Lord Napier v R F Kershaw Ltd

JurisdictionEngland & Wales
JudgeNourse,Hobhouse,Pill L JJ.
Judgment Date24 October 1996
CourtCourt of Appeal (Civil Division)
Date24 October 1996

Court of Appeal (Civil Division).

Nourse, Hobhouse and Pill L JJ.

Lord Napier
and
R F Kershaw Ltd & Ors
Society of Lloyd's
and
Woodard & Anor

Jules Sher QC, John Child and Joanne Wicks (instructed by Simmons & Simmons) for Lloyd's.

Nicholas Warren QC and Paul Newman (instructed by Richards Butler) for the names.

Richard Slowe, solicitor (instructed by S J Berwin & Co) for the second defendant.

The following cases were referred to in the judgment:

Allan v Gold Reefs of West Africa LtdELR[1900] 1 Ch 656.

Courage Group's Pension Schemes, ReWLR[1987] 1 WLR 495.

Deeny v Gooda Walker (No. 2)TAX[1996] BTC 144; [1996] 1 WLR 426.

Gra-ham Australia Pty Ltd v Perpetual Trustee WA Ltd[1989] 1 WAR 65.

Green v GlikstenELR[1928] 1 KB 475; [1929] AC 381.

Henderson v MerrettELR[1995] 2 AC 145; [1994] CLC 918.

Hole v GarnseyELR[1930] AC 472.

Kearns v Hill(1990) 21 NSWLR 107.

Napier v KershawUNK(unreported), 14 May 1992, QBD.

Owens v The QueenIR[1900] 2 IR 513.

R v BC Fir and Cedar Lumber CoELR[1932] AC 441.

Society of Lloyd's v Morris[1993] 2 Re LR 217.

Society of Lloyd's v Woodard[l996] CLC 1, 862.

Strohmenger v Borough of Finsbury Building SocietyELR[1897] 2 Ch 469.

Lloyd's insurance market Trust funds established by premiums trust deeds Underwriting name executed premiums trust deed governing premiums and moneys in connection with underwriting Heavy underwriting losses Names awarded damages for negligent underwriting Whether litigation recoveries were receipts in connection with underwriting Whether litigation recoveries to be applied to discharge names' indebtedness to Lloyd's Whether amendment to trust deeds to bring litigation recoveries within trust fund was consistent with commercial purpose of trust deeds Whether amendment valid

These were appeals against two decisions in favour of Lloyd's names in respect of litigation recoveries. InNapier v KershawUNK(unreported), 14 May 1992Saville J held that sums recovered by Lloyd's names in actions against their agents for negligent underwriting did not come within the premium trust deeds entered into by each name and therefore were not to be applied to discharge any outstanding indebtedness of the names to Lloyd's. Sir Richard Scott V-C reached the same conclusion in Society ofLloyd's v Woodard([1996] CLC 1,862). Lloyd's appealed.

Each name at Lloyd's was required to execute a premium trusts deed, which provided by cl. 2(a)(1) the trust fund shall consist ofall premiums and other monies whatsoevernow belonging or payable or hereafter at any time belonging or becoming payable to the name in connection with the underwriting. The other parties to the trust deed, which was in common form, were the name's member's agent and Lloyd's. Clause 22 gave the Council of Lloyd's the power to vary or amend any of the provisions of the trust deed as the council saw fit. The trust deeds in questions were approved by the Secretary of State in accordance with s. 83(4) of the Insurance Companies Act 1982, by which every underwriter was to carry to a trust fund all premiums received by him or on his behalf in respect of any insurance business.

As a result of very substantial underwriting losses a considerable number of Lloyd's names brought actions in negligence and breach of contract against their members' and managing agents. Liability was established in some actions and damages assessed. Others were pending or awaiting the assessment of damages. Lloyd's brought an action (Napier v Kershaw) to establish that all litigation recoveries by names in the actions against underwriting agents were caught by cl. 2(a)(i) of the names' trust deeds. Saville J in the Commercial Court decided that issue in favour of the names, holding that litigation receipts were outside the scope of cl. 2(a)(i). Lloyd's decided not to appeal to avoid further confrontation with the names.

As the scale of the losses at Lloyd's became apparent and the failure of so many names to meet their liabilities threatened Lloyd's future solvency, Lloyd's brought a second action (Society of Lloyd's v Woodard), seeking to overturn the decision inNapier v Kershaw. In addition to reliance on cl. 2(a)(i), Lloyd's exercised the power of amendment in cl. 22 to add a new sub-cl. (d) to cl. 2 by which the litigation recoveries obtained by names in the Lloyd's litigation became, to the extent of the names' indebtedness to Lloyd's, part of the trust fund. Sir Richard Scott V-C followedNapier v Kershawin relation to cl. 2(a)(i), and held that the purported amendment to cl. 2 was outside the commercial purpose of the trust deed. The amendment was therefore a misuse of the power in cl. 22 and accordingly failed to bring the litigation recoveries within the trust fund. Lloyd's appealed against that decision, and was granted leave, on terms, to appeal out of time againstNapier v Kershaw.

Held, allowing Lloyd's appeal:

1. The words in connection with underwriting business in cl. 2(a)(i) were intended to be of wider application than simply premiums and other receipts of the business. A litigation recovery in respect of negligent underwriting was a sum paid to a name to restore him to the position he would have been in if his managing agents had acted competently. The loss suffered for which damages were awarded was a loss to the business. There was therefore a causal link between the business and the payment. Litigation recoveries in respect of negligent underwriting accordingly fell within cl. 2(a)(i) of the trust deeds.

2. (Per Nourse and Pill L JJ) The primary purpose of the trust deeds was to comply with the requirements of s. 83(2) of the Insurance Companies Act 1982. The trust fund set up included all the receipts of the underwriting business. Litigation recoveries were not payable to a name in connection with his underwriting business but were assets personal to him. The trust deeds were not intended to be a means of attaching the name's personal assets as a fund for meeting the losses and outgoings of the business. The power to vary and amend the trust deeds in cl. 22 therefore did not extend to the proposed amendments to cl. 2(d), which were accordingly invalid.

3. (Per Hobhouse LJ dissenting) The purpose of the trust deed was to impose obligations on the name and provide mechanisms to facilitate the conduct of the name's activities at Lloyd's, including the discharge of his obligations within the market. In the exceptional conditions that had arisen it was consistent and proper for the Council of Lloyd's to amend cl. 2 so as to bring relevant litigation receipts within its scope. The amendments were therefore properly made.

JUDGMENT

Nourse LJ:

Introduction

The main question on these appeals is whether the pre-1995 form of premiums trust deed (PTD) which every name at Lloyd's must enter into pursuant to s. 83(2) of the Insurance Companies Act 1982, embraces, in addition to premiums and other receipts of his underwriting business, sums recovered in litigation against his agents for negligent underwriting. On 14 May 1992, in Napier v Kershaw, Saville J decided that question in favour of the members of the Outhwaite 1982 Names' Association and answered it in the negative. On 16 May 1996 a like answer was given by the Vice-Chancellor in Lloyd's v Woodard[1996] CLC 1,862. Lloyd's says that the question ought to be answered in the affirmative.

The circumstances in which this and related questions have arisen are fully explained in the judgment to be delivered by Hobhouse LJ, whose account I gratefully adopt. Some further explanation of the circumstances in which the appeal in Napier v Kershaw has come to be brought so late is necessary. Immediately after Saville J had given his decision, Lloyd's decided not to appeal and made an announcement to that effect. In an affidavit sworn on 19 April 1996 Mr David Rowland, the present chairman, has said that at that time Lloyd's was. seeking to avoid further confrontation with the names and that the decision not to appeal was made at a time when the magnitude of the problems which had come to confront it by 1996 were simply not appreciated. The failure by so many names to meet their liabilities had thrown a totally unexpected burden on the central fund, which by 1996 was threatening Lloyd's future solvency. That was not the situation in 1992 and Mr Rowland was very confident that, if it had been, Lloyd's would have appealed at that time. He added that in the intervening four years Lloyd's had concentrated its efforts and a substantial part of its resources, not on confrontation with the names, but in finding a solution to the market's problems, it being fundamental to any such solution that it would bring an end to the litigation brought by names against their underwriting agents. This had culminated in the plan, embarked on in early 1995, for reconstructing and renewing Lloyd's (R & R). The implementation of the R & R proposals was well advanced by April 1996 and it was hoped, as indeed has been the case, that it would be completed by the end of August. Mr Rowland went on to explain how the destination of the names' litigation recoveries had become critical to the completion of R & R and that it was desired to raise the question not only in Lloyd's v Woodard but in Napier v Kershaw as well.

Accordingly, on 19 April 1996, Lloyd's applied to this court for an extension of time for appealing against Saville J's order. The application was listed for hearing before us on 24 July, with the appeal to follow if ah extension was granted, together with the appeal in Lloyd's v Woodard. Lloyd's' particular concern in seeking a reversal of Saville J's decision was to ensure that the names affected by his order did not have the benefit of any issue estoppel (it was not accepted that they could have) which would allow them to claim preferential treatment over other names affected by a successful appeal in Lloyd's v Woodard. It was accepted from the outset that an extension could only be granted on terms that Lloyd's...

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2 cases
  • Napier and Ettrick (Lord) v R F. Kershaw Ltd
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    • House of Lords
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  • Society of Lloyd's v Leighs [QBD]
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