Equitas Ltd and Another v Walsham Brothers & Company Ltd

JurisdictionEngland & Wales
JudgeThe Honourable Mr Justice Males,Mr Justice Males
Judgment Date28 October 2013
Neutral Citation[2013] EWHC 3264 (Comm)
Docket NumberCase No: 2011 Folio 1066
CourtQueen's Bench Division (Commercial Court)
Date28 October 2013
Between:
(1) Equitas Limited
(2) Additional Underwriting Agencies (No. 9) Limited
Claimants
and
Walsham Brothers & Company Limited
Defendant

[2013] EWHC 3264 (Comm)

Before:

The Honourable Mr Justice Males

Case No: 2011 Folio 1066

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

COMMERCIAL COURT

Royal Courts of Justice

Strand, London, WC2A 2LL

Mr Christopher Butcher QC and Mr Benjamin Parker (instructed by Slaughter and May) for the Claimants

Mr John Lockey QC, Mr David QuestQC andMr Peter Ratcliffe (instructed by Berwin Leighton Paisner) for the Defendant

Hearing dates: 2, 3, 8 and 9 October 2013

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

The Honourable Mr Justice Males Mr Justice Males

Introduction

1

This action is about the duties of Lloyd's brokers to pass on to their reinsured principals money received from reinsurers in settlement of claims and by way of return of premium, and to pass on to reinsurers payments of premium received from the reinsured, and about the impact on those duties of the Lloyd's Reconstruction and Renewal following the catastrophic losses incurred in the Lloyd's market in the early 1990s.

2

The claimant, Equitas, is the successor to Lloyd's syndicates writing non-life insurance business for the 1992 and all prior years of account. It claims that the defendant broker, Walsham, received substantial sums which it ought to have remitted, either to the syndicates themselves before September 1996 or to Equitas thereafter, and that as a result of its failure to do so Equitas has lost substantial investment income. Walsham acknowledges a duty to remit such sums, but contends (in outline) that any claim is now time barred and that it is entitled to set off amounts which it overpaid to the syndicates in error.

3

The present trial is to deal with various issues of principle pursuant to an order made by Eder J on 3 September 2013. In the course of the trial the parties re-formulated the issues to be determined. I will address the issues as re-formulated. All other issues (save for those where one or other party has indicated that it no longer pursues a pleaded point) are left over for determination at a later stage in the light of my decisions on these issues of principle.

4

Because I am dealing with issues of principle much of the evidence adduced by the parties at a time when it was expected that this trial would deal with the whole case did not need to be considered in any detail, or in some cases at all.

Background

5

In outline, the circumstances in which these issues arise are as follows. It will be necessary to return to examine many of the agreements referred to in this summary in greater detail when considering the various issues. At this stage, however, it is convenient to summarise in chronological order the events which led up to the commencement of this action.

6

During the 1980s and early 1990s, Walsham was one of the largest Lloyd's reinsurance brokers. It had over 100 employees, and the annual turnover of claims and premium payments through its books reflected its size. For example, in 1989 it transacted over US $1.1 billion in claims and over US $600 million in premium. In 1991 it transacted over US $2.2 billion in claims and over US $650 million in premium. Its operations have been in decline for many years, however, and in 2010 it went into run-off, moving to premises out of London in 2011.

7

As is well known, during the late 1980s and early 1990s there was extraordinary turmoil in the Lloyd's market, primarily as a result of syndicates' exposure not only to crushing long-tail liabilities including in relation to asbestos and pollution claims from the United States, but also a series of catastrophes which, coming together as they did, shook the market to its foundations. It is unnecessary to recount the detail here. The story has been told in many previous judgments of this court.

8

It is Equitas's case that during this period Walsham failed to remit to syndicates substantial funds which it had received. These fall broadly into two categories. First, it is said that in its capacity as broker for syndicates on whose behalf it had placed contracts of reinsurance or retrocession (referred to in this action as "Outwards Protections"), Walsham failed to remit to its clients funds which it had received from reinsurers or retrocessionaires in payment of claims or by way of returns of premium. Second, it is said that in cases where Walsham received reinstatement premium for passing on to reinsurers or retrocessionaires (referred to as "Inwards Protections") Walsham again failed to remit such funds.

9

Cases where it is said that Walsham did eventually pay over the funds received, but only after substantial delay, have been referred to in this action as the "Settled Claims". In those cases Equitas's claim is for loss of investment income during the period of delay. In round figures, the total amount said to have been paid late is about £5.2 million (or its equivalent in other currencies) and the loss on investment income said to have been suffered as a result of the late payment is about £9.8 million.

10

Cases where it is said that Walsham still has not paid over the funds received have been referred to as the "Outstanding Claims". Here Equitas claims both the principal sum (about £3.1 million) and the lost investment income (about £2 million).

11

Equitas's total claim in this action is therefore about £14.9 million or its equivalent in other currencies. Of this, about £11.8 million represents a claim for investment income said to have been lost as a result of delay in making payments (including lost investment income in a cases where the payments still have not been made), while about £3.1 million represents principal amounts which are said to be still outstanding.

12

Walsham does not accept that it has failed to make the payments claimed by Equitas and it would not be appropriate for me to attempt to make any findings about this at this stage. Walsham's evidence seeks to explain that processing of transactions was complicated by a number of factors, namely (i) the fact that, until 1995, Walsham continued to use an old-fashioned, manual accounting system based on handwritten ledgers and vouchers, (ii) the turmoil in the market in the late 1980s and 1990s, and (iii) the considerable pressure which Walsham was put under from the syndicates to process claims as rapidly as possible in order to assist them with cash flow which led to backlogs in record keeping and to a practice of combining multiple remittances into a single payment or splitting a single remittance into multiple payments. It says also that it was common for Walsham to fund syndicates by advancing moneys against anticipated collections and to allow the paperwork to catch up later. In these circumstances Walsham says that it would not be surprising if some accounting or processing errors were made, with syndicates being either overpaid or underpaid. Whether or to what extent this actually happened, however, is not for decision at this stage. Walsham says that it may be that in some cases payments were indeed made reasonably promptly as they ought to have been, but that it all happened so long ago that in the meanwhile the evidence of payment has been lost.

13

All this is for another day. I proceed on the basis, as it was common ground that I should for the purpose of the present trial, that Equitas will be able in due course to make good its claim that at least some payments were not made reasonably promptly upon receipt and that other payments have not been made at all.

Reconstruction and Renewal

14

In 1996 a Settlement Agreement was concluded, dated 1 August 1996, but apparently not executed until a little later, which was intended to bring an end to the extensive litigation to which the market turmoil referred to above had given rise and to give the market a badly needed fresh start. It was concluded between (among others) Lloyd's itself, Equitas, "Accepting Names" and "Brokers". The settlement was the culmination of a long process, which came to be referred to as "Reconstruction and Renewal".

15

In May 1995 Lloyd's published a lengthy document entitled "Lloyd's: Reconstruction and Renewal", setting out how it proposed to "reconstruct our finances, maintain our solvency and deal with the problems of the past", including a settlement of the litigation which was then under way.

16

Three features of that proposal are relevant for present purposes. One was the concept of "finality" for Names who were facing continuing losses, potentially continuing for many years into the future. That finality was intended to consist of "a final reckoning of all their 1992 and prior liabilities, and the chance to resign from the Society, subject to regulatory consent" and was to be achieved by the incorporation of Equitas, which was created as an integral component of this proposal. There was to be compulsory reinsurance by Equitas of 100% of syndicates' liabilities in respect of non-life business for the 1992 and all prior years of account, in return for which Equitas would take an assignment of all the rights, title and interest of those syndicates in relation to that business, including any claims which the syndicates had against brokers. That would enable Equitas effectively to step into the shoes of the Names to manage the run off of the 1992 and prior years business, while enabling Names who wished to do so to resign secure in the knowledge that, subject to one qualification, they need have nothing further to do with Lloyd's, and could put what for many of them were their disastrous experiences as Names behind them. The qualification was that it was...

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