Henderson v Merrett Syndicates

This House affirmed that managing agents at Lloyd's owe a tortious duty of care to Names (both direct and indirect) under the principle in Hedley Byrne: where a party with special skill assumes responsibility and the other relies on it, a duty of care arises, including in respect of pure economic loss. The House held that contractual arrangements between Names, members' agents and managing agents do not, without clear wording, exclude a concurrent tortious duty; thus concurrent liability in contract and tort is permissible unless the contract clearly negates the tort duty. The phrase 'absolute discretion' in the pre-1985 agency forms did not exclude an implied obligation to exercise reasonable care and skill. The prescribed 1985 Lloyd's agency and sub-agency forms were construed as creating a contractual obligation on members' agents to underwrite for Names and to remain responsible to Names for negligent performance by managing agents to whom underwriting was delegated. Finally, for the question of reinsurance to close, the House held that the 1985 Byelaw form governed the contractual relationship for the 1985 year.

The appeals arose from multiple actions by Lloyd's underwriting members (Names) against their underwriting agents and syndicate managing agents seeking to recover very large economic losses. The parties agreed that preliminary legal issues concerning the scope of agents' duties and the construction of Lloyd's prescribed agency/sub-agency forms should be decided first. Saville J. decided these preliminary issues for the Names on 12 October 1993; the Court of Appeal affirmed on 13 December 1993. The House of Lords heard expedited appeals and dismissed them.

Nature of the claims and relief sought

• The Names alleged professional negligence in underwriting and management of syndicates and sought damages.
• Some Names also advanced claims in fiduciary duty and sought alternative remedies in contract and tort.

Principal issues before the House

• Whether managing agents owed a duty of care in tort to direct and/or indirect Names under pre-1985 and 1987–1989 forms.
• Whether an 'absolute discretion' clause excluded any duty of care.
• Whether members' agents remained contractually responsible to Names for negligent underwriting by managing agents under the 1985 Byelaw forms.
• Whether the 1985 Byelaw applied to the reinsurance-to-close transaction affecting the 1985 year.

Court's reasoning (concise)

• The House applied and extended the Hedley Byrne principle: where a party with special skill assumes responsibility and the other relies on it, a tortious duty of care can arise even where there is a contract between the parties. The existence of a contract does not automatically oust a tortious duty; the proper approach is to ask whether the contract expressly or by necessary implication excludes the tort duty.
• The 'absolute discretion' wording in the pre-1985 forms relates to the scope of authority rather than excluding an implied obligation to exercise reasonable care and skill; clear words are required to exclude negligence liability.
• The Lloyd's prescribed 1985 agency and sub-agency forms were construed together. Clause 2(a) of the agency agreement obliges the underwriting agent to underwrite for the Name; where a members' agent delegates underwriting to a managing agent by the prescribed sub-agency form, the members' agent remains contractually responsible to its Name for the exercise of reasonable care and skill by the managing agent.
• On the RITC point, the House agreed that the 1985 Byelaw form governed the contractual relationship for the 1985 year when the reinsurance-to-close transaction occurred.

The House dismissed the appeals. It held that managing agents owed a tortious duty of care to Names under the Hedley Byrne principle and that concurrent liability in contract and tort is permissible unless excluded by clear contractual language. The 'absolute discretion' clause did not exclude the duty to exercise reasonable care. The 1985 Byelaw agency/sub-agency forms impose contractual responsibility on members' agents to Names for underwriting and require them to remain responsible to Names for negligent performance by managing agents to whom underwriting is delegated. The 1985 Byelaw governed the 1985 reinsurance-to-close issue.

Preliminary issues decided by Saville J. (Commercial Court) on 12 October 1993; decision affirmed by the Court of Appeal on 13 December 1993; appeal to the House of Lords by leave and heard with expedited priority, judgment given 25 July 1994 ([1994] UKHL 5).