The Society of Lloyd's v Woodard and Another


The Times 24 May 1996, (Transcript)


17 MAY 1996

This is a signed judgment handed down by the judge, with a direction that no further record or transcript need be made (RSC Ord 59, r9(1)(f), Ord 68, r1). See Practice Note dated 9 July 1990, [1990] 2 All ER 1024.

None stated at original source



SIR RICHARD SCOTT VC: Over the past few years many members commonly called "Names", of the Society of Lloyd's (Lloyd's) have suffered very substantial underwriting losses. A considerable number of these Names have attributed their losses to breaches of duty by Members' Agents, Managing Agents' and, in some cases, syndicate auditors. The losses of these Names are said to have been brought about by misrepresentations, breaches of contract, acts of negligence and other analogous wrongs. Actions for the recovery of damages have been brought.

Many of these actions are still pending. In some, liability has been established but the recoverable damages have not yet been quantified. In a few, substantial recoveries of damages have already been achieved. Thus, in 1992 some 992 Names, members of the Outhwaite syndicate, received a payment of approximately 116 million by way of compensation for their losses. In October 1994, judgment on liability was given in favour of 3095 Names, members of some of the Gooda Walker syndicates, in an action against their underwriting agents. Damages have not yet been quantified but an interim payment of 210 million has been ordered to be paid. I have been told that at present sums totalling 300 million or thereabouts are held by solicitors pending distribution to the successful litigants. Further substantial receipts are expected. Of the Names who have been or are still engaged in these actions, some have duly discharged their indebtedness to Lloyd's incurred in respect of their underwriting losses. But many of them have not yet done so.

Lloyd's has had to draw on its own funds to meet the insurance liabilities of those who either cannot or will not provide the funds to meet their liabilities. Many of the successful litigants are, despite their success in the litigation, in grave financial difficulties brought about by their Lloyd's' losses. Whether or to what extent these litigants will choose to apply the damages recovered in these actions (which I will refer to as litigation recoveries') in the payment of their Lloyd's losses is, of course, a matter not known to Lloyd's. Some of them may prefer to use their litigation recoveries to meet other pressing liabilities such as, by way of example, the repayment of loans raised from banks and others in order to meet their Lloyd's indebtedness.

Lloyd's is naturally anxious to ensure that the litigation recoveries are applied in or towards the discharge of any outstanding indebtedness of the litigants to Lloyd's.

One of the features of the arrangements under which Names carry on their underwriting business is that each Name is required to execute a trust deed, known as a "Premiums Trust Deed" in a prescribed form. The parties to each Trust Deed, besides the Name, are the Name's Member's Agent and Lloyd's itself. I must take time in this judgment to examine more particularly the contents of these Trust Deed and the part they play in the conduct of every Name's underwriting business. It will suffice for the moment for me to refer to two clauses.

Clause 2(a)(i) provides that "the Trust Fund shall consist of ... all premiums and other monies whatsoever ... now belonging or payable or hereafter at any time belonging or becoming payable to the Name in connection with the Underwriting".

Clause 22 gives power to the Council of Lloyd's to "revoke and determine the trusts hereby constituted or (subject always to the prior approval of the Secretary of State) vary or amend all or any of them or any of the provisions hereof in which manner as the Council think fit ..."

Lloyd's primary contention in this action is that all litigation recoveries obtained by Names in the actions to which I have referred are caught by clause 2(a)(i) of the Names' respective Trust Deeds. The litigation recoveries are, it is said, "monies ... belonging or becoming payable to the Name in connection with the Underwriting". This contention was raised by Lloyd's in an action, Napier v Kershaw, which came before Saville J (as he then was) in 1992. In an unreported judgment delivered on 14 May 1992, Mr Justice Saville ruled against Lloyd's. He held that the litigation recoveries were not caught by clause 2(a)(i) and did not constitute part of the respective Trust Funds. In a later decision, Lloyd's v Morris [1993] 2 Re LR 217, in which the issue was whether the proceeds of stop loss policies effected by Names were caught by clause 2(a)(i), the Court of Appeal, in deciding that the proceeds of these policies were not caught, expressed approval of Mr Justice Saville's decision in Napier v Kershaw. Lloyd's contends before me that Mr Justice Saville was wrong, that the Court of Appeal's approval given in Lloyd's v Morris was merely obiter and not binding on me and that I should rule that litigation recoveries are caught by clause 2(a)(i) and constitute part of the Trust Funds. If the litigation recoveries are so caught, Lloyd's will be able, without the necessity of obtaining any consent or co-operation from the Names entitled to the recoveries, to ensure that the recoveries are applied in discharging any outstanding indebtedness of the Names to Lloyd's.

However, in addition, Lloyd's have purported to exercise their power of amendment under clause 22 of the Trust Deeds. The amendments are in form complex but in concept simple. In essence, the amendments have added a new sub-clause (d) to clause 2 whereby the litigation recoveries obtained by any Name from any such action as those to which I have referred become, to the extent of the Name's indebtedness, if any, to Lloyd's, part of the Trust Fund. So, if the amendments are effective, Lloyd's will be able to control the use made of the litigation recoveries and, without the necessity of obtaining any consent or cooperation from the Names, ensure that the recoveries are applied in discharging the Names' indebtedness to Lloyd's.

The Names protest that the power of amendment conferred on Lloyd's by clause 22 was never intended to be used for the purpose of adding to the Trust Fund assets outside those which the conduct of the Names' Underwriting business had generated. Lloyd's respond by pointing to the absence in clause 22 of any expressed limitation on the power of amendment.

Lloyd's have instituted this action in order to have a decision on the following issues:

(i) Is the Court bound by the Court ofAppeal decision in Lloyd's v Morris tohold that litigation recoveries are caught byclause 2(a)(i) of the Trust Deeds?

(ii) Assuming a first instance Court is not bound by Lloyd's -v- Morris so to hold, are litigation recoveries caught by clause 2(a)(i)? Saville J held in Napier -v- Kershaw that they were not. It is, I think, accepted that I ought to follow that ruling unless satisfied that it was clearly wrong.

(iii) On the footing that litigation recoveries were not caught by clause 2(a)(i), did the power of amendment conferred on Lloyd's by clause 22 enable Lloyd's to amend the Premiums Trust Deeds so as to bring litigation recoveries within the Trust Funds?

Lloyd's have joined a Name, Mr Woodard, as a defendant in a representative capacity, to argue these issues.

The questions identified under (ii) and (iii) above, turn on the construction of the relevant clauses in the Premiums Trust Deeds. It is well accepted that instruments in writing must be construed in the context of the matrix of facts in which they are set: see Prenn v Simmonds [1971] 3 All ER 237, [1971] 1 WLR 1381 in which Lord Wilberforce held that "evidence of the factual background known to the parties at or before the date of the contract, including evidence of the 'genesis' and objectively the aim of the transaction" was admissible for the purpose of construction of the contract.

In his judgment in Lloyd's v Morris, the Master of the Rolls, Sir Thomas Bingham, included a section entitled "The contextual scene". I cannot improve upon it as a description of the genesis and purpose of the Lloyd's Premiums Trust Deeds.

"The contextual scene

We are conscious that what we say about the contextual scene will be elementary material for those who are engaged in the Lloyd's market. The operation of Lloyd's insurance market is, however, a matter of public interest and we must therefore try to explain the context of the problem in readily intelligible terms.

The London insurance market comprises a companies market and the Lloyd's market. The capital of insurance companies is provided by shareholders whose liability is limited for each shareholder to the amount of capital that he has subscribed. For the protection of the interests of the policyholders the Insurance companies Act 1982 contains detailed provisions about the authorization of insurance companies to carry on insurance business, the regulation of authorized insurance companies, and the conduct of insurance business. Lloyd's, on the other hand, is a society of individuals underwriting members or Names. Lloyd's does not effect any insurance. Insurance is effected by Names who are grouped in syndicates. The Names are obliged to act through underwriting agents who have full authority to act on their behalf in dealing with brokers, the agents of the assured. A member's agent acts on behalf of a Name in all respects except the managing of the syndicate which the Name joins. A managing agent is an underwriting agent who manages one or more Lloyd's syndicates. An active underwriter employed by a managing agent effects insurance business on behalf of Names on a syndicate. The managing agent is also responsible for the investment of syndicate funds. A Name accepts unlimited liability for his share of any insurance written on his behalf: he is liable to sacrifice his entire personal fortune in payment of valid claims. And Names underwrite risks on the basis of liability 'each for his own part and not for one another': section 8(1) of the 1982 Act. The affairs of Lloyd's, and the carrying on of insurance business at Lloyd's, is governed by the Lloyd's Act 1982 and Byelaws made by the Council of Lloyd's. Section 15(4) of the Insurance Companies Act 1982 exempts Names at Lloyd's from complying with the solvency provisions in Part II of the Act provided that they comply with section 83. For present purposes the following subsections of section 83 are material:

'(2) Every underwriter shall, in accordance with the provisions of a trust deed approved by the Secretary of State, carry to a trust fund all premiums received by him or on his behalf in respect of any insurance business.

(3) ...

(4) The accounts of every underwriter shall be audited annually by an accountant approved by the Committee of Lloyd's and the auditor shall furnish a certificate in the prescribed form to the Committee and the Secretary of State.

(5) The said certificate shall in particular state whether in the opinion of the auditor the value of the assets available to meet the underwriter's liabilities in respect of insurance business is correctly shown in the accounts, and whether or not that value is sufficient to meet the liabilities ...'

The trust fund constituted under section 83(2) of the Act was plainly a critical factor which persuaded the legislature that, consistent with a policy of self-regulation at Lloyd's, it was possible to exempt Names from the solvency requirements of the Act. Consistent with the legislative policy of self-regulation adopted in respect of the Lloyd's insurance market, section 42 of the Financial Services Act 1986 also provides that the society of Lloyd's and persons permitted by the Council of Lloyd's to act as underwriting agents at Lloyd's are exempted persons as respects investment business carried on in connection with or for the purpose of insurance business at Lloyd's.

In accordance with section 83(2) each Name at Lloyd's is obliged to execute a Lloyd's Premiums Trust Deed. The parties to the deed are in each case a Name, his members' agent and Lloyd's. The critical provision in the Premiums Trust Deed is clause 2(a) which provides as follows:

'Subject as hereinafter provided the Trust Fund shall consist of:

(i) all premiums and other monies whatsoever (except as provided in sub-clause (b) of this Clause) now belonging or payable or hereafter at any time belonging or becoming payable to the Name in connection with the Underwriting and ...'

Two observations are pertinent. First, in practice it is to the individual Name's premium trust fund that the managing agent will first resort if he requires funds to meet the Name's underwriting liabilities. Secondly, it will immediately be obvious that, whereas section 83(2) only required 'premiums' to be carried to the trust fund, the trust deed approved by the Secretary of State also required Names to carry to the trust fund

'....all ... other monies whatsoever ... now belonging or payable or hereafter at any time belonging or becoming payable to the Name in connection with Underwriting.'

The meaning of 'other monies' in the context of clause 2(a)(i) is one of the principal issues in the case. As we have indicated it arises in connection with personal stop loss recoveries by Names."

There are some pertinent points made to me by counsel to which I should refer, by way of supplement to the Master of the Rolls' "contextual scene".

First, although s 83(2) (and its statutory predecessors, going back to the Assurance Companies Act 1909) requires only insurance premiums to be subjected to the trusts of the Premiums Trust Deeds, the approved form of Trust Deed has never, in practice, been limited so as to catch only premiums. It is accepted that the terms of clause 2(a)(i) of the form of Trust Deed current until the amendments now under review were made would catch such business receipts as salvage receipts and the proceeds of syndicate re-insurance policies.

Second, business receipts are not the only source of funds to be comprised in the Trust Funds established by the Premiums Trust Deeds. Paragraph 7 of the Agency Agreement entered into between each Name and his Managing Agent requires each Name to "ensure that at all times there are sufficient funds subject to the trusts of the Premiums Trust Deed ... to pay all claims and all reasonable expenses and outgoings made or incurred in connection with the Underwriting ..." and to "comply with any request by the Agent to make such funds available". So the Managing Agent can, from time to time, make calls on the Name requiring the Name to provide funds to top-up the Premiums Trust Fund. The Name is contractually obliged to comply. But, of course, enforcement of this contractual obligation would require, if the Name were unable or unwilling to pay, litigation and court orders. A similar contractual provision is to be found in the Agency Agreement entered into between the Name and his Member's Agent. The Member's Agent, too, can require the Name to top-up the Premiums Trust Fund (see para 9 of the Member's Agents Agreement).

Third, recourse to the Premiums Trust Fund is not the only means whereby funds to discharge a Name's underwriting liabilities may be obtained. Lloyd's maintains a Central Fund' to which every member of Lloyd's must each year contribute such sum or sums as Lloyd's may by special resolution prescribe (see The Central Fund Byelaw: No. 4 of 1986: para. 4). Paragraph 7 of the Byelaw permits Lloyd's to use the Central Fund, "in making good any default by any member of the Society under any contract of insurance underwritten at Lloyd's". Paragraph 8 obliges any such Name to repay the Central Fund. However, whether a Name's obligation to contribute to or to re-imburse the Central Fund under this Byelaw is regarded as statutory or as contractual, enforcement would require litigation and Court Orders.

Fourth, para 3 of Lloyd's Membership Byelaw (No. 17 of 1993) enables Lloyd's to require a Name "... to hold assets of such descriptions and in such amounts or of such value as may be specified ..." (sub-para (f), and "... to provide security in respect of underwriting business at Lloyd's in such form and manner for such period as may be specified" (sub-para (g)).

These powers seem to me ample enough to enable Lloyd's, if it so wishes, to require Names to earmark their respective litigation recoveries as security for the discharge of their underwriting liabilities. The powers have not however, been so used. Instead, Lloyd's have sought to achieve that result, first, by putting forward a construction of clause 2(a)(i) that would include litigation recoveries in the Trust Funds, and, alternatively, by relying on the clause 22 power of amendment and amending clause 2(a)(i) so as expressly to include litigation recoveries in the Trust Funds.

The importance of the Managing Agents and Members' Agents respective contractual rights to make calls on Names to top-up their Premiums Trust funds and of Lloyd's' powers under its Byelaws to call for contributions by Names to the Central Fund and for the provision by Names of assets and funds to be held as security is that those rights and powers, together with the rights and powers conferred by the Premiums Trust Deeds, constitute a comprehensive scheme whereby provision is made for the discharge of Names' underwriting liabilities. The construction of clause 2(a)(i) and clause 22 of the Premiums Trust Deeds must take account not only of the contents of the Trust Deeds but also of the scheme of which the Trust Deeds form a part.

There are several other provisions in the Trust Deeds which bear upon the construction of the two clauses with which I am particularly concerned and to which I should refer.

The parties to each Trust Deed include, besides the Name, the Member's Agent and Lloyd's itself. Each of these two parties is, therefore, entitled, as a matter of contract, to enforce the terms of the Trust Deed.

Clause 2 of the Trust Deed identifies the ingredients of the Trust Fund. Clause 2(a)(i) refers, as I have said, to "all premiums and other monies whatsoever ... belonging or becoming payable to the Name in connection with the Underwriting". "Underwriting" is defined as "The underwriting business (whether current or future) of the Name at Lloyd's carried on through the agency of the Member's Agent or under arrangements made by or through the Member's Agent ...".

The potential breadth of the words "in connection with the Underwriting" is striking. Before Saville J it was argued on behalf of Lloyd's that the words were apt to include loans raised by the Name from a bank or a friend in order to pay underwriting losses or, even, money donated or left by Will in order to enable underwriting losses to be paid. Saville J, being of opinion that litigation recoveries were not caught, certainly did not accept that that breadth of construction could be right. Before me Lloyd's has altered its stance. Mr Sher, counsel for Lloyd's, has accepted that loans raised or gifts made would not form part of the Trust Fund, notwithstanding that, in a sense, they would be paid to the Name in connection with" the Name's underwriting business. By contrast, an action which leads to litigation recoveries will be an action for breach of contract entered into or for breach of duties owed in the conduct of the Name's underwriting business. I will return later to the nature of the distinction between litigation recoveries on the one hand, and the loans and gifts made to Names on the other hand.

Clause 3 of the Trust Deed sets out the trusts on which the Trust Fund and its income are to be held. The trusts are described, so far as relevant to this action, as follows:

"(a) In trust for the payment or discharge as provided in clause 7(a) hereof:

(i) of any losses, claims, returns of premiums, reinsurance premiums and other outgoings now payable or at any time hereafter to become payable in connection with the Underwriting

... and;

(ii) of any expenses whatsoever from time to time incurred in connection with or arising out of the Underwriting ... and;

(iii) ...

(b) Subject to the trust hereinbefore declared in trust for the Name absolutely".

Clause 7(a), clause 7(d) and clause 7(e) of the Trust Fund, first, give the Managing Agent a discretionary power to decide in what order and at what time payments are to be made out of the Trust Fund in meeting "payments and expenses payable or incurred ... in connection with that part of the Underwriting which has been conducted ... by the Managing Agent" and, second, give the Member's Agent a discretionary power to decide what, if any, sums from the Trust Fund should be distributed to the Name as profits.

The combination, therefore, of clauses 3 and 7 of the Trust Deed creates what is, in effect, a discretionary purpose trust. The trustees of the Trust Deed hold the Trust Fund upon trust to discharge the outgoings and expenses of the Name's Underwriting business, with an ultimate trust for the Name absolutely.

It is important to notice the implications of Lloyd's contention that litigation recoveries are caught by the language of clause 2(a)(i) and, accordingly, are part of the Trust Fund, as defined. Damages paid by a defendant to an action in which a Name has been successful will represent a gross fund. Costs and expenses will have been incurred by the Name in bringing the action. Whatever costs order may have been made in favour of the Name, it is highly unlikely that the whole of the Name's litigation costs and expenses will have been met. In those circumstances, Mr Sher accepts that Lloyd's contention that the Name's damages, his litigation recoveries, are part of the Trust Fund has the logical corollary that the Name's litigation costs and expenses are payable, under clauses 3 and 7, out of the Trust Fund. This would be so, moreover, even in a case in which the action had failed. An answer to the question whether a Name's litigation costs were "expenses ... incurred in connection with or arising out of the Underwriting" could hardly depend on whether or not the litigation were successful.

Clause 6 of the Trust Deed is also important. The side heading to the clause is "Vesting of Trust Fund in Trustees". Sub-clause (a) refers to:-

"All premiums monies and other assets whatsoever constituting or becoming part of the Trust Fund and received by the Name or on behalf of the Name by the Member's Agent or any Managing Agent or any other person ...".

and sub-clause (b) refers to:

"... all premiums monies and other assets whatsoever constituting or becoming part of the Trust Fund in connection directly or indirectly with so much of the Underwriting as is conducted by a Managing Agent ...".

Each of these sub-clauses appears to contemplate that money forming part of the Trust Fund may be received in the first instance by the Name. Leaving aside litigation recoveries, neither Mr Sher for Lloyd's nor Mr Kentridge for the defendant has been able to describe circumstances in which money forming part of the Trust Fund would be expected to be received in the first instance by the Name. Since it is common ground that, until the Names' calamitous Lloyd's losses and the consequential litigation, no-one had in mind the possibility that the proceeds of damages actions might be caught by the Premiums Trust Deeds, the references to "monies ... received by the Name" is puzzling. Counsel suggested that the likely explanation was of a belt-and-braces nature. Although it would be irregular, it might nonetheless happen that premiums or salvage money or proceeds of re-insurance might be paid direct to a Name or Names. The wording in clause 6 would cater for that improbable eventuality. I am inclined to accept that explanation. I do not think the presence in clause 6 of the words in question is of assistance on either of the issues of construction that counsel have addressed.

I should briefly refer to clause 14(c) of the Trust Deed which contains a perpetuity provision. It provides that from and after the expiration of 21 years from the death of the Name, the Trust Fund shall be held in trust for the Name's executors, administrators or assigns, discharged from the provisions of the Trust Deed. This perpetuity provision is consistent with the "purpose" nature of the primary trusts of the Trust Deed.

The contents of the Trust Deeds and the part they play in the comprehensive scheme established by Lloyd's in order to ensure, so far as practicable, that Names' underwriting liabilities are duly met justify the conclusion that the primary purpose of the Trust Deeds was to ensure that the business receipts of the Underwriting business would be placed and would remain under the control of the Managing Agents and Members' Agents of the respective Names and would be available to meet the losses and expenses of the underwriting business.

I must now return to the three issues in the action:

(i) There is no doubt but that the decision of Mr Justice Saville in Napier v Kershaw is directly in point on the question whether litigation recoveries in damages actions against Managing Agents, Members' Agents or syndicate auditors are caught by clause 2(a)(i) of the successful litigants' Trust Deeds. Saville J held that they were not. He held that "The money in question is clearly not a receipt of the underwriting business, for the business is one of underwriting at Lloyd's and not one of compensating Names for mistakes".

Lloyd's v Morris [1993] 2 Re LR was, as I have said, concerned with the question whether the proceeds of Stop-loss policies were caught by clause 2(a)(i) of the Trust Deeds. Stoploss policies are, as the Master of the Rolls pointed out, taken out by Names on a personal and voluntary basis for their own protection. They are not taken out on the Name's behalf by a Managing Agent or Member's Agent. They may or may not be taken out at Lloyd's.

These policies, therefore, do not form part of the underwriting business carried out on the Name's behalf by the Managing Agent. And the rules of Lloyd's that bind all members insist that members can only conduct underwriting business through the medium of a Managing Agent. Tuckey J, at first instance, held that personal stop loss recoveries "are not receipts of the Name's underwriting business but the product of a personal voluntary arrangement which the Name has effected ...". Counsel for Lloyd's submitted in the Court of Appeal that the judge's approach, and that of Saville J in Napier v Kershaw, was wrong. Reliance was placed on the great width of the words in connection with" in clause 2(a)(i). The Master of the Rolls said this:-

"It seems to us that the argument advanced on behalf of Lloyd's stretches the language of clause 2(a)(i) beyond the limits which the context will allow. It must be remembered that a Name is a passive participant in the business of a syndicate. The managing agents and active underwriter take all underwriting and investment decisions. They are not obliged to take into account the individual wishes and circumstances of a Name but they must be guided by the best interests of the syndicate as a whole. All moneys derived from the business transacted by the managing agents and active underwriter in and about the affairs of the syndicate fall within the trust fund unless expressly excepted by the deed. In contradistinction the taking out of a personal stop loss policy by a Name is not syndicate business. The Name is not obliged to take out a stop loss policy. The managing agent or active underwriter cannot require him to do so. And he is entitled to reject advice to do so. It is an essentially personal decision by the Name for his own protection, judged in the light of his assessment of his personal circumstances. Moreover, he is entitled to arrange such personal stop loss insurance outside Lloyd's.

All moneys derived directly or indirectly from the underwriting business clearly fall within clause 2(a)(i). It follows that the proceeds of syndicate reinsurances, reinsurances to close, salvage, and the like, form part of the trust fund. But the proceeds of the personal stop loss insurances are not money derived directly or indirectly from 'the Underwriting'. Such moneys can only be said to be payable 'in connection with the Underwriting' if one gives to that phrase the very wide meaning 'having something to do with'. Taken in isolation the words are capable of bearing such a meaning but the context suggests otherwise. Postulate, for example, the case where a name recovers damages from a financial adviser outside Lloyd's who negligently advised him to join a particular syndicate. It is rightly conceded that such a recovery may in a sense be said to 'have something to do with' the underwriting. That would, however, be too wide a construction of those words in the context. Properly construed it seems to us that the words 'in connection with the Underwriting' import the idea that the underwriting business must be the source of the funds. And plainly the underwriting business was not the source of the stop loss recoveries.

Miss Gloster sought to gain support for her wide construction of the words 'in connection with the Underwriting' from other parts of the trust deed. Since the trust deed must be read as a whole this is in principle a perfectly legitimate exercise. She invoked clause 3(a)(i) which provides for the payment out of the trust fund and its income of 'losses claims returns of premiums reinsurance premiums'. In our view, however, this provision must be read in the same sense as clause 2(a)(i), and on this basis it yields no support to Lloyd's argument. Miss Gloster also relied on clause 6(a) which imposes a duty to transfer moneys 'constituting or becoming part of the trust fund' for the benefit of the fund. In our view clause 6(a) merely represents the contractual machinery to implement the due constitution of the trust fund. In our view it does not militate against the construction which we have suggested.

We would respectfully accept the reasoning of Saville J in Napier v. Kershaw. There are, of course, differences between that case and the present case. But we believe that the interpretation of Saville J, and the distinction between business transacted at syndicate level and at a personal level, is valid and applicable to the present case. In agreement with Saville J we also do not consider that the fact that the Inland Revenue allow tax relief on stop loss insurance premiums is significant. It follows that we also respectfully endorse the reasoning of Tuckey J in his judgment in the present case."

The passage from the Master of the Rolls' judgment that I have cited constitutes, in my opinion, the ratio decidendi of the case and is binding on me. Mr Sher submitted that that was not so. The decision was on an issue of construction, and a decision on a point of construction of a document, he said, was not binding, was no more than persuasive, on an issue of construction of another document. He cited a passage in the judgment of Lord Justice May in Ashville Investments v Elener Ltd [1989] QB 488. Lord Justice May said this:-

"However, I do not think that there is any principle of law to the effect that the meaning of certain specific words in one arbitration clause in one contract is immutable and that those same specific words in another arbitration clause in other circumstances in another contract must be construed in the same way. This is not to say that the earlier decision on a given form of words will not be persuasive, to a degree dependent on the extent of the similarity between the contracts and surrounding circumstances in the two cases. In the interests of certainty and clarity a court may well think it right to construe words in an arbitration agreement, or indeed in a particular type of contract, in the same way as those same words have earlier been construed in another case involving an arbitration clause by another court. But in my opinion the subsequent court is not bound by the doctrine of stare decisis to do so."

The principle expressed by Lord Justice May is, if I may respectfully say so, plainly correct. Dankwerts J was wont, when a first instance judge in the Chancery Division, to give a very testy reception in cases involving construction of Wills, to attempts by counsel to refer him to authorities. "Take that case away", he would say, "It is a case on another Will". But the point about the Lloyd's Premiums Trust Deeds is that they are all in the same common form. They are not merely "similar". The factual matrix in the context of which each Trust Deed must be construed will be exactly the same as the factual matrix applicable to every other Trust Deed. A decision on the true construction of words in one Trust Deed is not, in my opinion, capable of being distinguished from a case in which the same words in another Trust Deed are being construed. And a decision on construction of a document is a decision on a point of law, not a decision on facts. It follows, in my opinion, that a decision of the Court of Appeal on the true meaning of clause 2(a)(i) of a Premiums Trust Deed is binding on courts of first instance before which issue of construction of Premiums Trust Deeds in the same form arise.

The Master of the Rolls' judgment in Lloyd's v Morris expressly accepted the reasoning of Saville J in Lloyd's v Kershaw. That part of the judgment was part of the ratio decidendi. It follows, in my judgment, that I am bound to accept and follow Saville J's conclusion that litigation recoveries are not caught by clause 2(a)(i) of the Premiums Trust Deeds.

(ii) In any event, and apart from my obligation to follow binding authority, I agree with Saville J's conclusion. It is accepted by Lloyd's that the words "in connection with" in clause 2(a)(i) do not justify bringing within the clause all moneys "belonging or becoming payable to the Name" in respect of which some connection with the Underwriting can be discerned. The "connection" between the moneys and the Underwriting must be of an appropriate character for the moneys to be caught by the clause. Loans advanced or gifts made for the purpose of discharging underwriting losses would, it is now accepted, lack the requisite degree of "connection". So what is the appropriate character of the requisite "connection"?

Mr Sher has relied strongly on the judgment given by Lord Hoffmann in Deeny v Gooda Walker (No. 2) [1996] STC 299, [1996] 1 WLR 426, a judgment with which the other members of the House of Lords agreed. The case concerned the question whether litigation recoveries represented receipts of the Underwriting business for the purposes of income tax under Sch D. The House of Lords, agreeing with Potter J at first instance and the Court of Appeal, held that litigation recoveries did represent taxable receipts of the underwriting business. Lord Hoffmann, in his judgment, expressed some doubt about some of the reasoning of Saville J in Napier v Kershaw. Lord Hoffmann did not however, express the view that Saville J had come to the wrong conclusion.

The conclusion that litigation recoveries are, for taxation purposes, receipts of an underwriting business does not demand the conclusion that litigation recoveries must, therefore, as a matter of construction of clause 2(a)(i), be part of the Trust Fund constituted by a Premiums Trust Deed. The "connection" between the litigation recoveries and the underwriting may justify the imposition of income tax liability. It does not follow that the connection is such as to require the conclusion that the recoveries are part of the Trust Fund.

In my opinion, the contents of the Trust Deeds, viewed in the context of the composite Lloyd's scheme regarding the means by which Names are required to provide funds to meet their underwriting losses and expenses, justify the conclusion that the intention behind the Trust Deeds was that they were intended to catch the underwriting receipts that would become payable to the Names in the course of the business being managed by the Managing Agents. The litigation recoveries with which I am concerned may, for taxation purposes, be receipts of the underwriting business. But they are not moneys generated by the underwriting business itself. They supplement those moneys, thereby filling a gap in the business receipts caused by the negligence or breach of duty of the defendant in question. The proceeds of stop-loss policies have an undoubted "connection" with the underwriting business. But, as the Master of the Rolls pointed out, they are generated by a personal voluntary decision to effect the policy taken by the Name. They, too, are not generated in the course of the underwriting business conducted by the Managing Agent. If the relevant tax legislation were to be amended so as to require the proceeds of stop-loss policies to be brought into account in computing "the profits arising to a member from his underwriting business" (see S171(2) and 5.184(1), Finance Act 1993), the proceeds of stop-loss policies would, like litigation recoveries, be taxable as receipts of the underwriting business. But such an amendment would make no difference at all, in my opinion, to the conclusion or the reasoning of the Master of the Rolls in Lloyd's v Morris. The lack of a requisite "connection" for clause 2(a)(i) purposes would remain.

For the reasons I have expressed, no different in substance from those of Saville J, but expressed in deference to the sustained argument presented by Mr Sher, I would, even if not bound by Lloyd's v Morris, hold that the litigation recoveries are not caught by clause 2(a)(i).

(iii) The amendments to the Premiums Trust Deeds which Lloyd's have purported to make pursuant to the clause 22 power of amendment do, if they are validly made, have the result that a Name's litigation recoveries become part of the Trust Fund established under his Premiums Trust Deed to the extent of his indebtedness to Lloyd's at the time the recoveries are received by his solicitors. It may be noticed that the amendments do not, therefore, produce the same result as would have been produced if the unamended clause 2(a)(i) had caught the litigation recoveries. It would have been the whole of the litigation recoveries that would have constituted part of the Trust Fund, not simply a part thereof equal to the amount of the Name's current indebtedness, if any.

The limitation in the scope of the amendments to which I have referred makes clear the purpose of the amendments. The purpose is to be constitute the litigation recoveries a fund available for payment of the Name's current outstanding indebtedness, if any.

Mr Sher has drawn attention to the absence from clause 22 of any words limiting the scope of the power to "vary or amend all or any of ... the provisions ..." of the Trust Deed. The power conferred by the clause was, he submitted, intended to cater for as many contingencies as possible. The Trust Deeds are commercial documents entered into for valuable consideration. No limit should be placed on the purposes for which or the manner in which the power to "vary or amend" could be exercised, subject always to an irrationality long-stop. Mr Sher does however, accept that "any amendment made under the clause 22 power needs to be consistent with the commercial purpose" of the Trust Deeds (see para 9 of Mr Sher's skeleton argument). Therein, in my opinion, lies the key to this question.

The prime commercial purpose of each Premiums Trust Deed was to ensure that the business receipts of the syndicate underwriting business that the Managing Agent was conducting, eg. the premiums received from policy holders, the proceeds of syndicate re-insurance policies, the proceeds of salvage claims or other subrogation claims resulting from payments to policy holders, were under the control of the Name's Member's Agent and Managing Agent and were available to meet the losses and expenses of the Name's underwriting business. If, and whenever, it was thought that the Trust Fund held under any Trust Deed was inadequate in amount for the purpose I have mentioned, there were ample contractual powers vested in one or more of Lloyd's, the Member's Agent and the Managing Agent to require the Name to supplement the assets in the Trust Fund. I have already referred to these various powers. But all of the assets falling automatically within the Trust Fund would be assets generated from time to time in the conduct of the underwriting business. The amendments, however, purported to add a specific existing asset, limited to the amount of Name's existing current Lloyd's indebtedness, to the Trust Fund.

These amendments would, if valid, enable and cause the Trust Deed to serve an additional and different purpose to that which I have identified as its prime commercial purpose. The additional purpose would be that of enabling Lloyd's to obtain, without the consent of the Name and unilaterally, security for an existing indebtedness over the assets belonging to the Name and specified in the amendment. Mr Kentridge, in argument, exemplified the point by asking, rhetorically, whether Lloyd's could, by an amendment under the clause 22 power, subject a Name's house or even gold cuff-links to the trusts of the Trust Deed. Mr Sher answered this point by drawing attention to the absence of any expressed limits to the clause 22 power, and also by emphasising the connection between litigation recoveries and the underwriting business, a connection plainly absent in the case of the house or the cuff-links. But either the clause 22 power does have limits to its scope or it does not. It seems to me that it must have limits. I do not accept that the amending power could be validly exercised so as to enable Lloyd's validly to subject to the trusts of the Trust Deed any identifiable assets of the Name that Lloyd's might select.

In Hole v Garnsey [1930] AC 472 a question arose as to whether a power of amendment in the rules of an Industrial and Provident Society could be used so as to impose on members an obligation to contribute additional funds to the Society. The House of Lords rejected the suggestion. Lord Atkin said this:

"If a man enters into an association with others for a business venture he commits himself to be bound by the decision of the majority of his associates on matters within the contemplated scope of the venture. But outside that scope he remains dominus, and cannot be bound against his will -" (p.494).

The principle expressed by Lord Atkin, albeit in respect of very different facts from those of the present case, seems to me applicable here. Each Name has, by joining Lloyd's and executing a Premiums Trust Deed, accepted that he is not entitled to any part of the receipts of the underwriting business conducted for him by his Managing Agent, save such part as may, after due provision for losses and expenses, be released to him under the provisions of the Trust Deed. He has accepted a contractual obligation, inter alia, to top-up his Trust Fund when requested to do so. He has accepted a contractual obligation to re-imburse payments made by Lloyd's out of its Central Fund in discharging his underwriting liabilities. He has accepted the contractual obligation to provide Lloyd's with such additional security for his underwriting obligations as Lloyd's may from time to time require.

What he has not done, expressly at least, is to grant Lloyd's the power to take unilaterally such security over such assets of his as Lloyd's may select. Yet that is the power Lloyd's claims via the use of its amending power under clause 22.

In my judgment, the use by Lloyd's of its clause 22 power so as to add to the Trust Fund selected assets belonging to the Name in order that those assets shall stand as security for the discharge of the Name's then existing indebtedness to Lloyd's is a use of the power that goes beyond the purpose for which the power was created. The power was created in order to enable the Trust Deed to serve its commercial purpose more efficiently and satisfactorily. I have already identified what I believe to be its commercial purpose. It is entirely consistent with that purpose that the Trust Fund should include, "all investments and other assets" for the time being representing the premiums and other moneys referred to in clause 2(a)(i) and that the clause 22 amending power should have been used in, I believe, 1987 to bring within the Trust Fund "all income from time to time arising from any such investments ... or other assets comprised in the Trust Fund". It was not, in my judgment, consistent with that purpose that the clause 22 power should have been used to bring litigation recoveries within the Trust Fund in order to provide additional security for the Name's existing indebtedness to Lloyd's.

I have no criticism whatsoever of Lloyd's belief that litigation recoveries ought, in fairness to other Names who have duly discharged their Lloyd's debts or who have contributed to the Central Fund from which the defaulting Names' liabilities have been met, to be applied by the Names entitled thereto in discharge of any existing indebtedness to Lloyd's that those Names may have. Lloyd's have, it seems to me, ample contractual powers to call upon the Names in question to make their litigation recoveries available for that purpose. But what Lloyd's have done is to attempt a short cut. They have hoped to avoid proceeding in a manner that would first impose on the Name a specific contractual obligation to pay over their litigation recoveries and then require Lloyd's, by court action if necessary, to enforce that obligation. Lloyd's have sought to achieve their desired result, via a use of the clause 22 amending power, in a manner which does not require any co-operation from the Name, whether given voluntarily or under Order of the Courts. As sometimes happens to those who take short cuts, Lloyd's have, in my opinion, lost their way and failed to reach their objective. Their chosen route has involved what is, in my view, a misuse of the clause 22 amending power.

I am not prepared to endorse the amendments which Lloyd's have purported to make to the Premiums Trust Deeds.

I propose to answer each of Question 1 and Question 2 in the Originating Summons, "No"

Judgment for the Defendants

None stated at original source