NUTTING AND OTHERS v. BALDWIN AND OTHERS
See Law Reports version at  1 W.L.R. 201
[1993 N. No. 2891]
COUNSEL: Michael Hart Q.C. and Brian Green for the plaintiffs.
John Lockey for the defendants represented other than the fourth.
Mark Dencer for the fourth defendant.
SOLICITORS: Richards Butler; Berwin Leighton; Lawrence Graham; D. J. Freeman; Baker & McKenzie; Lane & Partners; Epstein Grower & Co.; Michael Freeman & Co.; Strain Keville & Co.
JUDGE: Rattee J.
DATES: 1994 Oct. 27, 28; Nov. 18
[*204] Cur. adv. vult.
18 November. RATTEE J. handed down the following judgment. The plaintiffs are the members of the committee of the Outhwaite 1982 Names Association (the association). The association was formed for the purpose of co-ordinating and financing the prosecution by members of Lloyds syndicates 317 and 661 of claims against the managing agent of the syndicates (R.H.M. Outhwaite (Underwriting Agencies) Ltd.) and 81 members agents in respect of those agents activities on their behalf relating to the syndicates 1982 year of account, which activities the members alleged had caused them loss. The defendants [*205] are some of the members of the association. There were 986 Lloyds Names who joined the association, which, in their names, prosecuted two actions against the managing agent and the 81 members agents. The two actions were tried together between 7 October 1991 and 30 January 1992. They were eventually compromised by an agreement under which the defendants to the two actions collectively agreed to pay £116m. to the plaintiffs solicitors.
The rules of the association as amended contain the following relevant provisions. Rule 2.1 declares the objects of the association to be:
the co-ordination financing and prosecution of claims common to members of the association for compensation for losses suffered as a result of being members of the syndicate – defined as Lloyds syndicates 317 and 661 – for the 1982 year of account and to make provision for the apportionment of such compensation between the members of the association and its subsequent distribution to them.
Rule 2.2 provides:
the association by its committee shall have power to do anything which in the opinion of the committee is calculated to facilitate, or is conducive or incidental to, the achievement of the objects of the association.
Rule 3.1 provides that any person alleged to be liable as a member of the syndicate in respect of the 1982 year of account is eligible for membership of the association. Rule 3.2 provides that any applicant for membership shall pay the subscriptions provided for by the rules and shall sign an application in a form set out in schedule 2 to the rules. That form includes a declaration that the applicant has read and understood the rules and agrees to be bound by their terms. By rule 4.1 each member (a) gives authority to the association and its solicitors to commence, carry on and compromise proceedings in his name for the purpose of achieving the objects of the association and to give a receipt for the fruits of any such proceedings and to apply them in the manner provided for by the rules and (b) agrees to indemnify the committee of the association against all liability incurred in the exercise or purported exercise of their powers under the rules. Rule 6.1 provides that the subscriptions payable by each member shall be (a) an initial subscription of £250 and (b) a litigation subscription of £40 per £1,000 of line written by the member on the syndicate in the year of account, which was defined as the syndicates year of account for 1982. Rule 6.2 provides:
If in the opinion of the committee it is desirable that further sums be raised for any purposes the committee may subject to rule 6.3 below raise the same by levying an additional subscription or subscriptions.
Rule 6.3 provides that the levying of any additional subscription under rule 6.2 shall be supported by a resolution passed by two-thirds of the members present and voting at a general meeting or by a majority on a postal ballot. Rule 6.4 provides that subscriptions shall always be calculated as a sum per £1,000 of line written on the syndicate in the year of account. Rule 6.5 is in these terms:
All additional subscriptions shall become due in full within 60 days of written notice to that effect being given to members provided that: (1) the committee may in its discretion defer collection of all or [*206] any part of any subscription upon such terms as to security as it thinks fit (including but not limited to requiring members to lodge with the association within the said period of 60 days post-dated cheques or other instruments) in which case any amount or amounts so deferred shall become due within 60 days of written notice to that effect being given to members; and (2) where the collection of any additional subscription or any part or parts thereof has been deferred in accordance with this rule and any member wishes to pay any deferred amount or amounts prior to their due date or dates the committee may in its absolute discretion accept from such member a lesser sum in full settlement of such amount or amounts.
Rule 6.6 provides that if a member fails to satisfy any requirement of rule 6.5 above the committee may declare him to be a defaulting member. Rule 9 provides that recoveries, which are defined as, in effect, the fruits of any proceedings brought in the names of members, shall be held by the association upon trust to apply them firstly in paying or providing for the payment of any outstanding liabilities of the association, and then by distributing the balance among the members of the association other than defaulting members in the proportions inter se in which such members have been liable to subscribe to the funds of the association. Rule 10 contains provisions for the election of the members of the committee by the members of the association. Rule 11.1 provides:
So far as not otherwise provided in these rules and subject to any directions which may be given by a resolution of the association in general meeting the affairs of the association shall be controlled and directed by the committee which shall have an absolute discretion as to the manner of exercise of the powers vested in it on behalf of the association. . . .
Rule 21 provides that any written notice shall be deemed to be given to a member if it has been sent by post or delivered to the last address notified by him to the secretary of the association.
At the annual general meeting of the association held on 31 October 1990 unanimous approval was given to the committees proposal to levy the following additional subscriptions under rule 6.2: (a) a subscription of £30 per £1,000 of line to be payable within 60 days of written notice being given to members; and (b) a subscription of £100 per £1,000 of line to be deferred in full, but secured by each member lodging within 60 days of written notice a United Kingdom bank or building society cheque in the required sum post-dated to 1 April 1992, or other appropriate security.
Notices of the additional subscriptions were sent to members at their last notified addresses on 30 November 1990 requiring payment and lodgment of the appropriate sums and securities as required by the resolution of the annual general meeting to which I have referred by 1 February 1991. Reminders were sent on either 19 or 22 April to those who failed to respond to the original notice. By 5 July only the 19 defendants had failed to provide the additional subscriptions due from them, and the committee alleges that it declared them defaulting members pursuant to rule 6.6. Two of the defendants, that is the fourth and twelfth defendants, do not admit that the committee did declare them to be defaulting members. The remaining defendants have by pleadings delivered in the action admitted that the committee has in fact declared them to be defaulting members. [*207]
Under rule 9 such persons as have been declared defaulting members are not entitled to share in the distribution under that rule of the proceeds of the compromise of the actions brought by the association to which I have referred earlier in this judgment. The defendants or some of them have raised various arguments to the effect that they should not be treated as defaulting members even though they admittedly failed to pay the additional subscriptions due from them within the time allowed by the rules. Accordingly the plaintiffs, the members of the committee, commenced the present action against the defendants seeking declarations that the association is entitled to distribute recoveries as defined in the rules on the footing that no person who has been declared a defaulting member is entitled to share in such distribution, and that each of the defendants is a defaulting member for the purposes of the rules.
The writ commencing the action was issued on 22 April 1993. All those defendants who have delivered defences in the action raise the following two defences: (1) the power purportedly conferred on the committee by rule 6.6 to declare a member who fails to pay an additional subscription a defaulting member, in conjunction with the exclusion by rule 9 of defaulting members from sharing in recoveries, is a penalty and therefore unenforceable; (2) the court has and should exercise an equitable jurisdiction to relieve a member who has failed to pay his additional subscription in time from what is said by the defendants to amount to forfeiture of his right to share in the proceeds of, inter alia, his own cause of action against the underwriting agents.
Those defendants sought leave at the hearing before me to amend their respective defences to plead in addition that the power to declare a member who fails to pay his additional subscription on time a defaulting member and thereby exclude him from sharing in recoveries is so onerous a term of the rules that it is ineffective or unenforceable against a member unless it was drawn fairly to the [members] attention at the time he joined the association, and that it was not so drawn to the attention of the defendants.
The fourth defendant alone also pleads in his defence a fourth point, namely that there is to be implied into the rules a term that, before declaring a member who has failed to pay his subscription on time a defaulting member, the committee must conduct a detailed investigation into the members financial means, which the committee did not do in the case of the fourth defendant.
In an understandable attempt to bring the four arguments raised on behalf of the defendants or some of them to as speedy a resolution as possible the plaintiffs, on 2 June 1994, issued the summons now before me seeking their determination as points of law under R.S.C., Ord. 14A. I turn, then, to consider each of the four points in turn.
The defendants submitted that the rules constitute a contract between the members, and that the failure by the defendants to pay their additional subscriptions as required by the rules was a breach of contract. The power in rule 6.6 for the committee to exclude the members in breach from their shares in the fruits of, inter alia, their own causes of action against the agents amounts to an unenforceable penalty on the well established principle expounded in Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd.  A.C. 79. The amount of a defaulting members [*208] forfeited share of recoveries does not represent a genuine pre-estimate of damage caused by the breach of contract. Its forteiture is a penalty. It does not cease to be a penalty because it is not a provision for payment of a sum of money by the party in breach of contract. For this last proposition the defendants rely on, inter alia, Jobson v. Johnson  1 W.L.R. 1026.
In my judgment, this argument is, as the plaintiffs submitted, misconceived. True it is that the rules of the association constitute a contract between the members, and true it is that by failing to pay their additional subscriptions in accordance with the rules the defendants are in breach of that contract. However, I accept the plaintiffs submission that it would be wrong to regard rule 6.6 as a penalty for breach of contract. In my judgment the essence of the contract between the members of the association is that the burden and benefit of enforcement of the members claims against the agents should be shared between all the members. There is a pooling of all such claims and a pooling of contributions in the form of subscriptions for the purpose of financing the enforcement of such claims. It is an essential part of the arrangement that if a member ceases to contribute to the pool of financial contributions to the cost of pursuing the claims there should be power for the committee on behalf of all the members to determine that he shall cease to share in the pool of benefit represented by the proceeds of such claims. In other words a member who fails to shoulder his share of the burden of this essentially multilateral arrangement runs the risk of being excluded from his share of the benefit of the arrangement. This is not a penalty for breach of contract. It is an essential part of the pooling arrangement thereby effected.
Thus, in my judgment, the defence based on the penalty argument is bad in law.
2. Relief from forfeiture
The case put by the defendants under this head, as refined in argument by Mr. Lockey of counsel, is as follows. The combined effect of the power for the committee to declare a member who fails to pay his additional subscription on time a defaulting member and the exclusion of defaulting members from sharing in the recoveries under rule 9 is a forfeiture provision forfeiting the defaulting members beneficial interest in the recoveries. The court has power to relieve against such forfeiture on such terms as the court thinks fit. Whether it should exercise such power in the case of any of the defendants will depend on the circumstances prayed in aid by each individual defendant. Between them the defendants plead a variety of reasons why the court should exercise its power to grant relief in his or her case. Some plead that they did not have actual notice of the demand for additional subscriptions, some that illness or financial hardship prevented their complying with such demand. It is common ground between the parties that I cannot on this summons determine whether it would be appropriate to grant relief in the case of particular defendants. I am asked only to decide whether the court has power to consider the grant of relief in the case of any of the defendants. The defendants, of course, say it has, the plaintiffs that it has not.
Mr. Hart, for the plaintiffs, argued that the relevant provisions of the rules do not constitute a forteiture provision within the equitable doctrine, because the doctrine applies only to proprietary or certain possessory rights. For this proposition he relied on Scandinavian Trading Tanker Co. [*209] A.B. v. Flota Petrolera Ecuatoriana  2 A.C. 694 and Sport International Bussum B.V. v. Inter-Footwear Ltd.  1 W.L.R. 776. Mr. Hart submitted that the effect of a member joining the association was an equitable assignment to all the members of his right of action against the Lloyds agents, leaving the individual member with only the right to future performance of the contract between him and all other members constituted by the rules.
I do not accept this submission. In my judgment, by virtue of rule 9 each member was left with a proprietary interest in the form of his beneficial interest under the trust declared by that rule. It seems to me that, if the rules had provided for automatic loss of this beneficial interest by a member who failed to pay his subscription on time, that would have been a forfeiture provision for the purposes of the doctrine of relief against forfeiture. The fact that forfeiture only takes place on a determination being made by the committee to that effect in my judgment makes no difference.
A classic statement of the nature of the courts equitable jurisdiction to grant relief against forfeiture is to be found in the speech of Lord Wilberforce in Shiloh Spinners Ltd. v. Harding  A.C. 691, 723-724:
it remains true today that equity expects men to carry out their bargains and will not let them buy their way out by uncovenanted payment. But it is consistent with these principles that we should reaffirm the right of courts of equity in appropriate and limited cases to relieve against forfeiture for breach of covenant or condition where the primary object of the bargain is to secure a stated result which can effectively be attained when the matter comes before the court, and where the forfeiture provision is added by way of security for the production of that result. The word appropriate involves consideration of the conduct of the applicant for relief, in particular whether his default was wilful, of the gravity of the breaches, and of the disparity between the value of the property of which forfeiture is claimed as compared with the damage caused by the breach. (Emphasis added.)
Mr. Hart, on behalf of the plaintiffs, stresses the words from Lord Wilberforces speech which I have italicised. He submits that even if – as I find it does – rule 6.6 constitutes a forfeiture provision, the doctrine of relief as stated by Lord Wilberforce is not available to relieve the defendants or any of them, because the result which was the primary object of rule 6.6 can no longer be effectively attained if relief is granted. The object of rule 6.6 was to give the committee on behalf of all the members of the association power to ensure that all those who were going to share in the fruits of the litigation against the Lloyds agents should share in the risks inherent in the litigation by requiring the payment of additional subscriptions towards the financing of the litigation within a strictly limited period. Far from being attained, submitted Mr. Hart, that object would be entirely defeated by the court granting relief from the effect of rule 6.6 after the litigation has been completed. For to allow a defaulting member to share in the fruits of the litigation now, even on terms that he pays the additional subscriptions with interest, would allow him to share the fruits of the litigation without having borne his share of the risk of its prosecution.
Mr. Lockey, with the support of Mr. Dencer, on behalf of the defendants sought to counter this argument by submitting that the object of the rules relating to subscriptions was to ensure that each member bore [*210] a pro rata share of the costs of the litigation. That can be attained by the defendants now being allowed to pay up their overdue subscriptions with interest.
I prefer the submission of Mr. Hart on this point. I agree that the object of the rules of the association was to achieve a situation in which the rights of action of all the members against the Lloyds agents were enforced together for the benefit of all the members at the shared risk of all the members, the risk being borne by the members inter se in proportion to their interests in the fruits of such enforcement. To allow a member who has not undertaken his share of the risk by paying his subscriptions on time to come in after the litigation has been successfully concluded, so that there is no longer any risk, and still share in the fruits of the litigation on payment of his overdue subscription would, in my judgment, undermine rather than attain the object of the forfeiture provision against which relief is sought, and indeed one of the fundamental objectives of the constitution of the association. This being so, whatever the individual circumstances of the defendants, and whatever the reasons for their default, it would in principle be wrong for the court to grant relief against forfeiture. However hard the result may bear on individual defaulting members they must, in my judgment, be held to the arrangement constituted by the rules of the association to which they expressly agreed when they signed their application to join the association.
3. Onerous nature of rule 6.6
This is the new point sought to be introduced by an amendment to the defences of the defendants. The submission of Mr. Lockey on the point was and I quote from his very helpful skeleton argument that
where clauses incorporated into a contract contain particularly onerous or unusual terms, the party seeking to enforce those terms must show that the onerous terms have been brought reasonably and fairly to the attention of that other party.
For this proposition Mr. Lockey relied, he said, on a decision of the Court of Appeal in Interfoto Picture Library Ltd. v. Stiletto Visual Programmes Ltd.  Q.B. 433. In that case the plaintiff carried on the business of lending photographic transparencies. It delivered to the defendant 47 transparencies with a delivery note containing nine printed conditions, one of which provided that unless all the transparencies were returned within 14 days a fee of £5 per day would be charged on each transparency returned thereafter. The defendant had not dealt with the plaintiff before and did not read the conditions. It returned the transparencies four weeks later and was presented with a bill for over £3,000. The Court of Appeal held the defendant not bound by the condition to which I have referred, and which was described by Bingham L.J., at p. 445, as an unreasonable and extortionate clause. Dillon L.J. expressed the principle the court was applying as follows, at p. 439:
if one condition in a set of printed conditions is particularly onerous or unusual, the party seeking to enforce it must show that that particular condition was fairly brought to the attention of the other party.
In my judgment that principle can have no application in the present case. As I have already said, the power in rule 6.6 for the committee to [*211] deprive a member who failed to pay his share of the financing of the litigation brought on behalf of all the members of the right to share in the fruits of that litigation was an essential part of the scheme of pooling of the benefits and burdens of the contemplated litigation which was the whole object of the association. It cannot be characterised, as could the relevant condition in Interfoto Picture Library Ltd. v. Stilletto Visual Programmes Ltd., as an unusual term included in usual terms in a contract. The whole constitution of the association was unusual in the sense that it was conceived and drafted to deal with a particular situation. In the context of the essential purpose of the constitution as I have described it, in my judgment the provisions of rule 6.6 were neither onerous nor unusual, save to the extent that the whole nature of the association was unusual.
Because I consider the proposed new defence bad in law I refuse leave to make the suggested amendment to the defendants pleadings.
4. Implied term
As I indicated earlier in this judgment, only the fourth defendant seeks to raise this defence. It is pleaded in the fourth defendants amended defence as follows:
It was an implied term of [the Rules] that in the event of the committee believing, or having good reason to believe that a members circumstances were such that not to waive or postpone payment of the whole or part of a subscription (including any additional subscriptions) would cause extreme financial hardship to the applicant the committee would take all reasonable steps to conduct a detailed investigation into the applicants means before declaring him to be a defaulting member and that in such circumstances, it was a condition precedent to the exercise of the said power to declare a member to be a defaulting member that such reasonable steps had been taken.
It is not disputed by the plaintiffs that the fourth defendant notified the committee before any decision was taken to declare him a defaulting member that he was in financial difficulties. The only basis on which Mr. Dencer, for the fourth defendant, submitted that the implication for which he contended fell to be made was the officious bystander test formulated by MacKinnon L.J. in Shirlaw v. Southern Foundries (1926) Ltd.  2 K.B. 206, 227. In other words, submitted Mr. Dencer, the term for which he contends is something so obvious that it goes without saying.
I cannot accept this submission. It seems to me far from obvious that the members who adhered to the rules of the association must have intended that, despite the provision in rule 11.1 that the committee should have an absolute discretion as to the manner of exercise of the powers vested in it by the rules, the committee should be bound to carry out some such investigation into the means of defaulting members as if alleged by the fourth defendant, particularly since the purpose of the discretion conferred on the committee by rule 6.6 was, in my judgment, to enable it to further the object of the association, namely to prosecute the causes of action of members against the Lloyds agents for the common benefit of those members who shouldered their shares of the burden of such prosecution. [*212]
Thus, in my judgment, the defendants fail on all four of the points of law or construction raised or sought to be raised by them or some one or more of them by way of defence to the plaintiffs claim in the action. I shall therefore answer the questions raised by sub-paragraphs (1), (2) and (3) of paragraph 1 of the plaintiffs summons dated 2 June 1994 in the negative, and will consider with counsel the form of declaration which I should now make under paragraph 2 of that summons.