Lord Napier and Ettrick v R F Kershaw Ltd (Lloyd’s (Society of) v Robinson)

A commercial instrument must be read in its contextual setting. The court should generally favour the construction which a reasonable commercial person would regard as commercially sensible.

Under the unamended Lloyd’s Premium Trust Deed, damages for negligent underwriting were held on trust because they replaced the receipts which proper underwriting would have produced. Damages concerning personal stop loss insurance and syndicate selection fell outside the trust.

A general power to amend a trust is confined by its purpose and the parties’ reasonable contemplation. It is not invariably restricted to procedural changes and may alter rights or bring additional property into the trust. The amendment bringing litigation recoveries into the premium trust fund was valid because it supplied further security for existing underwriting obligations without creating new liabilities.

A representative Lloyd’s underwriter appealed, and the Society of Lloyd’s cross-appealed, in proceedings concerning the Premium Trust Deed executed by every underwriting member. Clause 2(a)(i) subjected premiums and other money payable in connection with a Name’s underwriting to a trust. In 1995 the Council of Lloyd’s purported to amend the deed under clause 22 so that litigation recoveries would expressly enter the trust fund.

The litigation followed recoveries by Names against their managing and members’ agents. The Court of Appeal held that the unamended deed covered damages for negligent underwriting. Its members did not establish that it also covered damages concerning personal stop loss insurance or syndicate selection. By a majority, it held the 1995 amendments ultra vires.

The House considered whether the unamended deed covered each of the three categories of damages and, if it did not, whether the 1995 amendments were valid.

1. Appeal dismissed and cross-appeal allowed. Lord Steyn delivered the leading speech. Lord Browne-Wilkinson, Lord Woolf M.R., Lord Hope of Craighead and Lord Hutton agreed with it. The decision was unanimous.

2. Per Lord Steyn, damages for negligent underwriting were caught by clause 2(a)(i) of the unamended Premium Trust Deed. Loyalty to the text of a commercial instrument, read contextually, remained paramount. The court should generally favour the commercially sensible meaning which a reasonable commercial person would adopt. Such damages replaced the receipts that proper underwriting would have produced. Treating the replacement differently from those receipts would weaken policyholder protection and produce an commercially irrational distinction. The contrary decision in Napier v Kershaw, and its obiter approval in Society of Lloyd’s v Morris [1993] 2 Re. L.R. 217, should not be perpetuated.

3. Damages for negligent advice about personal stop loss insurance were not caught by the unamended deed. Morris correctly held that personal stop loss recoveries arose from a Name’s personal arrangements rather than from the underwriting business. That reasoning had been carefully affirmed in Deeny v Gooda Walker Ltd (No. 2) [1996] 1 W.L.R. 426. Damages for negligent stop loss advice were a surrogate for the insurance proceeds and therefore received the same treatment.

4. Damages for negligent advice about syndicate selection were also outside the unamended deed. The advice preceded the commencement of the relevant annual underwriting business. Syndicate selection was distinct from underwriting through the selected syndicate, and its connection with the underwriting business was more remote than that of personal stop loss insurance.

5. The 1995 amendments were validly made under clause 22. The deed’s purpose extended beyond compliance with section 83(2) of the Insurance Companies Act 1982. Although a reserved amendment power must be exercised for its granted purpose and within the parties’ reasonable contemplation, it may alter rights or bring a new class of property within a trust. This trust supplied security for policyholders rather than embodying a traditional bounty. The amendments created no new liability, but provided additional security for existing underwriting obligations during an exceptional market crisis. All three categories of damages were consequently subject to the amended trust.

1. House of Lords: Dismissed the representative underwriter’s appeal and allowed Lloyd’s cross-appeal unanimously. It held that negligent-underwriting damages fell within the unamended deed and that the 1995 amendments were valid.

2. Court of Appeal: Held unanimously that the unamended clause covered damages for negligent underwriting. Hobhouse L.J. held that it did not cover damages concerning personal stop loss insurance or syndicate selection; the other members did not finally determine those questions. By a majority, the court held the 1995 amendments ultra vires. The decisions and reasons were reported at [1997] 1 Re. L.R. 1.

3. High Court: Sir Richard Scott V.-C. followed the earlier decision of Saville J. concerning negligent-underwriting damages, decided the issues under the unamended deed in favour of the Names, and held the 1995 amendments invalid.