Society of Lloyd's v Clementson (No 2) [QBD (Comm)]
| Jurisdiction | England & Wales |
| Judge | Cresswell J. |
| Judgment Date | 07 April 1996 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 07 April 1996 |
Queen's Bench Division (Commercial Court)
Cresswell J.
Jeremy Lever QC and Richard Slowe (instructed by S J Berwin & Co) for Mr. Clementson.
Gordon Pollock QC, Paul Lasok QC and Richard Jacobs (instructed by Freshfields) for the Society of Lloyd's.
The following cases were referred to in the judgment:
Arbuthnott v Feltrim Underwriting Agencies Ltd [1995] CLC 437.
Assurpol (Decision 92/96) OJ 1992 L 37/16; [1992] 1 CEC 2096.
Banks (H & J) & Co Ltd v British Coal CorpECAS (Case C-128/92) [1994] ECR 1-1209.
Banque Bruxelles Lambert SA v Eagle Star Insurance Co LtdELR [1995] QB 375; [1995] 2 WLR 607; [1995] CLC 410, CA.
Banque Financière de la Cite SA v Westgate Insurance Co LtdUNK [1988] 2 Ll Rep 513.
Béguelin Import Co v SAGL Import Export (Decision 22/71) [1971] ECR 949.
Berriman v Rose Thompson Young (Underwriting) Ltd [1996] CLC 1,283.
BPC Group Holdings Ltd v Sovereign Marine General Insurance Co LtdUNK (unreported), 18 February 1994, CA.
Brown v KMR Services Ltd (formerly H G Poland (Agencies) Ltd) [1995] CLC 1,418.
Carter v BoehmENR (1766) 3 Burr 1905.
Chiron Corp v Organon Teknika Ltd (No. 2)UNK [1993] FSR 324.
Container Transport International Inc v Oceanus Mutual Underwriting Association (Bermuda) LtdUNK [1984] 1 Ll Rep 476.
Darville v Ernest A Notcutt & Co LtdUNK (unreported), 18 March 1991, CA.
Deeny v Gooda Walker Ltd (in voluntary liquidation) [1994] CLC 1,224.
Deeny v WalkerUNK (unreported), November 1995, Gatehouse J.
Galoo v Bright Grahame MurrayWLR [1994] 1 WLR 1360; [1994] BCC 319.
Gettrup-Klim Grovvaforening v Dansk Landbrugs Govvareselskab AmbA (DLG)ECAS (Case C-250-92) [1994] ECR 1-5641; [1995] CEC 461.
Group Josi Re v Walbrook Co Ltd [1995] CLC 1,532.
Henderson v Merrett Syndicates LtdELR [1995] 2 AC 145; [1994] CLC 918.
Higgins v Marchant & Eliot Underwriting Ltd [1996] CLC 301.
Hugin Kassaregister AB and Hugin Cash Registers Ltd v EC CommissionECAS (Case 22/78) [1979] ECR 1869.
Inversiones Manria SA v Sphere Drake Insurance Co plc (“The Dora”)UNK [1989] 1 Ll Rep 69.
Langnese-Iglo GmbH v EC CommissionECAS (Case T-7/93) [1995] ECR 11-1533; [1995] 2 CEC 217.
London Sugar Futures Market Ltd (Decision 85/563) OJ 1985 L369/25.
March Cabaret Club v Casino Ltd v London AssuranceUNK [1975] 1 Ll Rep 169.
Master foods Ltd tla Mars Ireland v HB Ice Cream LtdUNK [1992] 3 CMLR 830.
Miller International Schallplatten v EC CommissionECAS (Case 19/77) [1978] ECR 131.
National Justice Compania Naviera SA v Prudential Assurance Co Ltd (“The Ikarian Reefer”)UNK [1993] 2 Ll Rep 68.
Nuovo CEGAM (Decision 84/191) OJ 1984 L99/29; [1984] 2 CMLR 484.
Oude (H G) Luttikhaus ea v Verenigde Coö peratieve Melkindustrie Coberco BA v De Coöperatie ZuivelcoöperatieECASECASECASECAS [Joined with Cases C-319/93, C-40/94, and C-224/94] (Case C-399/93) (1995) Transcript 12 December.
Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co LtdELR [1995] 1 AC 501; [1994] CLC 868.
Panayiotou v SonyUNK (unreported), 21 June 1994, Jonathan Parker J.
PCW Syndicates v PCW Reinsurers [1995] CLC 1,517.
Pronuptia Schiligalis [1985] ECR 353.
Quinn v Burch BrosELR [1966] 2 QB 370.
Regina Fur Co Ltd v BossomUNK [1957] 2 Ll Rep 466.
Reynolds & Anderson v Phoenix Assurance Co LtdUNK [1978] 2 Ll Rep 440.
Rhône-Poulenc v EC Commission [1991] ECR 11-867.
Roselodge Ltd v CastleUNK [1966] 2 Ll Rep 105.
Shearson Lehman Hutton Inc v Machine Watson & Co LtdUNK [1989] 3 CMLR 429.
Société Technique Minière v Maschinenbau Ulm GmbHECAS (Case 56/65) [1966] ECR 235.
Society of Lloyd's v Clementson [1995] CLC 117.
Sword-Daniels v Pitel [1994] CLC 492.
TEKO (Decision 90/22) OJ 1990 L13/34; [1990] 1 CEC 2045.
Verband der Sachversicherer eV v EC CommissionECAS (Case 45/85) [1987] ECR 405.
Vereniging van Samenwerkende Prijsregelende Organisaties in de Bouwnijverheid v EC CommissionECAS (Case T-29/92) [1995] ECR 11-289; [1995] CEC 43.
Windsurfing International v EC CommissionECAS (Case 193/83) [1986] ECR 611.
Woolcott v Sun Alliance & London Insurance LtdUNK [1978] 1 Ll Rep 629.
Yorkshire Dale Steamship Co Ltd v Minister of War TransportELR [1942] AC 691.
Insurance — Lloyd's insurance market — Substantial underwriting losses sustained by names — Failure of name to meet underwriting losses in accordance with undertaking — Payment by Lloyd's out of central fund — Whether Lloyd's entitled to recover sums owed by name — Whether central fund arrangements affected trade between member states or distorted competition in common market in contravention of EC law — EC Treaty, art. 85.
This was an action by the Society of Lloyd's to recover sums paid out of the central fund in respect of the defendant name's underwriting losses in the Lloyd's market. The defendant name counterclaimed. The issue was whether Lloyd's central fund arrangements contravened art. 85 of the EC Treaty by affecting trade between member states or distorting competition.
The defendant was elected a name at Lloyd's from 15 December 1976. He signed an undertaking with Lloyd's by which he agreed to be bound by the provisions of the Lloyd's Acts and byelaws. Each name at Lloyd's, which was a society of individual underwriting names grouped in syndicates, was liable to meet debts incurred in his underwriting to the extent of his personal fortune. A name was required to pay underwriting losses when calls were made. He was responsible only for his own underwriting debts and not those of other names. To ensure that funds were available to meet claims when made Lloyd's had a chain of security with four links, the premium trust funds, names' funds, the personal wealth of individual names and finally the central fund. The central fund byelaw (no. 4 of 1986) empowered Lloyd's to recover from names moneys paid out of the central fund as a civil debt.
The defendant suffered losses on his underwriting which he did not meet. Lloyd's made payment out of the central fund in respect of sums owed by the defendant, and brought an action to recover those sums. The defendant counterclaimed, alleging that by making the central fund arrangements, the reinsurance provisions and reinsurance to close provisions Lloyd's caused the defendant loss and damage which he would not have suffered in conditions of undistorted competition, the quantum of loss being all or part of the defendant's aggregated underwriting losses.
On preliminary issues Saville J held that in exercising its powers to seek reimbursement for sums paid out of the central fund, Lloyd's was not engaged in activities subject to art. 3(g), 5, 85 and 90 of the EC Treaty. The Court of Appeal allowed Lloyd's appeal, holding that the issue as to whether Lloyd's had infringed art. 85 could not be determined as a preliminary point of law but should be decided on evidence at a trial.
It was the defendant's case that there was appreciable distortion of competition particularly in the provision of catastrophe cover in reinsurance business. In what was essentially international business there was an appreciable effect on trade between member states. A substantial proportion of all names suffered large losses in the years 1988-91. To a substantial effect those losses were attributable to their having been over-exposed to risk. The over-exposure to risk was the very thing to be expected to result, in the conditions of the 1980s, from the removal by Lloyd's of the normal constraint of counterparty credit risk assessment.
In relation to LMX losses the defendant argued that the central fund arrangements led to the absence of counterparty credit risk assessment which without any constraints led to moral hazard. That led to the risk of agents acting incompetently which risk eventuated to an appreciable extent such that names participated inappropriately on high-risk syndicates in appreciable numbers. In consequence capacity increased in those syndicates to an appreciable extent, which reduced rates and lowered retentions. That caused adverse selection attracting yet more high-risk business at low rates and low retentions thus distorting competition and affecting trade so that when catastrophes occurred the natural consequence was that losses fell on those names. The defendant then put forward 14 propositions in support of his case.
It was conceded for Lloyd's that it was an association of undertakings, the undertakings being the names and the syndicates within Lloyd's. It was further admitted that its byelaws, its decisions to raise contributions to the central fund and its decisions authorising sums to be withdrawn from the central fund were “decisions of an association of undertakings” within art. 85. Any infringement of art. 85 was denied.
Held, giving judgment for Lloyd's and dismissing the defendant's counterclaims:
1. The central fund was essential to the operation of Lloyd's, which relied on claims being paid promptly. It was the fourth and last link in Lloyd's chain of security. It was not for the protection of a name, who remained responsible for his liabilities to the full extent of his wealth. The central fund arrangements did not go beyond what was necessary to enable Lloyd's to function properly.
2. No reference to any concept of moral hazard had been identified in any decision of the European Court of Justice. There was no basis for the defendant's argument that the central fund arrangements opened the door to the realisation of moral hazard on the part of Lloyd's active underwriters and thereby distorted competition. To come within the prohibition in art. 85 it had to be established that the arrangements had as their object or effect the distortion of competition. It was not sufficient if the arrangements merely allowed subsequent events to produce such a consequence.
3. Even if a counterpart credit risk assessment had been possible at the name or syndicate level, which it was not, the insurance industry in general suffered similar problems...
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