Liberty Mutual Insurance Company (UK) Ltd & Anor v HSBC Bank Plc

[2002] EWCA Civ 691

Case details

Case citations
[2002] EWCA Civ 691
Court
Court of Appeal (Civil Division)
Judgment date
16 May 2002
Judgment text

This feature is available to zoomLaw Pro members.

Subjects
Contract Suretyship and subrogation Contractual construction
Keywords
surety bond subrogation partially overlapping security admiralty bond counter-indemnity contractual construction clear words one-year guarantee
Outcome
appeal dismissed (unanimous)
Judicial consideration

This feature is available to zoomLaw Pro members.

Summary

A surety which pays the guaranteed debt is ordinarily entitled in equity to subrogation to the creditor’s securities, including a rateable share of security securing both guaranteed and other liabilities. Contractual exclusion, reduction or postponement of that right requires clear words, or a necessary implication. A clause stating that a surety bond is separate from other security does not, without more, postpone subrogation. The meaning of “Guarantee” in a surety bond depends on the instrument’s language read objectively in its commercial context. Where the bond refers to procuring a guarantee as bail or security, that term may denote the underlying admiralty bond rather than the bank’s counter-indemnity. Liability is therefore tested by the terms of the admiralty bond. On the assumed facts, liability under a surety bond issued for a one-year guarantee did not extend beyond that period.

Factual background

HSBC appealed from decisions of the Vice-Chancellor and Patten J on preliminary construction issues concerning substantially identical surety bonds issued by Liberty and St Paul. The bonds supported HSBC’s admiralty bonds and counter-indemnities arising from guarantees arranged for Ocean Marine Mutual Insurance Association Ltd.

The issues concerned: whether the bond postponed or excluded the insurers’ subrogation to HSBC’s fixed charge; whether “Guarantee” meant the underlying admiralty bond or HSBC’s engagement; what evidence was required to establish liability; and whether liability extended beyond a one-year guarantee where the bond supplied was automatically renewable. The Court of Appeal considered the appeals on the assumptions and issues defined by the preliminary orders.

Held

  1. Subrogation. The appeals on the subrogation issue were dismissed. Subrogation is an equitable remedy founded on natural justice and preventing unjust enrichment. A paying surety is ordinarily entitled to the creditor’s securities and, where security secures the guaranteed debt and other debts, to share rateably with the creditor. Those rights may be varied or excluded by contract, but clear and unambiguous wording, or a necessary implication, is required.
  2. The clause stating that the surety agreement was separate from other security or rights of indemnity did not clearly postpone Liberty’s subrogation. Its language was more naturally directed to preserving the bond’s independence before discharge and preventing arguments that other security or dealings affected the bond. The proposed postponement produced unusual commercial consequences and required too much to be derived from the clause. Arden LJ additionally noted that payment discharged the principal debt in law, with subrogation subsequently reinstating the surety’s equitable rights.
  3. Guarantee. “Guarantee” meant the admiralty bond, not HSBC’s counter-indemnity. The definition referred to a bond, undertaking or guarantee executed or procured as bail or security. Only the admiralty bond could properly be procured by HSBC and function as bail. The proviso requiring payment by HSBC strictly in accordance with the Guarantee therefore referred to liability under the admiralty bond. The evidential questions remained governed by Patten J’s order, subject to the trial judge determining whether the evidence proved the relevant condition on the balance of probabilities.
  4. One-year issue. On the preliminary issue’s assumption that the renewable admiralty bond was inconsistent with OMMIA’s instruction for a one-year bond, Liberty’s liability did not extend beyond the requested one-year period. The wider question whether automatic renewal was within the scope of OMMIA’s instructions was left for trial, including possible issues of reasonable interpretation, acceptance, ratification or course of dealing.
  5. All three appeals were dismissed. HSBC was ordered to pay Liberty’s appeal costs and St Paul’s costs of Appeal 1, subject to detailed assessment if not agreed.

The court’s approach to earlier authorities

This feature is available to zoomLaw Pro members.

Appellate history

  • Court of Appeal (Civil Division): appeals from the Vice-Chancellor and Patten J dismissed. The Court upheld the decisions on subrogation, construction of “Guarantee”, and the assumed one-year issue.

Lower court decision

Judgment appealed:
Not stated in the judgment
Outcome:
appeal dismissed (unanimous)

Key cases cited

This feature is available to zoomLaw Pro members.

Cases citing this case

This feature is available to zoomLaw Pro members.