Deeny and Others v Gooda Walker Limited; Arbuthnott and Others v Fagan and Another; Henderson v Merrett Syndicates Limited; Arbuthnott and Others v Feltrim Underwriting Agencies Limited
Court of Appeal (Civil Division)
The Independent 14 December 1993, (Transcript:John Larking)
HEARING-DATES: 13 December 1993
13 December 1993
G Vos QC and D Lord for the Gooda Walker Names; B Eder QC and C Butcher for the Gooda Walker Members Agents; B Eder QC and D Foxton for the Feltrim Names; A Temple QC and J Rowland for the Merrett Syndicates; C Edelman for the Other Defendant Underwriting Agents listed in the Schedules to all the Merrett Writs (save for JH Minet Agencies Limited)
PANEL: Sir Thomas Bingham MR, Hoffmann, Henry LJJ
JUDGMENTBY-1: SIR THOMAS BINGHAM MR
SIR THOMAS BINGHAM MR: There are several appeals before the Court. They arise in actions now awaiting trial in the Commercial Court. In each action the plaintiffs are Underwriting Members (Names) at Lloyd's. In each the defendants include the Names' Underwriting Agents, some of these being Members' Agents, some Managing Agents and some both.
These actions are but a few of those now proceeding in the Commercial Court. In order to simplify and shorten the trial and preparation of these cases, Saville J ordered, with the consent and co-operation of the parties, that a number of issues of principle common to many of the actions be determined as preliminary issues. These issues, largely directed to deciding whether Underwriting Agents (and if so, which) owed a duty of care to their Names, were plainly fundamental to the outcome of the actions.
Saville J heard argument on the issues and gave judgment on 12 October 1993. He ruled in favour of the Names. The Underwriting Agents now appeal. Having heard argument in this Court, I find myself in agreement with the judge, for the reasons which he very clearly and succinctly gave.
A Name who is not a professional underwriter has at all material times been required to appoint an Underwriting Agent to conduct the underwriting on his behalf. Such Agents are known as Members' Agents and the appointment is made under an Underwriting Agency Agreement. The actual underwriting is done on behalf of the Name through a Syndicate of which the Name (with other Names) is a member. Such Syndicates are managed by Managing Agents, who employ a professional ("active") underwriter. Sometimes the Underwriting Agent is both the Members' Agent and Managing Agent : the Name is then called a direct Name, because he is in direct contractual relations with the Managing Agent. Sometimes the Members' Agent does not combine these roles, but appoints a Managing Agent under a Sub-Agency Agreement to conduct the actual underwriting : the Name is then called an indirect Name, because he has not been thought to have a direct contractual relationship with the Managing Agent.
Before 1987 there was no prescribed form of agreement between Name and Underwriting Agent. Some variation in the terms of these agreements was accordingly to be found. But to a large extent the terms of these agreements were standard and there was in practice a high degree of uniformity. We have before us what is accepted as being a typical pre-1987 agreement. It was made in October 1982 between a Name and Merrett Syndicates Limited as Underwriting Agent. This company in fact combined the roles of Members' Agents and Managing Agents and so, under this agreement, the Name was a direct Name. But had the Underwriting Agent been a Members' Agent only, the same form of agreement would have been used; then, however, the Members' Agent would have entered into a sub-agency agreement with a Managing Agent. We have a sample of such a sub-agency agreement before us, dated March 1978. It can be treated as typical.
In 1985 the Council of Lloyd's exercised its statutory powers to make The Agency Agreements Byelaw. This prescribed a standard form of agency agreement and a standard form of sub-agency agreement. Subject to transitional provisions (to which reference must be made below) the Byelaw prohibited the underwriting of insurance business at Lloyd's after 31 December 1986 save under the standard form of agency or sub-agency agreement. Thus the form of agreement became mandatory and standardised. But the structure described above remained intact. If the Underwriting Agent was to combine the roles of Members' Agent and Managing Agent, the Name entered into one agreement only, the Standard Agency Agreement. He remained a direct Name. If, however, the Underwriting Agent was to act as Members' Agent only, the Name entered into the Standard Agency Agreement with the Underwriting (Members') Agent and the Underwriting (Members') Agent entered into the Standard Sub-Agency Agreement with the Underwriting (Managing) Agent. The Name remained an indirect Name.
The distinction between direct and indirect Names came to an end in 1990. The Name himself then entered into a Members' Agents' Agreement and a Managing Agents' Agreement, and the Sub-Agency Agreement which had been made under the 1985 Byelaw was replaced by a different form of Agreement between Members' and Managing Agents. For present purposes it is not necessary to examine the detail of these Agreements, since no issue arises on them. It is enough to note that there was no longer a distinction between direct and indirect Names.
In considering what, if any, duties were owed to Names by different types of Underwriting Agents at different times, it would be logical to begin with the pre-1987 agreement between Names and Underwriting Agents acting as Members' Agents only. This is a live issue between the Merrett Names and the Merrett Members' Agents. But it was agreed that Saville J should not rule on the obligations owed to the Merrett Names by their Members' Agents before 1987, and there is accordingly no appeal before us on that point. It is agreed that anything said in relation to any other issue which bears on that point is not to bind the Merrett Names and the Merrett (pre-1987) Members' Agents.
The first issue which the judge ordered to be tried concerned the liability of Managing Agents to Names under the forms of agreement in force before 1987. The declaration which he made was in these terms :
"(1) That Managing Agents of syndicates at Lloyd's did owe a tortious duty of care to Names (whether direct or indirect Names) to conduct the underwriting business for the account of Names with reasonable care and skill for the 1979 to 1985 underwriting years of account (inclusive), including a duty of care in relation to the assessment or effecting of any RITC and in fixing the premium therefor.
(2) That the terms of the pre-1985 Byelaw Agreements (and, in particular, the true and proper construction of the expression "absolute discretion" in clauses 6(a) and 7(e) of such Agreements) did not have the effect that any cause of action or remedy in damages or otherwise concerning decisions taken by a Managing Agent in the management and conduct of the underwriting business for the 1979 to 1985 underwriting years of account (including decisions to accept risks and decisions taken in effecting an RITC) was precluded from arising save insofar as alleged and shown that the decisions were taken in bad faith or dishonestly, or were totally unreasonable."
Both the issue as framed and the declaration as made relate to both indirect and direct names. But the arguments are not exactly the same in relation to each, and for convenience of analysis I shall separate them.
Q1 Did Managing Agents (who were not also Members' Agents) owe Names a duty under the pre-1987 forms of agreement to carry out their underwriting functions with reasonable care and skill?
It was argued for the Merrett Managing Agents that they did not, for two main reasons :
(1) because the Managing Agents had absolute discretion in the acceptance of risks and settlement of claims and this excluded any duty other than a duty to act honestly, rationally and loyally; and
(2) because the law of tort did not impose on the Managing Agents a duty in tort not to cause economic loss to the Names.
These points require separate consideration.
The pre-1987 agreement between Name and Underwriting (Members') Agent contained the following terms relevant for present purposes :
"1. The Agent shall act as the Underwriting Agent for the Name for the purposes of underwriting at Lloyd's for the account of the Name policies and contracts of insurance reinsurance and guarantee relating to all classes of insurance business which with the sanction of the Committee of Lloyd's may be transacted at Lloyd's by the Syndicate.
4. The Agent shall have full power and authority to appoint and employ the Sub-Agent to carry on or manage the underwriting and to delegate to or confer upon the Sub-Agent all or any of the powers authorities discretions and rights given to the Agent by this Agreement.
6.(a) The Agent shall have the sole control and management of the underwriting and absolute discretion as to the acceptance of risks and settlement of claims whether such claims shall in the opinion of the Agent be legally enforceable or not.
(d) The Name shall not in any way interfere with the exercise of the aforesaid control or management or discretion.
7. The following provisions shall apply concerning the Accounts of the underwriting:-
(e) The Syndicate Account of any calendar year shall not be closed before the expiration of the two calendar years next following the calendar year in question and in order to close the Syndicate Account of any year the Agent may:-
(i) re-insure all or any outstanding liabilities in such manner and by debiting such Account with such sum as the Agent shall in the absolute discretion of the Agent think fit as a premium for reinsurance and crediting the reinsurance premium to the Syndicate Account of the next succeeding year or
(ii) re-insure all or any outstanding liabilities of such Account into the Account of any other year then remaining open or in any other manner which the Agent thinks fit or
(iii) allow the whole or part of a Syndicate Account of any year to remain open until its outstanding liabilities shall have run off
12.(a) The Agent may from time to time retain out of the profits of the underwriting which would otherwise be payable to the Name any moneys which the Agent may in the absolute discretion of the Agent (subject to any requirements prescribed by Lloyd's) think desirable to carry to reserve and such moneys may be placed on deposit at any bank or discount house or public or local authorities or building society or may be invested in such stocks funds shares or securities (including bearer securities) in any part of the world as the Agent may determine and the Agent shall not be responsible for any loss of principal or interest on such deposits or investments. Interest or dividends earned on any such deposits or investments shall be credited to the Name in respect to the Name's due proportion thereof."
The form of sub-agency agreement between Members' Agent and Managing Agent which is accepted for present purposes as typical contained these relevant terms :
"2. The Sub-Agent agrees and is retained and authorised to act as Underwriting Sub-Agent for the Agent for the purpose of Underwriting at Lloyd's in the names and for the account of each of the Names policies and contracts of insurance reinsurance and guarantee relating to all classes of insurance business which with the sanction of the Committee of Lloyd's may be transacted as Insurance Business and of carrying on for each of the Names the business of Marine Underwriter at Lloyd's and the appointment of the Sub-Agent shall take effect in respect of each of the Names on and from the date specified in the second column of the Schedule hereto opposite the name of each of the Names.
5. The Agent delegates to the Sub-Agent the exercise of all such powers authorities discretions and rights conferred upon the Agent by the Underwriting Agency Agreement as it may be in any way necessary for the Sub-Agent to have to enable the Sub-Agent or any Underwriter or agent appointed by the Sub-Agent to carry on the underwriting for the Names and to close the accounts of the Names.
6. Subject to the provisions of Clause 7 hereof the Underwriting shall be conducted and the accounts thereof shall be kept and made up and the profits ascertained in such manner as the Sub-Agent may for the time being think fit and the Sub-Agent shall have the sole control and management of the Underwriting and sole discretion as to the acceptance of risks and the compromise or settlement of claims.
8. All questions relating to the investment of premiums and other monies not required for the current service of the Underwriting and to the time and manner of paying over profits and the placing of sums to a reserve shall be decided by the Sub-Agent and subject as aforesaid the Sub-Agent shall pay over the profits of the Underwriting to the Agent for distribution to the Names."
There is some difference in the language of the two agreements but no significance has been said to attach to that.
It was argued for the Managing Agents, in reliance on the terms of the first agreement particularly, that where an agreement conferred on an agent a power to be exercised in his absolute discretion, the donor could not challenge the agent's exercise of that power save by alleging bad faith or perhaps that the exercise of the power had been wholly unreasonable or in breach of a duty of loyalty. Any challenge based on lack of due care and skill was, it was said, inconsistent with the breadth of the discretion conferred on the agent. Reference was made to a number of cases said to support this submission.
I do not think it necessary to review this authority because none of it arose from facts at all close to those before us and the meaning and effect of an expression such as "absolute discretion" are in my judgment closely governed by the contractual context in which the expression appears.
The crucial clause here is clause 6(a) of the agreement between Name and Members' Agent. This makes plain, because it says, that the Agent alone is to have control and management of the underwriting. It also makes plain, in my judgment, that in accepting risks and settling claims (a) the Agent's authority is not limited and (b) the Agent is not subject to the directions of the Name. There is, however, nothing in the language to suggest (what would, if spelled out, have surely been unacceptable) that in exercising the power conferred on him the Agent was absolved from the duty ordinarily binding on any professional agent to exercise reasonable care and skill.
I cannot improve on the reasons given by the judge for rejecting this submission at page 6 line 18 to page 7 line 22 of his judgment, which it is unnecessary to repeat. I would, however, observe that any successful claim against the Agent in negligence would, as in any other case, have to show a failure to show the standard of skill and care reasonably to be expected of such an Agent at the time and with the knowledge that he had or should have had. His judgment could not be impugned simply because events showed it to be wrong. A decision taken under clause 7(e)(i) could not easily be challenged.
Tortious duty not to cause economic loss
The Managing Agents' argument on this point assumed what, as I have explained, we cannot decide, that under the pre-1987 agreements the Members' Agent owed the Name a contractual duty of care. So, it was said, this was another case in which the parties had constructed a contractual chain under which the indirect Name looked to his Members' Agent and the Members' Agent alone looked to the Managing Agent. Authority showed the extreme reluctance of the courts to recognise a tortious duty to take reasonable care not to cause economic loss. There was no authority which justified doing so in a case such as the present. The fact that the Names faced limitation problems in pursuing claims in contract against those with whom they were in contractual relations provided no warrant for imposing a duty on those with whom they were not in contractual relations.
To state the argument is enough to indicate that one is entering the Flanders of the modern English law of tort. Recent and very familiar authority makes plain that the principled approach to problems of this kind based on Anns v Merton London Borough Council  AC 728,  2 All ER 492, is no longer to be followed. Foreseeability of damage to the plaintiff is still an essential requirement; so is the existence of a proximate relationship; but the court will not impose a duty on a defendant to take reasonable care not to cause a plaintiff purely economic loss unless satisfied that it is in all the circumstances fair and just to do so. In making this last decision, the court will have regard in particular to whether the case falls within any established class of case in which a duty has been recognised. If not, and an extension is sought beyond established classes of case in which a duty has been recognised, the court will accede, if at all, only by taking small and cautious steps.
I do not, again, think it necessary to make any detailed review of the many authorities on this subject, nor the abundant academic commentary. For to my mind it is clear, despite the contrary arguments of counsel and despite the existence of a contractual chain, that the Managing Agents did owe a tortious duty to the Names to take reasonable care not to cause them economic loss. I cannot, again, improve on the judge's reasons, which on this occasion I quote:
"To my mind the relationship between an indirect Name and the Managing Agents provides a classic instance of a relationship in which a duty to exercise reasonable care and skill is imposed by law upon the latter in favour of the former. The relationship is a professional one. The Managing Agents are in effect paid by the Name to use their special expertise for the purpose of conducting underwriting business at Lloyd's on behalf of the Name, with, as I have pointed out, the widest possible powers and discretions. They assume responsibility for underwriting for the Name at Lloyd's. They act directly for the Name, who relies (to an unlimited extent and as the Managing Agents must realise) upon the skill and expertise of the Managing Agents in committing the Name to contractual obligations to third parties and in otherwise conducting the affairs of the Name at Lloyd's in relation to the Syndicates in question. In truth the Name is the client of the Managing Agents, for the latter conducts the underwriting business for the Name rather than for the Members' Agents. To my mind the classic tests of foreseeability, proximity and fairness and reasonableness are more than met in the present circumstances."
The judge held that the present case fell within an existing category which had already been clearly established, as exemplified by cases such as Punjab National Bank v De Boinville  1 Lloyd's Rep 7, and added :
"There is a business relationship between the parties in which the one party for reward provides professional services to the other for financial and investment purposes and where the latter relies and is known to rely on the skill and expertise of the former in providing those services".
This statement was criticised as being too wide, and it may be so. The suggestion that the Punjab National Bank case exemplified a category into which this case falls was also criticised. The question whether case A falls into the same established category as case B is capable of becoming somewhat scholastic and sterile. It is certainly true that the Punjab National Bank case involved insurance brokers, not Lloyd's underwriting agents, and the duty was held to be owed to the bank as prospective assignee. Staughton LJ said (at page 36):
"In those circumstances it seems to me a justifiable increment to hold that an insurance broker owes a duty of care to the specific person who he knows is to become an assignee of the policy, at all events if (as in this case) that person actively participates in giving instructions for the insurance to the broker's knowledge."
These words cannot be applied directly to the present facts. But just as the Court in that case gave effect to the commercial common sense of the situation, so in my view the judge rightly did in the present case. For the reasons which the judge gave it is not easy to think of a non-contractual commercial relationship in which a duty of care more obviously ought to exist than the relationship of Managing Agent and indirect Name.
There was some argument before us, as before the judge, relating to fiduciary duty. He did not refer to this matter in his judgment, and I share his view that it does not advance the argument. I am very willing to accept that the Managing Agents' relationship with the Names can be described as fiduciary. But the finding of such a relationship does not preclude the finding of a duty of care. It makes such a duty, if anything, more likely, not less. So I do not think this helps the Managing Agents.
Q2 Did Managing Agents (who were also Members' Agents) owe Names a non-contractual duty under the pre-1987 forms of agreement to carry out their underwriting functions with reasonable care and skill?
This question concerns the direct Names, those in direct contractual relations with the Managing Agents. It is the existence of this direct contract which founds the additional argument. The argument is that where A and B have entered into a contract which governs relations between them and regulates the duty of care owed by B to A, the courts will not subject B to a concurrent duty of care in tort, least of all where the result is to enable A to escape from the limitation period which Parliament has imposed on A's claims against B in contract. (In the case of indirect Names, it was pointed out, the finding of such a concurrent duty would, if Managing Agents were also subject to such a duty, render the Members' Agents and the Managing Agents joint tortfeasors, with all the injustice to which that result could give rise).
The launching pad of the Managing Agents' argument on this point was the passage in the advice of the Privy Council, delivered by Lord Scarman, in Tai Hing Cotton Mill Limited v Liu Chong Hing Bank Ltd  AC 80,  2 All ER 947 at page 107 of the former report. It has been cited so frequently as to obviate the need for repetition. The Managing Agents were able to point to a growing body of support for Lord Scarman's approach : see, for instance, Lee v Thompson  40 EG 89,  2 EGLR 151, per Lloyd LJ; National Bank of Greece SA v Pinios Shipping Co (No 1)  1 AC 637,  1 All ER 213 per Lloyd LJ at 650 of the former report; and The Eras EIL Actions  1 Lloyd's Rep 570 at 597-600 per Mustill LJ.
I would for my part reject this argument, for three main reasons. First, it is not in my view open to this Court to accept the argument on the authorities as they stand. Against the dicta relied on, none of which has more than persuasive authority (however great), must be set decided cases at all levels, including Esso Petroleum Co Ltd v Mardon  QB 801,  2 All ER 5, at page 819 of the former report; Midland Bank Trust Co Ltd v Hett, Stubbs & Kemp  Ch 384,  3 All ER 571; DW Moore & Co Ltd v Ferrier  1 All ER 400,  1 WLR 267; Forsikringsaktieselskapet Vesta v Butcher  AC 852,  2 All ER 43; Iron Trades Mutual Insurance Co Ltd v JK Buckenham Ltd  2 Lloyd's Rep 85; The "Superhulls Cover" case  2 Lloyd's Rep 431; Bell v Peter Browne & Co  2 QB 495; Caparo Industries plc v Dickman  2 AC 605,  1 All ER 568 at page 619 of the former report; Nitrigin Eireann Teoranta v Inco Alloys Ltd  1 All ER 854,  1 WLR 498 at page 503 of the latter report; Lancashire and Cheshire Association of Baptist Churches Inc v Howard & Seddon Partnership  3 All ER 467. If the basis upon which so many cases have been decided is to be disturbed, it must be the House of Lords and not this Court which lays down the new law.
Secondly, I regard it as important to note the context in which Lord Scarman's observations were made. In Tai Hing the banks' primary argument was that, by virtue of terms to be implied into the contracts between them and their customer, the customer owed them duties beyond those recognised in London Joint Stock Bank Ltd v Macmillan  AC 777 and Greenwood v Martins Bank Ltd  AC 51. That argument the Privy Council roundly rejected. If, therefore, the banks were to succeed, it had to be by establishing a tortious duty of care more extensive than that for which the relevant contracts provided. That was not a promising contention and I am not surprised that the Privy Council declined to accept it. It is, however, noteworthy why it was not accepted. At page 107 G Lord Scarman said :
"Their Lordships do not, however, accept that the parties' mutual obligations in tort can be any greater than those to be found expressly or by necessary implication in their contract. If, therefore, as their Lordships have concluded, no duty wider than that recognised in Macmillan  AC 777 and Greenwood  AC 51 can be implied into the banking contract in the absence of express terms to that effect, the banks cannot rely on the law of tort to provide them with greater protection than that for which they have contracted."
In the present case the Names do not rely on the law of tort to provide a duty more extensive or far-reaching than the contractual duty. The duty contended for is the same, irrespective of its source. To that extent the ratio of the Privy Council's decision on this point is inapplicable here. It is of course true that by establishing a duty of care in tort the Names gain the benefit of a more advantageous limitation period. It is also true that this is one of the results of a concurrent duty in contract and tort which caused Lord Scarman concern. But the Names do not have to overcome the formidable difficulties which face a plaintiff seeking to establish a tortious duty inconsistent with a contractual duty.
Thirdly, even if (contrary to my view) it were open to this Court to accede to this argument in principle, I would not for my part be willing to do so. That is not because I regard the existing state of the law as satisfactory; I understand and share the misgivings expressed on the subject by distinguished judges and academic authorities. But I think it would be productive of injustice in many cases if the principle contended for were to be adopted, so as to preclude concurrent duties in contract and tort, without at the same time
(a) modifying the English contract rules of consideration and privity, so as to enable those for whose benefit a contract is made to sue on it; and
(b) modifying the English limitation rr in contract, so as to ensure that a party could not lose his cause of action before he knew he had it.
The present law has developed, untidily but pragmatically, to enable the courts to do justice despite these rules. Other legal systems have developed other, and possibly better, solutions. But I would not be willing to jettison the best solution we have unless it were to be replaced by a better.
The second major issue argued before us concerned the liability of Members' Agents who were not also Managing Agents for the defaults of the Managing Agents in the conduct of the Names' underwriting under the post-1987 forms of agreement. The issue to be tried was framed in the Feltrim case in this way :
"(1) In relation to Agency Agreements entered into between Names and Members' Agents in the standard form provided for by Lloyd's Byelaw No.1 of 1985 :
(a) Whether it was a term of the said Agency Agreements that the actual underwriting would be carried on with reasonable care and skill;
(b) Whether it was a term of the said Agency Agreements that the Members' Agent was only required to exercise reasonable skill and care in relation to such activities and functions as Members' Agents, by custom and practice, actually perform for their Names personally;
(c) Whether under the said Agency Agreements and the standard form of Sub-Agency Agreement provided for by Lloyd's Byelaw No. 1 of 1985, there was a direct contractual relationship of principal and agent as between Names and the Managing Agents of Syndicates in which Names participated;"
The judge's ruling on these issues was as follows:
"(1) That, in relation to Agency Agreements entered into between Names and Members' Agents in the standard form provided for by Lloyd's Byelaw No.1 of 1985 :
(a) it was a term of the said Agency Agreements that the actual underwriting would be carried on with reasonable care and skill, so that the Members' Agent remained directly responsible to its Names for any failure to exercise reasonable care and skill by the Managing Agent of any syndicate to whom such underwriting had been delegated;
(b) there was no term of the said Agency Agreements that the Members' Agent was only required to exercise reasonable skill and care in relation to such activities and functions as Members' Agents, by custom and practice, actually perform for their Names personally;
(c) under the said Agency Agreements and the standard form of Sub-Agency Agreement provided for by Lloyd's Byelaw No.1 of 1985, there was no direct contractual relationship of principal and agent as between Names and the Managing Agents of syndicates in which Names participated."
The Members' Agents' argument rested on two major contentions:
(1) Members' Agents who were not Managing Agents were not permitted to conduct the Names' underwriting business.
(2) Under the standard form of Agency Agreement prescribed by the Agency Agreements Byelaw Members' Agents did not in fact or in law undertake responsibility for the Names' underwriting business.
Hence, it was said, Members' Agents owed no duty of care to Names in relation to the conduct of underwriting which they were not allowed to, did not agree to, and did not undertake.
The first of these contentions rested on The Underwriting Agents Byelaw (No 4 of 1984) and is undoubtedly correct. A Members' Agent is defined to mean an Underwriting Agent which acts on behalf of a Name in accordance with a direct contractual relationship with that Name in respect of the Name's business at Lloyd's "but does not (or to the extent that it does not) perform any of the functions of a managing agent". A Managing Agent is defined to mean an Underwriting Agent which performs for the Name one or more of the functions of underwriting contracts of insurance at Lloyd's, reinsuring such contracts in whole or in part or paying claims on such contracts. Clause 4 of the Byelaw prohibits any person to act as a Members' Agent or Managing Agent unless registered as such. The Members' Agents with which we are concerned here were not registered as Managing Agents and so could not perform the functions reserved to Managing Agents.
The second contention rested primarily on the terms of the standard form of Agency Agreement prescribed by The Agency Agreements Byelaw. It is necessary to quote the following clauses :
"2(a) The Agent shall act as the underwriting agent for the Name for the purpose of underwriting at Lloyd's for the account of the Name such classes and descriptions of insurance business, other than those prohibited by the Council, as may be transacted by the Syndicate (hereinafter referred to as "the underwriting business").
(b) In acting as underwriting agent for the Name the Agent shall at all times comply with the byelaws, regulations and requirements for the time being of the Council affecting the Name as an underwriting member of Lloyd's. Provided that if and to the extent that any provision of this Agreement shall be inconsistent with any such byelaw, regulation or requirement such inconsistent provision shall be deemed to be modified or cancelled so far as may be necessary or appropriate to the intent that the byelaw, regulation or requirement in question shall prevail and have full effect.
4.(a) The Agent is authorised, and such authority shall continue to subsist so far as may be appropriate until the winding-up of the underwriting business shall have been completed, to exercise such powers as the Agent may consider to be necessary or desirable in connection with or arising out of the underwriting business, including without prejudice to the generality of the foregoing:
(i) the acceptance of risks and the effecting of reinsurance, including reinsurance for the purpose of Clause 5(g) hereof;
(b) Without prejudice to the generality of the provisions of sub-clause (a) of this Clause, the Agent shall have the following customary and/or special powers in connection with the conduct and winding-up of the underwriting business:
(A) Compliance with statutory provisions and with requirements of Lloyd's: Power to comply on behalf of the Name with the requirements prescribed by Lloyd's Acts 1871 to 1982, the Insurance Companies Act 1982 and all other statutory provisions, byelaws, regulations and requirements for the time being in force and affecting the Name as an underwriting member of Lloyd's.
(G) Delegation of Agent's powers.
Power, subject to any requirements of the Council, to appoint to employ any person, firm or body corporate to carry on or manage the underwriting business or any part thereof, and to delegate or to confer upon any person, firm or body corporate all [or] any of the powers, authorities and discretions given to the Agent by this Agreement including this power of delegation and the other powers contained in this paragraph.
5.(a) The Agent shall have the sole control and management of the underwriting business and the Name shall not in any way interfere with the exercise of such control or management.
(b) The underwriting business shall be conducted in the same manner as may for the time being be adopted by the Agent for the other members of the same Syndicate for whom the Agent for the time being acts as underwriting agent.
(g) In order to close the underwriting account of any year the Agent may:
(i) reinsure all or any outstanding liabilities in such manner as the Agent shall think fit, including the debiting of such account and the crediting of the underwriting account of the next succeeding year with such reinsurance premium as the Agent in its absolute discretion (subject to any requirements of the Council) thinks fair or
(ii) reinsure all or any outstanding liabilities into the underwriting account of any other year then remaining open or in any other manner which the Agent (subject as aforesaid) thinks fair.
6. The following provisions shall apply concerning the accounts and accounting records of the underwriting business:
(a) The Agent shall comply with, or procure compliance with, the byelaws, regulations, or requirements of the Council from time to time dealing with accounting to underwriting members of Lloyd's.
8.(a) The Name shall pay to the Agent as remuneration for the services of Agent a fee at the rate per annum specified in the Syndicate Schedule.
9.(a) The Name shall keep the Agent at all times in funds available for the payment of the liabilities, expenses and outgoings of the underwriting business......"
The form of Agreement contained an arbitration clause in general terms, but the Name was also obliged to enter into a binding Syndicate and Arbitration Agreement, also in a prescribed form, with the other members of his Syndicate, with all Members' Agents on the Syndicate Stamp and with the Managing Agent of the Syndicate. Clause 3(a) of the Syndicate and Arbitration Agreement provided :
"Any disputes, differences, questions or claims whatsoever between any one or more or all of the Names, the Members' Agents and the Agent, whether in contract, tort or otherwise, arising at any time and in any way out of or in connection with or in relation to the Syndicate or to its constitution or business (hereinafter called "Syndicate disputes") shall be referred to arbitration in London by a sole Arbitrator to be appointed at the instance of any of such Names, Members' Agents or the Agent by the Chairman or a Deputy Chairman of Lloyd's for the time being."
Where, as in the case under consideration, the Members' Agent was not also the Managing Agent, the Members' Agent entered into the prescribed form of Sub-Agency Agreement with the Managing Agent. In this Agreement the parties are described as "the Agent" and "the Sub-Agent" respectively. I should quote the following terms :
"Whereas the Agent is the underwriting agent at Lloyd's for certain underwriting members of Lloyd's and it has been arranged between the Agent and the Sub-Agent that the Sub-Agent shall act as the sub-underwriting agent for one or more of such underwriting members upon the terms hereinafter mentioned.
2. The Sub-Agent shall act as sub-agent for the Agent for the purpose of conducting in the names and for the account of each of the Agent's Names that part of the underwriting business as defined in Clause 2(a) of the Agency Agreement which is to be transacted by such Name as a member of the Syndicate (hereinafter called "the Syndicate underwriting business"); and (unless it shall appear otherwise from the Schedule) the appointment of the Sub-Agent shall take effect in respect of each of the Agent's Names on and from the 1st January of the year in respect of which the name of such Name shall first appear in Part I of the Schedule.
3.(a) The Sub-Agent shall underwrite for the Agent's Names as part of the Syndicate, unless it shall appear from any Supplementary Provision that the Agent's Names are to form a separate section or group within the Syndicate, in which event the expression "Syndicate" shall mean exclusively the Agent's Names for the purposes of Clause 17 of the Agency Agreement.
5.(a) The Agent delegates to the Sub-Agent the performance of all such duties and the exercise of all such powers, authorities and discretions imposed or conferred upon the Agent by the Agency Agreement (including without prejudice to the generality of the foregoing the power of delegation contained in that Agreement) as it may be appropriate or necessary for the Sub-Agent to perform or exercise for the purpose of carrying on the Syndicate underwriting business.
7.(a) The Sub-Agent shall conduct the Syndicate underwriting business in such manner as to comply with the provisions of the Agency Agreement and Lloyd's byelaws and regulations and as to have regard for Lloyd's Codes of Conduct or similar forms of guidance for the Lloyd's market.
12.(a) The Agent undertakes to put and keep the Sub-Agent at all times in funds to such extent as the Sub-Agent shall in its sole discretion determine to be requisite for payment of all liabilities, expenses and outgoings from time to time payable in connection with the Syndicate underwriting business but (subject to any Supplementary Provision) only to the extent that the Agent shall be able to enforce against a Name the provisions of the Agency Agreement."
In the earlier case of Boobyer v David Holman & Co Ltd (No.2)  1 Lloyd's Rep 96 at page 97 Saville J had said, with reference to this form of Agency Agreement (described as "the old form of contract") :
"Under the old form of contract the Name agreed that the members' agent should act as the underwriting agent of the Name at Lloyd's for the purpose of underwriting for the account of the Name. The Name further agreed that the members' agent should have sole control and management of the underwriting business, but could delegate to others the performance of these functions. In most cases of course it was known and expected that the members' agents would, as they did, delegate such functions to managing agents, but as a matter of the parties' express bargain it seems to me to be clear that despite such delegation the members' agents were and remained directly responsible to the Names for the conduct of the underwriting business. They had contracted to do it, not merely to exercise care in choosing other people to do it or to oversee the conduct of those they had entrusted with the task."
In argument before the judge this analysis was criticised but the judge adhered to it. He said, in his judgment under appeal at page 15 :
"To my mind there is nothing in the Byelaw to prohibit Members' Agents from undertaking to underwrite on behalf of the Name at Lloyd's. What is prohibited is the Members' Agents themselves personally carrying out that undertaking, but the Agreement makes full provision for this by giving the Members' Agents wide powers of delegation - see Clause 4(b)(G). In other words the Members' Agents can perfectly lawfully undertake to underwrite on behalf of the Name provided they "delegate" (the word used in the Agreement) their authority from the Name to do so to those who can lawfully carry out these functions. Despite Mr Eder's careful analysis of various clauses in the Standard Agency Agreement, I remain convinced that under that Agreement and by reason of the plain words used the Members' Agents do undertake to conduct on behalf of the Name the underwriting business of the Name at Lloyd's, including that which it is the function of the Managing Agents actually to perform."
In argument for the Members' Agents this passage also was criticised. It was said that the judge had relied on "the plain words used" without saying what they were and the Names were challenged to identify where in the Agency Agreement the Members' Agents undertook to underwrite on behalf of the Names. The Names responded to that challenge by pointing to clause 2(a). I have no difficulty in accepting that answer and I share the judge's view that the meaning is plain. The function of the Members' Agent is there laid down; his powers are prescribed in clause 4(a); and if The Underwriting Agents Byelaw prevents him carrying out the underwriting he has a comprehensive power (which in effect becomes a duty) to delegate under clause 4(b)(G).
The judge gave three additional reasons for rejecting the Members' Agents' arguments, each of which I find convincing :
(1) The standard form of Agency Agreement was the form used not only, as here, where the Members' Agents acted in that capacity alone but also where the Members' Agents acted as Managing Agents also. In the latter case, it seems clear, an obligation to conduct the Names' underwriting business was undertaken. It is hard to see how the meaning of the Agreement can alter according to whether "the Agent" is or is not permitted to act as Managing Agent.
(2) If the meaning and effect of the Agency Agreement were as the Members' Agents contended it was a very remarkable piece of drafting to confer these powers and discretions on the Members' Agent with power to delegate rather than authorising the Members' Agent to give the necessary powers and discretions to the Managing Agents.
(3) On the Members' Agents' argument, no one gave a contractual commitment to underwrite for the Name, since the Members' Agents would not on this argument have done so and they could not delegate a duty they did not have. It is hard to think that the Agency Agreements Byelaw intended to create such an obvious lacuna.
The Members' Agents sought to meet this last objection by suggesting that the effect of the Agency and Sub-Agency Agreements was to establish privity of contract between the Name and the Managing Agent. Reliance was placed on De Bussche v Alt (1878) 8 Ch D 286 at pages 310-11 and Powell & Thomas v Evan Jones & Co  1 KB 11 at pages 17, 22-23. Neither of these decisions is, perhaps, as clear as it might be, and Bowstead (15th edn, p 130, art 36) formulates the rule that
"(2) The relation of principal and agent may be established by an agent between his principal and a sub-agent if the agent is expressly or impliedly authorised to constitute such relation, or if his act is ratified, and it is the intention of the agent and of such sub-agent that such relation should be constituted.
(3) But there is no privity of contract between a principal and a sub-agent as such, merely because the delegation was effected with the authority of the principal ......".
Like the judge, I think the language of the Sub-Agency Agreement points against the Members' Agents' argument. Had it been intended to create a direct contractual relationship between Name and Managing Agent, one would have expected the Managing Agent to be appointed as Agent for the Name and not for the Agent in clause 2 and one would have expected the Name and not the Members' Agent to be obliged to keep the Managing Agent in funds under clause 12(a). But this point is not, as was accepted, determinative : even if, in the circumstances, a direct contractual relationship was established between Name and Managing Agent it would not shake my view, based on the construction of the Agency Agreement, that the Members' Agent also undertook an obligation to the Name to underwrite on his behalf.
On behalf of the Members' Agents an alternative submission was advanced : if (contrary to their primary and fundamental submission) they were responsible for the way in which the Names' underwriting was conducted, then their responsibility was for the underwriting as a whole.
The judge addressed this argument in his judgment and rejected it. He said:
"I now turn to what Mr Eder described as his "alternative submission". This was that if the Members' Agents were contractually responsible for the way in which the underwriting was performed, this responsibility related to the carrying on of the underwriting business of the Name as a whole. It followed, submitted Mr Eder, that it will be necessary to look at the entirety of the underwriting business conducted for the Name in order to decide whether the Members' Agents have failed to perform their obligation to exercise reasonable care and skill. By way of example Mr Eder instanced a case where it was alleged that the Managing Agents of a particular Syndicate of the Name had written a very narrow and risky range of business, but where other Syndicates of that Name managed by others had covered different risks, so that the proportion of this kind of risky business in the Name's portfolio as a whole did not exceed that which a reasonably competent, diligent and efficient underwriter would regard as perfectly acceptable. In such circumstances how could it be suggested that the Members' Agents had broken their promise to the Name to underwrite with reasonable care and skill?
In my judgment, to the extent that this argument is intended to encompass a case where those actually conducting insurance business on behalf of the Name fell below the required standard, it is fallacious. It seems to me that in respect of any given allegation of negligent underwriting the question is simply whether what was done (or omitted to be done) fell below the standard to be expected of a reasonably competent, diligent and efficient professional underwriter. Taking the example, if it were established that what Managing Agents of the particular Syndicate did fell below the required standard, then to my mind it follows (since they are the delegates of the Members' Agents) that the Members' Agents have broken their promise to the Name to conduct the underwriting to the requisite standard and are liable (to the extent permitted by other rules of law) for the consequences of that failure. In the end Mr Eder's submission seems to me to involve the proposition that the Members' Agents can perform their obligation to act with reasonable care and skill by employing delegates who act negligently, a proposition that to my mind has only to be stated to be rejected. The question whether the Managing Agents have actually acted negligently is of course a different matter altogether and nothing in this judgment is intended to rule upon the facts and matters which should be taken into account in determining that question."
The ruling made by the judge (in the Gooda Walker case) was:
"it was a term of the said Agency Agreements that the actual underwriting would be carried on with reasonable care and skill, so that the Members' Agent remained directly responsible to its Names for any failure to exercise reasonable care and skill by the Managing Agent of any particular syndicate to whom such underwriting had been delegated;".
Read in the light of the carefully expressed judgment, this ruling seems to me to be correct. It is only negligent conduct of the actual underwriting by the Managing Agent (or the active underwriter) which can render the Members' Agent liable. The Members' Agent's liability cannot be greater than if it had itself conducted the underwriting. The ruling leaves it open to the Members' Agent to challenge all allegations of breach and to advance any available defence. But if any underwriting transaction was conducted without reasonable care and skill it will not avail the Members' Agents to demonstrate that other underwriting transactions were properly conducted.
The Agency Agreements Byelaw of 1985, which required business to be done under the standard forms of agency and sub-agency agreements after the end of 1986, contained a transitional provision :
"Nothing ... shall prevent an underwriting agent from running off the insurance business of an underwriting member, underwritten for a year of account prior to 1st January 1987, in pursuance of an agency agreement other than a Standard Agency Agreement or a Standard Sub-Agency Agreement" (my underlining).
The issue was whether, when Names on the 1985 underwriting year reinsured the Names on the 1984 underwriting year, the 1984 Names were "running off" their business on that syndicate. The judge held not and that that reinsurance to close was governed by the forms of Agreement required by the Byelaw. His ruling (in the Merrett case) was
"(3) As between the Names (on the one part) and [Merrett] (on the other part), that on a true and proper construction of Lloyd's Byelaw (No 1 of 1985), for Names who executed new Underwriting Agency Agreements pursuant to the said Byelaw, the contractual relationship between Names on Syndicate 418/417 for the 1985 underwriting year of account ("the 1985 Names") and their respective Members' Agents, and between Names and/or their respective Members' Agents (on the one part) and the Managing Agents of that Syndicate (on the other) in relation to the acceptance by or for the Syndicate in about June 1987 of the reinsurance to close Syndicate 418/417 for the 1984 underwriting year of account was governed by the forms of Agency and Sub-Agency Agreement set out in the said Byelaw."
In my judgment these appeals must be dismissed. I would affirm the rulings made by the judge without alteration.
JUDGMENTBY-2: HOFFMANN LJ
HOFFMANN LJ: I agree.
JUDGMENTBY-3: HENRY LJ
HENRY LJ: I also agree.
Appeals dismissed with costs. Leave to appeal to the House of Lords refused.
Wilde Sapte; Elborne Mitchell; Richards Butler; Reynolds Porter Chamberlain; Oswald Hickson, Collier & Co