(Filed: 25/09/2003)

Queen's Bench Division (Commercial Court)
Andrew Smith J
September 16, 2003

Insurance - Banking and Financial Services - Negligence - Trusts - Duty of care - Defendants gave letter to claimants about underwriting agency's client account - Claimants relied on letter in deciding to renew or not to terminate binding authority given to agency - Claimants' failure to investigate whether agency's operation of client account was unreasonable broke chain of causation


The claimants ('Lloyd's syndicates') gave two binding authorities to an underwriting agency ('HMU') to write trade credit guarantee insurance. Three of the participating syndicates held shares in HMU and they were entitled to appoint a director to the board of HMU. The first binding authority ran from November 1994 to December 1995 and the second from January 1996 to December 1996. The authorities required HMU to maintain a separate fiduciary account in respect of the business conducted under the authorities, which was to be operated as an insurance broking account.

In fact HMU operated a single current account at the defendant bankers ('Coutts') until August 1995 when a second account was opened which was called the 'client' or 'underwriting' account but which was not a true client account. That was done after the claimants discovered that no separate account was being operated under the binding authorities. At that time Coutts sent a letter ('the Coutts letter') to the claimants at HMU's request stating that the funds in the client account represented a combination of claims due and insurance premiums payable. In February 1996 Coutts began to operate a 'sweeper' arrangement under which funds were automatically transferred from the client account to the general account if and when necessary to keep the latter within its overdraft limit. In July 1997 the claimants terminated the second binding authority on the basis that HMU had not been operating a segregated account in accordance with the binding authority. HMU ceased trading in September 1997 and provisional liquidators were appointed. In October 1997 there was £572,419 in the client account. Coutts used that money to reduce HMU's debit balances on its loan and general accounts. Investigating accountants appointed by the claimants concluded that the balance in the client account at the end of June 1997 should have been £1,860,521. The syndicates claimed against Coutts in negligence arguing that the Coutts letter was misleading and that they should have been told about the sweeper arrangement. They said that but for the letter they would have terminated and/or not renewed the authority and avoided subsequent losses.


Whether the defendant owed the claimant a duty of care.

HELD (dismissing the claim)

The binding authorities did not on their true interpretation require HMU to maintain an account in which it held the underwriting moneys on trust. The reference to a fiduciary account did not distinctly indicate an intention that the chose in action, which the account represented, should be held on trust. Funds in an account operated in accordance with the insurance broking accounts rules were not held on trust. Although 'client account' did not have an unambiguous meaning, the unqualified reference in the Coutts letter to a client account might reasonably have conveyed to the reader that the funds in the account were not subject to any right of set-off or charge. Since Coutts did have such rights of set-off the letter was potentially misleading. Coutts knew that the letter was to be shown to underwriters as a statement that HMU had set up a separate account to keep underwriting moneys separate from its general funds. It did not know that the letter might be relied on by underwriters to decide whether to continue to subscribe to the first binding authority or to renew it. Coutts did not assume any responsibility to the claimants in relation to those decisions. Therefore the claimants failed to establish a duty of care in relation to the Coutts letter.

If Coutts had owed a relevant duty of care it would have been in breach. The lead underwriter did not rely on the Coutts letter in deciding not to terminate the first binding authority or in deciding to subscribe to the second binding authority. If the requisite reliance on the part of the lead underwriter had been established, it would have been sufficient to support a claim by the following market. Coutts owed no duty to advise the claimants of the sweeper arrangement. In any event the claimants failed to show that they were still relying on the Coutts letter in February 1996 and it would not have been reasonable for them to do so. Also there was no evidence that the claimants would have terminated HMU's underwriting authority if they had learned about the sweeper arrangement.

If Coutts had been in breach of a duty of care which had caused loss, the only loss which would have fallen within the scope of the duty would have been a loss resulting from Coutts' exercise of its rights of set-off when it transferred the balance of £572,419 from the client account. The claimants' failure properly to investigate whether HMU was operating a client account was unreasonable and broke the chain of causation and prevented the claimants from arguing that any loss that they subsequently suffered resulted either from the Coutts letter or from failure to disclose the sweeper arrangement.

Julian Flaux, QC, and Timothy Kenefick (instructed by Barlow Lyde & Gilbert) for the claimants. Ali Malek, QC, and Adrian Beltrami (instructed by Herbert Smith) for the defendants.

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