The Society of Lloyd's v Burningham and others






4 MARCH 1998



D Foxton for the Plaintiff; J Brettler for Mr Gooda; M Watson-Gandy appeared as amicus curiae for Mrs Khan











Mr Gooda contends that he has an arguable defence to the claim for Equitas premium against him because the offer made to him in the settlement offer document was unreasonable, as it as unfairly discriminatory ("partial and unequal" to use the older language) and/or manifestly unjust. It is further submitted that the consequence of such injustice amounted to the imposition upon Mr Gooda of a penalty or sanction in circumstances where Lloyd's did not follow their bye-laws structure, which entitled him to legal representation and a hearing efore any such penalty or sanction could be imposed.


The facts are as follows. Mr Gooda has been involved with Lloyd's for many years. Before January 1990 he was a director of two underwriting agencies: Gooda Walker Limited and Gooda and Partners Limited, both of which were combined agents; that is to say agents which performed both managing and members' agents functions. In 1990 a restructuring took place which resulted in separate companies assuming responsibility for the managing and members' agents functions. Gooda Walker Limited became the managing agent and Gooda and Partners Limited became the members' agent. Mr Gooda remained a director of both companies.


In the years before the R&R settlement the managing agency made very substantial losses for its Names. Likewise names whose business was handled by the members' agency fared badly, no doubt as a result of being placed on syndicates, the syndicates underwritten by the managing agency. In the run up to the R&R settlement names were sent a number of indicative proposals which showed them what they were likely to be offered when the offer went firm. R&R eventually came about in September 1996. But so far as this case is concerned, the story starts in March 1996 when Mr Gooda received an indicative finality statement offering him debt credits of 1.69 million. Debt credits were at the heart of the settlement offer which finally crystallised in July of that year. They were funded by

Lloyd's itself and by institutions with an interest in seeing the survival of the Lloyd's market and were offered by way of settlement to all Names. Names who did not accept the settlement were not entitled to any debt credits. Taking account of debt credits in the March indicative statement Mr Gooda's estimated finality liability was put at L100,000. The finality statement was accompanied by a guide which said, under the heading "Excluded Names":


"A small number of Names will be excluded in full or in part from the settlement offer. For example, the council will exclude Names who, through demonstrated misconduct, have contributed to Names' losses. The Council has not yet finalised the list of excluded Names, but will be doing so in the near future. We intend to notify Names who are excluded from the offer . . . For these Names, these indicative statements will not be a good guide to their finality statement."


Mr Brettler, who appears for Mr Gooda, relies on this indicative statement and its statement that excluded Names would be those who had been guilty of demonstrated misconduct. I am afraid to say that I do not read the guide as being anything like a promise that only those Names guilty of demonstrated misconduct would be excluded. The statement makes it clear that a small number of Names would be excluded and gives this only as an example of those who would be. It makes it clear that the matter had not yet been finalised and makes it clear that for those excluded the statement was not to be taken as a good guide to what they would be finally offered.


So insofar as Mr Gooda's case is based on any expectation arising from or promise given in this document, I think it is unfounded.


Continuing with the story Mr Gooda was notified that he was an excluded Name (redesignated a restricted Name) by letter of 20 June 1996 which enclosed a June indicative finality statement. It recalled that the council had reserved a discretion to exclude individual members and said:


"The council has now given consideration to your particular circumstances and has made a preliminary decision that because you fall within one of the categories of restricted Names identified in part 1 at F of appendix 1 to the settlement information document, your allocation of debt credits is to be reduced in accordance with the schedule attached to this letter. Before reaching any final decision, the council of Lloyd's is giving you an opportunity to make written representations setting out any reasons why you consider this decision should not be made final. If you wish to make written representations they should be sent to [a gentleman in the legal services department] by 4th July 1996. If you do not make any written representations the council will assume that you accept the decision and proceed to make it final."


The accompanying finality statement reduced the debt credits which the earlier statement had shown by approximately 945,000. This included a reduction of 235,000 relating to 1989 syndicate losses and 354,000 relating to embers' agent's loss for the same year. The document which is referred to in the letter at Pt 1F of App 1, under the heading "Restricted

Names" said:


"This section sets out details of the principles, pursuant to which the allocation of debt credits has been restricted in relation to certain individuals. The application of these principles affects an estimated 170 individuals who fall into one or more of the categories described below."


The categories are then set out. 6.3, and I read only the relevant words said:


". . . directors of a managing agent, which managed during a syndicate year of account a syndicate where a loss review in respect of that syndicate year of account had been commissioned, or which had been subject to legal proceedings before the English High Court."


In respect of that category the statement said that the directors' allocation of debt credits had been reduced by an amount equal to the average loss suffered by members of the relevant syndicate in that syndicate year of account.


The other relevant category of restriction under the heading "Members' agents" affected directors of those managing agents where the average loss for members underwriting through the agent in any calendar year in the period 1988 to 1992 was not less than 50 per cent of the aggregate allocated capacity of all Names underwriting through the members' agent in such a year have had their allocation of debt credits reduced by the average loss of such Names for any such year.


Those explanations of who were restricted Names, and the basis upon which their debt credit had been reduced were repeated in exactly the same terms in the final settlement offer document in July 1996. The June document, however, went on to say at para. 6.15:


"The individuals affected by these proposals will be notified shortly and will be given the opportunity to make representations to the council before any restrictions on their debt credits are finally determined. And the council may, in its absolute discretion, vary the principles or their application where it considers it fair and reasonable to do so in all the circumstances."


Mr Gooda chose not to make any representations because he says he thought it futile to do so. The evidence is, however, that of the 118 people who did make representations, which were considered by a special subcommittee of the council, 12 eliminated the restriction altogether and a further 74 cases resulted in some variation in the restriction.


The substantially reduced offer in the June document was carried through in Mr Gooda's case into the actual settlement offer made to him in July 1996. He did not accept the offer because, he says, it treated him unfairly. This court has had to analyse the process by which a Name became a party to the equitas contract, despite his non-acceptance of the offer made in the settlement offer document. It is not necessary for me to go through the stages in detail but they started with the R&R bye-law which was passed on 6 December 1995. In general terms it authorised the council to take such steps as might benecessary to ensure the success of R&R. There is nothing offensive, objectionable, unjust, or discriminatory to be found in its terms. The next stage was the appointment of AU9, as in this case, Mr Gooda's substitute agent, under the substitute agents' bye-law, which was passed by Lloyd's in 1983. The final link in the chain was Lloyd's' direction to AU9 on 3 September 1996 to enter into the contract on Mr Gooda's behalf.


The court in the first part of the Leigh's case was concerned with an argument that the imposition of R&R upon non-accepting Name was ultra vires the bye-laws. The evidence before the court was that so far as the Equitas reinsurance was concerned, it could only work if all Names on the relevant syndicates were bound by it. Extreme practical difficulties would have arisen if only some Names were reinsured by Equitas and others of them stood outside Equitas as freestanding insurers on their own. The DTI needed to be satisfied that all Names would be bound by the contract before it would authorise Equitas.All Names needed to be insured into Equitas to create a firebreak between the old and the new which was essential to avoid disintegration of the market which the circumstances existing before R&R had threatened. It was therefore essential for all Names to be reinsured into Equitas.


Mr Brettler, submits that if the R&R bye-law permitted Lloyd's to make a discriminatory or manifestly unjust offer to Mr Gooda, it was ultra vires on theprinciple laid down in Kruse v Johnson [1898] 2 QB 91 or, if it did not, the offer or the means by which the settlement was implemented in the case of Mr Gooda was ultra vires. He submits that because Mr Gooda was treated less favourably than other Names what happened was discriminatory, or manifestly unjust. Then he says that the consequence of his being able to impugn the settlement offer in this way is that Mr Gooda is not bound by the contract. Here he submits that the R&R package consisted of two key components: the reinsurance into Equitas and the benefits provided by the settlement offer. A valid settlement offer was obviously therefore an essential part of that package. The direction by Lloyd's that Mr Gooda should enter into the contract was on the basis that it had made a valid settlement offer to him. As they had not, because the settlement offer was discriminatory or unjust, the invalidity of the settlement offer vitiated the direction to reinsure into Equitas. In giving this direction Lloyd's failed to take into consideration a highly important relevant consideration which was that he had been made an invalid settlement offer. Mr Brettler further submits that the double reductionfor the 1989 year was particularly unfair. The whole process. It imposed an illegal penalty or sanction upon Mr Gooda because the Lloyd's disciplinary regime entitled him to representation and a hearing before that could be done.


I will start by examining the submission that the offer was discriminatory and/or unjust. The criteria for making Mr Gooda a restricted Name and the basisupon which the offer to be made to him would be reduced, were very clearly set out in the June document and the final settlement offer. It is accepted that Mr Gooda met the criteria and that the reductions were calculated correctly.


I can see nothing discriminatory or unjust or arguably so, treating Mr Gooda in this way. That those who were most closely involved in the large losses which resulted in the crisis should be made a less favourable offer than those who were not, so far from being unjust strikes me as being eminently just. Mr Gooda was such a person. A Name who was not closely involved, but was treated equally with someone in the position of Mr Gooda might in my judgment justifiably complain that he or she had been unfairly treated. I think that Lloyd's' treatment of Mr Gooda was both a rational and proportionate response to his particular position. This does not involve misconduct, in the colloquialsense. It merely recognises the fact that as a director of both a managing and a members' agency directly associated with massive losses he should not be treated so favourably as others. It was for Lloyd's to decide whether it was appropriate to treat Mr Gooda in this way, and the court will only substitute its view in such circumstances as these, if it can be demonstrated that the viewwas irrational. I can see nothing irrational in what happened.


The discrete point about double counting in the 1989 year seems to me to overlook the fact that Mr Gooda was affected in two quite separate capacities. As a director of a members' agent, he had a responsibility for ensuring his Names were placed on suitable syndicates and a duty to ensure that those syndicates served the Name properly. As a director of a managing agent, he had a responsibility for directing or approving the underwriting which that agency carried out on behalf of Names. I can see nothing unfair in the decision to make reductions in the amount offered under both heads for the year in which the criteria set out in the offer document were met.


For these reasons I think Mr Gooda's attempt to set up an arguable defence fails at the first hurdle.


That makes it unnecessary to consider the next stage of the argument as to the effect which assumed unfairness would have upon Mr Gooda's rights. Mr Brettler's supported his argument with a red hair analogy. If, he argued, Lloyd's had chosen not to make an offer of debt credit to anyone with red hair, that would be plainly discriminatory and unjust. Could Lloyd's nevertheless say that the reinsurance into Equitas, which was part and parcel of the package was binding on those affected? Such an offer would be ultra vires the bye-laws and would make imposition of liability under the contract ultra vires as well.


That is, I think, a more difficult question in the context of this case. I accept Mr Foxton's answer to this point which is looking at R&R as a whole and the reasons for it, all Names had to go into Equitas or none. So it would be possible to sever such rights or remedies as the Name had arising out of the offer from the direction and binding of the Name into the contract. It is not possible in all the circumstances to say that the contract could only be imposed upon those who had been made a valid settlement offer. There is no sense or legal justification for this. Anyone who complained that they had not received a valid offer would become a freestanding Names continuing to be liable for their proportion of the losses on the 1992 and prior years alongside Equitas. This would be a commercial absurdity. So I do not accept Mr Brettler's submissions although this is not an entirely straightforward point. I have not overlooked the alternative way in which Mr Brettler put the case which was that this was effectively the imposition of a penalty. I do not see as a matter of language how a complaint that someone has not been made a fair settlement offer can be characterised as a penalty. It may put him or her at a disadvantage as compared with others who have been made more favourable offers but I cannot haracterise it as a penalty. I would certainly not equate it with the form of penalty or sanction envisaged by Lloyd's disciplinary machinery.


Accordingly no question of Lloyd's being in breach of those provisions or natural justice arises in the circumstances of this case. It is, however, worth adding that in fact Mr Gooda was offered the opportunity to make representationsand in retrospect I suspect, given the success of those who did, he may regret not having availed himself of the opportunity to do so. So there was nothing procedurally unfair about the way in which Mr Gooda was dealt with.


It follows that, despite the able way in which Mr Brettler made the points which he, Mr Gooda, has not shown that he has an arguable defence to this claim.



Judgment for the plaintiff.



Dibb Lupton Alsop; Clifford Harris & Co.