COUNSEL: Gordon Pollock, QC and Richard Jacobs for the plaintiffs;
Michael Burton, QC and Dr Nicholas Green for the defendant.

SOLICITORS: Dibb Lupton Broomhead; Epstem Grower & Michael Freeman.

JUDGE: Rix J

DATE: 24 October 1995

SUMMARY: Under an agreement dated Aug 2, 1989 the defendant Dr Higgins appointed Bankside Members Agency Ltd (Bankside) as his members’ agent on the terms of the standard members’ agents agreement set out in Schedule 1 of Lloyd’s Agency Agreements Byelaw No 8 of 1988 (the 1988 Byelaw). By cl 2 of the members’ agents agreement Dr Higgins authorized Bankside to enter into an agreement on the standard managing agent’s agreement set out in Schedule 3 to the 1988 Byelaw with the managing agent of each syndicate in which Dr Higgins and Bankside agreed that Dr Higgins was to participate.

In due course by means of the signing of syndicate lists by Bankside and the plaintiffs in December, 1989 and 1990 Dr Higgins, through Bankside, appointed the plaintiffs as his managing agents in respect of his participation for the 1990 and 1991 years of account in Syndicate 282 on the terms of the Standard Managing Agents Agreement (the standard agency agreement) cl 7 of which provided inter alia:

7.1(a) The Name shall ensure that at all times there are available sufficient funds … held by or under the control of the Managing Agent’s Trustee to enable them to pay all claims and all necessary and reasonable expenses and outgoings made or incurred in connection with the underwriting and shall comply with any request made by the Agent to make such funds available …

7.1(d) Any payment requested by the Agent under … clause 7.1 shall be made by the Name free and clear from any set-off counterclaim or other deduction on any account whatsoever and in connection with any proceedings which may be brought to enforce the Name’s obligation to comply with any such request for payment by the Agent the Name hereby waives stay of execution and consents to immediate enforcement of any judgment obtained.

7.1(e) The Name may not issue proceedings nor make any reference to arbitration and no cause of action shall arise or accrue in connection with any request for payment made by the Agent … unless the Name has first complied in full with any request …

In accordance with cl 7 the plaintiffs called upon Dr Higgins by written requests dated June 24, 1994 for £4500 in respect of the 1990 year and for £1500 in respect of the 1991 year. They claimed summary judgment under O 14.

Dr Higgins relied on art 85 of the Treaty of Rome contending that there were triable issues.

Article 85 provided:

(1) The following shall be prohibited as incompatible with the common market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member states and which have as their object or effect the prevention restriction or distortion of competition within the common market and in particular those which (a) directly or indirectly fix purchase or selling prices or any other trading conditions …

(2) Any agreement or decisions prohibited pursuant to this article shall be automatically void.

Dr Higgins submitted that this action was at least arguably tainted with illegality because it was merely another attempt to secure the anti-competitive object of the central fund. It was further submitted that the 1988 Byelaw and cl 7 in particular, was arguably anti-competitive and that no part of the standard agency agreement which was scheduled to that Byelaw could be enforced.

Held, by QB (Com Ct) (Rix J), that (1) it was accepted for the purposes of this application that this action had been brought at the instigation of Lloyd’s with the aim inter alia of protecting the central fund from further disbursements and that the central fund and its bye laws were arguably anti-competitive (see p 321, col 2; p 323, col 1);

(2) the rights being exercised were not being exercised for the purpose of implementing an unlawful arrangement; the central fund arrangements were left untouched, be they valid or not; the present action was one to enforce an altogether more basic obligation, that of a Name to provide funds to his underwriting agent to enable valid claims on the policies that he had underwritten to be met; if the obligation was itself enforceable there was nothing in its exercise which amounted to the improper use of rights in order to frustrate the community law on cartels nor did its enforcement amount even arguably to the subject, the means or the result, of a restrictive practice (see p 324, col 1);

Etablissements Consten SARL and Grundig-Verkaufs-GmbH v Commission of the European Community, [1966] ECR 299 and Sirena Srl v Eda Srl, [1971] ECR 69, considered.

(3) the agreement and the causes of action on which the plaintiffs sued predated the decision by Lloyd’s to instigate the plaintiffs to commence action against Dr Higgins; the validity and enforceability of that agreement and those actions could not be rendered invalid and unenforceable because of subsequent pressure by Lloyd’s, and the actions themselves if otherwise [*314] founded on lawful rights could not be impeached (see p 324, col 2);

(4) if Dr Higgins wished to say that the Byelaw was proscribed he must advance at least the basis of a fair or reasonable argument, and not by mere assertion, that complaint could legitimately be made about the potentially anti-competitive object or effect of particular terms of the standard agency agreement which the Byelaw required (see p 325, col 2);

(5) there was nothing here to justify the submission that there existed a rule that mandatory standardized agreements were per se illegal; the defendant’s a priori approach to the Byelaw (and thus to the standard agency agreement itself) that merely because it required the acceptance of standard terms of agreement, Dr Higgins had a real or bona fide defence under art 85, would be rejected (see p 326, cols 1 and 2);

(6) the standard agency agreement was not concerned with restricting or distorting freedom of competition at all where the market in international insurance was concerned; and where the internal Lloyd’s market for agency services was concerned any restrictions were merely incidental to the need to protect Names; in particular the provisions of cl 7 were vital for the maintenance of the Lloyd’s market and promoted rather than restricted competition; the contrary was not regarded as being fairly arguable (see p 332, col 2);

(7) an obligation to pay insured losses and to do so without regard for disputes between underwriter and underwriter’s agent, was a wholly conventional aspect of insurance and could not be said to amount to anti-competitive behaviour in object or effect and therefore an agreement between underwriter and agent to do so could not come within art 85(1) (see p 332, col 2);

(8) since cl 7 reflected inherently necessary parts of the arrangements and normal common law obligations ii was not arguable that cl 7 would not survive as valid and a fortiori cl 7.1(a) whatever other arguable breaches of art 85 there might be (see p 333, col 2);

(9) Dr Higgins had failed to show a fair or reasonable probability of a defence for O 14 purposes that the standard agreement as a whole or in any material part was anti-competitive and unenforceable under art 85, and a fortiori had failed to show that cl 7 was a breach of art 85; the plaintiffs were entitled to summary judgment against Dr Higgins (see p 333, col 1; p 334, col 2).

Society of Lloyd’s v Clementson, [1995] LRLR 307 considered.

INTRODUCTION: In these proceedings the plaintiffs, Marchant & Eliot Underwriting Ltd, who were the managing agents [*315] of Syndicate 282 at Lloyd’s claimed summary judgment against the defendant Dr Andrew James Higgins, who was an underwriting member of Syndicate 282 in respect of two cash calls made on him by the plaintiffs in June 1994 in respect of the 1990 and 1991 underwriting years of account.

JUDGMENT:

Rix J:

These proceedings are a further chapter in the Lloyd’s litigation. In them the plaintiffs, Marchant & Eliot Underwriting Ltd, who are the managing agents of Syndicate 282 at Lloyd’s, claim summary judgment against the defendant, Dr Higgins, who was an underwriting member of Syndicate 282, in respect of two cash calls made on him by the plaintiffs in June, 1994 in respect of the 1990 and 1991 underwriting years of account, in the total sum of £6000. The plaintiffs used to be known as MJ Marchant Underwriters Ltd prior to their change of name in March, 1994.

The plaintiffs say there is no defence to this claim. Under an agreement dated Aug 2, 1989, Dr Higgins appointed Bankside Members Agency Ltd (“Bankside”) as his members’ agent on the terms of the standard members’ agent’s agreement set out in Schedule 1 of Lloyd’s Agency Agreements Byelaw No 8 of 1988 (the “1988 Byelaw”). Under cl 2.2 of that members’ agent’s agreement Dr Higgins authorized Bankside to enter into an agreement in the terms of the standard managing agent’s agreement set out in Schedule 3 to the 1988 Byelaw with the managing agent of each syndicate in which Dr Higgins and Bankside agreed that Dr Higgins was to participate. In due course by means of the signing of syndicate lists by Bankside and the plaintiffs in December, 1989 and 1990 respectively Dr Higgins, through the agency of Bankside, appointed the plaintiffs as his managing agents in respect of his participation for the 1990 and 1991 years of account in Syndicate 282 on the terms of the standard managing agents’ agreement (the “standard agency agreement”). Clause 7 of the standard agency agreement contains the so-called “pay now, sue later” provisions under which a syndicate member or “name” becomes liable to meet cash calls made by his syndicate managers, as follows:

7.1(a) The Name shall ensure that at all times there are available sufficient funds subject to the trusts of the Premiums Trust Deed and held by or under the control of the Managing Agent’s Trustees to enable them to pay all claims and all necessary and reasonable expenses and outgoings made or incurred in connection with the Underwriting and shall comply with any request made by the Agent to make such funds available; provided however that the Name shall not be obliged to make any payment in or towards the satisfaction of any such request by the Agent for funds unless the Name has first been supplied: (i) if the request for funds is made for the purpose of satisfying an Audited Closed Year Loss, with an audited annual report prepared as at the date at which the relevant year of account was closed; (ii) in any other case, with a statement signed by the Agent, accompanied by a report signed by the auditors of the Managed Syndicate, complying with paragraph (b) below.

7.1(d) Any payment requested by the Agent under and in accordance with the provisions of this clause 7.1 shall be made by the Name free and clear from any set-off, counterclaim or other deduction on any account whatsoever and in connection with any proceedings which may be brought to enforce the Name’s obligation to comply with any such request for payment by the Agent the Name hereby waives stay of execution and consents to the immediate enforcement of any judgment obtained.

7.1(e) The Name may not issue proceedings nor make any reference to arbitration, and no cause of action shall arise or accrue, in connection with any request for payment made by the Agent under and in accordance with the provisions of this clause 7.1 unless the Name has first complied in full with any such request. The Name shall not seek injunctive or any other relief for the purpose, or which would have the result, of preventing the Agent from making any such request for payment or enforcing the Name’s obligation to comply with any such request or of preventing the Agent from applying any money or assets held by or under the control of the Managing Agent’s Trustees in or towards the discharge of any claims or any necessary and reasonable expenses or outgoings made or incurred in connection with the Underwriting.

The plaintiffs called upon Dr Higgins in accordance with cl 7 by written requests dated June 24, 1994, for £4500 in respect of the 1990 year and for £1500 in respect of the 1991 year. Irrespective of the “pay now, sue later” provisions, Dr Higgins does not assert any defence, set-off or cross-claim to this cash call, other than a defence based upon art 85 of the Treaty of Rome. The plaintiffs say that Dr Higgins’ reliance on art 85 is hopeless and that they are entitled to summary judgment. Mr Pollock, QC, who has appeared on the plaintiffs’ [*316] behalf, says that the Lloyd’s insurance market could not operate if Names were under no legal liability because of art 85 and that this case therefore raises an argument, hopeless as it is, that goes to the heart of Lloyd’s. There is no doubt that the implications of the arguments I have heard are potentially of great importance.

Dr Higgins, however, who has been represented by Mr Burton, QC, says that his art 85 defence raises a triable issue or issues, and that in this respect the Court of Appeal has already determined that this is so in its recent decision in Society of Lloyd’s v Clementson, [1995] LRLR 307. It is therefore necessary to consider that case and what it decided, so far as is relevant to the present proceedings. I only pause to interpolate the provisions of art 85 itself:

(1) The following shall be prohibited as incompatible with the common market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention restriction or distortion of competition within the common market, and in particular those which:

(a) directly or indirectly fix purchase or selling prices or any other trading conditions …

(2) Any agreements or decisions prohibited pursuant to this Article shall be automatically void.

Article 85(3) then proceeds to set out the conditions under which in effect notified agreements may be exempted by the Commission from the provisions of art 85(1).

In Clementson the Society of Lloyd’s brought proceedings against a Name for reimbursement of sums paid out on the Name’s behalf from Lloyd’s central fund. Anyone who wishes to become a member of Lloyd’s is required to enter into a form of agreement with the Society known as the “general undertaking”, as part of which he undertakes to comply with the provisions of the Lloyd’s Acts and any subordinate legislation. Among such subordinate legislation is the Central Fund Byelaw No 4 of 1986 (as later amended) under which the Society is entitled to apply central fund moneys inter alia to make good any default by any member under any contract of insurance underwritten at Lloyd’s or to prevent the occurrence of any such default and the member is obliged to reimburse the Society. This was the obligation which the Society was seeking to enforce in Clementson. The background was well described by Mr Justice Saville in Clementson and I gratefully adopt the following passages from his judgment [1995] LRLR 307 at p 308:

An individual who is not a professional Lloyd’s underwriter but who wishes to underwrite insurance at Lloyd’s must (among other things) first become a member of the Society of Lloyd’s and then join one or more syndicates. Each syndicate has a professional underwriter who transacts business on behalf of syndicate members. It has always been a fundamental principle of underwriting at Lloyd’s that each member is a sole trader and thus only liable for the specified share of any risk underwritten. In other words, the member is only liable to policyholders to the extent of that share …

In view of the number of members involved, it would be wholly impracticable for each member personally and separately to negotiate his or her part of any underwriting transaction, to collect his or her share of the premium or to negotiate and pay his or her share of any claims. Thus under the rules of the Society a Name must appoint agents who, among other things, are responsible for the actual underwriting, keeping the accounts of each member, arranging for the collection of premiums and the negotiation and payment of claims and other expenses of the business, and attributing the resulting debits and credits of the business to the members according to their respective shares.

There is another factor of the greatest importance, namely the need to protect policyholders so as to ensure, so far as is possible, that their legitimate claims are duly met. In general terms most insurance is a business where in return for a payment in advance (the premium) the insurer undertakes a risk of loss which would otherwise fall on the insured. There would be no point in the business unless there was a real chance that a loss could, in money terms, exceed the premium. There would also be no point in the business unless there was confidence that the insurer would be able to pay when a loss occurred. Thus it is of paramount importance that insurers so conduct their affairs that their assets are and remain sufficient to meet their known and estimated liabilities under insurances that they have written …

The Society of Lloyd’s has many rules and regulations designed to ensure, so far as is possible, that those insuring or reinsuring at Lloyd’s are adequately protected in this regard. The individual must show a level of personal wealth before being admitted to membership of the Society. All premiums have to be paid into a trust fund and remain unavailable for distribution to the member while the accounts of the underwriting year to which they are attributable remain open and until proper provision is made for outstanding liabilities. The member must provide [*317] and maintain security at Lloyd’s in the form of readily realisable assets to meet underwriting liabilities including the costs of running the business. The member agrees with the agents to provide funds upon demand to enable the agents to meet these liabilities …

There is also, as an integral part of these arrangements, the central fund. Each member contributes annually to this fund. If a member fails to provide the agents with sufficient money and the deposits and security are not in themselves enough to satisfy solvency requirements, the fund can be “earmarked” by the amount of the shortfall so as to enable that part of the central fund to be taken into account for purposes of the solvency requirements of the member concerned. The Central Fund Byelaw stipulates that the Society has the right to demand payment from the member of any amount so earmarked. If the member persists in a failure to meet cash calls from the agents and funds and securities of the member held at Lloyd’s are insufficient to discharge the amounts outstanding, then as a last resort the central fund is used to discharge the member’s obligations. Again in such an event the Central Fund Byelaw stipulates that the Society has the right to demand payment from the member of the amount so disbursed as a civil debt due from the member to the Society.

In Clementson among other issues that arose the defendants contended that the Society had been guilty of anti-competitive practices contrary to the Treaty of Rome (the “third issue”). In this respect an order was made for the trial of certain preliminary issues, phrased in the following way (see at p 312, col 1):

… whether the following matters are capable, as a matter of law, of infringing Articles … 85 … of the EC Treaty …

The defendants’ attack on the allegedly anti-competitive nature of the Lloyd’s arrangements covered a broad front (see at p 313, col 1). In sum (at p 314, col 1):

The defendants allege that all these matters meant that the Lloyd’s arrangements restricted, distorted or prevented competition in the market for the provision of capital for the underwriting of insurance at Lloyd’s, the market for the provision of agency services to names and in the market for brokerage at Lloyd’s.

Mr Justice Saville determined that in answering the “third issue” a central and vital question must be whether the Society’s attempt to enforce the Central Fund Byelaw in seeking reimbursement for sums paid out of the central fund fell within the prohibition of art 85. He concluded on this question as follows (at pp 315-316):

In the present case, however, I fail to see how on any sensible basis it could be suggested that in discharging the underwriting obligations of members who have failed to honour their commitments and in seeking reimbursement of such payments from those members, the Society is somehow engaged either in economic activities of the kind discussed in the authorities, or is doing something which may affect trade between member states, or which could to any degree whatever prevent, restrict or distort competition in the common market or indeed elsewhere. What the Society is doing is, in fact, the precise opposite of these things. It is endeavouring by the exercise of its regulatory powers to ensure that the Lloyd’s insurance market (on the defendants’ own case a significant part of trade between member states) is maintained, by in effect enforcing the underwriting obligations of the members who have failed themselves to honour their own underwriting commitments. Unless such commitments are honoured then there will indeed be a prevention, restriction or distortion of competition, for in that event this important part of the Community insurance market will not be able to function properly so as to compete with other insurers who are able and willing to fulfil their promises. As I pointed out during the course of argument, it could be said with some force that it is in truth what the defendants are doing, together with others who have together decided to refrain from honouring their underwriting commitments, that offends art 85. These individuals, who it is common ground are undertakings carrying out trading or commercial activities as underwriters, have apparently agreed or decided in concert not to fund their underwriting activities. The effect, if not the object, would be on their own case to starve the Society of funds and thus either to destroy or at least gravely to damage the business of underwriting at Lloyd’s, and in consequence adversely to affect competition between insurers in the common market.

The defendants submit that it is quite wrong to concentrate exclusively on the Central Fund Byelaw and on the legitimacy of the Society’s claims for reimbursement under that byelaw. In their submission, it is necessary to have regard to the whole of the Lloyd’s arrangements when considering the applicability of art 85. Looking at the matter in this way, and since it is the defendant’s case that the sums now being claimed are the product of the breaches of art 85 which they allege, there is, at least for the purposes of the preliminary issues in the present cases, sufficient connection between the offending restrictions and this exercise of powers under [*318] the Central Fund Byelaw to make the latter subject to art 85.

As a general proposition I accept that in considering art 85 it is necessary to look at the whole of the picture. It goes without saying that that which appears innocuous viewed in isolation may well take on a completely different aspect when viewed in the overall context of all the agreements, decisions or practices involved. But the difficulty for the defendants in the present case is that they accept that they were personally contractually committed to the underwriting obligations which have been discharged by payment from the central fund and for which the Society now seek reimbursement. This became expressly clear during the course of argument, when I enquired of the defendants whether their arguments involved the proposition that they were not bound as a matter of law to honour their underwriting obligations, and was assured that this was not the case.

In these circumstances the proposition must be that while the defendants were bound personally to perform those obligations, art 85 somehow entails that the Society cannot take steps to ensure that this is done, because these admittedly binding obligations came into existence as a result of unlawful anti-competitive practices of the Society. I have seen nothing in the many dozens of cases cited to me which begins to suggest that art 85 should be construed and applied in this way. The defendants assert (contrary to the sworn testimony of the Society) that there is plenty of money in the central fund, so that their policyholders will be paid, but this (as I have already pointed out) is another way of saying that other members of Lloyd’s should shoulder the legal obligations of the defendants, quite apart from the fact that on the defendants’ own arguments no one is obliged to contribute to the central fund, at least so as to enable losses resulting from the alleged illegal practices to be paid.

In my judgment, therefore, the action of the Society to recover sums disbursed from the central fund to discharge the obligations of the defendants does not, in the context of the present proceedings, constitute an activity subject to art 85 of the Treaty of Rome.

In a subsequent part of his judgment Mr Justice Saville went on to consider (as the third sub-issue of the third issue) a submission by the defendants that the Lloyd’s (1985) Agency Agreement Byelaw was itself an anti-competitive arrangement struck down by art 85. As to this he concluded as follows (at p 319, cols 1 and 2):

… The complaint of the defendants in this regard is that the agents are given the widest possible powers to write what business they consider necessary or desirable, and the standard terms effectively deny the Names from interfering with the control and management of the underwriting business, which is in the sole hands of the agents. The defendants say that this restricts competition, since but for the requirement of standard forms, agents could compete with one another in offering better terms to Names, in the form of giving Names more control over the running of the business, in particular the types of risk to be accepted and the levels of premium to be charged. In addition, the defendants contend that their inability to control matters puts them at an unfair disadvantage to working names, ie those actually conducting the business.

The mere fact of standard terms does not, of course, demonstrate a breach of art 85. What has to be established is that the object or effect of such terms is to prevent, restrict or distort competition within the common market. Indeed it is clear from Community authorities that circumstances may arise where the absence of what can be described as standard terms offends art 85. For example, where the rules for membership of a trade association do not set out objectively justifiable criteria equally applicable to all, with proper rights of appeal, but instead allow for membership to be granted or refused on an arbitrary or ad hoc basis, then such provisions are likely to offend art 85, for they would be calculated to inhibit competition for unacceptable reasons.

There is nothing in the standard terms themselves or their provenance which suggests that they were put in force with the object of unlawfully preventing, restricting or distorting competition, nor in my judgment can this be said to be their effect. For the Lloyd’s market to operate properly and provide effective competitive services it seems to me not merely desirable but essential that not only should those with the actual conduct of the underwriting have the wide powers given to them under the standard form of agreements (as I have observed in a number of recent cases) but that all names who have to employ agents should be treated in the same way so far as the conduct of the business is concerned. Were this not so then there would not be objectively justifiable criteria applicable to all who wish to engage in the business of insurance at Lloyd’s, nor, given the number of names involved, could Lloyd’s exist as a viable insurance and reinsurance market. In my judgment the standard agency and sub-agency agreements and [*319] their mandatory use cannot be categorised as imposing restrictions over and above what the very nature of the Lloyd’s market itself requires and which accordingly, for reasons already given, cannot be regarded as falling within the provisions of art 85.

Mr Justice Saville therefore gave judgment in favour of the Society of Lloyd’s.

In the Court of Appeal, Society of Lloyd’s v Clementson, [1995] LRLR 307, that decision was reversed since it was held that the issue of whether there had been an infringement of art 85 such as would prevent the Society from enforcing their Central Fund Byelaw could not be decided as a preliminary issue and would have to proceed to trial to be decided on the evidence. Sir Thomas Bingham, MR dealt with the Community law issues at pp 325-329. He dealt first of all with the threshold requirement under art 85(1) that the relevant agreements between undertakings or decisions by associations of undertakings or concerted practices be such as “may affect trade between member states”. As to that requirement he said (at p 325, cols 1 and 2):

It could scarcely be said, in the case of any individual name, that the decision to make payment under par 7 or to sue under par 10, might affect trade between member states. I am not, however, able, as a matter of law and in the absence of economic or other evidence, to reach the same conclusion about the decisions to adopt the central fund byelaw and the reinsurance provision. Given the substantial share of the European insurance market which Lloyd’s has traditionally enjoyed, it seems to me at least possible that these decisions (if they are such) have and have had economic effects of more than purely domestic significance.

The Master of the Rolls then turned to the additional requirement that the relevant agreements etc —

… have as their object or effect the prevention, restriction or distortion of competition within the common market

and began by setting out a series of “unchallengeable principles” established by the terms of the article and the jurisprudence of the Court of Justice (at p 325, col 2):

(1) Decisions fall within the prohibition of the article if they have either the object or the effect of preventing, restricting or distorting competition; it is not necessary to show that they have this object if they have this effect.

(2) Decisions fall within the prohibition of the article if they have the object or effect of preventing or restricting or distorting competition; it is, again, not necessary to show prevention or restriction of competition if distortion is shown.

(3) Any decision by an association of undertakings which may affect trade between member states and which has as its object or effect the prevention, restriction or distortion of competition within the common market is automatically void.

(4) Article 85 has direct effect and national Courts are accordingly bound to apply it.

(5) The power in par (3) of art 85 to declare inapplicable the prohibition in par (1) in any given case is exercisable only by the Commission. It is not exercisable by a national government or a national Court. Any association of undertakings seeking to show that any of its decisions which may affect trade between member states and which has as its object or effect the prevention, restriction or distortion of competition within the common market must accordingly notify the Commission and obtain exemption. If a decision falls within the prohibition in par (1) of the article, a national Court cannot relieve the association from the consequences in par (2) on the ground that the decision is in all the circumstances beneficial or economically justified.

(6) The conduct of insurance falls within the scope of art 85.

Against the background of these principles the Master of the Rolls then considered Mr Clementson’s submission that the Central Fund Byelaw upon which the Society was relying was anti-competitive and thus unenforceable. After quoting from Sir David Walker’s June, 1992 report he said (at p 326, cols 1 and 2):

The existence of the central fund as a source from which, in the last resort, policy-holders would be paid enabled Lloyd’s underwriters (so it was argued for Mr Clementson) to neglect the ordinary disciplines of prudent underwriting and so capture business which would otherwise have gone to others. It also encouraged Lloyd’s to vet less carefully than would otherwise have been appropriate the means of those in whose names large obligations were taken.

I do not feel able, as a matter of law, to reject Mr Clementson’s contentions. One may imagine a party in (say) New York considering whether to place a risk with (say) a corporate insurer in Frankfurt or with Lloyd’s in London. The New York party will no doubt be influenced by many considerations in making his choice, among them the terms of the cover and the assurance of payment if the risk materialises. It seems reasonable to suppose that his decision may also be influenced by the level of premium payable. If it is possible that Lloyd’s underwriters have been [*320] able to attract business by offering lower premiums, in effect gambling on the chance that a risk will not materialise, in knowledge that, if all else fails, the central fund will be used to indemnify the assured, then that would in my view make it arguable that the existence and mode of operation of the central fund have had the effect of distorting competition within the common market.

He concluded (at p 328, col 1):

I do not feel able to reject Mr Clementson’s argument in so far as it is based on the Central Fund Byelaw as plainly wrong in law. Nor am I persuaded it is right in law. It seems to me at least possible that the correct answer in law may turn on facts which, because of the procedure adopted, have not yet been fully explored or decided.

In the light of these conclusions it was unnecessary to determine the specific sub-issues on which the preliminary points had been ordered and they were commented on only briefly. In dealing with the third sub-issue relating to the Agency Agreements Byelaw, the Master of the Rolls merely said (at p 329, cols 1 and 2):

A decision which obliges all the traders in a market to trade on common terms is prima facie capable of restricting or distorting competition. The restriction may be fully justified; if so, it may earn exemption under art 85(3). Given the complex terms of the standard agency agreement I could not hold as a matter of law and in the absence of evidence that none of its terms was capable of distorting competition in the common market.

In conclusion the Master of the Rolls said this (at p 329, col 2):

I am not, as I wish to emphasize, concluding that Lloyd’s is wrong on any of these points. It may be, or it may not be. I am only concluding that it is not, in my judgment, shown to be right. The same is true of Mr Clementson. I do not think that these issues can be answered favourably to one side or the other at this stage.

I differ from the Judge with diffidence, reluctance and regret. In answering the sub-heads of this issue, he prefaced his answers with the words “In bringing the present proceedings …”, “In exercising its powers to seek reimbursement …”, “In the context of the present proceedings …”. He assumed as a fact that the payments made by Lloyd’s were made purely to meet the legitimate claims of policy-holders, and he confined his attention to the conduct of Lloyd’s in making payment and seeking reimbursement from Names. There is obvious force in his view that paying the policy holder’s claim and seeking to enforce a contract debt do not offend against art 85. But the Judge’s factual assumption is not accepted and may not be entirely true. The legal issues were not framed in this very limited way. And I do not think the payment by Lloyd’s and the recovery by Lloyd’s can properly be regarded in law as isolated acts independent of closely interrelated provisions on which their operation depended. Mr Clementson is, I think, entitled to complain that the answers the Judge gave were not answers to the issues as framed. For reasons I have tried to give, I do not think the Judge could properly have answered the issues as framed in favour of Lloyd’s at this stage.

Lord Justice Steyn agreed and on the Community law issues added this (at p 331, cols 1 and 2):

At the end of the oral argument my provisional view was that Mr Clementson should fail on all Community law issues. In taking that view I was influenced by the judgment of Mr Justice Saville and the arguments of Mr Beloff, QC I have, been persuaded since then by the judgment of Sir Thomas Bingham, MR, that it is not a position that I can maintain. I still consider that Mr Clementson’s Community law defences will ultimately fail. But on reflection I cannot on a principled basis conscientiously hold that the submissions of Mr Lever, QC, on the Community law defences are entirely unarguable.

Finally, Lord Justice Hoffmann, who also agreed, said this (at p 332):

The doubts which exist about the compatibility of various Lloyd’s byelaws and directions with European competition law seem to me to stem from the ambiguous nature of Lloyd’s in the insurance world. For some purposes, it presents itself as a single institution seeking to preserve or increase its market share against outsiders and for other purposes it acts as an association of individual insurers, each competing with each other as well as with outside insurers. Rules which are entirely acceptable on the first hypothesis may well be anti-competitive on the second. Lloyd’s could have resolved this identity crisis by notifying its rules to the Commission, as it repeatedly said it would do. But for reasons which have never been explained, it decided not to. It may appear at trial that there is in fact no need to do so. But I agree with the Master of the Rolls that we are not in a position to say so now.

It is next necessary for me to set out the similarities and differences or alleged similarities and differences between Clementson and the present proceedings. [*321]

The Central Fund Byelaw is not directly in issue in these proceedings. I do not have here the Society of Lloyd’s suing a defendant as a member of Lloyd’s pursuant to its Central Fund Byelaw for reimbursement of sums expended on his behalf from the central fund, but rather an individual firm of managing agents suing a Name as its principal in respect of his liability as a syndicate member pursuant to cl 7 of the standard agency agreement. Nevertheless, it is said on behalf of Dr Higgins that the absence of the central fund and its byelaw is more apparent than real, because the background to this action is that the managing agent is here suing at the behest of the Society in order to protect its central fund. It is, so it is submitted, at any rate arguably true for the purpose of these proceedings that the position is as follows. On Apr 24, 1995 the Society, through its Lloyd’s Regulatory Board (“LRB”), approved policies designed to improve the collection of calls on underwriting Names with a view to reducing the need for disbursements from the central fund. Pursuant to those policy decisions, on Apr 25, 1995 a bulletin was issued to all underwriting agents reminding them of their obligations to ensure that cash calls are met by Names, requiring them to take all reasonable steps, including litigation, to ensure collection of outstanding cash calls, and informing them that failure in this respect would be relevant to any review of their status as “fit and proper” persons pursuant to Lloyd’s underwriting agency byelaw. The bulletin continued:

The purpose of this exercise is to ensure that the utilisation of Central Fund is limited to a bridging facility of last rather than first resort in accordance with its proper purposes. As a result funding for the pursuit of members chosen for litigation may, in certain circumstances, be available and agents are encouraged to contact the FRD (Financial Recovery Department) in this connection.

A Lloyd’s press release of the same day commenting on these measures reported Lloyd’s Chairman, Mr David Rowland, saying that —

… These steps will strengthen Lloyd’s ability to collect money owed to the Society.

It is said that these proceedings among others have been brought by managing agents against Names as a result of this initiative and pressure on the part of Lloyd’s. Although it is not in evidence I have been told by Mr Burton, QC that it is not contentious that Dr Higgins had already received a notice of intended drawdown from the central fund prior to the Clementson decision in the Court of Appeal, and that that drawdown was not carried out in the light of that decision. It is submitted that these proceedings have been brought at Lloyd’s instigation in effect as the means of achieving indirectly, or by an alternative route, what Lloyd’s would have achieved via use of the central fund and the Central Fund Byelaw, had the Court of Appeal decision in Clementson not thrown at the very least a temporary obstacle in that path.

I will therefore assume for the purpose of these proceedings that, whatever their form, they have been instigated at the behest of Lloyd’s with the aim inter alia of forestalling the need of disbursements from the central fund to make up for the failure of persons in the position of Dr Higgins to meet the calls made by managing agents upon them. The question then arises whether that renders these proceedings subject to the arguments raised in Clementson concerning the validity of the central fund and Central Fund Byelaw. Dr Higgins says it does, the plaintiffs say it does not, that these proceedings have to be viewed on their own legal merits.

The other matter argued in Clementson which is raised again in these proceedings is the validity of the standard agency agreement. The importance of that for present purposes is that cl 7, the pay now, sue later provision, which is the obligation upon which this suit is founded, is of course a term of that standard agency agreement. It will be recalled that in Clementson Mr Justice Saville held that the standard agency agreement did not fall foul of art 85: he found that the wide underwriting powers granted under that agreement were essential to the operation of the Lloyd’s market and that the standard form of that agreement was similarly essential to the existence of Lloyd’s as a viable market (at p 319). In the Court of Appeal, however, the issue as to the standard agency agreement was not regarded as necessary to that Court’s decision, but it was said that a decision which obliges all traders in a market to trade on common terms is prima facie capable of being anti-competitive (at p 329). Dr Higgins says that the Court of Appeal’s view is again determinative of the present proceedings, whether one approaches the matter by reference to the 1988 Byelaw itself (in Clementson its 1985 equivalent was in issue) or to the individual standard agency agreements within it. The plaintiffs say that, whatever may be the position regarding the possibility “as a matter of law and in the absence of evidence” of some one or other of the standard agency agreement’s terms being capable of distorting competition (cf Clementson at p 329), in this case the issue must be whether cl 7 would be invalidated by the provisions of art 85: for they submit that an agreement is not invalidated as a whole by reason of the anti-competitive nature of some one or other of an agreement’s terms, if the term in question is not itself prohibited as such by art 85 and if it would survive as binding on the [*322] parties to it despite the invalidity of other parts of their agreement.

Thus one comes to the matter of cl 7 itself. Unlike the standard agency agreement as a whole, of which it forms part, cl 7 itself was not the subject of specific review in the Clementson judgments and did not have to be. It was not there the obligation sued upon. It is here. Dr Higgins, however, says that even taken by itself cl 7 is arguably anti-competitive, for it is a device, like the central fund, designed to provide Lloyd’s with a competitive advantage only attainable by agreement and standardized provision. The plaintiffs, on the other hand, say that it is impossible to visualize individual underwriters operating through an underwriting agency who would not be liable, either by agreement or even by operation of law in the absence of agreement, to put their agents in funds for the purpose of discharging obligations under the insurance policies they have underwritten; and that any argument that such a provision is anti-competitive is misconceived.

The next point I must mention was the subject of considerable debate before me, and that is whether the test in these O.14 proceedings is the same test as that applied by the Court of Appeal in Clementson on the preliminary issues which fell for decision there. On behalf of the plaintiffs Mr Pollock drew my attention to the well-known principles regarding the O.14 jurisdiction, such as that the burden is on the defendant to show cause why a properly constituted application for summary judgment should not be granted, that mere unparticularized assertion on the part of a defendant is not enough to meet that burden, and that in general a defendant must show “a fair or reasonable probability of … having a real or bona fide defence” (per Lord Justice Ackner in Banque de Paris et des Pays-Bas (Suisse) SA v Costa de Naray, [1984] 1 Lloyd’s Rep 21 at p 23, National Westminster Bank plc v Daniel, [1993] 1 WLR 1453 at p 1457E). He also cited Megarry, V-C in Lady Anne Tennant v Associated Newspapers Group Ltd, [1979] 5 FSR 298 to the effect that —

You do not get leave to defend by putting forward a case that is all surmise and Micawberism.

By contrast, Mr Pollock submitted, the Clementson case raised a preliminary issue at trial expressed in the terms of a demurrer, viz whether “as a matter of law” specified matters were “capable” of infringing art 85, and that that issue had to be decided on limited factual material, so that if there was other factual material not then before the Court which could “as a matter of law” affect the issue, the preliminary issue could not be decided in favour of the plaintiff there. Mr Burton, on the other hand, while accepting the O.14 burden of showing cause, submitted that in practice the test applied in Clementson was no different. In any event he submitted that Dr Higgins here satisfied the O.14 test.

Finally, there is this difference between Clementson and the present case. In Clementson the defendants were claiming that they had suffered loss as a result of what they alleged were Lloyd’s anti-competitive practices: arguably breach of art 85 gives rise to a personal claim in damages at the suit of a party injured by the operation of prohibited agreements, in the nature of a cause of action for breach of statutory duty. Thus the defendants in Clementson relied on the alleged breaches of art 85 not only as a defence but also as a set-off or counterclaim in the amount of their loss (see Mr Justice Saville at p 312, col 1).

This is why in Clementson there was submission about the manner in which allegedly anti-competitive agreements and decisions had led to the writing of poor insurance and the defendants thus being drawn into loss. It followed that in Clementson the preliminary issue regarding community law was not confined to the question whether a right to ensure the payment of the legitimate claims of policy-holders via the central fund was valid and enforceable: it might be that it was, and nevertheless the general state of anti-competitive agreements and decisions would have sustained a set-off or counterclaim to extinguish the claim. In this context, the difference between the approach on the one hand of Mr Justice Saville, who, in the words of the Master of the Rolls (at p 329, col 2):

… assumed as a fact that the payments made by Lloyd’s were made purely to meet the legitimate claims of policy-holders, and … confined his attention to the conduct of Lloyd’s in making payment and seeking reimbursement from Names …

and on the other hand of the Master of the Rolls himself, who pointed out (at p 329, col 2) that —

… the Judge’s factual assumption is not accepted and may not be entirely true. The legal issues were not framed in this very limited way. And I do not think that the payment by Lloyd’s and the recovery by Lloyd’s can properly be regarded in law as isolated acts independent of closely interrelated provisions on which their operation depended …

was at the heart of the Court of Appeal’s disagreement with Mr Justice Saville.

In the present case, however, no complaint has been made in the affidavits before me nor has there been any submission that Dr Higgins has a defence by way of set-off or counterclaim, in diminution or extinction of the claim against him, by reason of the [*323] plaintiffs’ (or anyone else’s) breach of community law or otherwise. This is another factor that has led Mr Pollock to submit that, subject to Dr Higgins’ point that this action must fail because it is Lloyd’s attempt in another form to preserve the central fund, the crux of this application is whether there is any properly arguable case that cl 7, the obligation sued upon, is unenforceable under community law.

This action as an unlawful attempt to secure the anti-competitive object of the central fund

I therefore turn first of all to Dr Higgins’ submission that this action is at least arguably tainted with illegality because it is merely another attempt to secure the anti-competitive object of the central fund. For the purpose of this submission Mr Pollock was prepared to concede that, if I agreed with it, I should give leave to defend, whatever otherwise might be said in favour of his contention that I could consider again, under the O.14 test, Clementson’s holding that, as a matter of law, it could not without more be said that the central fund and its Byelaw were not in breach of art 85. Mr Pollock made this concession in effect because he accepted that, with the Clementson trial on the central fund issues imminently due to take place in January, 1996, there was at least “some other reason” for a trial in the present case as well (cf O 14, r 3(1)). He was prepared to accept, therefore, that in matters of the central fund and its byelaw I should regard myself as bound by Clementson. It follows that this is the natural point at which to start to consider Dr Higgins’ claim for leave to defend, for if he is right as to the present submission, albeit Mr Burton put it fourth and last in his submissions before me, nothing else matters.

Since, I accept, for the purposes of this application, the factual premise of Dr Higgins’ present submission, that this action has been brought at the instigation of Lloyd’s with the aim inter alia of protecting the central fund from further disbursements, and since Mr Pollock accepts in this context that the Central Fund and its Byelaw are arguably anti-competitive, there remains a pure question of law whether this action, whatever its other merits, is, at any rate arguably, so tainted by illegality that it cannot succeed. In this connection Mr Burton relied on the following material. He cited Bellamy & Child, Common Market Law of Competition, 4th ed (1993) at par 2-023: The mere exercise of a legal right, for example, by bringing an infringement action under a patent or trademark or registered design does not, as such, fall within Article 85(1); but the position may be different if the action is brought pursuant to a continuing agreement or concerted practice and has the effect of dividing markets or restricting competition in some unreasonable and exploitative manner.

He also referred me to par 8-065 of the same work: Thus, although intellectual property rights do not as such fall within Article 85(1), the bringing of an infringement action may contravene Article 85(1) where the infringement action tends to the partitioning of the common market and is brought as “the object, the means or the consequence” of an agreement. The principles were first laid down in Consten and Grundig and Sirena and have been developed in later cases.

In Etablissements Consten SARL and Grundig-Verkaufs-GmbH v Commission of the European Community, [1966] ECR 299, Grundig (a supplier) granted to Consten, as part of a wider distribution agreement, the right to register a trademark in France. The purpose of the grant was to enable Consten to keep under surveillance and impede the import of Grundig’s products into France by other suppliers. In other words the grant of the trademark was part of an agreement to divide markets. The European Court of Justice held that the agreement was caught by art 85(1) and therefore agreed that the Commission had rightly injuncted Consten from relying on the trademark to hinder parallel imports. The Court said (at pp 345-346):

The prohibition [in article 85(1)] would be ineffective if Consten could continue to use the trade-mark to achieve the same object as that pursued by the agreement which has been held to be unlawful …

The injunction … to refrain from using rights under national trade-mark law in order to set an obstacle in the way of parallel imports does not affect the grant of those rights but only limits their exercise to the extent necessary to give effect to the prohibition under Article 85(1) …

Such a body of rules … does not allow the improper use of rights under any national trademark law in order to frustrate the Community’s law on cartels.

In Sirena Srl v Eda Srl, [1971] ECR 69, the same trademark had come into different hands in different member states as a result of assignments. At p 82 the Court of Justice said:

A trade-mark right, as a legal entity, does not itself possess those elements of contract or concerted practice referred to in Article 85(1). Nevertheless, the exercise of that right might fall within the ambit of the prohibitions contained in the Treaty each time it manifests itself as the subject, the means or the result of a restrictive practice. [*324]

Mr Burton also relied in this context on cases dealing with the exercise of rights other than the right to sue, such as a right of a supplier to refuse to supply a customer when its exercise is motivated by anti-competitive purposes (Allgemeine Elektricats-Gesellschaft AEG-Telefunken AG v Commission of the European Communities, [1983] ECR 3151), or the service of a notice to quit on a brewery’s tenant when motivated by the tenant’s refusal to enter into an illegal agreement (Holleran v Daniel Thwaites plc, [1989] 2 CMLR 917 at p 928), or cases dealing with acts carried out in implementation of a prior unlawful agreement with the object of distorting competition (Re The Cement Cartel: EC Commission v Cembureau, [1995] 4 CMLR 327 at pp 507-513).

Based on these authorities Mr Burton submitted that this action, instigated as it was in protection of an arguably anti-competitive central fund, is similarly tainted as the “subject, means or result” of a restrictive practice or as the implementation of an illegal object. At any rate, he submits, the tainting is arguable.

I do not agree. For the purpose of this submission I have to assume that the rights being exercised by the plaintiffs under the standard agency agreement are otherwise lawful and enforceable. Whether they are or arguably are not is of course the subject of consideration below. In the present context the only authorities relied on by Mr Burton impeaching the use of actions to enforce otherwise valid legal rights arise in the area of intellectual property, viz the Consten and Sirena cases. All that those cases justify, however, is the proposition that you cannot carry out an unlawful agreement by exercising rights granted to you under an unlawful agreement for the purpose of implementing what is unlawful about it. Even so, for all other purposes the trademark rights remained unimpeachable. In this case, however, the rights being exercised are not being exercised for the purpose of implementing an unlawful arrangement. The central fund arrangements are left untouched, be they valid or not. The present action is one to enforce an altogether more basic obligation, that of a Name to provide funds to his underwriting agent to enable valid claims on the policies that he has underwritten to be met. If that obligation is itself enforceable, I can see nothing in its exercise amounting to —

… the improper use of rights … in order to frustrate the Community’s law on cartels [to cite the words of Consten] …

nor can I see that its enforcement amounts, even arguably, to —

… the subject, the means or the result of a restrictive practice (to pick up the words of Sirena).

Moreover in Consten and Sirena it was a party to the unlawful agreement itself, or one standing in his shoes, who was injuncted from carrying out that agreement’s unlawful object. Similarly, in the other cases cited by Mr Burton: it was a party to an unlawful agreement itself who was the subject of the Court’s ruling. No case has been cited to me in which A has been unable to enforce his lawful rights under contract with B because A has been instigated to litigate against B by C in furtherance of C’s unlawful agreement or decision. Such a doctrine would be immensely far-reaching and damaging to lawful rights. I decline to accede to it as even arguable in the absence of authority binding on me. It may be that a party to an unlawful arrangement cannot exercise his otherwise lawful rights if he seeks to use them as the means or otherwise of implementing his prohibited arrangements. That, however, is a wholly different matter. If Mr Burton’s submission had any validity, I am unable to understand why it would be that even an insured under a Lloyd’s policy would be able to enforce that policy against a Name in circumstances where that insured were to be asked by Lloyd’s or by the managing agents under pressure from Lloyd’s to do so in order to forestall any call on the central fund. Yet Mr Burton accepts before me, as did the defendants in Clementson (see at p 315, col 2), that even if the argument that Lloyd’s insurance business has been obtained in the international insurance market by means of anti-competitive arrangements prohibited under art 85 were found to be correct, there is no defence based on art 85 that a Name could raise against an insured who seeks to enforce a policy against him.

This matter can also be looked at in the following way. The agreement and the causes of action on which the plaintiffs sue predate the decision by Lloyd’s to instigate the plaintiffs to commence action against Dr Higgins. The validity and enforceability of that agreement and those causes of action cannot be rendered invalid and unenforceable because of subsequent pressure by Lloyd’s, even if that pressure can itself be anathematized. Community law may require the Courts to say, if the central fund arrangements were to be found to be unlawful, that the Lloyd’s decision in aid of the central fund to put pressure on agents to enforce their rights must be rescinded. I cannot, however, see how the actions themselves, if otherwise founded on lawful rights, can be impeached.

Finally, there is, Mr Pollock submits, an illogicality in Dr Higgins’ position. If the central fund arrangements are unlawful, why is it unlawful for Lloyd’s to wish to avoid (unnecessary) resort to them? The central fund was intended as a third line of liquidity for the purpose of the payment of claims under Lloyd’s policies, where the first line [*325] was the Names’ obligation to pay calls, and the second was the security posted by Names for the discharge of their obligations. As the Lloyd’s bulletin of Apr 25, 1995 stated:

The purpose of this exercise is to ensure that the utilisation of Central Fund is limited to a bridging facility of last rather than first resort in accordance with its proper purposes.

In these circumstances, it cannot be improper for Lloyd’s to wish to return as it were to basics and to minimize use of the central fund. In other words, even if the central fund arrangements are unlawful, Lloyd’s pressure on agents is properly to be understood as designed not to implement those unlawful arrangements but to avoid doing so. In my judgment there is considerable force in these submissions. It seems to me that, in the light of the Court of Appeal judgment in Clementson, that is precisely what the Society of Lloyd’s must have been minded to do. Since, however, Mr Pollock’s submissions involve a view as to the proper characterization of the Lloyd’s pressure complained of, I prefer to rest my decision on the matters of law previously stated, far which reasons I reject this first defence.

The Agency Agreement Byelaw of 1988

In Clementson the Agency Agreement Byelaw of 1985 was in issue. For present purposes nothing critical turns on the fact that it is the 1988 Byelaw that is here in question. Mr Burton’s submission is first, that the Byelaw was held in Clementson to be arguably anti-competitive and that decision is binding on me; secondly, that, Clementson apart, the Byelaw is arguably anti-competitive; and thirdly, that upon either premise, no part of the standard agency agreement which is scheduled to that Byelaw can be enforced. Therefore, at least arguably, this action must fail.

As for the submission that Clementson is in this respect binding on me in the O.14 context, I reject it. The sale basis for this submission is the brief passage at p 329, cols 1 and 2 which for the sake of convenience to my reader I will set out again:

A decision which obliges all the traders in a market to trade on common terms is prima facie capable of restricting or distorting competition. The restriction may be fully justified; if so, it may earn exemption under art 85(3). Given the complex terms of the standard agency agreement I could not hold as a matter of law and in the absence of evidence that none of its terms was capable of distorting competition in the common market.

I make two observations about this passage. First, it falls within that part of the Master of the Rolls’ judgment where, having already decided that there would have to be a full trial on the community law issues, he turned for only brief comment to matters such as the Byelaw on the basis that anything further was unnecessary. Secondly, the negative holding that it could not be excluded “as a matter of law and in the absence of evidence” that some one or other of the terms of the standard agency agreement was capable of distorting competition is plainly not a holding that even a single one of those terms even arguably “[has] as [its] object or effect” the distortion of completion.

In my judgment it follows that if, on an application for summary judgment, Dr Higgins wishes to say that the Byelaw is proscribed, he must advance at least the basis of a fair or reasonable argument, and not by mere assertion, that complaint can legitimately be made about the potentially anti-competitive object or effect of particular terms of the standard agency agreement which the Byelaw requires. Alternatively he must show an (at any rate arguable) rule of law under which standard term agreements are per se illegal. He must also show an arguable case that any such terms of which complaint is made “may affect trade between Member States”. In as much as complaint is made about cl 7 itself, I will leave that out of account far the present, because it will be considered separately in due course. If there is an arguable case that cl 7 is itself anti-competitive in object or effect and may affect trade between member states, then it is common ground that leave to defend should be granted. Similarly, in as much as complaint may be made of other terms of the standard agency agreement, I will deal with that under the heading of the standard agency agreement below: in that case, however. Mr Pollock submits that the arguable invalidity of other terms of the agreement would not affect the essential validity of cl 7.

As for a per se rule, Mr Burton has drawn my attention to two paragraphs in Bellamy & Child.Paragraph 2-098 reads as follows:

Agreements that have been held by the Court of Justice and the Court of First Instance to have, by their very nature, the object of restricting competition include “horizontal” agreements to fix prices, partition markets, or deal exclusively through agreed channels, and “vertical” agreements imposing export bans, or otherwise restricting the buyer’s freedom to deal with the goods. The Commission has followed the same approach.

Paragraph 4-025 states:

Collective horizontal agreements often regulate not only the prices but also the conditions upon which goods or services may be supplied. Since Article 85(1)(a) expressly prohibits agreements which “fix … any other trading conditions” such collective horizontal agreements [*326] usually infringe Article 85(1), particularly if they purport to restrict the terms upon which, or the persons to whom, goods or services may be supplied.

However, par 4-026 goes on to state:

A trade association may make available to its members a standard form of contract for the members to use or not as they see fit. The Commission has stated that

… no objection can be raised against the use of standardised printed forms; their use must, however, not be combined with an understanding or tacit agreement on uniform prices, rebates or conditions of sale.

In my judgment there is nothing here to justify the submission that there exists a rule that mandatory standardized agreements are per se illegal. It all depends on the nature of the agreements. Price-fixing agreements may be per se illegal, but that is because price-fixing is viewed as per se having the object (whatever the subjective purpose and whatever the objective effect) of distorting competition, (Bellamy & Child at par 2-097). To the contrary, all the many European authorities cited to me indicate that the Commission or the European Court considers agreements, including standard form agreements, and their particular terms, on their merits, and the fact that some terms may be objectionable does not mean that others are not free from objection. Thus in Re The International Petroleum Exchange of London Ltd, [1989] 4 CMLR 281, the Commission gave negative clearance to the articles of association and rules and regulations of the IPE, interestingly enough even though they provided for an independent clearing house company which guaranteed due fulfilment of all IPE contracts registered by clearing members (shades of the central fund): see at p 283; and in Re The GAFTA Soya Bean Meal Futures Association Ltd, [1989] 4 CMLR 287 the Commission gave negative clearance to the association’s rules at any rate after requiring it to abandon its system of specified minimum commission rates. Thus in the seminal case of Societe Technique Miniere v Maschinenbau Ulm GmbH, [1966] ECR 237 the Court of Justice warned against —

… an advance judgment with regard to a category of agreements determined by their legal nature [at p 248]

and laid down the rule (at p 250) that art 85(2) with its language “shall be automatically void” —

… only applies to those parts of the agreement affected by the prohibition, or to the agreement as a whole if it appears that those parts are not severable from the agreement itself. Consequently any other contractual provisions which are not affected by the prohibition, and which therefore do not involve the application of the Treaty, fall outside Community law.

I therefore reject as unarguable Mr Burton’s a priori approach to the Byelaw (and thus to the standard agency agreement itself) that merely because it requires the acceptance of standard terms of agreement, therefore Dr Higgins has a real or bona fide defence under art 85.

There is also the initial question whether the standard agency agreement or any objectionable terms within it “may affect trade between Member States”. In the words again of the Court in Technique Miniere, (at p 249):

For this requirement to be fulfilled it must be possible to foresee with a sufficient degree of probability on the basis of a set of objective factors of law or of fact that the agreement in question may have an influence, direct or indirect, actual or potential, on the pattern of trade between Member States.

For these purposes it is necessary to begin by identifying the relevant market for investigation. It is common ground that at least one relevant market is that for the provision of agency services, and that that is an internal Lloyd’s market based in London. Mr Pollock submits that that is the only relevant market, and that as such it is impossible to argue that it could affect trade between member states. Mr Burton (and Dr Green, his junior) submitted that the international insurance market was also relevant. To understand that submission, however, it is again necessary to take into account exactly what it is about the standard agency agreement that is objected to.

The standard agency agreement

It is Dr Higgins’ contention that the history of the evolution of the standard agency agreement, as reflected in the Byelaw, demonstrates, at any rate arguably, both the object and the effect of distorting competition in both the internal Lloyd’s market for agency services and the international market for insurance. I use the word distortion as a convenient shorthand for the proscribed conduct, as being probably the most general of the words “prevention, restriction or distortion” used by art 85(1).

It is not, however, easy for me to state with any feeling of conviction what particular terms within the standard agency agreement are objected to, with the exception of cl 7 itself. No other clauses are specifically identified as anti-competitive by reference to their clause number, either in Mr Michael Freeman’s second affidavit on behalf of Dr Higgins or in Counsel’s written submissions. The most that can be said is that there are certain general references to terms relating to the agent’s wide or total [*327] discretion as to the writing of insurance business on behalf of the Name, and to horizontal and vertical deficit clauses affecting the calculation of an agent’s remuneration. (Deficit clauses permit an agent to net off profits and losses across different syndicates in the same years — horizontal clauses — or across different years — vertical clauses.) There were similar general references to such topics in oral submissions.

It is against this background that I must consider the evidence produced on behalf of Dr Higgins. It consisted of passages from various reports on the working of Lloyd’s over the years.

The Fisher Report. This was the report in 1980 of a working party chaired by Sir Henry Fisher. His report recommended the introduction of a mandatory form of agency agreement in order to protect external Names —

… to give to sections within the Lloyd’s Community protection which they can justifiably expect but are not in practice able to obtain for themselves.

The report identified as a particular example of areas where mandatory provisions ought to be introduced the area of “Legal liability to Names”: thus the report recommended a byelaw forbidding any clause purporting to exclude or limit an agent’s legal liability. As to agents’ remuneration, this was in principle an area where agents should be free to compete, nevertheless in order to protect Names the Council should be prepared to take action to end any abuses which, on investigation, might come to light, and a form of mandatory deficit clause should, if possible, be devised. Mr Burton asked me to note in particular (it was one of four passages from the various reports relied upon which he especially stressed) the following extract from par 1.23 of the report:

We have left to last the one factor of all others which looms largest in any consideration of the constitution of Lloyd’s and the powers of the Committee, namely the security of the Lloyd’s policy. The continued success of Lloyd’s depends on the reputation which it possesses throughout the world. Many things can affect this reputation, favourably or unfavourably. We are satisfied that, despite the principle that the Council and Committee of Lloyd’s should not in general seek to fetter free competition or seek to influence commercial decisions, the Council or Committee should endeavour to prevent conduct which may bring Lloyd’s as an institution into discredit and should have the necessary powers to enable it to do so. But the one matter to which the Council and the Committee should give paramount consideration on all occasions is the maintenance of the security of the Lloyd’s policy. We have taken particular care to ensure that the Council and Committee have sufficient powers in this respect.

The Higgins Report. This was the 1983 report of a working party chaired by Mr AW Higgins. It added its weight to the call for a mandatory form of standard agency agreement. On the subject of the remuneration of agents, it stressed the importance of disclosure requirements to the successful operation of market forces and stated that compulsory deficit clauses needed further consideration. The second passage that Mr Burton in particular underlined for my attention was at par 9.15 of this report:

The Lloyd’s community is right to be concerned about bureaucracy, its fetters, and its direct and indirect cost, all of which must bear upon the competitiveness of the Lloyd’s market. Some price must be paid for effective self-regulation. We believe that the following could contribute materially towards keeping down the level of bureaucracy required to regulate the relationship between Agents and their owners and Names:

(a) overriding articles of association, with undertakings, so as to write into the constitution of each Agency company the limitations imposed on ownership and control (see Appendices 1, 2 and 3);

(b) standard forms of agency and sub-agency agreements in place of the unacceptably one-sided agreements that have been the fashion;

(c) standard accounting and auditing practices embracing adequate disclosure requirements.

The Neill Report. This was the 1987 report of the Committee of Inquiry chaired by Sir Patrick Neill, QC established to report to Parliament on whether the regulatory arrangements at Lloyd’s provided protection for Names comparable to that proposed for investors under the Financial Services Act, 1986. It concluded that the standard agency agreement which had come into effect on Jan 1, 1987 (under the 1985 Byelaw) was seriously defective in protecting Names’ legitimate interests and required reconsideration. In particular Dr Higgins highlights concern expressed about the difficulty for Names of identifying, challenging and controlling agents charges and expenses; and about the problem of challenging calls which a Name was required to pay without disputing. (Nevertheless the report stated that the underlying objective of the pay now sue later clause was laudable: valid claims of policyholders should be met promptly.) It may also be noted that the report recommended that a fair and efficient form of deficit clause should be made mandatory: the arguments against compulsory deficit clauses — the 1985 Byelaw had excluded them [*328] — were found unconvincing. At par 6.33 is a third passage which Mr Burton especially commends to my attention:

What was lacking in this process was detailed consideration of the standard agency agreement by outside lawyers with instructions to review the draft from the point of view of the interests of the Names. With the benefit of hindsight we think that this is a step that ought to have been taken. Had such advice been sought the drafting history of the agreement would have been very different. Such a course should be followed in future whenever the occasion demands it. We recommend accordingly.

The 1988 Lloyd’s Consultative Document. This was produced by the Underwriting Agency Agreements Working Group convened in response to the Neill report recommendations. As to the pay now sue later clause, it accepted previous recommendations that an auditor should report on the reasonableness of calls (while rejecting the Neill report’s more ambitious proposal for a preliminary form of arbitration to decide whether a Name had a prima facie case why he should not pay a call. The condition precedent to a Name’s obligation to meet a call of there being a syndicate auditor’s report has now been incorporated in the 1988 Byelaw’s cl 7.) As to deficit clauses, the Working Group rejected Neill’s recommendation for three reasons, the first being that —

… there is a strongly-rooted belief that the remuneration of agents is a commercial matter that should be left to the market-place,

(the second that a mandatory clause would lead inexorably to an increase in the level of fixed fees, the third that it had not proved easy to identify an efficient and fair form of clause).

The Walker Report. The 1992 report of an inquiry chaired by Sir David Walker into syndicate participations and the LMX spiral underlined a point made in previous reports about the wide discretion allowed to active underwriters under Names’ agency agreements, albeit this was not ascribed to the standard agency agreement first introduced under the 1985 Byelaw but was regarded as predating that event. The LMX spiral had indicated a reminder of the downside risks involved in such flexibility. The report commented (at pars 8.2/3):

Great emphasis is placed by Lloyd’s on the need for the active underwriter to retain substantial flexibility and freedom of manoeuvre. It is argued that this enables him to respond quickly to changing market conditions and to seize opportunities that the corporate reinsurer may be slower to identify and slower still to be able to take up; and that this traditional differentiation between Lloyd’s and corporate underwriters has been an important element in the long term success of Lloyd’s, particularly in specialist areas of business.

The committee share this view and would not wish to see these distinctive characteristics disturbed or displaced in a way that would unreasonably constrain the ability of Lloyd’s underwriters to innovate and react quickly to changing market conditions. But while this latitude has been and should continue to be a source of competitive strength for Lloyd’s, recent experience of the LMX spiral demonstrates that inadequate control of an active underwriter can become a major source of weakness, not only for individual syndicates but for the whole market.

The 1992 Rowland Report. Finally, as the fourth passage which he recommended for my particular attention, Mr Burton referred me to pars 3.29/3.30 of this report:

3.29 Reputation for security. A second strength, but a more vulnerable one, is Lloyd’s reputation for security. Although this continues to be a source of relative advantage, it is under increasing review by external agencies, and is the subject of criticism by competitors. The reforms proposed in this report will, we believe, address these external concerns and ensure that the security behind a Lloyd’s policy continues to be a major source of strength.

3.30 Strengths as a marketplace. Lloyd’s unique structure as a marketplace of competing units is also a major strength, offering brokers an innovative and responsive environment in which to structure and place risks. The market’s structure is well suited to flexible and agile competition, with small entrepreneurial units and short decision-making lines. Lloyd’s competitors are unable to emulate this important competitive strength.

Based upon this material Mr Burton and Dr Green submitted that the standard agency agreement was anti-competitive in both object and effect. Thus to quote from their written submissions: the above reports demonstrate that the existence of the standard agency agreement and the pay now sue later clause —

… represents the end product of an exercise whose very object was the fettering of the free market and competition …;

the standard agency agreement was in itself —

… a fettering of market forces and an interference in the free working of the market.

Had the interests of external Names been properly represented in the drafting of the standard agency agreement, that agreement would have been very different. Among the objects of the standard agency agreement are first, [*329]

… the conferral upon agents of complete and total freedom of manoeuvre which, as Lloyd’s recognises, gives Lloyd’s a competitive advantage over more ponderous corporate rivals …

and secondly, the underpinning of the “security of the Lloyd’s policy” whose twin pillars are the central fund and cl 7. Clause 7 is also designed to protect the central fund. It is, like the central fund, a “device … designed to cement Lloyd’s competitive advantage” and

… attracts article 85 because the competitive advantage to Lloyd’s is only attainable by agreement and coordinated behaviour.

Harmonization of important terms of a contract in order to protect policy holders, while arguably a laudable aim, does not disengage art 85(1) but, if relevant at all, goes only to the possibility of exemption under art 85(3).

In the light of these reports, the reliance placed on them by Dr Higgins and the submissions addressed to me by Counsel, I make the following observations.

First, it is difficult for me to identify any relevant anti-competitive complaint regarding agents’ remuneration and deficit clauses. On the contrary, the passages of the reports to which I have been referred emphasize the importance of leaving questions of remuneration to the open market, subject to an argument for some form of mandatory deficit clause in favour of Names. Agents’ remuneration is dealt with in cl 6 and Schedule 1 of the standard agency agreement, but nothing in that clause or Schedule had been drawn to my particular attention as being anti-competitive in object or effect. I have not been referred to cl 6 or Schedule 1 at all. I have noted the emergence of a form of vertical deficit clause in Schedule 1.

Secondly, while the reports acknowledge that the drafting of a mandatory standard agency agreement is an intrusion on (at any rate the theory of) free competition in the provision of agency services, it is quite clear from the passages to which I have been referred that the guiding principle which illuminated the call towards such mandatory provisions was the need to protect Names, and in particular external Names: see for example the Fisher report at pars 9.16/17ff, the Higgins report at par 9.15(b), and the Neill report at chapter 6. Whether the exercise was well or ill done from that point of view (I have in mind the criticisms of the Neill report regarding the 1985 version and in particular par 6.33), that was the guiding principle, and it was the ground on which in 1987 the Neill report called for further or altered mandatory provisions to protect Names. It is an irony, therefore, that Dr Higgins in this action seeks on the basis of the mandatory nature of the standard agency agreement to excuse his liability to meet his contractual obligations. Of course, if his objection under art 85 is well-founded, or for present purposes even arguably well-founded, he is entitled to the defence, as Lord Mansfield, CJ said in another but parallel context in HolmanJohnson, (1775) 1 Cowp 341 at p 343 —

… not for his sake … but it is founded in general principles of policy, which the defendant has the advantage of, contrary to the real justice …

Thirdly, as for the complaint about the width of an agent’s discretion, it has not been suggested that that width of discretion did not predate the emergence of the standard agency agreement, and the Walker report confirms that it did. It is, however, now subject to the duties of an agent to be found in cl 4 with its requirements regarding inter alia information, reporting and disclosure. It is not suggested that this discretion is a restriction on competition, but rather so enhances the competitive abilities of Lloyd’s syndicates as to give them a competitive advantage. It is submitted that such a competitive advantage is a distortion of competition. It is, however, impossible to visualize how a system of sole (sleeping) traders such as is found at Lloyd’s could possibly work without there being such a discretion. Without it, there would be no Lloyd’s market at all, and no competition. The contrary has not been advanced: what is said is that such considerations go, not to avoiding the application of art 85(1) but, to questions of exemption under art 85(3), and that the standard agency agreement has not even been notified to the Commission, the first stage in seeking exemption. I shall revert to such considerations below.

Fourthly, as to cl 7 and “pay now, sue later”, it is submitted that this, either alone or in combination with the central fund, by advancing the security of a Lloyd’s policy, is another distorting competitive advantage. I simply fail to understand, however, how an obligation to pay calls can be said to distort competition. I quite see that if an insurer fails to pay calls needed to meet his obligations as an insurer, he will quickly go out of business. Indeed, if his advertised terms of trade are such that he disavows an obligation to pay such calls, he will never get into business. That does not begin to mean, however, that the mandatory presence of such an obligation to meet calls is a distortion of competition. In any event, the obligation to put an agent in funds to meet liabilities which he has incurred on his principal’s behalf is an obligation at common law, and I do not see how such a normal obligation, when expressly agreed to even in a mandatory form of agreement, can amount to a distortion of competition. [*330]

I have spoken so far of the obligation to pay simpliciter, as distinct from what is involved in an obligation to “pay now, sue later”. This is because in this action Dr Higgins raises no defence, set-off or counterclaim — other than his reliance on art 85 as a matter of pure defence and not for the purpose of setting up a cause of action in damages. It would therefore be sufficient for the purposes of this action if cl 7.1(a) is valid and enforceable, whatever may be the position regarding sub-cll (d) or (e). Nevertheless, I have no doubt that at least sub-cl (d) shares with the “pay” provisions of sub-cl (a) two characteristics: one, that the Lloyd’s market could not possibly function without it, and two that it cannot be said to distort competition. In my judgment the idea that payment by underwriters of moneys needed to discharge their obligations to their insureds should be subject to or await the outcome of set-offs, counterclaims or deductions which those underwriters may have or claim to have as principals vis-a-vis not their insureds but their agents, is a startling business concept. The Lloyd’s market could not operate on that basis. Such a rule, so far from eliminating a distortion of competition, would eliminate the competition of Lloyd’s from international insurance markets. Sub-clause (d) is needed, not to put the Lloyd’s market into a privileged position, but to even the playing-field, or rather to construct a playing-field, on which individuals who wish to place their capital in the insurance market as sole traders but at the same time to leave the conduct of their insurance business to professional agents may operate at all. I am also inclined to think that a rule which permitted underwriters to avoid payment of their underwriting losses on the ground of disputes with their agents would itself be contrary to the common law. Mr Burton did not dispute Mr Pollock’s submission to that effect, but the matter has not been looked into. As for sub-cl (e), the Court of Appeal has not viewed it as going materially beyond sub-cl (d) in its essence: see Deeny v Gooda Walker Ltd, (CA unreported, July 30, 1993).

Fifthly, there were times during oral argument when I had the feeling that underlying it all was the more fundamental submission that, irrespective of the need to find any particular terms which were anti-competitive in object or effect, Lloyd’s was one big cartel. “Cartel” was the word frequently on Mr Burton’s lips. The submission was, if I understood it aright, that what a corporation can do with the assistance of its shareholders, because they are not undertakings, Lloyd’s cannot do because it is made up of an aggregation of undertakings, viz its Names, and because the agreements which are necessary to turn individual traders into an effective business able to compete in world markets inevitably fall foul of art 85(1) and can only be rescued, if at all, by exemption under art 85(3). I will be forgiven, I hope, if I am mistaken in seeming to detect such a submission, but in my judgment it is misconceived. Otherwise every agreement which even arguably improves its participants’ business affairs (and there are few agreements which are not made with at least the object of advantages for their participants) will be subject to litigation over its validity, provided there is a case for inter-state effect. Such a submission is contrary to the principles laid down in Technique Miniere.

Sixthly, there are passages in Mr Freeman’s affidavit and the submissions based on them on behalf of Dr Higgins which reflect the anxiety no doubt felt by many Names as to their involvement in Lloyd’s and as to their rights to maintain causes of action arising out of their particular circumstances. I say nothing whatsoever as to that. Dr Higgins, as I have mentioned before, raises no set-off or counterclaim, and has no complaint about his underwriting, other than to raise as a matter of public policy in general the defence that he has entered into an unlawful agreement.

In the light of these observations I turn to the authorities cited to me to see whether they arguably support the submissions made on behalf of Dr Higgins. Foremost among them, and strongly relied on by Mr Burton and Dr Green, is Verband der Sachversicherer eV v Commission of the European Communities, [1987] ECR 405 (“VdS”). That was the first case to apply art 85 to the insurance industry. Its central holding is that a recommendation by a trade association to its members imposing a general and across-the-board increase in premiums was caught by art 85(1). In essence it is a case about price-fixing. It is authority for a number of relevant and, at any rate in these proceedings, uncontroversial propositions, such as that the association’s recommendation was a decision of an association of undertakings, and that it is unnecessary to consider actual effects if the apparent object of the decision (viz price-fixing) was to distort competition. Its importance to Dr Higgins lies in the argument advanced on behalf of VdS and rejected by the Court of Justice to the effect that the recommendation was not really concerned with any objective in the field of competition, but merely represented —

… the expression of a method of cooperation which is usual and necessary in the insurance industry given the special characteristics of that industry …

and that the recommendation was —

… the only method of ensuring in the long term that contracts of insurance will be performed [at p 456]. [*331]

The problem had been that internecine price-cutting of premium rates was such as to entail insufficient premium income to meet claims. The Court said (at par 39/42 at p 457) that this aim was irrelevant where price-fixing was concerned. Thus (at par 42):

There is therefore no need to examine whether the statistical analysis needed for the calculation of premiums presuppose the cooperation of all insurers concerned with a particular class of insurance, as was maintained by the intervener, and it is sufficient to state that Article 85(1) does not permit those insurers to extend their concentration to the price which they apply on the market for the service which they provide.

I merely comment for the moment that in the present case I am not concerned with price-fixing, nor indeed with any of the classic symptoms of anti-competitive agreements, such as the division of markets or the regulation of important secondary aspects of competition. I am concerned with the question of whether a purchaser of insurance is entitled to be paid for his insured losses out of the capital of his insurer collected through his insurer’s agent and (although the problem does not arise in this case) irrespective of disputes between his insurer and the latter’s agent.

It was submitted that the reference to VdS in Clementson at p 327 was support for the relevance of the former case to the present dispute: but I do not think it is. That passage cites other parts of VdS as support for other submissions advanced in Clementson not presently under consideration.

Mr Burton also relied on various Commission decisions in the insurance field granting art 85(3) exemption and incidentally finding certain restrictions on competition to be caught by art 85(1). Thus he referred me to Nuovo Consorzio Centrale Guasti Alle Machine Nuovo Cegam, [1984] 2 CMLR 484, Concordato Italiano Incendio Rischi Industriali, Re [1990] 4 CMLR 179; TEKO OJ 1990 L13/34, and Assurpol, OJ 1992 L37/16. In Lloyd’s Underwriters’ Association and The Institute of London Underwriters, OJ 1993 L4/26 art 85(1) was held no longer to be engaged but only as a result of the deletion of offending clauses. All those decisions, however, concerned price-fixing and associated restrictions. I do not find any assistance in them, nor in the fact that the block exemption granted to the insurance industry in Commission Regulation 3932/92/EEC could have, but did not cover the settlement of claims.

Of much greater assistance, and, it seems to me, much closer to the heart of the matter raised by this application, are the following authorities relied on by Mr Pollock. In Remia BV and Others v Commission of the European Communities, [1985] ECR 2545 the Court of Justice held that a non-competition clause included in an agreement for the sale of a business did not engage art 85(1) where, in the absence of such a clause, the agreement of sale would not have taken place. In such a case, competition is promoted, not restricted (at p 2571). In Gottrup-Klim v Dansk Landbrugs Grovvaresekskab AmbA (DLG), [1994] ECR 5641 the Court of Justice held that provisions in the rules of a cooperative purchasing association forbidding its members to participate in competing organizations are not caught by art 85(1) where the cooperative permits for more effective competition and where the restrictions go no further than are necessary for the proper functioning of the cooperative (at p 5687-5688). In this context I find the opinion of Advocate General Tesauro (at pp 5654-5657) highly persuasive and in particular his analysis at p 5655 to the following effect:

According to that analytical approach, agreements which, viewed objectively and in the abstract, have no other function than to restrict freedom of competition between the parties, or between the parties to it and third parties, in a manner considered incompatible with the common market, will be regarded as prohibited by virtue of their object. An example might be a cartel which partitions the market and imposes production quotas or selling prices, or a clause included in a distribution contract which prohibits the import and export of the product covered by it within the common market or which prescribes the retail prices to be charged for the product in question.

Conversely, agreements capable of performing a more complex function will not be regarded as having an anti-competitive object. That applies to clauses which form an integral part of a contract and in that way contribute to defining the basis and the balance of the legal relations between the parties. Indeed, according to a fairly well defined trend in the case-law, in order to establish whether a particular clause is anti-competitive in intent, for the purposes of Article 85(1), it is necessary to look at its function in the context of the contractual relationship of which it forms part. Against that background, the Court normally concludes that no anti-competitive object is contained in clauses which are found in the abstract to be necessary to ensure that a contract, which is not in itself harmful to competition, can fully discharge the legal and economic function which it pursues.

In Leyland DAF Ltd v Automotive Products plc, [1993] BCC 389 the Court of Appeal had to consider whether an unpaid supplier of goods who refused to supply an insolvent company with further goods until goods already supplied had been paid for was abusing a dominant position within [*332] art 86. The question arose in interlocutory proceedings, where the receivers of the insolvent plaintiff sought mandatory relief for continuity of supply, against the background that without such supply production would stop, as well as that the supplier was secured for its price of goods already delivered if its retention of title claim proved well founded. The plaintiff therefore was able to submit that the balance of convenience favoured the order sought if only there was a seriously arguable case in favour of a breach of art 86. At first instance Sir Donald Nicholls, V-C said (at p 394D/H):

In my view, when payment is overdue for goods supplied and the supplier is under no contractual obligation to continue supplies, the refusal by the supplier to deliver further goods until paid what he is already owed cannot be regarded as an abuse within art 86. I accept that in some circumstances a refusal to supply goods may constitute abuse. Commercial Solvents Corporation v EC Commission [1974] ECR 223 is an example of this. But where the reason for the refusal is the buyer’s failure to pay for goods already delivered to him, and the sole purpose of the refusal is to exert commercial pressure to obtain payment, I can see nothing in the supplier’s conduct which departs from normal and reasonable commercial behaviour in a competitive market. There might, I suppose, be a very exceptional case where, although that is the reason and purpose, the failure to supply might still be regarded as an abuse, but I confess no example of such a case springs to mind.

I appreciate that, because of his dominant position, such a supplier is able to exercise over the buyer a degree of commercial pressure he would otherwise lack. This does not turn into an abuse conduct which would otherwise not be such. It is important to keep in mind that holding a dominant position is not itself contrary to the EEC Treaty. Article 86 is concerned to prevent the misuse of the economic power possessed by those who are in a dominant position. They must not impose unfair prices, or limit production to the prejudice of consumers, or trade on discriminatory terms, or impose conditions having no connection with the subject of the contract. In short, they must not use their power to “impair genuine, undistorted competition in the common market&#!48;: see Michelin v EC Commission, [1983] ECR 3461. But the obligation to pay for goods supplied is a fundamental feature of a normal market. Likewise, a refusal to sell any more goods to a particular buyer until he pays what he owes for goods already sold to him by that seller is an altogether normal and unexceptional feature of a competitive market.

He therefore held that there was no seriously arguable case of conduct in breach of art 86. The Court of Appeal agreed. Lord Justice Dillon said at p 400E:

It is one of the regular commercial practices that buyers of goods are expected to pay for them. I can find nothing which warrants the conclusion that the importance of preserving competition under the Treaty entirely overrides the conventional obligation to pay for goods purchased.

Lord Justice Steyn and Lord Justice Rose agreed with the analysis and reasoning of Sir Donald Nicholls, V-C and concluded that the plaintiff had no arguable prospect of demonstrating an abuse within art 86. That was a strong case, in the light of the balance of convenience, and both Courts expressed their regret as to the decision which they felt compelled to reach.

It seems to me that these authorities are much to the point. I do not consider that the standard agency agreement is concerned with restricting or distorting freedom of competition at all where the market in international insurance is concerned; and where the internal Lloyd’s market for agency services is concerned any restrictions are merely incidental to the need to protect Names. In particular the provisions of cl 7 are vital for the maintenance of the Lloyd’s market and promote rather than restrict or distort competition. I do not regard the contrary as being fairly arguable. Moreover, an obligation to pay insured losses, and to do so without regard for disputes between underwriter and underwriter’s agent, is a wholly conventional aspect of insurance and in my judgment cannot be said to amount to anti-competitive behaviour, in object or effect, and therefore an agreement between underwriter and agent to do so cannot come within art 85(1). In other words this case is a fortiori the Remia and Klim decisions, or the analysis of Advocate General Tesauro in the latter case, for there at any rate the restrictions in question, in the abstract at any rate, and without regard for their context, did restrict competition. Moreover, my finding that the Lloyd’s market could not function without the “pay now, sue later” provisions of cl 7 has already been stated on several occasions and by higher authority: see Sir Thomas Bingham, MR at pp 5G and 7F and Lord Justice Hoffmann at p 16E in Deeny v Gooda Walker Ltd (CA unreported, July 30, 1993), R v Lloyd’s of London, ex parte Briggs, [1993] 1 Lloyd’s Rep 176 at p 182 (per Lord Justice Leggatt) and Boobyer v Holman & Co, [1993] 1 Lloyd’s Rep 96 at p 97 per Mr Justice Saville). It seems to me that the same holds true for the wide [*333] discretion given to agents under cl 4, as Mr Justice Saville himself held in Clementson (at p 319).

There remains the question whether Dr Higgins has shown an arguable case that the standard agency agreement “may affect trade between Member States”. In view of my conclusions above, this question may not matter. I should, however, state that if, as I believe, the matter turns exclusively on the internal Lloyd’s market for the provision of agency services, I would not accept that there was any effect on inter-state trade since, for all that there is evidence before me that there are some 900 Names resident in member states other than the United Kingdom, it seems to me that the market in the provision of Lloyd’s services takes place entirely in this country. Arguably, however, were I to be wrong in my conclusions above, the market to be considered would not be only the internal market for the provision of agency services, but also the international insurance market, in which Lloyd’s is a major force with a substantial share of European business. In such a case it would not seem right for me to depart from the views of the Court of Appeal in Clementson, albeit pronounced in the context of the central fund, that it is at any rate arguable that there are economic effects of more than purely domestic significance: see at pp 325 and 326.

In concluding that Dr Higgins has failed to show a fair or reasonable probability of a defence for O.14 purposes that the standard agency agreement as a whole or in any material part is anti-competitive and unenforceable under art 85, and a fortiori has failed to show that cl 7 is a breach of art 85, I have not taken into account the fact that, following the Court of Appeal’s decision in Clementson, the defendants in that case, as is common ground before me, have in repleading their defence dropped the 1985 Byelaw and the standard agency agreement from their complaints under community law. I mention that fact, however, because it seems to me that Dr Higgins’ contention that I am bound by Clementson to say that the Byelaw and the standard agency agreement are arguably in breach of art 85 rings particularly hollow in the light of the revelation that the defendants in Clementson itself no longer rely for a defence on those matters.

Clause 7: “pay now, sue later&148;

I have already given my conclusions as to the validity of this clause, both by itself and in the context of the standard agency agreement as a whole. Nor do I consider that the matter is affected in any way by considering the clause as a concomitant or “twin pillar” of the central fund. It seems to me for reasons stated above that I am not concerned with the central fund in this case; and in any event in my judgment, contrary to Mr Burton’s submission, it is not true to say that cl 7 supports the central fund. Clause 7 is the fundamental route by which payment of a Name’s own moneys to discharge his obligations under his policies is enforced. In theory, and in practice too, that obligation is wholly separate from any call that there may also exist on a central fund if the Name is unable or refuses to pay. It is possible to visualize a situation, even if practical aspects may be another matter, in which a central fund did not exist: but the cl 7 obligation would still have to remain.

In truth this action depends at the end of the day, and at the beginning of it too, upon the validity of cl 7, and in particular, for reasons I have already expressed, of cl 7.1(a), the “pay” obligation. Even if other aspects of Lloyd’s arrangements may be arguably open to attack, and even if other aspects of the standard agency agreement itself may be arguably open to attack, this action must succeed unless cl 7, and in particular cl 7.1(a), is arguably unenforceable. The fact that other aspects of the standard agency agreement might be arguably unenforceable would be no reason for failing to enforce cl 7, unless, under domestic principles of severance, which are the relevant principles, cl 7 could not survive an attack on other parts of the agreement: see Chitty on Contracts, 27th ed, (1994) pars 16-164/172 and 40-340, and Chemidus Wavin Ltd v Societe pour La Transformation et L’Exploitation des Resines Industrielles SA, [1978] 3 CMLR 514. Subject to Mr Burton’s primary submission that cl 7 is itself anti-competitive, it has not even been seriously argued that cl 7, if itself valid, could not survive the invalidity of other unspecified parts of the agreement. In the light of the vagueness with which other parts of the agreement have been attacked, and my conclusion that cl 7 reflects inherently necessary parts of the arrangements and normal common law obligations, I do not accept it as arguable that cl 7 would not survive as valid, and a fortiori cl 7.1(a), whatever other arguable breaches of art 85 there might be.

Towards the end of their written submissions Mr Burton and Dr Green state:

The only [my emphasis] questions for the Court are:

Whether clause 7 is (arguably) anti-competitive. If it is, it is (arguably) automatically [*334] void and the Plaintiff may not rely upon it; and

(2) Whether the action herein is arguably tainted with the illegality which undoubtedly, arguably attaches to the Central Fund after Clementson.

For the reasons stated in this judgment I would answer “no” to both questions. It follows that this application for summary judgment against Dr Higgins in the principal sum of £6000 is entitled to succeed.

Judgment accordingly.