Society of Lloyd's v Woodard [ChD]
| Jurisdiction | England & Wales |
| Judge | Sir Richard Scott V-C. |
| Judgment Date | 16 May 1996 |
| Court | Chancery Division |
| Date | 16 May 1996 |
Chancery Division.
Sir Richard Scott V-C.
Jules Sher QC, John Child and Joanne Wicks (instructed by Simmons & Simmons) for Lloyd's.
Sydney Kentridge QC, 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:
Ashville Investments Ltd v Elmer Contractors LtdELR[1989] QB 488.
Deeny v Gooda Walker (No. 2)WLR[1996] 1 WLR 426.
Hole v GarnseyELR[1930] AC 472.
Napier v KershawUNK(unreported) 14 May 1992, QBD.
Prenn v SimmondsWLR[1971] 1 WLR 1381.
Society of Lloyd's v Morris[1993] 2 Re LR 217.
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
This was an originating summons issued by Lloyd's against a name acting in a representative capacity. The issue was whether all litigation recoveries obtained by names in the actions brought in respect of underwriting losses were to be applied to discharge any of the names' outstanding indebtedness to Lloyd's.
Each name at Lloyd's was required to execute a premium trusts deed, which provided by cl. 2(a)(i) the trust fund shall consist ofall premiums and other moneys 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.
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 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. Lloyd's also exercised the power of amendment in cl. 22 to add a new sub-clause (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.
The names argued thatNapier v Kershaw, (unreported) 14 May 1992, had been correctly decided by Saville J against Lloyd's on the issue of cl. 2(a)(i). TheCourt of Appeal in Lloyd's v Morris[1993] 2 Re LR 217had expressly approved that decision. Further, the power of amendment contained in cl. 22 was never intended to be used for the purpose of adding to the trust fund assets outside those which the conduct of the names' underwriting business had generated. Lloyd's submitted thatNapier v Kershawwas wrongly decided, and that there was no expressed limitation on the power of amendment in cl. 22.
Held, giving judgment for the names:
1. Litigation recoveries were not a receipt of the underwriting business and therefore did not come within cl. 2(a)(i) of the trust deed. The intention behind the trust deeds was to secure the underwriting receipts which became payable to the names in the course of the business managed by the managing agents. Litigation recoveries were not moneys generated by the underwriting business itself, and therefore lacked the requisite connection with the underwriting for the purposes of cl. 2(a)(i).
2. The prime commercial purpose of the trust deeds was to ensure that the syndicate's underwriting business receipts were controlled by the name's underwriting agents, and were available to meet the losses and expenses of the name's underwriting business. Any amendment to cl. 2 had to be consistent with that commercial purpose. To use the cl. 22 power to bring litigation recoveries within the trust fund in order to provide additional security for the name's existing indebtedness to Lloyd's was not consistent with that commercial purpose. The purported amendment was therefore a misuse of the cl. 22 amending power and as such failed to bring the litigation recoveries within the trust deeds.
Scott V-C: Over the past few years many members, commonly called Names, of the Society of Lloyd's (Lloyd's) have suffered very substantial underwriting losses. A considerable number of these names have attributed their losses to breaches of duty by members agents, managing agents and, in some cases, syndicate auditors. The losses of these names are said to have been brought about by misrepresentations, breaches of contract, acts of negligence and other analogous wrongs. Actions for the recovery of damages have been brought.
Many of these actions are still pending. In some, liability has been established but the recoverable damages have not yet been quantified. In a few, substantial recoveries of damages have already been achieved. Thus, in 1992 some 992 names, members of the Outhwaite syndicate, received a payment of approximately 116m: by way of compensation for their losses. In October 1994, judgment on liability was given in favour of 3,095 names, members of some of the Gooda Walker syndicates, in an action against their underwriting agents. Damages have not yet been quantified but an interim payment of 210m has been ordered to be paid. I have been told that at present sums totalling 300m or thereabouts are held by solicitors pending distribution to the successful litigants. Further substantial receipts are expected. Of the names who have been or are still engaged in these actions, some have duly discharged their indebtedness to Lloyd's incurred in respect of their underwriting losses. But many of them have not yet done so. Lloyd's has had to draw on its own funds to meet the insurance liabilities of those who either cannot or will not provide the funds to meet their liabilities. Many of the successful litigants are, despite their success in the litigation, in grave financial difficulties brought about by their Lloyd's losses. Whether or to what extent these litigants will choose to apply the damages recovered in these actions (which I will refer to as litigation recoveries) in the payment of their Lloyd's losses is, of course, a matter not known to Lloyd's. Some of them may prefer to use their litigation recoveries to meet other pressing liabilities such as, by way of example, the repayment of loans raised from banks and others in order to meet their Lloyd's indebtedness.
Lloyd's is naturally anxious to ensure that the litigation recoveries are applied in or towards the discharge of any outstanding indebtedness of the litigants to Lloyd's.
One of the features of the arrangements under which names carry on their underwriting business is that each name is required to execute a trust deed, known as a premiums trust deed, in a prescribed form. The parties to each trust deed, besides the name, are the name's member's agent and Lloyd's itself. I must take time in this judgment to examine more particularly the contents of these trust deeds and the part they play in the conduct of every name's underwriting business. It will suffice for the moment for me to refer to two clauses.
Clause 2(a)(i) provides that:
the trust fund shall consist ofall premiums and other moneys whatsoevernow belonging or payable or hereafter at any time belonging or becoming payable to the name in connection with the underwriting.
Clause 22 gives power to the Council of Lloyd's to
revoke and determine the trusts hereby constituted or (subject always to the prior approval of the Secretary of State) vary or amend all or any of them or any of the provisions hereof in which manner as the Council think fit
Lloyd's primary contention in this action is that all litigation recoveries obtained by names in the actions to which I have referred are caught by cl. 2(a)(i) of the names respective trust deeds. The litigation recoveries are, it is said, moneysbelonging or becoming payable to the name in connection with the underwriting. This contention was raised by Lloyd's in an action, Napier v Kershaw, which came before Saville J (as he then was) in 1992. In an unreported judgment delivered on 14 May 1992, Saville J ruled against Lloyd's. He held that the litigation recoveries were not caught by cl. 2(a)(i) and did not constitute part of the respective trust funds. In a later decision,Society of Lloyd's v Morris[1993] 2 Re LR 217, in which the issue was whether the proceeds of stop loss policies effected by names were caught by cl. 2(a)(i), the Court of Appeal, in deciding that the proceeds of these policies were not caught, expressed approval of Saville J's decision in Napier v Kershaw. Lloyd's contends before me that Saville J was wrong, that the Court of Appeal's approval given in Lloyd's v Morriswas merely obiter and not binding on me and that I should rule that litigation recoveries are caught by cl. 2(a)(i) and constitute part of the trust funds. If the litigation recoveries are so caught, Lloyd's will be able, without the necessity of obtaining any consent or co-operation from the names entitled to the recoveries, to ensure that the recoveries are applied in discharging any outstanding indebtedness of the names to Lloyd's.
However, in addition, Lloyd's have purported to exercise their power of amendment under cl. 22 of the trust deeds. The amendments are in form complex but in concept simple. In essence, the amendments have added a new...
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