this direct contract which founds the additional argument. The argument is
that where A and B have entered into a contract which governs relations between
them and regulates the duty of care owed by B to A, the courts will not subject
B to a concurrent duty of care in tort, least of all where the result is to
enable A to escape from the limitation period which Parliament has imposed on
A's claims against B in contract. (In the case of indirect Names, it was
pointed out, the finding of such a concurrent duty would, if Managing Agents
were also subject to such a duty, render the Members' Agents and the Managing
Agents joint tortfeasors, with all the injustice to which that result could
give rise).
The launching pad of the Managing Agents'
argument on this point was the passage in the advice of the Privy Council,
delivered by Lord Scarman, in Tai Hing Cotton Mill Limited v Liu Chong Hing
Bank Ltd [1986] AC 80, [1985] 2 All ER 947 at page 107 of the former report. It
has been cited so frequently as to obviate the need for repetition. The
Managing Agents were able to point to a growing body of support for Lord
Scarman's approach : see, for instance, Lee v Thompson [1989] 40 EG 89, [1989]
2 EGLR 151, per Lloyd LJ; National Bank of Greece SA v Pinios Shipping Co (No
1) [1990] 1 AC 637, [1989] 1 All ER 213 per Lloyd LJ at 650 of the former
report; and The Eras EIL Actions [1992] 1 Lloyd's Rep 570 at 597-600 per
Mustill LJ.
I would for my part reject this argument, for
three main reasons. First, it is not in my view open to this Court to accept
the argument on the authorities as they stand. Against the dicta relied on,
none of which has more than persuasive authority (however great), must be set
decided cases at all levels, including Esso Petroleum Co Ltd v Mardon [1976] QB
801, [1976] 2 All ER 5, at page 819 of the former report; Midland Bank Trust Co
Ltd v Hett, Stubbs & Kemp [1979] Ch 384, [1978] 3 All ER 571; DW Moore
& Co Ltd v Ferrier [1988] 1 All ER 400, [1988] 1 WLR 267;
Forsikringsaktieselskapet Vesta v Butcher [1989] AC 852, [1988] 2 All ER 43;
Iron Trades Mutual Insurance Co Ltd v JK Buckenham Ltd [1989] 2 Lloyd's Rep 85;
The "Superhulls Cover" case [1990] 2 Lloyd's Rep 431; Bell v Peter
Browne & Co [1990] 2 QB 495; Caparo Industries plc v Dickman [1990] 2 AC
605, [1990] 1 All ER 568 at page 619 of the former report; Nitrigin Eireann
Teoranta v Inco Alloys Ltd [1992] 1 All ER 854, [1992] 1 WLR 498 at page 503 of
the latter report; Lancashire and Cheshire Association of Baptist Churches Inc
v Howard & Seddon Partnership [1993] 3 All ER 467. If the basis upon which
so many cases have been decided is to be disturbed, it must be the House of
Lords and not this Court which lays down the new law.
Secondly, I regard it as important to note the
context in which Lord Scarman's observations were made. In Tai Hing the banks'
primary argument was that, by virtue of terms to be implied into the contracts
between them and their customer, the customer owed them duties beyond those
recognised in London Joint Stock Bank Ltd v Macmillan [1918] AC 777 and
Greenwood v Martins Bank Ltd [1933] AC 51. That argument the Privy Council
roundly rejected. If, therefore, the banks were to succeed, it had to be by
establishing a tortious duty of care more extensive than that for which the
relevant contracts provided. That was not a promising contention and I am not
surprised that the Privy Council declined to accept it. It is, however,
noteworthy why it was not accepted. At page 107 G Lord Scarman said :
"Their Lordships do not, however, accept
that the parties' mutual obligations in tort can be any greater than those to
be found expressly or by necessary implication in their contract. If,
therefore, as their Lordships have concluded, no duty wider than that
recognised in Macmillan [1918] AC 777 and Greenwood [1933] AC 51 can be implied
into the banking contract in the absence of express terms to that effect, the
banks cannot rely on the law of tort to provide them with greater protection
than that for which they have contracted."
In the present case the Names do not rely on the
law of tort to provide a duty more extensive or far-reaching than the
contractual duty. The duty contended for is the same, irrespective of its
source. To that extent the ratio of the Privy Council's decision on this point
is inapplicable here. It is of course true that by establishing a duty of care
in tort the Names gain the benefit of a more advantageous limitation period. It
is also true that this is one of the results of a concurrent duty in contract
and tort which caused Lord Scarman concern. But the Names do not have to
overcome the formidable difficulties which face a plaintiff seeking to
establish a tortious duty inconsistent with a contractual duty.
Thirdly, even if (contrary to my view) it were
open to this Court to accede to this argument in principle, I would not for my
part be willing to do so. That is not because I regard the existing state of
the law as satisfactory; I understand and share the misgivings expressed on the
subject by distinguished judges and academic authorities. But I think it would
be productive of injustice in many cases if the principle contended for were to
be adopted, so as to preclude concurrent duties in contract and tort, without
at the same time
(a) modifying the English contract rules of
consideration and privity, so as to enable those for whose benefit a contract
is made to sue on it; and
(b) modifying the English limitation rr in
contract, so as to ensure that a party could not lose his cause of action
before he knew he had it.
The present law has developed, untidily but
pragmatically, to enable the courts to do justice despite these rules. Other
legal systems have developed other, and possibly better, solutions. But I would
not be willing to jettison the best solution we have unless it were to be replaced
by a better.
Issue 2
The second major issue argued before us
concerned the liability of Members' Agents who were not also Managing Agents
for the defaults of the Managing Agents in the conduct of the Names'
underwriting under the post-1987 forms of agreement. The issue to be tried was
framed in the Feltrim case in this way :
"(1) In relation to Agency Agreements
entered into between Names and Members' Agents in the standard form provided
for by Lloyd's Byelaw No.1 of 1985 :
(a) Whether it was a term of the said Agency
Agreements that the actual underwriting would be carried on with reasonable
care and skill;
(b) Whether it was a term of the said Agency
Agreements that the Members' Agent was only required to exercise reasonable
skill and care in relation to such activities and functions as Members' Agents,
by custom and practice, actually perform for their Names personally;
(c) Whether under the said Agency Agreements and
the standard form of Sub-Agency Agreement provided for by Lloyd's Byelaw No. 1
of 1985, there was a direct contractual relationship of principal and agent as
between Names and the Managing Agents of Syndicates in which Names
participated;"
The judge's ruling on these issues was as
follows:
"(1) That, in relation to Agency Agreements
entered into between Names and Members' Agents in the standard form provided
for by Lloyd's Byelaw No.1 of 1985 :
(a) it was a term of the said Agency Agreements
that the actual underwriting would be carried on with reasonable care and
skill, so that the Members' Agent remained directly responsible to its Names
for any failure to exercise reasonable care and skill by the Managing Agent of
any syndicate to whom such underwriting had been delegated;
(b) there was no term of the said Agency
Agreements that the Members' Agent was only required to exercise reasonable
skill and care in relation to such activities and functions as Members' Agents,
by custom and practice, actually perform for their Names personally;
(c) under the said Agency Agreements and the
standard form of Sub-Agency Agreement provided for by Lloyd's Byelaw No.1 of
1985, there was no direct contractual relationship of principal and agent as
between Names and the Managing Agents of syndicates in which Names
participated."
The Members' Agents' argument rested on two
major contentions:
(1) Members' Agents who were not Managing Agents
were not permitted to conduct the Names' underwriting business.
(2) Under the standard form of Agency Agreement
prescribed by the Agency Agreements Byelaw Members' Agents did not in fact or
in law undertake responsibility for the Names' underwriting business.
Hence, it was said, Members' Agents owed no duty
of care to Names in relation to the conduct of underwriting which they were not
allowed to, did not agree to, and did not undertake.
The first of these contentions rested on The
Underwriting Agents Byelaw (No 4 of 1984) and is undoubtedly correct. A
Members' Agent is defined to mean an Underwriting Agent which acts on behalf of
a Name in accordance with a direct contractual relationship with that Name in
respect of the Name's business at Lloyd's "but does not (or to the extent
that it does not) perform any of the functions of a managing agent". A
Managing Agent is defined to mean an Underwriting Agent which performs for the
Name one or more of the functions of underwriting contracts of insurance at
Lloyd's, reinsuring such contracts in whole or in part or paying claims on such
contracts. Clause 4 of the Byelaw prohibits any person to act as a Members'
Agent or Managing Agent unless registered as such. The Members' Agents with
which we are concerned here were not registered as Managing Agents and so could
not perform the functions reserved to Managing Agents.
The second contention rested primarily on the
terms of the standard form of Agency Agreement prescribed by The Agency
Agreements Byelaw. It is necessary to quote the following clauses :
"2(a) The Agent shall act as the
underwriting agent for the Name for the purpose of underwriting at Lloyd's for
the account of the Name such classes and descriptions of insurance business,
other than those prohibited by the Council, as may be transacted by the
Syndicate (hereinafter referred to as "the underwriting business").
(b) In acting as underwriting agent for the Name
the Agent shall at all times comply with the byelaws, regulations and
requirements for the time being of the Council affecting the Name as an
underwriting member of Lloyd's. Provided that if and to the extent that any
provision of this Agreement shall be inconsistent with any such byelaw,
regulation or requirement such inconsistent provision shall be deemed to be
modified or cancelled so far as may be necessary or appropriate to the intent
that the byelaw, regulation or requirement in question shall prevail and have
full effect.
.....
4.(a) The Agent is authorised, and such
authority shall continue to subsist so far as may be appropriate until the
winding-up of the underwriting business shall have been completed, to exercise
such powers as the Agent may consider to be necessary or desirable in
connection with or arising out of the underwriting business, including without
prejudice to the generality of the foregoing:
(i) the acceptance of risks and the effecting of
reinsurance, including reinsurance for the purpose of Clause 5(g) hereof;
.....
(b) Without prejudice to the generality of the
provisions of sub-clause (a) of this Clause, the Agent shall have the following
customary and/or special powers in connection with the conduct and winding-up
of the underwriting business:
(A) Compliance with statutory provisions and
with requirements of Lloyd's: Power to comply on behalf of the Name with the
requirements prescribed by Lloyd's Acts 1871 to 1982, the Insurance Companies
Act 1982 and all other statutory provisions, byelaws, regulations and
requirements for the time being in force and affecting the Name as an
underwriting member of Lloyd's.
.....
(G) Delegation of Agent's powers.
Power, subject to any requirements of the
Council, to appoint to employ any person, firm or body corporate to carry on or
manage the underwriting business or any part thereof, and to delegate or to
confer upon any person, firm or body corporate all [or] any of the powers,
authorities and discretions given to the Agent by this Agreement including this
power of delegation and the other powers contained in this paragraph.
5.(a) The Agent shall have the sole control and
management of the underwriting business and the Name shall not in any way
interfere with the exercise of such control or management.
(b) The underwriting business shall be conducted
in the same manner as may for the time being be adopted by the Agent for the
other members of the same Syndicate for whom the Agent for the time being acts
as underwriting agent.
.....
(g) In order to close the underwriting account
of any year the Agent may:
(i) reinsure all or any outstanding liabilities
in such manner as the Agent shall think fit, including the debiting of such
account and the crediting of the underwriting account of the next succeeding
year with such reinsurance premium as the Agent in its absolute discretion
(subject to any requirements of the Council) thinks fair or
(ii) reinsure all or any outstanding liabilities
into the underwriting account of any other year then remaining open or in any
other manner which the Agent (subject as aforesaid) thinks fair.
.....
6. The following provisions shall apply
concerning the accounts and accounting records of the underwriting business:
(a) The Agent shall comply with, or procure
compliance with, the byelaws, regulations, or requirements of the Council from
time to time dealing with accounting to underwriting members of Lloyd's.
.....
8.(a) The Name shall pay to the Agent as
remuneration for the services of Agent a fee at the rate per annum specified in
the Syndicate Schedule.
.....
9.(a) The Name shall keep the Agent at all times
in funds available for the payment of the liabilities, expenses and outgoings
of the underwriting business......"
The form of Agreement contained an arbitration
clause in general terms, but the Name was also obliged to enter into a binding
Syndicate and Arbitration Agreement, also in a prescribed form, with the other
members of his Syndicate, with all Members' Agents on the Syndicate Stamp and
with the Managing Agent of the Syndicate. Clause 3(a) of the Syndicate and
Arbitration Agreement provided :
"Any disputes, differences, questions or
claims whatsoever between any one or more or all of the Names, the Members'
Agents and the Agent, whether in contract, tort or otherwise, arising at any
time and in any way out of or in connection with or in relation to the
Syndicate or to its constitution or business (hereinafter called
"Syndicate disputes") shall be referred to arbitration in London by a
sole Arbitrator to be appointed at the instance of any of such Names, Members'
Agents or the Agent by the Chairman or a Deputy Chairman of Lloyd's for the
time being."
Where, as in the case under consideration, the
Members' Agent was not also the Managing Agent, the Members' Agent entered into
the prescribed form of Sub-Agency Agreement with the Managing Agent. In this
Agreement the parties are described as "the Agent" and "the
Sub-Agent" respectively. I should quote the following terms :
"Whereas the Agent is the underwriting
agent at Lloyd's for certain underwriting members of Lloyd's and it has been
arranged between the Agent and the Sub-Agent that the Sub-Agent shall act as
the sub-underwriting agent for one or more of such underwriting members upon
the terms hereinafter mentioned.
.....
2. The Sub-Agent shall act as sub-agent for the
Agent for the purpose of conducting in the names and for the account of each of
the Agent's Names that part of the underwriting business as defined in Clause
2(a) of the Agency Agreement which is to be transacted by such Name as a member
of the Syndicate (hereinafter called "the Syndicate underwriting
business"); and (unless it shall appear otherwise from the Schedule) the
appointment of the Sub-Agent shall take effect in respect of each of the
Agent's Names on and from the 1st January of the year in respect of which the
name of such Name shall first appear in Part I of the Schedule.
3.(a) The Sub-Agent shall underwrite for the
Agent's Names as part of the Syndicate, unless it shall appear from any
Supplementary Provision that the Agent's Names are to form a separate section
or group within the Syndicate, in which event the expression
"Syndicate" shall mean exclusively the Agent's Names for the purposes
of Clause 17 of the Agency Agreement.
.....
5.(a) The Agent delegates to the Sub-Agent the
performance of all such duties and the exercise of all such powers, authorities
and discretions imposed or conferred upon the Agent by the Agency Agreement
(including without prejudice to the generality of the foregoing the power of
delegation contained in that Agreement) as it may be appropriate or necessary
for the Sub-Agent to perform or exercise for the purpose of carrying on the
Syndicate underwriting business.
.....
7.(a) The Sub-Agent shall conduct the Syndicate
underwriting business in such manner as to comply with the provisions of the
Agency Agreement and Lloyd's byelaws and regulations and as to have regard for
Lloyd's Codes of Conduct or similar forms of guidance for the Lloyd's market.
.....
12.(a) The Agent undertakes to put and keep the
Sub-Agent at all times in funds to such extent as the Sub-Agent shall in its
sole discretion determine to be requisite for payment of all liabilities,
expenses and outgoings from time to time payable in connection with the
Syndicate underwriting business but (subject to any Supplementary Provision)
only to the extent that the Agent shall be able to enforce against a Name the
provisions of the Agency Agreement."
In the earlier case of Boobyer v David Holman
& Co Ltd (No.2) [1993] 1 Lloyd's Rep 96 at page 97 Saville J had said, with
reference to this form of Agency Agreement (described as "the old form of
contract") :
"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 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."
In argument before the judge this analysis was
criticised but the judge adhered to it. He said, in his judgment under appeal
at page 15 :
"To my mind there is nothing in the Byelaw
to prohibit Members' Agents from undertaking to underwrite on behalf of the
Name at Lloyd's. What is prohibited is the Members' Agents themselves
personally carrying out that undertaking, but the Agreement makes full
provision for this by giving the Members' Agents wide powers of delegation -
see Clause 4(b)(G). In other words the Members' Agents can perfectly lawfully
undertake to underwrite on behalf of the Name provided they
"delegate" (the word used in the Agreement) their authority from the
Name to do so to those who can lawfully carry out these functions. Despite Mr
Eder's careful analysis of various clauses in the Standard Agency Agreement, I
remain convinced that under that Agreement and by reason of the plain words
used the Members' Agents do undertake to conduct on behalf of the Name the
underwriting business of the Name at Lloyd's, including that which it is the
function of the Managing Agents actually to perform."
In argument for the Members' Agents this passage
also was criticised. It was said that the judge had relied on "the plain
words used" without saying what they were and the Names were challenged to
identify where in the Agency Agreement the Members' Agents undertook to
underwrite on behalf of the Names. The Names responded to that challenge by pointing
to clause 2(a). I have no difficulty in accepting that answer and I share the
judge's view that the meaning is plain. The function of the Members' Agent is
there laid down; his powers are prescribed in clause 4(a); and if The
Underwriting Agents Byelaw prevents him carrying out the underwriting he has a
comprehensive power (which in effect becomes a duty) to delegate under clause
4(b)(G).
The judge gave three additional reasons for
rejecting the Members' Agents' arguments, each of which I find convincing :
(1) The standard form of Agency Agreement was
the form used not only, as here, where the Members' Agents acted in that
capacity alone but also where the Members' Agents acted as Managing Agents
also. In the latter case, it seems clear, an obligation to conduct the Names'
underwriting business was undertaken. It is hard to see how the meaning of the
Agreement can alter according to whether "the Agent" is or is not
permitted to act as Managing Agent.
(2) If the meaning and effect of the Agency
Agreement were as the Members' Agents contended it was a very remarkable piece
of drafting to confer these powers and discretions on the Members' Agent with
power to delegate rather than authorising the Members' Agent to give the
necessary powers and discretions to the Managing Agents.
(3) On the Members' Agents' argument, no one
gave a contractual commitment to underwrite for the Name, since the Members'
Agents would not on this argument have done so and they could not delegate a
duty they did not have. It is hard to think that the Agency Agreements Byelaw
intended to create such an obvious lacuna.
The Members' Agents sought to meet this last
objection by suggesting that the effect of the Agency and Sub-Agency Agreements
was to establish privity of contract between the Name and the Managing Agent.
Reliance was placed on De Bussche v Alt (1878) 8 Ch D 286 at pages 310-11 and
Powell & Thomas v Evan Jones & Co [1905] 1 KB 11 at pages 17, 22-23.
Neither of these decisions is, perhaps, as clear as it might be, and Bowstead
(15th edn, p 130, art 36) formulates the rule that
"(2) The relation of principal and agent
may be established by an agent between his principal and a sub-agent if the
agent is expressly or impliedly authorised to constitute such relation, or if
his act is ratified, and it is the intention of the agent and of such sub-agent
that such relation should be constituted.
(3) But there is no privity of contract between
a principal and a sub-agent as such, merely because the delegation was effected
with the authority of the principal ......".
Like the judge, I think the language of the
Sub-Agency Agreement points against the Members' Agents' argument. Had it been
intended to create a direct contractual relationship between Name and Managing
Agent, one would have expected the Managing Agent to be appointed as Agent for
the Name and not for the Agent in clause 2 and one would have expected the Name
and not the Members' Agent to be obliged to keep the Managing Agent in funds
under clause 12(a). But this point is not, as was accepted, determinative :
even if, in the circumstances, a direct contractual relationship was
established between Name and Managing Agent it would not shake my view, based
on the construction of the Agency Agreement, that the Members' Agent also undertook
an obligation to the Name to underwrite on his behalf.
Issue 3
On behalf of the Members' Agents an alternative
submission was advanced : if (contrary to their primary and fundamental
submission) they were responsible for the way in which the Names' underwriting
was conducted, then their responsibility was for the underwriting as a whole.
The judge addressed this argument in his
judgment and rejected it. He said:
"I now turn to what Mr Eder described as
his "alternative submission". This was that if the Members' Agents
were contractually responsible for the way in which the underwriting was
performed, this responsibility related to the carrying on of the underwriting
business of the Name as a whole. It followed, submitted Mr Eder, that it will
be necessary to look at the entirety of the underwriting business conducted for
the Name in order to decide whether the Members' Agents have failed to perform
their obligation to exercise reasonable care and skill. By way of example Mr
Eder instanced a case where it was alleged that the Managing Agents of a
particular Syndicate of the Name had written a very narrow and risky range of
business, but where other Syndicates of that Name managed by others had covered
different risks, so that the proportion of this kind of risky business in the
Name's portfolio as a whole did not exceed that which a reasonably competent,
diligent and efficient underwriter would regard as perfectly acceptable. In
such circumstances how could it be suggested that the Members' Agents had broken
their promise to the Name to underwrite with reasonable care and skill?
In my judgment, to the extent that this argument
is intended to encompass a case where those actually conducting insurance
business on behalf of the Name fell below the required standard, it is
fallacious. It seems to me that in respect of any given allegation of negligent
underwriting the question is simply whether what was done (or omitted to be
done) fell below the standard to be expected of a reasonably competent,
diligent and efficient professional underwriter. Taking the example, if it were
established that what Managing Agents of the particular Syndicate did fell
below the required standard, then to my mind it follows (since they are the
delegates of the Members' Agents) that the Members' Agents have broken their
promise to the Name to conduct the underwriting to the requisite standard and
are liable (to the extent permitted by other rules of law) for the consequences
of that failure. In the end Mr Eder's submission seems to me to involve the
proposition that the Members' Agents can perform their obligation to act with
reasonable care and skill by employing delegates who act negligently, a
proposition that to my mind has only to be stated to be rejected. The question
whether the Managing Agents have actually acted negligently is of course a
different matter altogether and nothing in this judgment is intended to rule
upon the facts and matters which should be taken into account in determining
that question."
The ruling made by the judge (in the Gooda
Walker case) was:
"it was a term of the said Agency
Agreements that the actual underwriting would be carried on with reasonable
care and skill, so that the Members' Agent remained directly responsible to its
Names for any failure to exercise reasonable care and skill by the Managing
Agent of any particular syndicate to whom such underwriting had been
delegated;".
Read in the light of the carefully expressed
judgment, this ruling seems to me to be correct. It is only negligent conduct
of the actual underwriting by the Managing Agent (or the active underwriter)
which can render the Members' Agent liable. The Members' Agent's liability
cannot be greater than if it had itself conducted the underwriting. The ruling
leaves it open to the Members' Agent to challenge all allegations of breach and
to advance any available defence. But if any underwriting transaction was
conducted without reasonable care and skill it will not avail the Members'
Agents to demonstrate that other underwriting transactions were properly
conducted.
Issue 4
The Agency Agreements Byelaw of 1985, which
required business to be done under the standard forms of agency and sub-agency
agreements after the end of 1986, contained a transitional provision :
"Nothing ... shall prevent an underwriting
agent from running off the insurance business of an underwriting member,
underwritten for a year of account prior to 1st January 1987, in pursuance of
an agency agreement other than a Standard Agency Agreement or a Standard Sub-Agency
Agreement" (my underlining).
The issue was whether, when Names on the 1985
underwriting year reinsured the Names on the 1984 underwriting year, the 1984
Names were "running off" their business on that syndicate. The judge
held not and that that reinsurance to close was governed by the forms of
Agreement required by the Byelaw. His ruling (in the Merrett case) was
"(3) As between the Names (on the one part)
and [Merrett] (on the other part), that on a true and proper construction of
Lloyd's Byelaw (No 1 of 1985), for Names who executed new Underwriting Agency
Agreements pursuant to the said Byelaw, the contractual relationship between
Names on Syndicate 418/417 for the 1985 underwriting year of account ("the
1985 Names") and their respective Members' Agents, and between Names
and/or their respective Members' Agents (on the one part) and the Managing
Agents of that Syndicate (on the other) in relation to the acceptance by or for
the Syndicate in about June 1987 of the reinsurance to close Syndicate 418/417
for the 1984 underwriting year of account was governed by the forms of Agency
and Sub-Agency Agreement set out in the said Byelaw."
I agree.
Summary
In my judgment these appeals must be dismissed.
I would affirm the rulings made by the judge without alteration.
JUDGMENTBY-2: HOFFMANN LJ
JUDGMENT-2:
HOFFMANN LJ: I agree.
JUDGMENTBY-3: HENRY LJ
JUDGMENT-3:
HENRY LJ: I also agree.
DISPOSITION:
Appeals dismissed with costs. Leave to appeal to
the House of Lords refused.
SOLICITORS:
Wilde Sapte; Elborne Mitchell; Richards Butler;
Reynolds Porter Chamberlain; Oswald Hickson, Collier & Co