Sirius International Insurance and Another v Fai General Insurance Company Ltd
| Jurisdiction | England & Wales |
| Judge | MR. JUSTICE JACOB |
| Judgment Date | 23 July 2002 |
| Neutral Citation | [2002] EWHC 1611 (Ch) |
| Court | Chancery Division |
| Date | 23 July 2002 |
| Docket Number | 5590 of 2001 |
[2002] EWHC 1611 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Royal Courts of Justice
Mr. Justice Jacob
5590 of 2001
MR. G. VOS Q.C. and MR. P. ARDEN (instructed by Messrs. Reynolds Porter Chamberlain) appeared on behalf of the Claimant.
MR. M. BRIGGS Q.C. and MR. P. MARSHALL (instructed by Messrs. Ince & Co.) appeared on behalf of the Defendant.
(As approved by the Judge)
This preliminary point is about the proceeds of a draw down of a letter of credit in the sum of US$5 million. The background facts, though not in dispute, are quite complicated. I will set them out as far as they matter. A syndicate at Lloyd's, Agnew, wished to reinsure its liabilities. Its brokers were Lambert Fenchurch Ltd. ("Lambert"). FAI General Insurance Ltd. ("FAI") were proposed as the reinsurers. Agnew were not happy with this, there being questions (justified in the event) as to the solidity of FAI. Agnew wanted a stronger reinsurer. Sirius International Insurance Company Ltd. became that reinsurer. This was set up in the following way: Sirius wrote the policy on the basis that FAI would in turn pay Sirius should Sirius be called upon to pay. In the jargon of the business, Sirius "fronted" the arrangement and "retroceded" it to FAI. As a requirement for fronting the reinsurance Sirius required and eventually got a letter of credit from a bank, namely Westpac. I say "eventually", because very oddly FAI first proposed a company who were not in the business of providing letters of credit. In the event the provision was very late. But that does not matter for it is now common ground that the letter of credit which was eventually provided was on the terms contained in an offer letter of 9th September 1999, the contract being concluded by an acceptance letter of 22nd October 1999.
The key terms of the letter of 9th September read as follows:
"With regard to the LOC, we are happy to agree to the two conditions which you propose, but with reservations as regards the first of the conditions. We therefore undertake that we will not agree or pay any claim presented to Sirius by the Agnew Syndicate without FAI's prior agreement in writing, nor will we draw down under the LOC, unless (1) FAI has agreed that Sirius should pay a claim but has not put Sirius in funds to do so, notwithstanding the simultaneous settlements clause in our retrocession contract … or (2) the Agnew Syndicate obtains a judgment or binding arbitration award against Sirius which Sirius is obliged to pay.
We agree unreservedly to the second condition, i.e. that the existence of the LOC will be kept completely confidential …"
The letter of credit from Westpac finally emerged on 24th January 2000. By this time Agnew had made a claim against Sirius under the reinsurances. A dispute arose: were Sirius liable to Agnew? If they were, it would follow that FAI would be correspondingly liable to Sirius under the back- to-back retrocession arrangements.
On 23rd March 2000 Lambert, Sirius and Agnew entered into a tripartite funding arrangement. Clause 2 says:
"Sirius acknowledges that Agnew has a reasonable cause for arguing: (a) that there exists no ground upon which to challenge the Reinsurances, so that the Reinsurances should be deemed fully binding and effective;"
(b) does not matter. The agreement went on to provide that Agnew would not take steps to enforce payment by Sirius until specified proceedings against FAI were concluded, and Lambert agreed to fund Agnew for its losses by way of loan until then.
Sirius agreed to try to set up an arbitration between the real protagonists, namely Agnew and FAI. If that failed (as it did) Sirius would permit Lambert to use its name to enforce its rights. Lambert agreed to indemnify Sirius completely against all and any liability to FAI. Any recoveries to be applied by Lambert on behalf of Sirius towards payment of Sirius' liability to Agnew under the reinsurances.
In May 2000 Sirius, behind whom by then stood Lambert, started an arbitration against FAI. In March 2001, owing to the insolvency of its parent, provisional liquidators were appointed over FAI. This had the effect, under section 132 of the Insolvency Act 1986, of staying the arbitration proceedings. These by then had become very heavy. Sirius applied to the court for the removal of the stay. By then of course it was the provisional liquidators who were running FAI, as they continue to do at present. They are formally named as defendants, but nothing turns on that.
The application for a stay was compromised by a Tomlin order of 6th April 2001. I turn to some of the terms of the schedule to this order:
"1. FAI … is indebted to [Sirius] in the sum of US$22,500,000 and [Sirius] shall be entitled to prove in the liquidation … in the said sum …
2. [Sirius] shall draw down on [the letter of credit].
3. [Sirius] shall pay the proceeds of the LOC … into an escrow account to be held together with accrued interest thereon by [a firm of solicitors] pending the resolution of the parties' claims (if any) in respect of the LOC.
4. For the avoidance of doubt, the position and all arguments of the Applicant and the Respondents in respect of the LOC are preserved in respect of the proceeds notwithstanding the terms of this Schedule.
5. Save for the parties' rights with respect to the LOC and the agreements associated to the LOC, the terms herein shall be in full and final settlement of all claims raised by either party in the arbitration proceedings …"
The money was drawn down and put in an escrow account. The question is: who is entitled to it? Sirius or FAI?
Because there is no dispute as to the relevant facts, it is agreed that I can and should determine certain preliminary points. These are somewhat opaquely defined in an order of Mr. Registrar Baister of 27th May 2002. There are no actual points of claim or defence on the points. When I read the skeleton arguments, there were signs of ships passing in the night, points being answered which were not being taken and so on. The course of argument before me has narrowed these points further. It is to the points as they finally emerged that I now turn.
What is the effect of the conditions in the September 9th letter? It is common ground that I should read the undertaking as a two-part undertaking: that Sirius will not agree or pay any claim presented to Sirius by the Agnew Syndicate without FAI's prior agreement in writing; and a separate undertaking that Sirius will not draw down under the letter of credit unless one or other of the two conditions has been satisfied.
Mr. Briggs Q.C. for FAI argues thus: suppose there has been no draw down and no compliance with either condition. Suppose Sirius threatened to draw down nonetheless. Could FAI come to court for an injunction? Mr. Briggs said: "Yes. Here is a negative covenant. The court always enforces a negative covenant on the well known principle that it is only making a man refrain from doing that which he has agreed not to do". Mr. Briggs went further. He said that even if the money had already been drawn down in breach of covenant but remained identifiable (as in this case) the court would simply order the wrong to be undone. Technically that would be done by ordering it to be given back to the bank who would then credit it to FAI. That, Mr. Briggs said, could be short circuited by declaring the money now in escrow as FAI's.
Mr. Briggs' argument then runs on. The Tomlin order was specifically intended to preserve the position vis-a-vis the letter of credit. It permitted a draw down only on that basis. So the parties had agreed to treat the position concerning the letter of credit as if there had been no draw down. Putting it another way, the Tomlin order by its own terms required that its existence be ignored. So the position, submitted Mr. Briggs, is just as if there had been no Tomlin order and that there was non-compliance with the conditions. Moreover, he submitted that it is now clear that there never could be compliance so the conditions for draw down had not and could not be met. Hence, Sirius were not entitled to draw down and the money should be treated as FAI's.
Mr. Vos Q.C. attacked this reasoning at a number of points. His first attack is based upon the principle that letters of credit are autonomous. A letter of credit gives an independent right to the beneficiary to require the bank to pay. Mr. Vos took me to a number of authorities to establish the position. The first of these was United City Merchants v. Royal Bank of Canada [1983] 1 A.C. 168. The passage relied upon was the speech of Lord Diplock at p.182–183.
Next I was taken to the ICC Uniform Customs and Practice for Documentary Credits, 1993 revision, and particularly to Article 3. This reads as follows:
"(a) Credits by their nature are a separate transaction from the sales or other contracts on which they may be based and banks are in no way concerned with or bound by such contracts even if any reference whatsoever to such contracts is included in the credit. Consequently the undertaking of a bank to pay, accept and pay drafts or negotiate and/or to fulfil any other obligation under the credit is not subject to claims or defences by the applicant resulting from his relationships with the issuing bank or the beneficiary."
Finally, my attention was drawn to Paget's Law of Banking, 11th edition, at p.657, where there is a brief statement:
"The most important application of the autonomy principle is that a bank cannot refuse payment on the...
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