Sirius International Insurance Company (Publ) v FAI General Insurance Limited & Ors

The appeal concerned the correct contextual interpretation of two related commercial documents: a side letter to a standby letter of credit and the schedule to a Tomlin order settling a dispute. The central legal question was whether paragraph 1 of the Tomlin schedule constituted an agreement by FAI that Sirius should pay Agnew, thereby satisfying the pre-condition in the side letter for draw down under the letter of credit. The House preferred a commercially sensible, contextual approach to construction and held that, read in its commercial context and with regard to the surrounding provisions of the Tomlin schedule (including the reservation in paragraph 4), paragraph 1 meant that FAI had agreed that Sirius should pay Agnew and so satisfied the first condition for draw down. The court did not need to determine or apply the autonomy principle of letters of credit.

This was an appeal from the Court of Appeal concerning the entitlement to proceeds of a US$5 million standby letter of credit drawn down and placed into escrow pursuant to a Tomlin order. Sirius had acted as a fronting reinsurer for Agnew and had a back-to-back retrocession with FAI. Sirius required a letter of credit as security against FAI's insolvency. A side letter stipulated that Sirius would not pay Agnew or draw on the letter of credit unless (inter alia) FAI had agreed that Sirius should pay a claim but had not put Sirius in funds to do so.

The dispute arose after arbitration claims between Sirius and FAI were compromised by a Tomlin order dated 6 April 2001. Paragraph 1 of the Tomlin schedule recorded that FAI was indebted to Sirius in US$22,500,000 and that Sirius was entitled to prove for that sum in any insolvency. Paragraphs 2–4 provided for draw down of the letter of credit, payment of the proceeds into escrow, and a preservation of the parties' arguments concerning the letter of credit respectively. The letter of credit was drawn down and the proceeds were held in escrow. Sirius sought release of the escrowed funds, asserting that paragraph 1 satisfied the pre-condition in the side letter enabling draw down.

The procedural history was: Jacob J (Chancery Division) held that paragraph 1 satisfied the condition and authorised release; the Court of Appeal reversed, holding paragraph 1 did not constitute an agreement by FAI that Sirius should pay Agnew and awarded the proceeds to FAI; Sirius appealed to the House of Lords.

The issues agreed between the parties were (i) whether paragraph 1 of the Tomlin schedule, properly construed, constituted the agreement required by the side letter; (ii) whether paragraphs 4 and 5 of the Tomlin schedule preserved rights affecting entitlement to the proceeds; and (iii) if the agreed conditions for draw down were not satisfied, whether the autonomy principle or other equitable considerations entitled Sirius or FAI to the proceeds.

The House reasoned that contractual interpretation is objective and commercial: the meaning a reasonable commercial person would give to the text in its context governs. Applying that approach, paragraph 1 must be read against the commercial reality of the fronting/back-to-back arrangement and the parties' immediate objectives in the Tomlin order (ending arbitration and obtaining draw down while preserving disputed rights). Paragraph 1, viewed in that context and read with paragraph 4, meant that FAI had agreed that Sirius should pay Agnew (or at least accepted that liability in the stated sum existed under the back-to-back arrangements), and the reservation in paragraph 4 was limited to enabling the provisional liquidators to raise certain defences; it did not nullify the commercial effect of paragraph 1. Because that construction satisfied the first condition, other issues (including the autonomy principle) fell away.

Appeal allowed. The House held that, on a correct contextual and commercial construction of the Tomlin schedule read with the side letter, paragraph 1 constituted an agreement by FAI that Sirius should pay Agnew (or at least accepted the corresponding liability under the back-to-back arrangements) and thereby satisfied the first condition for draw down. The reservation of rights in paragraph 4 did not negate that commercial effect. As a result, Sirius was entitled to the proceeds placed in escrow and remaining issues did not require determination.

First instance: Jacob J, Chancery Division, held that paragraph 1 of the Tomlin schedule satisfied the side letter condition (Sirius International Insurance Co. (Publ) v FAI General Insurance Ltd & Others [2002] EWHC 1611 (Ch); reported [2003] 1 WLR 87). Appeal: Court of Appeal reversed on 4 April 2003, holding paragraph 1 did not constitute the required agreement ([2003] EWCA Civ 470; [2003] 1 WLR 2214). Appeal to the House of Lords allowed on 2 December 2004 ([2004] UKHL 54).