Deeny v Gooda Walker Ltd (No. 2)
| Jurisdiction | England & Wales |
| Judge | Lord Goff of Chieveley,Lord Browne-Wilkinson,Lord Mustill,Lord Nicholls of Birkenhead,Lord Hoffmann |
| Judgment Date | 07 March 1996 |
| Judgment citation (vLex) | [1996] UKHL J0307-1 |
| Date | 07 March 1996 |
| Court | House of Lords |
[1996] UKHL J0307-1
House of Lords
Lord Goff of Chieveley
Lord Browne-Wilkinson
Lord Mustill
Lord Nicholls of Birkenhead
Lord Hoffmann
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT IN THE CAUSE
My Lords
I have had the opportunity of reading in draft the speech of my noble and learned friend. Lord Hoffmann; and, on the first and principal ground relied upon him in his speech, viz, that the receipt of damages by a Name constitutes a receipt of his underwriting business as a member of Lloyd's, I too would dismiss the appeal.
At the conclusion of his speech Lord Hoffmann addressed the question whether a statement by Diplock L.J. in London and Thames Haven Oil Wharves Ltd. v. Attwooll [1967] Ch. 772, 815, provides an accurate statement of the law. He concluded that it does. However, having regard to the concern expressed on this point by my noble and learned friend, Lord Browne-Wilkinson, a concern shared by the remainder of my noble and learned friends on the Appellate Committee, I am content that the appeal should be dismissed only on the first ground considered by Lord Hoffmann.
My Lords,
I agree that the appeal should be dismissed on the first ground relied on by my noble and learned friend, Lord Hoffmann: the receipt of damages by a Name constitutes a receipt of "his underwriting business as a member of Lloyd's" within the meaning of sections 171 (2) and 184 (1) of the Finance Act 1993, because the Name entered into the contracts with the agents in the course of carrying on that business.
My noble and learned friend, Lord Hoffmann further concludes that, whether or not the contracts with the agents formed part of "his underwriting business," the same result is achieved by applying the statement of law made by Diplock L.J. in London and Thames Haven Oil Wharves Ltd. v. Attwooll [1967] Ch. 772 at p.815 which he quotes. Where compensation is received by a trader, two questions arise viz first, was the receipt of the compensation a receipt of the recipient's business and, second, was such receipt of an income or capital nature? I have no doubt that the test propounded by Diplock L.J. correctly determines the answer to the second of those questions, i.e. whether such compensation falls to be treated as income or capital of the tax payer's trade. As to the first of those questions, in the ordinary run of cases the receipt of a sum by a trader as compensation for the failure to receive what would have been a receipt of his trade will normally demonstrate that the compensation is itself a receipt of that business. But there may be unusual cases where the test propounded by Diplock L.J. might not be appropriate to the correct determination of the question whether the compensation is a receipt of the taxpayer's business. For example, in Higgs v. Olivier [1952] Ch. 311 the Court of Appeal held, rightly or wrongly, that the receipt by an actor of a sum to compensate him for not carrying on part of his trade for a limited period was not a receipt of the actor's trade. It may be that the test propounded by Diplock L.J. would have led to a contrary conclusion. Since it is unnecessary to decide the point in order to determine this appeal, I prefer to express no view whether the test propounded by Diplock L.J. is in all circumstances determinative of whether or not a receipt of compensation is a receipt of the taxpayer's business.
My Lords,
I too agree that the appeal should be dismissed, for the reasons given by my noble and learned friend, Lord Hoffmann in support of the first ground of his decision.
I would however also wish to express my agreement with the observations of my noble and learned friend. Lord Browne-Wilkinson concerning London and Thames Haven Oil Wharves Ltd. v. Attwooll [1967] Ch. 772. In my opinion the question whether a particular receipt is a receipt of the taxpayer's trade must always come first. No doubt in practice it will often be so closely linked to the second question whether if it is a receipt of the trade it is in the nature of interest or capital, that an affirmative answer to one will demand an affirmative answer to the other. But this need not always be so, and I too would prefer to decide this appeal on the first ground alone.
My Lords,
I have had the advantage of reading in draft the speeches of my noble and learned friends, Lord Browne-Wilkinson, Lord Mustill and Lord Hoffmann. I agree that this appeal should be dismissed on the first of the two grounds relied on by Lord Hoffmann. As to the second ground, I agree with the observations of Lord Browne-Wilkinson and Lord Mustill.
My Lords,
This appeal is the latest episode in the storm of litigation which has blown up in the wake of the huge losses suffered by insurance underwriters at Lloyd's a few years ago. It raises a narrow but important point, namely whether damages awarded to a member of Lloyd's in compensation for losses caused by the negligent conduct of the underwriting on his behalf are a taxable receipt of his underwriting business.
1. Underwriting at Lloyd's
Underwriting members of Lloyd's ("Names") are individuals who each carry on insurance business. The way in which the business is conducted has a number of special features, including the following:
(a) members' agents
A Name who is not himself an underwriting agent must carry on his business through an underwriting agent, known as a "members' agent." This is a statutory requirement: see section 8(2) of the Lloyd's Act 1982. The relationship between the Name and his members' agent is governed by a standard form of agency agreement prescribed by a Lloyd's Byelaw and gives the agent wide discretionary powers.
(b) Syndicates and managing agents
For the purposes of writing insurance policies, Names join together in syndicates which usually specialise in the underwriting of particular forms of risk. The managing agent of the syndicate will appoint one or more "active underwriters" who will enter into contracts of the insurance on behalf of all the Names, including sometimes himself. A syndicate is not a legal entity but an aggregate of the Names who have joined the syndicate for a given underwriting year. Nor is a syndicate a partnership: each Name undertakes to be liable for his several share of the risk but not for the share of any other Name.
(c) Sub-agents and combined agents
The Name's members' agent may or may not be the same person as the managing agent of one or more of his syndicates. If they are, they will be called combined agents. If not, the Name's members' agent will enter into a sub-agency agreement in standard form with the managing agent of the syndicate which the Name wishes to join, delegating his discretionary power to carry on the underwriting business on behalf of the Name.
2. The litigation
In the period 1988 to 1990 there occurred a number of catastrophes (such as the total loss of a North Sea oil rig and a hurricane in the United States) which resulted in very large claims being made against certain syndicates. When the extent of the losses became known on the closure of the three-year Lloyd's accounting period, litigation followed. Large numbers of Names sued their members' agents and the managing agents of the loss-making syndicates. They alleged that the losses had been caused by the negligence of the managing agents in the conduct of the underwriting and that the members' agents were contractually liable for that negligence. In Henderson v. Merrett Syndicates Ltd. [1995] 2 A.C. 145, this House decided two questions of principle. The first was that a managing agent owed a duty of care in tort to all members of his syndicate, whether he was acting as combined agent or under a sub-agency agreement. The second was that under the terms of the standard agency agreement, a members' agent was responsible for the negligent conduct of a managing agent to whom, under a sub-agency agreement, he delegated his discretions in carrying on the business of underwriting on behalf of the Name.
The actions with which this appeal is concerned were commenced by Names belonging to syndicates managed by Gooda Walker Ltd. and an associated company. I shall for convenience call them both "Gooda Walker." The defendants were Gooda Walker and the members' agents of those Names for whom Gooda Walker were not combined agents. In a judgment dated 4 October 1994 (unreported), Phillips J. held that Gooda Walker had failed to exercise proper care and skill in the conduct of the underwriting. In consequence, he held that Gooda Walker and the members' agents were liable for such damages as would place the Names "in the same position as if the underwriting carried on on their behalf by each syndicate had been competently performed." More specifically, he held that the damages should be assessed by computing what each syndicate would have received from the reinsurance cover which Gooda Walker ought reasonably to have had in place, less what such cover would have cost. An assessment of damages on these lines has since been undertaken. In the course of that assessment, however, a further question of principle arose. If appropriate reinsurance cover had been in place, the receipts of the syndicate members would have been greater and they would have made profits instead of losses, or at any rate smaller losses. The additional profits would have been liable to income tax. or if there had still been losses, there would have been less to set off against other profits or carry forward to future years. In either case, the Names would have paid more tax. In computing what should be paid to the Names to put them in the same position as if the...
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