Arbuthnott v Fagan & others

Queen's Bench Division

(Transcript: Nunnery & Co)


HEARING-DATES: 13 May 1993

13 May 1993



A Boswood QC and S Moriarty for the Plaintiff; B Eder QC and D Foxton for the Defendants


PANEL: Saville J





SAVILLE J: In these actions a number of Names at Lloyds have brought proceedings against their Members and Managing Agents at Lloyds, alleging that these parties were in breach of contract or duty (or both) in the conduct of underwriting for the Names. The point that I am asked to decide at this preliminary stage is whether and if so to what extent these proceedings are affected by what are generally known as the "pay now, sue later" clauses in the agreements between the parties. In essence, it is the defendants' case that those of the plaintiffs who have failed to pay cash calls made upon them by their Agents before the issue of the proceedings have no right to sue the Agents in connection with the underwriting until such calls are paid.


As in Boobyer v Holman & Co [1993] 1 Lloyds' Rep 96, I am concerned with both the old and the new (post 1989) forms of agreement. So far as the old form of agreement is concerned, the clause in question is Clause 9 of the Agreement made between the Name and the Members' Agent which I set out in full in a schedule to this judgment. For convenience, however, I set out below the opening part of Clause 9(c) for it is this part of the clause which lies at the heart of the debate.


"It shall be a condition precedent to the issue of proceedings or the making of any reference to arbitration by the Name in respect of any matter arising out of or in any way connected with either the making of such a requirement by the Agent or the subject-matter thereof, or the preparation or audit of the accounts referred to in clause 6, that the Name shall have duly complied with any such requirement made or purported to be made by the Agent, and no cause of action in respect of any such matter shall arise or accrue in favour of the Name until such requirement shall have in all respects been duly complied with."


The defendants' submissions in their widest form, are to the effect that the "subject matter" of any requirement for funds (or "cash calls" as they are generally known) is, by virtue of Clause 9(a), the money needed for "the payment of the liabilities, expenses and outgoings of the underwriting business". In other parts of the Agreement the "underwriting business" is defined, in effect, so as to include the underwriting for the account of the Name as transacted by any of the Syndicates of which the Name is for the time being a member for the year in question and any subsequent year up to the end of 1989, when the agreement in this form was replaced by the new arrangements.


Building on this basis the defendants submitted that where there was (before the issue of proceedings) an unpaid cash call in respect of any year (prior to 1990) or any Syndicate, Clause 9(c) had the effect of preventing the Name in question from launching any or any effective proceedings in respect of the underwriting business, even if the proceedings concerned years of account or Syndicates where all calls had been paid.


There was common ground between the parties as to the underlying purpose of the "pay now, sue later" provisions, namely, the overriding need to ensure that the funds were available for the prompt settlement of the claims of those who had insured or reinsured at Lloyds. As I pointed out in Boobyer v Holman & Co (supra), those joining Lloyds as Names must appreciate that the system can only work if the business of underwriting is conducted by professionals who must be left to judge, among other things, and, of course, in good faith, what funds are required from time to time for the underwriting business. Were this not so and Names were entitled to withhold funding until personally satisfied that the money was needed, then in view, again among other things, of the numbers of Names involved, claims could not be settled promptly, nor could the attendant administrative expenses of the underwriting business be met and, in short, Lloyds could not exist as an insurance market.


Given that this is the underlying purpose of the provisions the question arises as to whether or not the wide construction contended for by the defendants is required to carry it through. For the defendants, Mr Eder QC submitted that it was. In his submission, and looking at the matter in the context of the market as a whole, the need for prompt payment of cash calls was so important that is was necessary to have provisions that, in effect, precluded the Names from asserting any rights against the Agents in respect of the underwriting without first paying the calls, however remote the Names' complaints might be from those calls. By this means, suggested Mr Eder, Names would be the more likely to be persuaded to pay calls.


I am prepared to assume for the purpose of the argument that the words relied upon by Mr Eder may be capable of bearing the wide meaning for which he contends, though I do not accept that this is necessarily the natural meaning, nor do I accept that the underlying purpose of the provisions justifies the "persuasion" of the Names by preventing them from suing in respect of matters which on no view have anything whatever to do with the unpaid call. I can find nothing in the material before me concerning the "pay now, sue later" principle which begins to suggest that this element of "persuasion" has ever been regarded as an essential or even desirable part of the principle. Indeed, the debate in recent years at least has been rather the other way, namely, whether or not the provisions should be modified in favour of the Names by giving them some right to challenge the cash call itself though, in the end, this suggestion was not adopted.


Furthermore, it is difficult to see how it could have been envisaged by the draftsman that this particular method of "persuasion" would have any useful results. Under Clause 9(b) the Name is prohibited from setting up any claim etc against any proceedings by the Agent for unpaid calls, so that if the Name has funds there will be no delay in getting and executing a judgment for the amount due, while (at least in broad terms) Clause 9(c) on any view prevents any form of proceedings by a Name designed to stop, delay or modify any cash call made by the Agent. If, of course, the Name had no money then the suggested "persuasive" effect of the wide construction will ex hypothesi be non existent, for you cannot be persuaded to do that which you are unable to do. Indeed, at that stage the wide construction would, in effect, be counter-productive, for it would deprive a Name with no funds of the only asset which could be utilised to pay the call, namely, the value of his claim against the Agent.


Mr Eder also advanced what could be described as a narrower construction of Clause 9(c). On this construction proceedings by the Name would not be treated as being "in respect of any matter arising out of or in any way connected with" the subject matter of the call merely because the proceedings concerned the "underwriting business" in the broad sense discussed above, but only if there was in fact a connection or relation between the call and the proceedings. In the present proceedings the Names in the Feltrim action allege neglects or defaults in the conduct of the underwriting in the years 1987-1989, while in the Gooda-Walker proceedings the years in question are 1988 and 1989 (and 1990 which falls to be considered under the new form of agreement). I am told that the calls in question, which it is said many of the plaintiffs have not paid, also relate to those years and to the Syndicates the subject of the Names' complaints. As Mr Eder put it, these calls are the foundation of the claims for they represent part at least of the loss and damage which the Names allege they have suffered from the neglects or defaults of the Agents.


In my judgment, bearing in mind the purpose of the "pay now, sue later" provisions and the words the parties have chosen to use, neither of the constructions suggested by Mr Eder is correct.


The basis of these constructions is the meaning given by the defendants to the words "subject matter" in Clause 9(c), for as I understand it, there is no suggestion that the proceedings are in respect of any matter arising out of or in any way connected with the making of the calls, as opposed to the subject matter of the calls. The constructions suggested by Mr Eder assume that the subject matter of the calls can properly be described as the liabilities, expenses and outgoings of either the underwriting business generally (the wide construction) or those of the particular years and Syndicates the subject of the proceedings. In my view, however, neither of these is the subject matter of the calls within the meaning of Clause 9(c) read in the context of Clause 9 as a whole.


As I have already pointed out, it is common ground that the underlying purpose of the provisions is to prevent internal disputes from delaying the collection of funds for the purpose of paying policyholders and running the business of insurance in an efficient way. This is achieved by giving the Agents the widest possible discretion to assess and call for the funds they consider are required for the business, without having first to justify or defend the need for the call and without having to seek to fend off or give credit for cross-claims or the like. In my judgment, therefore, the "subject matter" of the call is not the actual liabilities, expenses or outgoings of the business, but the Agent's assessment of those things. Indeed, were this not so, and the meaning of "subject matter" was that which Mr Eder suggests then this part of the Clause would be inconsistent with the whole of the rest of Clause 9, which is concerned with ensuring that until the Name pays, the question whether the call is in fact justified by the liabilities, expenses and outgoings or whether the need for a call has been brought about by neglect or default of the Agent is completely irrelevant.


I can find nothing in the proceedings brought by the Names which can be described as being in respect of any matter arising out of or in any way connected with the Agent's assessment of what is required for the business. Indeed, such assessments have been made years after the matters of which the Names make complaint. They do not dispute the assessment or suggest that there is anything wrong with or about it. Their complaint is, in essence, that the neglects or defaults of the Agents in the past have put them under liabilities or risk of liabilities to others which should either not have happened or which should have been properly guarded against by appropriate reinsurance. The assessments the Agents may have made of these liabilities has, in short, nothing to do with the proceedings.


It seems to me that this construction fully meets the underlying purpose of the "pay now, sue later" provisions. Nothing is to interrupt the collection and distribution of funds judged to be required by the Agents, but given this, there is no good reason to shelter the Agents from liability for failure to perform their obligations or duties. It also seems to me that this construction gives proper effect to all the words used in the Clause. As Mr Boswood QC for the Feltrim plaintiffs pointed out, the stipulation that no cause of action should arise or accrue in favour of the Name is confined to causes of action "in respect of any such matter", ie the "matter" referred to in the opening words of Clause 9(c). It is reasonable to suppose that the draftsman intended this second part of the first sentence of Clause 9(c) to serve some useful purpose. It is also clear that the causes of action referred to are those that would otherwise arise or accrue after the call in question, for this part of the clause does not seek to affect causes of action which have already risen or accrued. Given these premises it would seem that the second part of the first sentence is not setting up a further obstacle to actions by the Names against the Agent (for which there would be no purpose in view of the "condition precedent" in the first part of the sentence) but is rather the other side of the same coin: the Name cannot sue until the call is paid, but the cause of action shall not arise or accrue until payment, thus avoiding difficulties with limitation. Looked at this way, these provisions would at the least indicate that what the draftsman was exclusively concerned with was causes of action that would arise on the making of a cash call and as the result of it. The present proceedings do not fall within this description.


For these reasons I consider that those of the plaintiffs who have failed to pay calls are not prevented by Clause 9 from pursuing the proceedings. I reach the same conclusion with regard to the cases where the new (post 1989) form of Agreement is applicable. In this Agreement, which the Name makes with the Managing Agents, the relevant clause is Clause 7, which is also set out in full in the schedule to this judgment. To my mind, for the reasons given, I cannot categorise the proceedings as being "in connection with" any call made by the Agent under these provisions.


There remains the question whether the Clauses in question relate only to proceedings against the other party to the Agreements, or extend to protecting the Managing Agents, in the case of the old form of Agreement, or the Member's Agent, in the case of the new form of the Agreement. Neither agreement purports on its face to embrace proceedings brought by the Name against third parties in general, or the Managing or Member's Agents (as the case may be) in particular, nor can I discern any good reason for implying into either of the Agreements any such extension. It was common ground that if the Agreements themselves did not protect third parties, then nothing in any other agreement (particularly the Syndicate and Arbitration Agreements) would be of any relevance.


In view of this judgment, it is not necessary to deal with a further argument advanced by the Names, to the effect that if the defendants were right in their construction of the Clause, the result would be such an unjustifiable ouster of the jurisdiction of the courts that the provisions should be treated as void or unenforceable as a matter of public policy.


On the basis of this judgment I accordingly answer the question posed on para 1(1) of the order dated 26th March 1993 in the Feltrim action in the negative; and likewise the questions posed in para 1(1) and (2)(a)(b)(2) of the order dated 23rd April 1993 in the Gooda Walker action. In the circumstances, the other questions posed in these orders do not arise.



Judgment accordingly



Richards Butler; Elborne Mitchell