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

This is an appeal by the defendants, FAI General Insurance Company Limited, against a decision and order of Jacob J of 23^rd July 2002 on the trial of preliminary issues. The judge gave them permission to appeal. The issue is whether the claimants, Sirius International Insurance Corporation, or FAI’s provisional liquidators are entitled to US$5m. now in an escrow account. The source of the money was a letter of credit established by FAI for the benefit of Sirius which the parties agreed should be drawn down into the escrow account pending determination of the issue.

The judge decided that one of the conditions of an agreement between the parties recorded in a letter dated 3^rd September 1999 as to the circumstances in which Sirius were entitled to draw on the letter of credit was satisfied. He also decided however that, if the condition had not been satisfied, FAI could have relied on the agreement to prevent Sirius from resorting to the letter of credit, although the letter of credit itself contained no such restriction. The first subject matter of the appeal is the construction of the schedule to a Tomlin order dated 6^th April 2001 which had the effect of compromising arbitration proceedings between Sirius and FAI. By respondents’ notice or, if necessary, by cross-appeal, Sirius challenge the judge’s decision rejecting their contention that the letter of credit was autonomous entitling them to resort to it according to its terms without reference to the underlying agreement by which it was established.

The facts were not in the end in dispute. The judge summarised them as follows:

“A syndicate at Lloyd’s, Agnew, wished to reinsure its liabilities. Its brokers were Lambert Fenchurch Ltd. (“Lambert”). FAI General Insurance Ltd. (“FAI”) were proposed as the reinsurers. Agnew were not happy with this, there being questions (justified in the event) as to the solidity of FAI. Agnew wanted a stronger reinsurer. Sirius International Insurance Company Ltd. became that reinsurer. This was set up in the following way: Sirius wrote the policy on the basis that FAI would in turn pay Sirius should Sirius be called upon to pay. In the jargon of the business, Sirius “fronted” the arrangement and “retroceded” it to FAI. As a requirement for fronting the reinsurance Sirius required and eventually got a letter of credit from a bank, namely Westpac. … it is now common ground that the letter of credit which was eventually provided was on the terms contained in an offer letter of 3^rd September 1999, the contract being concluded by an acceptance letter of 22^nd October 1999.

The key terms of the letter of 3^rd September read as follows:

“With regard to the LOC, we are happy to agree to the two conditions which you propose, but with reservations as regards the first of the conditions. We therefore undertake that we will not agree or pay any claim presented to Sirius by the Agnew Syndicate without FAI’s prior agreement in writing, nor will we draw down under the LOC, unless (1) FAI has agreed that Sirius should pay a claim but has not put Sirius in funds to do so, notwithstanding the simultaneous settlements clause in our retrocession contract (see below), or (2) the Agnew Syndicate obtains a judgment or binding arbitration award against Sirius which Sirius is obliged to pay.

We agree unreservedly to the second condition, ie. that the existence of the LOC will be kept completely confidential …””

An additional paragraph of the letter of 3^rd September 1999, not quoted by the judge was as follows:

“We note what you say concerning the provision of a binding letter. While we appreciate the force of the arguments which you make, we should point out that FAI has already agreed to a simultaneous settlements clause which provides that FAI shall pay their share of any loss under the retrocession simultaneously with Sirius’ payment to Agnew. It is only on this basis that we will not pursue further our request for a binding letter making it a condition precedent to our obligation to pay Agnew’s claims that FAI first puts us in funds to do so.”

The judgment continued:

“The letter of credit from Westpac finally emerged on 24^th January 2000. By this time Agnew had made a claim against Sirius under the reinsurances. A dispute arose: were Sirius liable to Agnew? If they were, it would follow that FAI would be correspondingly liable to Sirius under the back-to-back retrocession arrangements.

On 23^rd March 2000 Lambert, Sirius and Agnew entered into a tripartite funding arrangement. Clause 2 says:

“Sirius acknowledges that Agnew has a reasonable case for arguing: (a) that there exists no ground upon which to challenge the Reinsurances, so that the Reinsurances should be deemed fully binding and effective;”

The first issue before the judge was whether the preconditions entitling Sirius to draw down the letter of credit were fulfilled.

Sirius contended that the terms of paragraph 1 of the schedule to the Tomlin order in substance fulfilled the first alternative condition of the letter of 3^rd September 1999, that is that FAI had agreed that Sirius should pay Agnew’s claim but had not put Sirius in funds to do so. The judge rejected FAI’s contention that paragraph 1 determined the amount for which Sirius were entitled to prove in FAI’s liquidation or scheme of arrangement, but did not constitute an agreement that Sirius should pay Agnew that amount. The judge further rejected FAI’s contention that paragraph 4 of the schedule to the Tomlin order preserved arguments relating to the letter of credit which included those which, according to Sirius, had been determined by the agreement in paragraph 1 of the Tomlin order. FAI appeal against these decisions.

Sirius contended in the alternative that the letter of credit was an autonomous contract not affected by the conditions as to its draw down agreed between themselves and FAI. They were entitled to draw the letter of credit according to its terms. Even if Sirius resorted to it in breach of those conditions, the remedy would be a claim for damages and an injunction would not be granted. Sirius further contend that, in the light of the terms of the Tomlin order, any damages would be nominal.

The judge rejected this submission. He referred to Deutsche Ruckverischerung v. Walbrook Insurance [1995] 1 WLR 1017 at 1030, where Phillips J (as he then was) declined on the facts of that case to imply a term in an underlying contract preventing recovery under a letter of credit which did not itself contain such a term. But in the present case there was an express term that Sirius would not draw down the letter of credit except in certain circumstances. The judge did not see why such a contract should not be enforced. He accepted that the principle of autonomy was of vital importance, but it was not undermined in the very special case where a party expressly agreed not to draw down unless certain conditions were met. To seek to draw down in breach of those terms would be breach of an express negative covenant which could be restrained by injunction. Sirius could also be restrained by injunction from disposing of the proceeds held in escrow. The fact that the letter of credit was an autonomous contract between Sirius and Westpac did not determine the entitlement as between Sirius and FAI to the money now held in escrow. Sirius, if necessary, seek to appeal this decision.

The judge also rejected a third argument advanced by FAI that the Funding Agreement contained an admission by Sirius of Agnew’s claim without FAI’s prior agreement in writing in breach of the agreement in the letter of 3^rd September 1999. He held that the Funding Agreement contained no admission of liability by Sirius. FAI do not challenge this part of the judge’s decision.

FAI’s grounds of appeal are that the judge misconstrued paragraph 1 and paragraphs 4 and 5 of the schedule to the Tomlin order.

As to paragraph 1, Mr Briggs QC submits on behalf of FAI that the judge’s analysis depended upon what he considered was its commercial substance. He considered that FAI knew who was really getting the benefit of clause 1 of the settlement agreement, and the commercial substance was that FAI had agreed that Sirius should pay Agnew. This was both a misconstruction of the paragraph and a misinterpretation of the commercial substance. The paragraph did not expressly authorise Sirius to pay Agnew and it would be wrong to imply that it did.

In written submissions, Mr Briggs pointed out that the events leading to the Tomlin order were the arbitration proceedings and the provisional liquidation of FAI. The agreement of 3^rd September 1999 was confidential and it and the letter of credit were not the subject of the arbitration proceedings. Notwithstanding views expressed by solicitors instructed by Sirius in relation to the letter of credit, a finding in the arbitration proceedings would not satisfy the second alternative condition of the letter of 3^rd September 1999, that is that Agnew obtained a judgment or binding arbitration award against Sirius which Sirius was obliged to pay. Sirius had abandoned all hope that FAI would ever voluntarily give its consent to a payment by Sirius to Agnew. At the date of the Tomlin order, the provisional liquidators had only been in office for some 13 days. They had not investigated the position but were faced with an application to continue a heavy arbitration. It was not surprising that as a matter of commercial reality they might take a pragmatic view about the arbitration in so far as it involved a claim which was unsecured. But it would have been very surprising if the provisional liquidators would voluntarily abandon FAI’s main argument against enforceability of the letter of credit, that the express condition of draw down was not satisfied, by tamely agreeing that Sirius should pay Agnew. The commercial effect of the Funding Agreement, of which both parties were aware at the time of the Tomlin order, was to protect Sirius from the risk of having to pay Agnew more than they had recovered from FAI. Accordingly paragraph 1 of the schedule to the Tomlin order only exposed Sirius to an obligation to pay Agnew anything recovered at the end of the liquidation as an unsecured creditor. There was no basis for the judge to interpret paragraph 1 as having a meaning different from its ordinary and natural meaning. It only meant that the provisional liquidators accepted US$22.5m. for the purposes of proof in the insolvency. The commercial reality of the Funding Agreement was that the arbitration was for the benefit of Lambert, not Agnew.

As to paragraphs 4 and 5 of the schedule to the Tomlin order, Mr Briggs submits that the judge’s construction of paragraph 4 ignored its ordinary and natural meaning. It preserved all arguments irrespective of the provisions of the schedule itself including those in paragraph 1. The judge’s interpretation ignored the words “notwithstanding the terms of this Schedule”. His analysis included that it would be bizarre or absurd if the agreement removed any possibility of the conditions for draw down being satisfied and that the parties cannot have intended this. Sirius contended that the letter of credit was autonomous. Their original position was that the letter of 3^rd September 1999 did not contain the agreed conditions relating to draw down. As to FAI, the provisional liquidators simply wished to preserve all arguments until they had investigated the position and did not wish to prejudice any arguments regarding the letter of credit and its proceeds. FAI further submit that the judge was wrong to conclude that the word “preserved” referred only to pre-existing rights and arguments. On the contrary, paragraph 4 refers to “all arguments”. The judge was wrong to conclude that FAI had, by making the agreement in compromise of the arbitration proceedings, given up its contention that the conditions for draw down were not satisfied.

Mr Vos QC submits on behalf of Sirius that the judge correctly construed the schedule to the Tomlin order. These terms compromised the arbitration between Sirius and FAI. Sirius’ claim in the arbitration was that FAI were liable to Sirius under the retrocessions. Sirius’ claim against FAI depended on Sirius’ liability to Agnew under the reinsurances. The arbitration would not have resulted in an arbitral award or judgment against Sirius in favour of Agnew. But an award against FAI in the arbitration necessarily meant that Sirius were liable to Agnew under the reinsurances.

Mr Vos submitted that the written submissions on behalf of FAI seek to rely on evidence of the parties’ subjective intentions at the time the Tomlin order was made. Evidence of this kind is not admissible. But if it were, there was no evidence before the judge to justify what is said. On the contrary, it would be extremely surprising if the provisional liquidators of FAI considered it proper to admit for the purposes of proof only such a substantial claim with no regard to its underlying merits. It is to be supposed that the provisional liquidators acted upon proper and adequate advice. Just as there was no evidence of FAI’s subjective intentions, so there was no basis for looking at Sirius’ own view of their ability to resort to the letter of credit. In his oral submissions, Mr Briggs in effect abandoned reliance on the evidential matters to which Mr Vos objected.

Mr Vos submitted that, by paragraph 1 of the schedule to the Tomlin order, FAI expressly accepted that it was indebted to Sirius in the sum of US$22.5m. This was not limited to an acceptance only for the purposes of proof in the insolvency. The debt arose under the retrocessions. It only arose because there was a corresponding liability on Sirius under the reinsurances. To contend that acceptance of a liability in settlement of an arbitration, where the key issue was Sirius’ liability under the reinsurances, did not involve an acceptance of that liability or was not sufficient compliance with the relevant part of the undertaking simply flouted commonsense. Paragraph 1 of the schedule sufficiently satisfied the undertaking, and the judge was right so to decide.

As to paragraphs 4 and 5 of the schedule, before the Tomlin order liability under the retrocessions and the reinsurances had not been determined. Sirius had not drawn down the letter of credit and FAI could not have asserted that Sirius were in breach of the 3^rd September 1999 agreement. The Tomlin order resolved the disputes under the retrocessions and reinsurances against FAI. The preservation of rights in the Tomlin order can only have been intended to preserve FAI’s pre-existing position, not to prevent Sirius ever saying that it was entitled to the proceeds of the letter of credit because the claims had been compromised and FAI had agreed that payment was due. The use of the word “all” does not affect the meaning of the word “preserved”. What was preserved were pre-existing contentions, which the terms of the Tomlin order did not compromise, to prevent Sirius from arguing that they were entitled to the proceeds of the letter of credit by the mere act of drawing them down, which paragraph 2 of the schedule provided for. FAI’s arguments make no sense of the agreement of 3^rd September 1999 and the terms of the Tomlin order. Sirius could have claimed the proceeds of the letter of credit by persuading Agnew to sue them to judgment without Sirius defending. On the other hand, if paragraph 1 of the schedule does not have the effect contended for by Sirius, the Tomlin order would have the effect of determining the letter of credit issue against Sirius by its very terms. Pre-existing arguments, such as FAI’s contention that the letter of credit was procured by fraudulent misrepresentations by Sirius are preserved: but paragraphs 4 and 5 of the schedule do not prevent paragraph 1 from taking effect according to its proper construction.

In my judgment, the judge was correct to reject FAI’s extreme submissions based on paragraphs 4 and 5 of the schedule to the Tomlin order. The short point is that paragraphs 4 and 5 cannot, in my view, be read as leaving open for future contention that which paragraph 1 compromised. Paragraph 1 compromised the arbitration proceedings. It did not purport to determine questions arising out of the letter of credit. Available arguments as to the letter of credit were preserved, but the indebtedness of FAI to Sirius under the retrocessions was determined.

The agreed determination of the arbitration proceedings in favour of Sirius necessarily carried with it an acceptance by FAI that Sirius were equivalently liable to Agnew under the reinsurances. That, however, does not without more mean that the first condition of the letter of 3^rd September 1999 was fulfilled. For that condition to be fulfilled, paragraph 1 has to be construed, not only as an acknowledgment that FAI were indebted to Sirius in the sum of US$22.5m., but also as an agreement by FAI that Sirius should pay Agnew’s claim notwithstanding the simultaneous settlements clause in the retrocession contract. The simultaneous settlements clause provided that FAI should pay their share of any loss under the retrocession simultaneously with Sirius’ payment to Agnew. I accept Mr Vos’ submission that the court has to construe the schedule to the Tomlin order without reference to the parties’ subjective intentions. I consider that the admissible factual matrix sufficiently appears from the basic relationship between Agnew, Sirius and FAI.

Mr Vos accepted that the second condition of the 3^rd September 1999 agreement was not and is not fulfilled. He accepted that the first condition was not fulfilled before the Tomlin order. He accepted that the literal words of paragraph 1 do not express an agreement by FAI that Sirius should pay Agnew’s claim. Creative construction or implication is required to interpret it as doing so. He accepts, I think, that an award in contested arbitration proceedings would not have fulfilled the first condition. But the Tomlin order, he says, embodied an agreement not an award, and the agreement that Sirius should be entitled to prove in FAI’s liquidation or administration for US$22.5m. necessarily carried with it an agreement by FAI that Sirius should pay Agnew’s claim. I do not think so.

The first condition of the 3^rd September 1999 agreement diminished as between FAI and Sirius the security which the letter of credit provided. FAI were entitled to withhold their agreement to Sirius paying Agnew. Sirius had an alternative route to drawing on the letter of credit, that is if Agnew obtained judgment or a binding arbitration award against them which Sirius were obliged to pay. If Agnew had disabled themselves from obtaining a judgment or award against Sirius, that was nothing to do with FAI. In the circumstances in which the Tomlin order was made, there was general commercial sense in FAI continuing to withhold consent. The agreement did not say that FAI’s agreement was not to be withheld unreasonably. Mr Vos only suggested the possibility that it might be so read as a complete afterthought. The words of paragraph 1 cannot, in my view, be stretched to say what they do not say. It would be rather surprising if they did. There are other issues than this issue of construction going to the parties claims in respect of the letter of credit. Neither party persuaded me that the resolution of the disputed meaning of paragraph 1 forecloses those claims, if the other party’s submission on the construction issue succeeds. I accept that it is conceivable that paragraph 1 could have itself fulfilled the first condition notwithstanding the terms of paragraphs 4 and 5 (and paragraphs 2 and 3) of the schedule. But the plain general sense of those paragraphs is that the Tomlin order agreement was not affecting the parties’ positions and arguments in respect of the proceeds of the letter of credit.

For these reasons, I consider that the judge’s decision on this issue was wrong. This means that the second issue on which he found against Sirius arises on their cross-appeal.

Sirius accept that the second condition of the 3^rd September 1999 agreement was not fulfilled when the letter of credit was drawn down and that it is not now fulfilled. The case proceeded before the judge on the basis that it could never have been fulfilled once the terms of the Funding Agreement disabled Agnew from proceeding against Sirius. The cross-appeal arises on a finding by this court that the first condition was not fulfilled either. As between Sirius and FAI, Sirius were not entitled to draw down the letter of credit. To do so would have been a breach of contract. Sirius maintain nevertheless that they would have been entitled to draw down the letter of credit even though to do so would have been a breach of contract. They point to the autonomous nature of letters of credit and say that the court would not have restrained them by injunction from drawing down, notwithstanding their breach of contract. The judge was wrong to decide otherwise. They say that the terms of the underlying agreement which purport to regulate draw down could at best give rise to a personal obligation sounding in damages. They alternatively say that in the circumstances of this case, the grant of an injunction would have been discretionary only, and that the court would not have granted an injunction because FAI’s damages in the alternative would have been nominal. FAI were admittedly liable to Sirius. Sirius were liable to Agnew. Payment from each to the other was due. Realising the security of the letter of credit would result in no loss to FAI. I observe parenthetically that it would result in a diminution of any dividend payable to FAI’s creditors in liquidation, if, as this issue has to acknowledge, Sirius were not, as against FAI, entitled to realise their security.

FAI submit that the autonomous nature of letters of credit does not extend to permitting beneficiaries to draw them down in accordance with their terms but in plain breach of a promise to the person who opened the letter of credit not to do so. The court will restrain by injunction breach of a negative covenant of this kind. The remedy is not discretionary. It is acknowledged that no case has gone so far as to decide otherwise. The judge’s decision was correct.

Letters of credit are an important commercial means of providing cash or security for those who in return provide goods or services. Typically a seller agrees to sell goods to a buyer. The buyer establishes a letter of credit with a confirming bank in favour of the seller. The terms of the letter of credit spell out the circumstances in which the beneficiary – the seller – is entitled to draw it down. The terms will typically include presentation to the bank of specified shipping and insurance documents and the like. The bank’s concern is to be satisfied that the terms of the letter of credit are fulfilled, whereupon the bank is obliged to pay the beneficiary. Because the letter of credit is, subject to its terms, the equivalent of cash, the bank is not concerned with any disputed question, not within the terms of the letter of credit itself, which may arise under the underlying sale contract between the seller and the buyer, as for instance, if the goods were said to be defective or to have arrived late – see generally United City Merchants v. Royal Bank of Canada [1983] 1 A.C 168 at 183. This is also the effect of Article 3(a) of the ICC Uniform Customs and Practice for Documentary Credits (1993 Revision) which was incorporated in the letter of credit in this case. Absent fraud by the seller presenting documents to the confirming bank seeking payment, the court will not restrain a bank from paying a letter of credit which is payable according to its terms, nor a beneficiary from seeking payment – see Group Josi Re v. Walbrook Insurance [1996] 1 Lloyd’s R. 345 at 360-1. Nor, again absent fraud, will the court restrain a beneficiary from drawing on a letter of credit which is payable in accordance with its terms on the application of a buyer who is in dispute with the seller as to whether the underlying sale contract has been broken – see for both these propositions the Deutsche Ruckverischerung case at 1030 where Phillips J considered the authorities. This is the autonomous nature of letters of credit. By means of it, banks are protected and the cash nature of letters of credit is maintained. There is no authority extending this autonomy for the benefit of the beneficiary of a letter of credit so as to entitle him as against the seller to draw the letter of credit when he is expressly not entitled to do so.

The present case is in more than one important respect a variant of the more typical. Here the relevant underlying agreement is, not the commercial transaction that the letter of credit was intended to support, as in the typical case the contract of sale or in the present case the retrocession treaties, but a related agreement regulating as between FAI and Sirius terms on which the letter of the credit would be established. The terms included express contractual restrictions on the circumstances in which Sirius would be entitled to draw on the letter of credit. To that extent the letter of credit was less than the equivalent of cash and Sirius’ security was correspondingly restricted. Although those restrictions were not terms of the letter of credit, and although the bank would have been obliged and entitled to honour a request to pay which fulfilled its terms, that does not mean that, as between themselves and FAI, Sirius were entitled to draw on the letter of credit if the express conditions of this underlying agreement were not fulfilled. They were not so entitled. I reject Mr Vos’ submission that in the present case the parties must be taken, as between themselves, to have afforded Sirius the right to draw on the letter of credit in defiance of the conditions of this underlying contract.

In my judgment, this analysis without more answers the question who is now entitled to the money in the escrow account. The letter of credit was drawn down by an agreement – the Tomlin order agreement – which changed the circumstances in which it could be drawn while preserving each party’s position and arguments in relation to it. Sirius are not entitled to the money because the conditions of the 3^rd September 1999 agreement have never been fulfilled so as to entitle them to draw the money. They did not draw the money in breach of the agreement and did not try to do so. The question whether the court would have granted FAI an injunction never arose and a hypothetical answer to that hypothetical question is not, I think, determinative of the issue before the court. Whether in other circumstances the bank would have been obliged and entitled to pay is not in point. What determines the issue against Sirius is the fact that, as between themselves and FAI, the protagonists on the issue who is entitled to the proceeds of the letter of credit, they were never entitled to draw the letter of credit. I rather think that strictly the money should revert to the bank, but we were told that, if it did, it would get back to FAI.

I should add that, had it been necessary to do so, I should have been very strongly inclined to agree with the judge’s implicit finding that, had the question arisen out of the facts in the present case, the court would have granted an injunction restraining Sirius from drawing on the letter of credit in breach of conditions of the 3^rd September 1999 agreement – see Doherty v. Allman (1878) 3 App. Cas. 709 at 719-20, modified perhaps as explained in Insurance Co. v. Lloyd’s Syndicate [1995] 1 Lloyd’s R. 273 at 277 and see also Equity – Doctrines and Remedies, Third Edition 1992, Meagher and others.

This analysis accords with the judgment of Phillips J in the Deutsche Ruckverischerung case at page 1030. He was concerned that the commercial effectiveness of letters of credit would be eroded if a claimant could prevent a beneficiary from drawing on the letter of credit by doing no more than to persuade the court that there was a seriously arguable case that the claim under the underlying contract was invalid. He did not consider that it was correct to imply a term into the underlying contract that the beneficiary would not draw on the letter of credit unless payment under the underlying contract was due. In the present case there is an unusual underlying contract and an express term restricting the circumstances in which Sirius were entitled to draw on the letter of credit. There is no need for implication. Further, FAI do not have only a seriously arguable case. They have in my judgment positively established that Sirius were not entitled to draw on the letter of credit when its proceeds were placed in the escrow account.

Mr Briggs did not rely strongly on the questionable majority decision of this court in Themehelp Limited v. West [1996] QB 84. He did not, in my view, need to do so. The court there upheld a decision to grant an injunction restraining sellers from giving notice to guarantors where there was a seriously arguable prospect of the buyers satisfying the court at trial that the only realistic inference to draw was that the sale contract had been induced by fraudulent misrepresentation. Mr Vos is equally unable to draw comfort from the dissenting judgment of Evans LJ. He held (at page 102) that the injunction was contrary to legal principle. The buyers undertook that the sellers would have the benefit of the guarantee in accordance with its terms, yet they sought to resile from that undertaking. The injunction was contrary to legal principle essentially because in the circumstances of that case the sale contract remained binding even if the buyers’ allegation of fraudulent misrepresentation were sufficiently proved; and there was no finding or evidence that the fraud exception defence would be available to the banks, who were not parties, if payment were demanded under the guarantees. Evans LJ (at page 104) would have been prepared to agree that in principle, if there was an arguable case that the sale contract was voidable or otherwise invalid, then further performance of the contract might be restrained pending the court's resolution of that dispute. But in the present case fraud is not alleged. Further, it is not a case where FAI undertook that Sirius would have the benefit of the letter of credit in accordance with its terms. They placed express restrictions on Sirius’ entitlement to draw on the letter of credit and Sirius agreed to them. As to the status of the Themehelp case generally, see Staughton LJ in the Group Josi case at 361 and Rix J (as he then was) in Czarnikow-Rionda v. Standard Bank [1999] 2 Lloyd’s R. 187 at 202.

In my judgment therefore the judge reached the correct conclusion on this issue. As I read his judgment, the judge decided this issue in favour of FAI for the reasons which I have expressed, although he also decided that an injunction could have been granted. He certainly recorded Mr Briggs’ submission that the position was just as if there had been no Tomlin order and that there was non-compliance with the conditions; and that Sirius were not entitled to draw down and the money should be treated as FAI’s. That submission did not depend on arguments relating to a hypothetical injunction.

For these reasons, I would allow the appeal and hold that FAI are entitled to the proceeds of the letter of credit in the escrow account. This result may, as Mr Vos suggested, be contrary to one view of the merits. But another view is that Sirius should not, as between themselves and FAI, be regarded as entitled to do that which they expressly agreed not to do.

I agree.

For the reasons given by May LJ, I agree that this appeal should be allowed on the first issue, namely that as between Sirius and FAI, the latter is entitled to the proceeds of the letter of credit in the escrow account. I also agree with him that the judge reached the correct conclusion on the second issue relating to the autonomy of the letter of credit. I wish only to add a short judgment of my own on the first point.

I have to say that, when first reading the papers, I was attracted by the judge’s conclusion, expressed in the following terms –

Clause 1 of the Schedule to the Tomlin order contains an acknowledgement that FAI is indebted to Sirius in the sum of $US22.5 million and that Sirius was entitled to prove in FAI’s liquidation or scheme of arrangement in that sum. By clause 1 of the document sent to FAI on 3 September 1999, Sirius agreed that it would not agree or pay any claim presented to Sirius by Agnew without FAI’s prior agreement in writing and would not draw down under the letter of credit unless (1) FAI had agreed that Sirius should pay a claim but had not put Sirius in funds to do so, notwithstanding the simultaneous settlement clause in the retrocession agreement or (2) Agnew obtained a judgment or binding arbitration award against Sirius which Sirius was obliged to pay.

The judge found that Sirius had been brought in because Agnew (rightly as it turned out) was unhappy about FAI’s “solidity” (the judge’s word). The essence of the retrocession agreement was that if Sirius was called upon by Agnew, FAI would reimburse Sirius. On this analysis, the acknowledgement in the Tomlin order that FAI was indebted to Sirius in the sum of $US22.5 million could only mean one thing – namely that Sirius had been called upon by Agnew, and was in those circumstances entitled to be reimbursed by FAI. It could thus legitimately draw down the US$5 million letter of credit in part satisfaction of FAI’s liability .

As I indicated earlier, I find this as an attractive argument, and one which may well reflect the overall merits of the case. The difficulty about it, however, in my judgment, is that it has to be prised out of the documents, and does not reflect what they actually say. I need, I think, to remind myself that these are highly sophisticated arrangements involving large sums of money and made by acute and hard-headed men of business: equally, the terms of the Tomlin order were negotiated by highly competent counsel.

When negotiating the terms of the Tomlin order, the parties were aware of a funding agreement between Agnew, Sirius and Lambert, by means of which Sirius was fully protected by Lambert against any liability which it might have to Agnew. No doubt there are sound commercial reasons for that agreement. Equally, it is apparent that had Sirius wished to have a cast iron claim to the $US5 million represented by the letter of credit, it would have only had to ask Agnew to obtain a default judgment against it pursuant to the second condition set out in the agreement of 3 September 1999.

It is not for us, however, to ask why this course was not taken. Against the background which I have sketched, it seems to me that a court seeking to construe the documents passing between the protagonists in this case must interpret them according to what they say, and should only draw the type of inference which appealed to the judge if it is wholly consistent with the contents of the documents. On this basis, looking at the letter of 3 September 1999 from Sirius to FAI, it is clear that FAI had not given prior agreement in writing to the payment of a claim presented by Agnew; and the terms upon which Sirius undertook not to draw down the letter of credit stood. Clause (2) of the agreement of 3 September is plainly not satisfied in any event, and I have come to the conclusion that I cannot read paragraphs 1 and 4 of the Schedule to the Tomlin order as altering that conclusion or triggering the first condition contained in Sirius’ letter of 3 September 1999.

I am fortified in this construction of the Tomlin order by the fact that it is consistent with the proper wish of recently appointed provisional liquidators not to prejudice any arguments regarding the letter of credit and its proceeds.

For these reasons, in addition to those given by May LJ I would respectfully part company from the judge on the first issue. As I agree with both May LJ and the judge on the second issue, I do not wish to add anything in relation to it.