HSBC Bank Plc v Liberty Mutual Insurance Company (UK) Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Rix,Lady Justice Arden,Lord Justice Judge |
| Judgment Date | 16 May 2002 |
| Neutral Citation | [2002] EWCA Civ 691 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2001/0450 |
| Date | 16 May 2002 |
[2002] EWCA Civ 691
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
(THE VICE-CHANCELLOR & Mr Justice PATTEN)
Royal Courts of Justice
Strand,
London, WC2A 2LL
Lord Justice Judge
Lord Justice Rix and
Lady Justice Arden
Case No: A3/2001/0450
Gabriel Moss QC and Felicity Toube (instructed by Messrs DLA) for the Claimant/Respondent
Jonathan Sumption QC and Mark Arnold (instructed by Messrs Allen & Overy) for the Defendant/Appellant
This is an appeal by HSBC Bank plc (the "bank") against three judgments concerned with points of construction arising out of surety bonds in essentially the same form issued to it by two insurance companies, Liberty Mutual Insurance Company (UK) Limited ("Liberty") and St Paul International Insurance Company Limited ("St Paul", formerly Seaboard Surety Co ("Seaboard")). The three judgments are those of the Vice-Chancellor and Patten J (two judgments). The appeals arise in two sets of proceedings in one f which the bank is the claimant and in the other of which Liberty is the claimant, but there is no need to distinguish between them, nor, for the most part, between Liberty and St Paul. I shall therefore refer save as may be necessary to both surety companies by the name of "Liberty".
The bonds were given to secure liabilities which the bank (formerly Midland Bank plc) entered into at the request of its customer, Ocean Marine Mutual Insurance Association Limited ("OMMIA"), a P&I Club incorporated in the Turks and Caicos Islands. As part of its business activities, OMMIA was regularly called upon to provide security in the form of bank guarantees to claimants who had arrested, or threatened to arrest, its members' vessels in various parts of the world in respect of maritime claims such as those arising out of the carriage of goods or collisions. Such guarantees therefore provided security in place of the arrested vessel. A traditional form of such security is a bail bond or so-called admiralty bond, which is a security provided to the court itself: but nowadays a bank guarantee provided directly to the claimant by an acceptable financial institution is the more normal procedure. In OMMIA's case, it would utilise its facilities with the bank to procure from local correspondent banks the provision of the necessary guarantees. In a few cases the bank provided the guarantees itself directly to the beneficiaries; but in the majority of cases it procured their provision from correspondent banks to whom it in turn granted a counter-indemnity. The practice was for OMMIA to name a local bank, which the bank could approve or disapprove, and a local firm of agents or lawyers to negotiate the actual wording of the guarantee. Such guarantees were limited to a specific sum and were "conditional" in the sense that they were payable only upon a judgment, arbitral award or agreement in settlement of the beneficiary's claim. The bank's counter-indemnity, however, took the form of an undertaking to pay, up to the stated maximum, on the correspondent bank's first demand subject only to a statement that the correspondent bank was required to pay in accordance with the terms of its guarantee. Because the security provided to the claimant and the counter-indemnity provided by the bank can both be referred to as guarantees, I shall use the expression "admiralty bond" to refer to the former, and "counter-indemnity" to refer to the latter. I shall set out typical examples of each below.
Liberty's surety bonds were provided to support and secure the bank's engagements, whether in the form of admiralty bonds (of which there were only a handful or so) or of counter-indemnities (of which there were some 140). Since these appeals raise points of construction upon such surety bonds, I shall set out their language without delay, utilising one provided in the case of a vessel called the Lady Lela; but they were all in substantially the same form, thus:
"Bank Guarantee Number 102/113865/96 M/V LADY LELA
Surety Guarantee Number…049–000–139
WHEREAS OCEAN MARINE MUTUAL PROTECTION & INDEMNITY ASSOCIATION LIMITED has requested MIDLAND BANK PLC (hereinafter called 'Bank') to execute or procure the execution of a bond, undertaking or guarantee (hereinafter called "Guarantee") as bail or security in connection with their lawful business.
NOW THEREFORE LIBERTY MUTUAL INSURANCE COMPANY (UK) LIMITED (hereinafter called 'Surety') undertakes in the amount of TND 85,000.00 (EIGHTY FIVE THOUSAND TUNISIAN DINARS) to indemnify the Bank and hold it harmless from and against all liability, losses and damages which the Bank…may sustain or incur by reason of having executed or procured the execution of such Guarantee provided always that the loss sustained by the Bank arises from a claim that has been paid by the Bank strictly in accordance with the express terms of the Guarantee and that the aggregate liability of the Surety under this Agreement shall not exceed the sum of TND 85,000.00 (EIGHTY FIVE THOUSAND TUNISIAN DINARS) which is the value of the Guarantee.
This Agreement is separate from any other security or right of indemnity taken in respect of the Guarantee from any person, including your above mentioned customer.
This Agreement shall be a continuing agreement and binding on the Surety, its successors and assigns.
This Agreement shall be governed by and construed in accordance with the Laws of England."
The preliminary issues
Disputes arose between Liberty and the bank regarding the construction of the bonds. The bank had taken a fixed charge over all OMMIA's book debts as a continuing security for all its liabilities to the bank, and had subsequently had to appoint a receiver. Liberty's case was that, to the extent that it had discharged by payment any of its surety bonds given to the bank, it was entitled to be subrogated to the bank's security under its fixed charge pari passu with the bank's claims on OMMIA. The bank's case was that the third paragraph of the bond ("This Agreement is separate…") was a consensual exclusion or postponement of Liberty's rights of subrogation. That dispute was decided by the Vice-Chancellor in favour of Liberty. I shall call this the "subrogation issue".
The second dispute was whether the proviso at the end of the second paragraph of the bond ("provided always that the loss…") which requires a payment to have been made "strictly in accordance with the express terms of the Guarantee" refers to the terms of the admiralty bond given to the claimant beneficiaries or to the engagement given by the bank, whether admiralty bond or, as in nearly every case, counter-indemnity. In other words did "Guarantee" in the surety bond mean "admiralty bond" or "the bank's engagement"? In theory it ought to make no difference, because the bank's counter-indemnities can only be called on by the correspondent banks to the extent that the latter have to face a liability under their admiralty bonds: in theory, therefore, the bank is only exposed under its first demand counter-indemnities in the event of negligence or fraud on the part of its correspondents, of which there is no evidence. In practice, however, it is suggested by the bank that it may face difficulties in proving the condition of the proviso, if "Guarantee" does indeed refer to the admiralty bond and not to its own engagement. I shall call this the "Guarantee issue".
The third dispute relates to a small number of admiralty bonds where OMMIA's instructions to the bank asked it to procure an admiralty bond with a validity of a year, but where the admiralty bond which emerged, although valid in the first instance for only a year, was automatically renewable for successive periods of twelve months. Liberty claims to be entitled to reject any liability under its bonds given in respect of such requests, at any rate beyond the first year, on the ground that its engagement relates only to the admiralty bond requested and not to the admiralty bond given in excess of OMMIA's authority. If the bank's submission on the second issue were to be correct, then this third issue would not arise, for the only question would be whether the bank had suffered loss by reason of its counter-indemnity. I shall call this the "one year issue".
The Guarantee issue was decided by Patten J in his first judgment in favour of Liberty, and the one year issue was decided by Patten J in his second judgment, also in favour of Liberty. Thus the bank is the appellant in this court on all three issues.
These three disputes came before the courts in the form of preliminary issues. In all, five preliminary issues were ordered, of which those numbered (iii) and (iv) below are ancillary to the Guarantee issue and in this court have given rise to no additional debate. The preliminary issues are:
The subrogation issue
(i) Whether on the proper construction of the Bonds…[Liberty and St Paul] have waived in favour of [the bank] such rights as they might otherwise have to be subrogated to the rights of [Liberty and St Paul] under the charge dated 17 November 1997 executed by [OMMIA].
The Guarantee issue
(ii) What is the "Guarantee" within the meaning of Liberty's standard form bond?
(iii) Where the Guarantee has been issued by [the bank], how does [it] prove that liability attaches to Liberty under Liberty's bond?
(iv) Where the Guarantee has been issued by [the bank's] correspondent bank, how does [the bank] prove that liability attaches to Liberty under Liberty's bond?
The one year issue
(v) In cases where OMMIA stipulated...
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