Sirius International Insurance Co (Publ) v FAI General Insurance Ltd & Others (Court of Appeal)

The Court of Appeal held that the proceeds of a letter of credit drawn down into an escrow account belonged to FAI rather than Sirius because the express contractual conditions agreed between Sirius and FAI for draw down were not satisfied. The court upheld the commercial doctrine of autonomy of letters of credit but refused to allow that doctrine to defeat an express negative covenant between parties that limited a beneficiary's right to realise the credit. The court construed the schedule to the Tomlin order and held that, although the arbitration was compromised in favour of Sirius for the purposes of proof in the insolvency, paragraph 1 did not amount to FAI's written agreement that Sirius should pay Agnew notwithstanding the simultaneous settlements clause. The court therefore allowed FAI's appeal and dismissed Sirius' cross-appeal.

Background and parties: Sirius fronted reinsurance for Agnew Syndicate and retroceded to FAI. Sirius required a letter of credit from Westpac, on terms set out in a letter dated 3 September 1999 which contained two alternative conditions permitting draw down, and an undertaking that Sirius would not draw down except in those circumstances. A dispute arose with claims by Agnew; arbitration against FAI was commenced by Sirius. Provisional liquidators were appointed over FAI and, on application to lift the stay of arbitration, the parties compromised by a Tomlin order of 6 April 2001 which required draw down of the letter of credit into an escrow account pending resolution of claims.

Nature of the claim and relief sought: The issue before the Court of Appeal was who was entitled to US$5m held in escrow following draw down of the letter of credit: Sirius (the beneficiary) or FAI (the issuer/retained party). Sirius sought entitlement to the escrowed funds; FAI contended the draw down conditions were not satisfied and the funds belonged to FAI.

Procedural posture: Appeal from Jacob J's decision of 23 July 2002 on preliminary issues; permission to appeal was granted. The Court of Appeal heard substantive construction and proprietary/contractual entitlement issues.

Issues framed:

• whether paragraph 1 of the Tomlin schedule constituted the written agreement by FAI that Sirius should pay Agnew and thus satisfied the first alternative condition for draw down in the 3 September 1999 letter;
• whether paragraph 4 (preserving all arguments) and other schedule provisions left open the letter of credit issue;
• whether the autonomous nature of letters of credit meant Sirius could draw notwithstanding breach of the underlying agreement, and whether an injunction would have been refused.

Reasoning and outcome: The court construed the Tomlin schedule objectively and held that while the arbitration had been compromised in favour of Sirius for purposes of proof, paragraph 1 did not amount to FAI's written agreement that Sirius should pay Agnew contrary to the simultaneous settlements clause. The autonomy doctrine protects banks and beneficiaries from being drawn into underlying disputes, but it does not permit a beneficiary to retain funds against a party who has an express contractual restriction on draw down. On these grounds the appeal was allowed: FAI was entitled to the proceeds in escrow. The cross-appeal on autonomy was dismissed.

Contextual notes: The court referred to the commercial importance of letters of credit and earlier authorities on autonomy, but distinguished the present case because the underlying contract expressly limited the beneficiary's right to draw. The court also noted the stay under section 132 of the Insolvency Act 1986 resulting from appointment of provisional liquidators and that the Tomlin compromise preserved parties' arguments about the letter of credit.

Appeal allowed. The Court of Appeal held that the Tomlin order did not satisfy the express first condition in the 3 September 1999 agreement permitting Sirius to draw the letter of credit, and that the express negative covenant between Sirius and FAI limiting draw down must be enforced between them despite the autonomy of the letter of credit. The court therefore held that FAI was entitled to the proceeds in the escrow account; Sirius' cross-appeal on autonomy was dismissed.

Appeal to the Court of Appeal (Civil Division) from Jacob J's decision on the trial of preliminary issues dated 23 July 2002. Permission to appeal was granted; Court of Appeal judgment reported as [2003] EWCA Civ 470.