Dilip Desai & Anor v Paul David Wood & Anor

The appellants, Dilip Desai and Paresh Shah, have asserted (but have not yet established) a claim for breach of contract and/or negligence against Boscolo Ltd (the “Company”). The Company had the benefit of a policy of professional indemnity insurance (the “Policy”) with Royal & Sun Alliance Ltd (“RSA”). Shortly prior to the Company going into voluntary liquidation RSA paid to the Company the limit of indemnity under the Policy, £250,000 (the “Insurance Proceeds”), relieving them of any further liability in respect of the appellant’s claim, and relinquished control of the claim. The appellants claim that the Insurance Proceeds (of which £246,000 remain in the hands of the Company’s liquidators) are held on trust for them.

By his Order dated 8 August 2024, following the hand-down of a reserved judgment dated 24 July 2024, HHJ Paul Matthews declared that the Insurance Proceeds belong beneficially to the Company alone. For the reasons set out below, I consider he was right to do so.

The facts are set out in the judge’s clear and concise judgment, at §2 to §12. The following is a brief summary.

The Company carried on the business of interior design and project management. Its director and sole person with significant control was Mr Ravi Lakhaney (“Mr Lakhaney”).

By a written contract dated 13 April 2013 (the “Design Contract”), the appellants engaged the Company to design a refurbishment scheme for an apartment they were about to purchase in Hampstead, London.

Mr Lakhaney carried out the work on behalf of the Company. He advised the appellants that Listed Buildings Consent was not required for the refurbishment. The appellants contend that this advice was negligent and that they have suffered loss as a consequence. They first intimated their intention to make a claim against the Company on 22 July 2015, but a formal letter of complaint was not sent until 25 July 2018.

The Design Contract was made on a standard form “Model Memorandum of Agreement” (the “Memorandum”), which incorporated the conditions (the “Conditions”), of the British Institute of Interior Design (“BIID”).

Article 9 of the Conditions provides as follows:

“9.1

The Designer shall obtain professional indemnity insurance in respect of the Services for not less than the amount stated in the Letter/Memorandum.

9.2

The Designer shall maintain such insurance until the expiry of the period stated in the Letter/Memorandum provided such insurance remains available to the Designer on commercially reasonable rates and terms, failing which the Designer will inform the Client in order that the parties can discuss the best means of protecting their respective positions in the absence of such insurance.

9.3

The Designer shall produce on request, evidence that the insurance required under the Agreement is in place and is being maintained.”

By Article 8 of the Conditions, the Company’s liability for loss or damage:

“shall not exceed the lesser of the limit of liability specified in the Letter/Memorandum or the amount of the Designer’s professional indemnity insurance…”

Clauses 10 and 11 of the Memorandum provided as follows:

“10.

The Client and the Designer agree that, as referred to in clause 8.1 of the Conditions, no action or proceedings against the Designer arising out of or in connection with this Agreement shall be commenced after the period of …[months/years] from completion of the Project or of the Services, which ever is the earlier. If no period is specified then the period shall be 6 years. It is also agreed that the same period shall apply in relation to the Designer's obligation to maintain professional indemnity insurance in accordance with clause 9.

11.

The Client and the Designer have agreed that the Designer's limit of liability and the amount of professional indemnity insurance to be provided in connection with this Agreement (as referred to in clauses 8.2.1 and 9.1) shall be the amount/s of £…”

As the Memorandum did not set out an expiry date for the maintenance of insurance, a period of six years therefore applied. As noted, the Memorandum did not specify any amount of indemnity insurance that the Company was required to maintain. By a letter dated 4 April 2013, however, the Company had informed the appellants’ agent that they carried professional indemnity insurance for £250,000 for any one claim and public indemnity insurance for £1 million for any single event.

The Company did maintain professional indemnity insurance, under the Policy. The only policy document in evidence related to the period 1 January 2014 to 31 December 2014. It is common ground that the Policy was renewed annually on the same terms, including for the year relevant to the appellants’ claim (although it is not clear which year that was).

By Insurance Clause 1, RSA agreed to indemnify the Company up to the “Limit of Indemnity” specified in the policy schedule in respect of claims first made and notified to RSA during the period of cover.

RSA also agreed to pay “Defence Costs” incurred by RSA, or by the Company with RSA’s consent, “provided that the Insurer’s liability for Defence Costs in relation to any Claim disposed of for an amount which exceeds the available Limit of Indemnity shall be limited to the proportion that the available Limit of Indemnity bears to the amount payable to dispose of such Claim.”

The policy schedule provided for a Limit of Indemnity of £250,000 for any one claim.

The “Insured” under the Policy was defined as meaning the insured named in the policy schedule, and included any partners or directors of the insured (or members, where the insured was an LLP) and, at the request of the insured, any employee of the insured or their legal representatives. Clients of the Company were not insured under the Policy.

By Claims Condition 5 of the Policy, RSA was entitled to take over the defence of any claim against the Company that was covered by the Policy.

By Claims Condition 7 of the Policy, RSA had the option of paying to the Company the maximum amount recoverable under the Policy in relation to a particular claim against the Company, and thereby relieve itself of the obligation to defend proceedings. It was in the following terms:

“In connection with any Claim against the Insured the Insurer may at any time pay to the Insured the Limit of Indemnity (after deduction of any sums already paid as damages or claimant’s costs and expenses in respect of such Claim) or any less amount for which such Claim can be settled and thereupon the Insurer shall relinquish the control of such Claim and be under no further liability in connection therewith except for Defence Costs for which the Insurer may be responsible under this Insurance in respect of matters prior to the date of such payment.”

Once notified of the claim, RSA appointed solicitors to defend the claim. The parties’ respective solicitors corresponded about the claim and entered into a standstill agreement, which would have expired on 8 October 2021.

By a letter dated 19 August 2021, before any legal proceedings had been issued, RSA’s solicitors informed the Company that RSA had made the decision to exercise its power under Claims Condition 7 to pay the Company the limit of indemnity in respect of the appellant’s claim. The letter said:

“on making the payment, your Insurers will have no further liability in connection with the Claim. In other words, your Insurers will be released and forever discharged from any further liability to your company in respect of the Claim under the terms of the Policy.

Also, when making the payment, your Insurers will relinquish control of the Claim. We will, therefore, cease to act on your behalf and further you will be responsible for all Defence Costs from the date of the payment.”

On 4 October 2021, the appellants issued proceedings against both the Company and RSA, claiming among other things that the Insurance Proceeds were held on trust for them, and claiming damages against the Company in excess of £700,000.

On 26 October 2021, the Company entered creditors voluntary liquidation. The statement of affairs, signed by Mr Lakhaney, identified the only material asset as cash at bank in the sum of £246,000 (being what remained of the Insurance Proceeds). Total liabilities were stated to be £534,000, of which £250,000 was stated to be due to Mr Lakhaney and £250,000 was stated to be due to the appellants (although, as noted above, the damages claimed by the appellants exceeded £700,000).

In fact, the Company appears to have been insolvent for many years. Its short-form unaudited financial statements for the years ended 31 March 2018, 31 March 2019 and 31 March 2020, revealed net liabilities of £229,677, £260,740 and £245,632 respectively (without, it appears, making any provision for the appellants’ claim).

The appellants’ claim was stayed by consent on 6 December 2021. The appellants applied to lift the stay in April 2023, but that application has yet to be heard, being adjourned pending determination of an application for directions issued by the liquidators of the Company, as to what they should do with the remainder of the Insurance Proceeds. It was that application which was determined by the judge.

Before the judge, the appellants contended that it was either an express term (on the true construction of Condition 9), or an implied term, of the Design Contract that any insurance monies received by the Company in respect of a claim by the appellants were to be held on trust for the appellants.

The judge rejected this argument for reasons which it is unnecessary to develop, because it is not pursued on appeal.

Alternatively, the appellants contended that the Insurance Proceeds were the subject of a constructive trust, first because it would be unconscionable for the Company to assert its own beneficial entitlement to the Insurance Proceeds given the circumstances of the Company at the time it was received or, second, because a constructive trust is necessary to prevent the unjust enrichment of the Company.

The judge rejected the argument based on unconscionability, which he noted had not been pressed very hard at the hearing. The Policy was not property which the parties agreed to acquire for their joint benefit, nor was there any property which came into the Company’s hands which it undertook to insure. The money paid to the Company was not paid to it by mistake, or through fraud, theft or breach of trust, and there was nothing unconscionable in it retaining the Insurance Proceeds.

He also rejected the contention based on unjust enrichment, for reasons which it is again unnecessary to develop because it is not pursued on appeal.

In the appellants’ grounds of appeal, it was first contended that the judge erred in failing to find that it was an implied term of the Design Contract that the Company would hold the Insurance Proceeds on behalf of the appellants. That was broadly the same as the implied term argument advanced before the judge. It was abandoned, however, at the start of the hearing of the appeal.

Instead, the appellants now advance two alternative cases of implied term. The first is an implied term in the Design Contract:

“if [the Company] had reasonable grounds to believe that [the Company] might be unable to meet the Appellants’ claim in due course from its other resources (the “Relevant State of Mind”) it would not dissipate those insurance monies or use them to pay other creditors or for any purpose conflicting or inconsistent with the Paramount Purpose” (the “Paramount Purpose” being defined in the further alternative case referred to below).”

The second is an implied term in both the Design Contract and the Policy:

“if (A) the Appellants as clients made a professional negligence claim against [the Company], and (B) the claim was covered by [the Company’s] insurance and (C) Insurers investigated the claim; and (D) Insurers decided to pay, and paid, insurance monies in respect of the claim to [the Company]; and (E) [the Company] had the Relevant State of Mind; then [the Company] would transfer the insurance monies to the client (or alternatively would in any event not use those insurance monies otherwise than for the paramount purpose for which the insurance was (compulsorily) required (and the insurance claim was paid) namely to secure that [the Company] was financially able to compensate its clients: see Impact Finding Solutions Ltd v Barrington Service Ltd [2017] AC 73 per Lord Hodge at [16]-[18] (the “Paramount Purpose”).”

The grounds of appeal and the appellants’ skeleton argument contained a further argument, namely that because the Company had the Relevant State of Mind at the time it received the Insurance Proceeds, it held those monies on an implied trust not to use them inconsistently with the Paramount Purpose. Mr Fletcher KC, who appeared with Mr Munro for the appellants did not separately press this argument at the hearing, putting the appellants’ case firmly on the basis of a trust that arose by reason of one or other of the implied terms for which he contended.

There was one further refinement at the hearing of the appeal. On the face of it, both of the implied terms would have prevented the Company – at least unless and until it was established that the appellants had no valid claim against the Company – from using the Insurance Proceeds for any purpose other than satisfying the appellants’ claim. At the hearing, however, Mr Fletcher accepted that the Company could use the Insurance Proceeds for the purpose of funding its defence of the appellants’ claim.

A professional indemnity policy provides insurance in respect of claims brought by third parties against the insured. It has long been established that, absent some special condition in the policy, third party claimants against an insured generally have no rights either against its insurer, or in the proceeds of such an insurance policy: MacGillivray on Insurance Law, 15th ed at §28-013, where it is pointed out that prior to the enactment of the Third Party (Rights against Insurers) Act 1930 (the “1930 Act”),

“… the right of a person to be indemnified under a contract of insurance against claims made against him by persons whom he might have injured was one personal to himself, and there was no privity of any sort between the injured person and the insurers. The injured person had no interest at law or in equity in the insurance money, either before or after it was paid by the insurers to their insured. If the insured became bankrupt or, being a company, went into liquidation the insurance money became part of the general assets distributable among creditors, and if the injured person had not already obtained judgment and levied execution in respect of his claim for damages his only right was to prove in the bankruptcy or winding-up.”

In Re Harrington Motor Co Ltd, ex p Chaplin [1928] Ch 105, the Court of Appeal recognised the unfairness of this where the insured was insolvent and could not pay a third party to whom it was liable from its own resources. In that case, Mr Chaplin obtained a judgment against a taxi-cab company for damages for the negligent driving of its driver. Before the judgment could be executed the company went into liquidation. The insurer paid the company, now in liquidation, in respect of the liability established in favour of the applicant.

The Court of Appeal held that Mr Chaplin had no right at law or in equity either as against the insurance company or as against the liquidator to require that the money should be handed over to him. As Lord Hanworth MR explained at pp.112-114, had the taxi-cab company been solvent, the money due to Mr Chaplin would have been paid out of any sums which the company chose to appropriate to that purpose. They need not pay over the actual money received from the insurer. There was an “absolute break” between Mr Chaplin and the insurer, and there was no basis on which it was possible to cancel out the insured upon its bankruptcy or liquidation and so create a privity between Mr Chaplin and the insurer. Although the occasion of the loss in respect of which the insurance company paid was that Mr Chaplin suffered an accident, that was not the basis of the liquidator’s right to receive the insurance proceeds:

“[T]he reason why the insurance money is paid to the liquidator is that over a period of time the company, now represented by the liquidator, have made an independent contract of their own and paid their own money to the insurance company, so that, if and when a liability on their part arose, there should be paid to them a certain sum of money.”

Lord Hanworth MR acknowledged, at pp.110-111 that “most people would think that there ought to be a right on the part of Mr Chaplin to recover the sum which had been paid to the defendants in the action on the strength of the liability under which they had been placed to him” but, he continued:

“It is, perhaps, unfortunate that one should have to give a judgment which would, at first sight, appear to run counter to what I might call the common sense view of the proceedings. None the less, it is necessary for us to administer the law as it stands, and if any alteration is to be made in it that must be made by the proper authorities and by the proper means.”

Lord Atkin, at p.124, echoed that sentiment:

“I agree, that on the whole this is an unsatisfactory result of the application of legal principles which are very good, in themselves, but which I should like to be able to modify to meet the special facts of this class of case, which is, of course, a very common one. I notice, for instance, in this case, that the Commissioner of Police requires as a condition of the licence to a cab owner that he should have taken out a policy against third party risks in quite a large sum. It is quite obvious that that very reasonable and proper precaution is defeated in the very case in which it is intended to be of most use - namely, where the cab owner becomes insolvent…”

The 1930 Act sought to cure that problem by providing for a statutory assignment of the rights of the insured under a liability insurance policy to the third party claimants to whom the insured is liable, in the event that the insured suffers one or other of a series of insolvency events, such as the commencement of a voluntary or compulsory winding-up. The 1930 Act was replaced by the Third Party (Rights against Insurers) Act 2010 (the “2010 Act”) which provides for a similar assignment of rights.

It is common ground that the 2010 Act did not apply in this case to cause an assignment of the Company’s rights under the Policy in favour of the appellants, because by the time the Company went into voluntary liquidation its rights under the Policy – so far as any claim relating to its liability to the appellants was concerned – had been compromised by payment of the Insurance Proceeds by RSA to the Company under Claims Condition 7.

Harrington stands in the way of an argument that the proceeds of an insurance policy in the hands of the insured are subject to a trust in favour of a third party merely because the insurance proceeds are specifically referable to that third party’s claim.

Mr Fletcher submitted, however, that Harrington is distinguishable because, unlike in this case, there was no contract between Mr Chaplin and the taxi-cab firm under which the firm was obliged to maintain insurance. There was accordingly no basis for implying any term of the sort relied on in this case.

The question whether a term is to be implied cannot sensibly be divorced from the question whether the Design Contract (or the Policy) gave rise to a trust over the Insurance Proceeds. That is because, even if either contract impliedly obliged the Company to apply the Insurance Proceeds in a particular way, that would be of no benefit to the appellants unless that obligation gave rise to a trust. A mere contractual right, being a personal right, would give rise only to a right to prove for a dividend in the liquidation of the Company, and add nothing to the existing right to prove in the liquidation in respect of the appellants’ underlying claim.

The critical question, therefore, is whether a term is to be implied that the Company must deal with the Insurance Proceeds in such a way that has the consequence in law of giving rise to a trust in favour of the appellants.

To take an example from the law of agency: an agent may be required to account to its principal for sums received from a third party, but that does not necessarily mean that sums received by the agent are held on trust for the principal. A trust would only arise if the contract of agency was construed as preventing the agent from dealing for its own account with the very money received, and that will usually (though not invariably) depend on it being required to segregate that money from its own: see Bowstead & Reynolds on Agency, 23^rd ed., §6-041.

The reason Mr Fletcher abandoned the implied term which had been advanced before the judge was because he accepted that the parties would not have intended to impose a trust on the Insurance Proceeds in the hands of an insured that was fully solvent, and thus able to meet claims made against it from its own resources. The “Paramount Purpose” – which Mr Fletcher described as “to secure that the insured is financially able to compensate its clients” – is simply not engaged where the insured has no difficulty in meeting its clients’ claims.

The implied terms now advanced would therefore permit the Company to use any insurance proceeds received in relation to claims against it by its clients for its own purposes unless and until the Company had the Relevant State of Mind; that is, when it had reasonable grounds to believe or suspect that it might be unable to meet a client’s claim against it in due course from its other resources.

There was no dispute between the parties as to the legal requirements for implication of terms. These are usefully summarised by Lord Hughes, giving the judgment of the Privy Council in Ali v Petroleum Company of Trinidad and Tobago [2017] UKPC 10 at [7]:

“It is enough to reiterate that the process of implying a term into the contract must not become the re-writing of the contract in a way which the court believes to be reasonable, or which the court prefers to the agreement which the parties have negotiated. A term is to be implied only if it is necessary to make the contract work, and this it may be if (i) it is so obvious that it goes without saying (and the parties, although they did not, ex hypothesi, apply their minds to the point, would have rounded on the notional officious bystander to say, and with one voice, ‘Oh, of course’) and/or (ii) it is necessary to give the contract business efficacy. Usually the outcome of either approach will be the same. The concept of necessity must not be watered down. Necessity is not established by showing that the contract would be improved by the addition. The fairness or equity of a suggested implied term is an essential but not a sufficient pre-condition for inclusion. And if there is an express term in the contract which is inconsistent with the proposed implied term, the latter cannot, by definition, meet these tests, since the parties have demonstrated that it is not their agreement.”

A further relevant requirement is that the term must be capable of being identified with certainty. Ms Chalmers, who appeared for the Company, fairly accepted that this requirement cannot be taken too far, citing Chitty on Contracts, 35^th ed., at §17-018:

“Whether the term sought to be implied is a term in fact or a term in law, it must be capable of being formulated with sufficient clarity and precision and it not infrequently happens that the court rejects the implication of a term on the ground that the difficulty in identifying the precise scope of the proposed term evidences that it is not a necessary ingredient of their contract. The vaguer the term, the less likely it is to be implied into the contract. But the point cannot be pushed too far. It may be that the lack of precision in the criterion to be embodied in the term is not fatal to any implication, since:

‘… it is no novelty in the common law to find that a criterion on which some important question of liability is to depend can only be defined in imprecise terms which leave a difficult question for decision as to how the criterion applies to the facts of a particular case.’ [citing Shell UK Ltd v Lostock Garage Ltd [1976] 1 WLR 1187, 1204]

However, the more likely inference that the court will draw from the inability of the parties to formulate the term with precision is that no term is to be implied into the contract.”

The mainstay of Mr Fletcher’s argument in support of the implied terms was that a policy of liability insurance is entered into and maintained for the benefit of the insured’s clients. At this point in his argument, he meant “benefit” in a colloquial sense, not that the Policy is held in trust for the insured’s clients. He submitted that the judge had failed to find that the Company received the money specifically in relation to the appellants’ claim against the Company, and that he was wrong to find that the appellants, in their dealings with the Company, took the ordinary risk of dealing with a person who later becomes insolvent.

He cited Impact Funding Solutions Ltd v Barrington Services Ltd [2017] AC 73 in support of his submission as to the “Paramount Purpose” of the Policy – i.e. to secure that the Company was financially able to compensate its clients. That case concerned the interpretation of an exclusion clause in a solicitor’s professional indemnity policy (excluding “trading liabilities” arising from “any breach by any insured of the terms of any contract or arrangement for … services in the course of the insured firm’s practice”). A firm of solicitors entered into a contract with the claimant, under which the claimant provided loans to the firm’s clients and the solicitors undertook personal liability to repay the loans. The Supreme Court held that the claimant’s claim against the solicitors for breach of that agreement fell within the exclusion clause. In doing so, it held that the insurance policy had to be construed consistently with its purpose.

Solicitors are required to maintain professional indemnity insurance pursuant to a statutory scheme made by the Law Society acting under s.37 of the Solicitors Act 1974. At §16 of Impact Funding Solutions, Lord Hodge cited Lord Brightman’s description of the statutory scheme of compulsory insurance in Swain v The Law Society [1983] 1 AC 598 as one “designed to benefit, not only solicitor-principals and their staff, but also solicitors’ clients.” Mr Fletcher relied in particular upon the following passage from the judgment of Lord Toulson (with whom Lords Mance, Sumption and Hodge agreed), at §41:

“There are two points to highlight about the nature and purpose of the policy. One is that the relevant terms replicate the minimum terms of the cover which Barrington was required to maintain under the Solicitors’ Indemnity Insurance Rules 2009. As the House of Lords recognised in Swain v The Law Society [1983] 1 AC 598, 610, the paramount purpose of The Law Society being given statutory power to require solicitors to maintain insurance cover against professional liability was “the protection of that section of the public that makes use of the services of solicitors” (Lord Diplock).”

Mr Fletcher submitted that the same is true of the insurance which the Company was required to maintain, pursuant to its membership of the BIID. Under the heading “Responsibility to the Institute and the interior design profession”, the code of conduct of the BIID requires members, among other things, to carry appropriate insurance.

I accept that one of the purposes of the Policy in this case was to benefit – indirectly, and in a colloquial sense – the Company’s clients including the appellants. That is sufficiently demonstrated in this case by the fact that it was a term of the Design Contract that the Company maintain insurance cover. Although this was a standard term contained in the Conditions, the very fact that the Company agreed with the appellants to carry and maintain insurance shows that there was some benefit to the clients in it doing so.

That was not its only purpose, however. Its direct purpose was to benefit the Company. I do not find any real assistance in comparing the position in relation to solicitors’ indemnity insurance but, even if this is relevant, it is clear that it has at least a dual purpose: to protect solicitors and their staff, and to protect their clients.

The benefit of the Policy to the Company’s clients is indirect, because it flows from the fact that the insurance is taken out by the Company to provide it with funds to meet claims against it and to protect it against having to deplete its own assets in order to pay claims. No implied term is required to recognise the indirect benefit that flows to clients in this sense. Even if an insured is insolvent, that does not mean that a client to whom the insured is liable obtains no indirect benefit when the insured receives insurance proceeds. These will, at least potentially, affect the size of the dividend payable to all creditors, including that client, in the insured’s subsequent liquidation.

I also accept the force of the points made by Mr Fletcher that it is if and when an insured is in financial difficulties, and is unable to meet its clients’ claims from its own resources, that the clients most need access to the proceeds of insurance. That was the issue that the 1930 Act was intended to address, but given it applied only upon one or more formal insolvency steps being taken in relation to the insured, it does not address a case like the present, where the Insurance Proceeds were received by the Company shortly prior to any such formal step being taken.

The fact that clients most need to access the insurance proceeds when the insured is insolvent is far from sufficient, however, to imply either of the terms for which the appellants contend. There are insurmountable difficulties both as regards the requirements for necessity and certainty.

An important part of the context in considering necessity is the fact, as I have observed above, that under the general law clients of an insured have no beneficial entitlement to the insured’s liability insurance policy or its proceeds, whether before or after the insured becomes insolvent.

The parties could have, but did not, address this issue in the Design Contract. They could have, but did not, make specific provision to confer on the appellants a proprietary right or security interest over the Company’s rights under the Policy or any other assets of the Company. In the absence of such terms a third party dealing with an insured will (as the judge found in this case) assume the ordinary risk of dealing with a person who later becomes insolvent.

If, as Mr Fletcher accepts, the parties would not have said “of course, payment from RSA in respect of a claim by the appellants should be ringfenced for the appellants” for payments received when the Company was solvent, I do not think they would have reached the opposite conclusion for payments received when the Company was insolvent. The most that can be said is that it might have been reasonable for the parties to have addressed the possibility that insurance proceeds would be received by the Company when it was insolvent, or likely to be insolvent, and to provide appropriate protection to the appellants in that event. That falls short of the requirement that such a provision is necessary to make the contract work.

In any event, there are insurmountable difficulties in identifying with sufficient precision what the notional bystander would assume the parties had intended, once it is accepted there is no implication of a term requiring funds to be ringfenced that applies from the outset of the Policy or at any time while the Company is solvent.

Mr Fletcher submitted that either of the implied terms set out in the grounds of appeal are sufficiently certain in themselves, even though there might be uncertainty as to how they would be applied in any particular circumstances. That, however, misses the point. It is necessary to identify with sufficient clarity what the parties would have agreed had they thought about it. If there are, as here, any number of possible options – both as to the definition of the Company’s financial circumstances which would give rise to the obligation to ringfence insurance proceeds, and as to the state of mind required of its directors – it is impossible to identify the term of which the parties would have said to the notional bystander, “of course”.

As to the range of solutions concerning the time at which the obligation to ringfence should arise, the parties might have said (among other options): it should be when the Company is actually balance sheet insolvent, or when it is actually cash-flow insolvent, or both, or when it is likely to be so, or when there are reasonable grounds to believe that it will or might be unable to meet the claim from its own resources, or from its own resources including the proceeds of claims that it (or its liquidator) may have to recover assets from third parties.

As to the requisite state of mind, the parties might have agreed that the directors should actually know of the relevant financial circumstances, or that they suspected, or that they should have known or suspected, or that they both knew or suspected of the financial circumstances and did not believe or did not reasonably believe that the Company’s position would improve so as to remedy the situation.

The range of possibilities cannot be brushed aside as being matters which the parties could reasonably have intended to be left to be resolved by a court if necessary as and when insurance proceeds were received by the Company. The imposition of a trust has important consequences, including giving rise to personal liability on the part of directors and others for using the proceeds for purposes other than those of the trust. The notional bystander would not in my view have thought that parties were intending to impose such obligations on the Company, and the risk of liability on the directors and others, without defining in sufficiently precise terms when such obligations and risks would arise.

As I have already observed, neither of the implied terms for which the appellants contend works, as formulated, in relation to the payment that was actually made in this case, pursuant to Claims Condition 7. The “Paramount Purpose” within each implied term relates solely to the Company’s ability to compensate its clients and would not, therefore, permit the Company (as Mr Fletcher accepted it can) to use the Insurance Proceeds to fund its defence of the appellants’ claim.

The precise modification to the implied term that would be necessary to accommodate this adds a further layer of uncertainty. Would the parties have agreed that if, as here, the Company goes into liquidation, the liquidators are entitled to use the Insurance Proceeds to fund their investigation of the appellants’ claim and related statutory functions – e.g. preparing a statement of affairs? It may be that there was more than one claim arising out of the same “original cause or source” in which case, all such claims will be regarded as one “Claim” under sub-clause 3 under the heading “Limits of Indemnity”. Would the parties have agreed that the Company could use a payment made under Claims Condition 7 to fund the defence of claims by others, and payments to them, even if there was no contract with them, and so no grounds for implication of a term or trust so far as they are concerned?

Given these uncertainties, it is impossible to say of any one possible solution that it is necessary to give business efficacy to the Design Contract or that the notional bystander would say it went without saying that the parties must have intended that solution.

The second alternative implied term in the grounds of appeal is said to be implied also in the Policy. There is no basis for such an implication. An insurer satisfies its obligation by making payment to the insured. I can see no reason why an insurance policy is ineffective without imposing a restriction on the insured as to the use of the funds paid by the insurer, or why a notional bystander would think the parties to it would obviously have agreed to such a thing.

Even if a term was to be implied as contended for by the appellants, it would not give rise to any trust. A trust requires certainty of intention, subject matter and objects.

In addition to the difficulties addressed above in relation to the implication of a term in identifying with certainty the point at which such a trust would be imposed, the implied terms for which the appellants contend fall short of the necessary intention to create any trust. Each of the two suggested implied terms are to the effect that the Company can only use the Insurance Proceeds for the “Paramount Purpose”. That, however, is only “to secure that [the Company] was financially able to compensate its clients”. On its own terms, that falls short of requiring the Company to use the Insurance Proceeds only for the purpose of paying the appellants’ claim.

In Cox v Bankside Members Agency Ltd [1995] 2 Lloyds Rep 437, managing and members’ agents at Lloyds were sued by their principals. The members had the benefit of E&O insurance which it was accepted would be insufficient to indemnify the agents against all claims. The principals contended that the agents had impliedly agreed that the available policy moneys should be shared proportionately and that the agents held such money on trust for the principals. The Court of Appeal rejected these arguments. In relation to the trust argument, which was premised on (a) the fact that the agents owed fiduciary duties to their principals and (b) the fact that the agents were required to effect E&O insurance, Peter Gibson LJ said, at p.464:

“It is of course correct that the agent is a fiduciary in relation to his principals and that the Lloyds regulations require him to effect E&O insurance (though only a minimum level is prescribed). No doubt the insurance is required not just for his own benefit but for the ultimate protection of his principals if the agent becomes insolvent. But it by no means follows that a trust attaches to the policy so affected or the proceeds of the policy or, if there is no trust, that the agent is under a fiduciary obligation to apply the proceeds of policy rateably among his principals.

First, there is nothing in the regulations or the policy or in any document governing the contractual relationship between the agent and his principal that is suggestive of a trust of the policy or its proceeds. There is nothing, for example, that requires the policy proceeds to be kept separate from other moneys held by the agent, which would be necessary if there were a trust.”

The same is true here. There is no indication anywhere in the Design Contract, even in the implied terms contended for, that the Company is required to ringfence the Insurance Proceeds, so that they are segregated from its own funds.

Nor is there any possibility of modifying the implied terms as formulated in the grounds of appeal to provide for such segregation of funds. That would be inconsistent with Mr Fletcher’s acceptance that the Company can use the Insurance Proceeds to fund its defence of the appellants’ claim. That is doubly inconsistent with the implication of a trust because it permits the supposed trustee to use the fund – potentially to its extinction – for its own purposes, and permits it to do so for a purpose which is directly opposed to the interests of the supposed beneficiary – namely to prevent them from establishing the very claim which is said to be the foundation of their beneficial interest in the fund.

This also points to there being insufficient certainty as to the subject matter of a trust, in circumstances where the supposed trustee can use potentially all of the Insurance Proceeds for its own purposes. At no time after receipt of the Insurance Proceeds, and prior to the appellants’ claim being finally established, potentially after an appeal, is there any defined part of the Insurance Proceeds that could be the subject matter of a trust in favour of the appellants.

The appellants’ alternative argument contained in their skeleton argument, though not pressed separately at the hearing, is based on the circumstances surrounding the payment of the Insurance Proceeds, rather than on any implied term. It is based on an argument that it would be unconscionable for the Company to retain the Insurance Proceeds if at the moment they were received the Company had the Relevant State of Mind.

As Ms Chalmers pointed out, it can hardly have been unconscionable for the Company to retain the Insurance Proceeds in this case, given that it is accepted it can use them to fund its defence of the appellant’s claim. She did not rule out altogether a constructive trust arising if an insurer paid an insured, in respect of an established claim, for example where the insurer had meant to pay the third party claimant directly, but paid the insured by mistake. That is clearly not this case, and I need say nothing about that possibility.

The appellants contend that a constructive trust arises on the basis of an analogy with the decision of the House of Lords in Twinsectra v Yardley [2002] 2 AC 164. That case concerned the circumstances in which a payment by A to B, for the specific purpose of paying C, created a resulting trust in favour of A, subject to a power to make payments to C. It if applied at all in this case, it would be because RSA had imposed a limitation on the Company’s use of the Insurance Proceeds, so that the Company was precluded from using for its own account, but was required to apply them only towards payment to the appellants.

Since this is not based on any pre-existing contractual term, such a limitation has to be spelled out of the circumstances in which the Insurance Proceeds were paid to the Company. I have quoted above (at §20) the relevant passage in the letter from RSA’s solicitors informing the Company that it was making payment pursuant to Claims Condition 7. Following receipt of this letter, the Company’s solicitor emailed RSA’s solicitor, pointing out that “The Policy and your correspondence to the Company regarding RSA’s decision to dispose of the claim have been silent on how the Company is required to treat those funds. Can you please confirm the terms on which the payment was made to our client? Are there any restrictions on use?”

RSA’s solicitors responded:

“The payment is made in accordance with the terms of Claims Condition clause 7 of the policy as set out in our letter to the company dated 19^th August 2021. The only reference regarding the payment is that the insurers relinquish control of the claim (it does not dispose of the claim contrary to the statement in your e-mail) and it discharges any further liability our insurer client has in connection with the claim.”

There is nothing in this correspondence that suggests any limitation on the Company’s right to use the Insurance Proceeds.

Although not expressly put by Mr Fletcher on this basis, this way of putting the claim appears to be an attempt to resurrect the type of constructive trust recognised in Neste Oy v Lloyds Bank plc [1983] 2 Lloyds Rep 658, but rejected by the Supreme Court in Angove’s Pty Ltd v Bailey [2016] UKSC 47; [2016] 1 WLR 3179 as a species of remedial constructive trust not recognised in English law.

In Neste Oy, the plaintiff shipowners made a series of six payments to their shipping agent, for the purpose of the agent settling bills on behalf of the shipowners to harbour authorities, pilots and others. The shipowners contended that the unspent balance of these payments that remained in the agent’s general account upon its insolvency were held on trust, either by virtue of the agency relationship or as a special purpose trust. Bingham J rejected those arguments. He held, however, that the sixth payment, which had been received after the agent’s directors had concluded that their company was insolvent, was held on a constructive trust. That was because:

“Given the situation of [the agent] when the last payment was received, any reasonable and honest directors of [the agent] (or the actual directors had they known of it) would, I feel sure, have arranged for the repayment of that sum to the plaintiff’s without hesitation or delay. It would have seemed little short of sharp practice for PSL to take any benefit from the payment, and it would have seemed contrary to any ordinary notion of fairness that the general body of creditors should profit from the accident of a payment made at a time when there was bound to be a total failure of consideration. Of course it is true that insolvency always causes loss and perfect fairness is unattainable. The bank, and other creditors, have their legitimate claims. It none the less seems to me that at the time of its receipt PSL could not in good conscience retain this payment and that accordingly a constructive trust is to be inferred.”

That decision was, however, disapproved in Angove’s v Bailey. At §28, Lord Sumption (with whom the other members of the Supreme Court agreed) said:

“Bingham J’s point of departure in the Neste Oy case … was that the recipient of money may be liable to account for it as a constructive trustee if he cannot in good conscience assert his own beneficial interest in the money as against some other person of whose rights he is aware. As a general proposition this is plainly right. But it is not a sufficient statement of the test, because it begs the question what good conscience requires. Property rights are fixed and ascertainable rights. Whether they exist in a given case depends on settled principles, even in equity. Good conscience therefore involves more than a judgment of the relative moral merits of the parties. For that reason it seems to me, with respect, that Bingham J’s observation in Neste Oy that any reasonable and honest director would have returned the sixth payment upon its receipt begs the essential question whether he should have returned it. It cannot be a sufficient answer to that question to say that it would be ‘contrary to any ordinary notion of fairness’ for the general creditors to benefit by the payment. Reasoning of this kind might be relevant to the existence of a remedial constructive trust, but not an institutional one.”

At §29, he said:

“The difficulty about the decision in the Neste Oy case concerning the sixth payment is that Bingham J had rejected the argument that the agency relationship between the shipowners and [the agent] was such as to impose the status of a trustee on the agents, and had declined to find that the payments were subject to a special purpose trust. He had rejected these submissions mainly because the agent was not expected to keep the funds remitted to it by the shipowners separate from its own, but was entitled to treat them as part of its general assets: see pp 664—665. It follows that in paying money to [the agent] the shipowners intended to part with any interest in the money, subject only to a purely personal obligation of [the agent] to account to them for what they had done with it and to repay any balance due as a debt.”

In this case, absent any implied term in the Design Contract sufficient to create a pre-existing right to any trust, the argument that the Insurance Proceeds were subject to a constructive trust because it would be unconscionable for the Company to retain them suffers from the same problem.

For the above reasons, I would dismiss this appeal.

The hardship that this conclusion creates for the appellants stems in large part from the facts that (1) RSA is entitled under the Policy to compromise the insurance claim by paying a sum equal to the limit of insurance to the Company and (2) the Company is free to use that sum to fund the defence of the appellants claim.

In a case where insurance proceeds are paid in respect of an established liability, the conclusion I have reached against the implication of a term might be said (as the Court of Appeal in Harrington said of the conclusion in that case) to be one that “runs counter to a common sense view of the proceedings”. That is particularly so where insurance proceeds are received by the insured shortly before its liquidation, given that, had the payment been delayed, the right to receive it would, upon liquidation, have been transferred to the third party claimant. That consequence follows, however, from the long-established position in law, as confirmed in Harrington, and the fact that the 2010 Act identifies – so far as the facts of this case are concerned – going into liquidation, and no earlier point, as the trigger-point for an assignment of rights to third parties.

The conclusion does not, moreover, preclude parties seeking to provide, by express terms, protection against an insured’s insolvency, whether by grant of a proprietary right or security interest.

I agree.

I also agree