Heath Lambert Ltd v Sociedad De Corretaje De Seguros & Anor

The First Defendants (“Scort”) and the Second Defendants (“Banesco”) each. apply to set aside the Order of Tomlinson J. made on 7 October 2002 granting the Claimant (“Heath Lambert”) permission to serve the claim form on the Defendants in Venezuela.

Venezuela, like many countries, requires insurance to he placed with local insurance companies. However, it permits local insurers to reinsure the risks assumed with foreign companies. This has led to a practice whereby the local insurer fronts the risk and reinsures the risk into the London market, which sets the premium. Often the reinsurance policy allows the original insured to “cut through” and make a direct claim against the reinsurer. This is to protect the insured against potential insolvency on the part of the local insurance company.

Instituto Nacional de Canalizaciones (“NC”) is a dredging company and a substantial shipowner in Venezuela operating what has been called a major fleet, a medium fleet and a minor fleet of vessels. Until 1994 the local insurance was placed with Latino Americana de Seguros but in 1994 INC became seriously concerned as to the solvency of Latino Americana and Banesco was substituted as the local fronting insurer.

Scort, a firm of Venezuelan insurance brokers, were retained by INC to place its marine insurance. As part of its overall responsibilities, Scort was also involved in obtaining the reinsurance for Banesco in the London market - the exact nature of Scort’s responsibilities for obtaining reinsurance is in dispute. For this purpose, Blackwell Green Limited, a firm of Lloyd’s brokers, was retained as placing broker. Blackwell Green has since been subsumed into Heath Lambert. No point was taken as to Heath Lambert’ s title to sue and I will not distinguish between them.

The 1996 reinsurance was duly placed by Heath Lambert with a number of Lloyd’s syndicates and London market insurance companies. The Cover Note issued by Heath Lambert on 26 January 1996 and addressed to Scort recorded as follows:

“We confirm that in accordance with your instructions we have effected insurance on your behalf as follows:

Type: Marine Facultative Reinsurance

The brokers cancellation clause was in the following terms:

“Notwithstanding anything contained in this Policy to the contrary, [Heath Lambert], in addition to their lien on the Policy, shall be entitled to cancel this Policy in the event of any premium not having been paid to them when due and Underwriters hereby agree to cancel this Policy on presentation of the request of [Heath Lambert] and to return any premium payable thereon in excess of a pro rata premium up to the date of cancellation”

The underlying insurance policy was not produced to the Court, but the 1995 Major Fleet policy, which was produced in evidence, had a Venezuelan arbitration clause. It also provided that the policy would be null and void in the event of change of ownership, bareboat charter or withdrawal of class.

Following the placement of the reinsurance in London, a number of extensions were agreed by underwriters. The premiums due on these extensions have not been paid by either Defendant and they form the subject of this action. The premiums outstanding arise as follows:

None of the premiums due for these extensions has been paid. The claim form was issued on 23 July 2002 for a total amount of $687,366.44, reduced in the Particulars of Claim to $526,090.40, made up as explained above.

It is accepted by the Defendants that the Court has jurisdiction to permit service abroad under CPR Part 6.20(3), although they do not accept that all the gateways relied on by Heath Lambert were correctly invoked. No point is taken on the appropriateness of the English forum. The Defendants argue that permission for service of the claim form in Venezuela should be set aside because Heath Lambert cannot show that the claim has a reasonable prospect of success. Three main points are taken:

In the course of their submissions, Counsel took these points in different orders. I shall follow the order I have set out above.

Where a producing broker employs a placing broker at Lloyd’s, the general rule is that there is privity of contract between those brokers, and no privity between the principal and the placing broker. The producing broker is liable to the placing broker for the premium, which the producing broker must collect from the principal. There may however be special factors which lead to the exceptional case that there is privity between principal and placing broker, but even then it may be that this privity is not exclusive: see the valuable judgment of Rix J in Prentis Donegan & Partners Ltd v. Leeds & Leeds Co. Inc. [1998] 2 Lloyd’s Reps 326, esp. at 332 (col. 1) and 334 (col. 1). As he said at p.332:

“The burden must be on the defendants [the alleged producing broker] to show some special factors in this case to raise an argument that the general rule makes way for the exception. Such factors might be found, for instance, in the direct relations that might exist between Offshore [the principal] and the plaintiffs [the placing broker], or in the consideration that, as Mr Gaisman put it, the delegation by the defendants to the plaintiffs was complete, effecting a complete substitution of the defendants by the plaintiffs (to pick up the term “substitute” used in De Bussche v. Alt) and indicating that the defendants’ sole responsibility to Offshore was to procure a competent placing broker, but not to place or procure the insurance itself. Ultimately, one would be looking for signs that the involvement of the plaintiffs was not merely authorized by Offshore, but intended by each of Offshore, the defendants and the plaintiffs, to create contractual relations directly (and only) between Offshore and the plaintiffs.”

In his powerful submissions on this point, Mr Richard Millett QC for Banesco pointed out that the contemporary documentation was all one way. The requests for extensions to the cover were all sent by Scort to Heath Lambert. They referred to instructions “received from our client”. The cover notes and debit notes were addressed to Scort. There was no contemporary correspondence from Scort rejecting the debit notes. Further the reality was that Banesco was slotted into an existing scheme to fulfil the requirement that there be a primary Venezuelan insurer. Scort dealt with INC and took its instructions from them, Banesco fronted and had no decision making role.

In response, Mr Geary for Scort argued that this was one of the exceptional cases identified by Rix J. He contended that Scort’s role was to act as intermediary introducing and recommending Heath Lambert to Banesco. Scort acted as an intermediary, and not as broker. He made the following main points:

I am sceptical about Mr Geary’s submissions and the evidence filed by Mr Dickie (although, I stress, not his good faith). They find very little support in the contemporary correspondence. I unhesitatingly reject Mr Geary’s submission that there is no reasonably arguable case that Scort is liable to pay the premium to Heath Lambert. On the contrary, there is in my judgment a powerful case that it is liable. But at this stage I cannot conclude that there is no reasonable prospect that Scort is not liable for the premiums. If the evidence set out by Mr Dickie is accepted at trial, it might well mean that Scott was not liable.

The Defendants accept that one of them must be liable for the premium. Mr Millett asked me to “grasp the nettle” and conclude at this stage that Scott was liable and Banesco not liable for the premium. I have concluded that there is a reasonable prospect that Scott is not liable. It must follow that there is also a reasonable prospect that Banesco is liable. The case against Scott is much the stronger, but the case against Banesco is not hopeless if the evidence advanced by Mr Dickie is accepted. I therefore accept Mr Jeffery Onions QC’s submission for Heath Lambert that it is not possible to decide at this stage which Defendant is liable. It would plainly be unjust to release Banesco from the action at this stage unless I could be certain that the claim against Scort was bound to succeed. I cannot be certain of this at this stage.

Mr Millett argued that Heath Lambert had no liability to pay any premiums to underwriters, so there was nothing in respect of which the principal (Scort or Banesco) was liable to indemnify it. Insofar as Heath Lambert made payments of premium - and the evidence suggests it did so in respect of all premiums except those clue to Lloyd’s underwriters in respect of the final extension (see paragraph 39 below) - it did so as a volunteer.

The argument advanced through the following stages:

These arguments are of great importance to the London market, because it is nowadays by no means inevitable that policies are written under English law - the flexibility of the market is such that it is quite prepared to contemplate writing policies governed by other laws. Mr Millett argued that the term “Subject to Venezuelan Law and/or Venezuelan Jurisdiction if required” meant that Venezuelan law applied, but Venezuelan jurisdiction was optional. The words “if required” applied to the jurisdiction element only. I reject Mr Millett’s submission. I consider that it is an unnatural construction of the policy to confine the effect of “if required” as he suggested. In my judgment, the clause gave the Venezuelan principal the option to demand Venezuelan law and/or jurisdiction. It was a so-called floating choice of law clause: see Dicey & Morris on the Conflict of Laws (13th ed) at §32-084. I do not accept that just because the underlying insurance policy contained a Venezuelan arbitration clause or was, implicitly, governed by Venezuelan law (if it was), that meant that Venezuelan law and/or jurisdiction had been required. It by no means follows, for instance, that Banesco as reassured would prefer to have the case decided by a Venezuelan judge, rather than by the Commercial Court in London, or that it would prefer Venezuelan law to English law.

This was an option to be exercised by Banesco. No such option was exercised during the currency of the policy or afterwards. Mr Millett contended that, if necessary, he could exercise it in argument before me. I am very doubtful whether this option is still open so many years after the policy has expired, but if it were, the election would have to be communicated to underwriters. They were not before the Court.

But let me assume that the reinsurance contract is governed by Venezuelan law. There is no authority that counsel could find as to whether section 53 of the 1906 Act applies to contracts of insurance not governed by English law. Section 53 is part of the Act dealing with the premium. The Act was designed to codify the English law of marine insurance. I think that it is probably right that section 53 only applies to English law insurance/reinsurance contracts. But that is by no means an answer to the question whether London brokers, placing foreign law insurance/reinsurance contracts into the London market, assume liability for payment of the premium to underwriters. Section 53 was based on the practice of the London market. Nowadays, at least, the London market quite frequently deals with non-English law policies. Whatever the proper law of the reinsurance policy, the relationship between the placing brokers and their principals is typically governed by English law. I understood all parties to accept that the relationship between Heath Lambert and Scort/Banesco (whichever was principal) was governed by English law. In 1996, the general practice of the London market with regard to the payment of premiums was well known.

I consider that there is a very strong argument that in 1996 when London placing brokers were retained to place a policy with the London market, in the absence of an agreement to the contrary, whatever the proper law of the insurance/reinsurance contract, the broker accepted responsibility for payment of the premium.

But on the facts of this particular case, there can be no doubt that Heath Lambert was responsible to underwriters for the payment of premiums for two additional reasons:

In my judgment, therefore, Heath Lambert did not pay premiums as a mere volunteer. It was under a legal liability to do so, and was entitled to be indemnified against that liability by its principal, whoever that was.

Two questions arise:

The general rule is that an insurance premium becomes due when the risk attaches. As discussed above, in the London market the placing broker is entitled to he indemnified in respect of the premiums due to underwriters whether or not they have in fact been paid to underwriters: Power v. Butcher (1829) 10 B & C 329; Universo Insurance Co. of Milan v. MMI Co Ltd. [1897] 1 QB 205. So, if credit has been privately agreed between broker and underwriter, this will not affect the entitlement of the broker to be indemnified. The broker’s cause of action is against the incurring of the liability to underwriters and the cause of action accrues therefore on the attachment of the policy: Telfair Shipping Corporation v. Inersea Carriers SA [1985] 1 WLR 563 at 568-69.

However, where the policy grants a period of credit for payment of the premium, the premium will not become payable until the expiry of the agreed credit period. In my judgment, in the absence of special agreement between the broker and his principal, that credit must be intended not only to give credit to the broker, but also to the broker’s principal. I can see no reason why the policy should set out credit terms unless that was so. I am sure that any principal seeing the policy or a cover note would understand that it was also being granted credit. In such circumstances, the principal’s obligation is to put the broker in funds in time for the payment to be made to underwriters; in the days of electronic bank transfer, that would be a very short time before the premium was due to underwriters.

Was credit granted under this policy? Mr Onions relied on the provision in the policy “Warranted premium payable on cash basis to London Underwriters within 90 days of attachment”. He contended that this gave 90 days credit for payment of premiums. This was strongly disputed by Mr Millett and Mr Geary. They contended that the word “warranted” was critical. It did not mean that the premium was not due at inception. It created a longstop whereby underwriters would cease to be liable on the policy if non-payment extended beyond 90 days. It did not postpone the time when the premium became payable.

Mr Geary additionally argued that to construe the policy as giving 90 days credit would run against commercial common sense. If the premium was not due for 90 days, underwriters would run the risk without necessarily being able to recover the premium. The contract might be determined if there was a change of ownership, a bareboat charter or withdrawal of class. Underwriters might find that they were on risk without receiving any premium. I am not at all persuaded that this is actually correct. The argument assumes that underwriters would not he entitled to any premium for the period that they were on risk. In my judgment, underwriters would be entitled to recover premium for the period on risk. But even if that were wrong, I very much

The clause is not well drawn and, as so often, this is a point of construction that is very much one of first impression. My clear view is that the clause was intended to give 90 days credit, as well as create a warranty. The use of the word “payable” points to the time when the premium becomes due. I contrast this clause with that in J.A. Chapman & Co. Ltd (in liquidation) v. Kadirga Denizcilik Ve Ticaret [1998] Lloyds Reps I&R 377 at 383 (col. 1) where the warranty was that each instalment of premium would he “paid to underwriters within 75 days of due date” and the due dates were separately set out.

If one asks whether the parties intended that it would be open to underwriters to issue proceedings for the premium and seek an award of interest during the first 90 days, it seems extremely improbable that any party intended that this should be possible given the terms of the warranty clause. Mr Geary invoked the “contra proferentem” rule of construction but, assuming it applies, any ambiguity should be resolved in favour of finding that the clause gives the benefit of credit. At the time of making the contract, credit terms, not time bar, would have been uppermost in the minds of the parties. No one would have envisaged at the time that the limitation period was a point of any significance.

Mr Millett and Mr Geary argued that, even if the policy gave 90 days credit, this was only from attachment. The date of attachment was 31 December 1995, alternatively, in the case of the “ICOA”, 16 January 1996. There was no credit agreed for the later extensions of the policy. This was confirmed by the terms of the debit notes “payable NOW”. Although this argument has some force, the contractual bargain was in the slips signed by underwriters. These all referred expressly to the terms and conditions of the policy. In my judgment the contracts evidenced by the slips intended the warranty to apply to the new risks, so underwriters could invoke it if there was non-payment within 90 days. It is most unlikely that underwriters would wish to give up this important right. The concomitant result is that 90 days credit was granted. The terms of Heath Lambert’s debit notes cannot alter the terms of the contract, unless they evidence an agreed variation of terms between Heath Lambert and their principals. There is no evidence that any variation was agreed. Further the terms of the first “Punta Brava III” debit note issued on 13 February 1996 rather contradict the proposition that the premium was actually regarded as then due.

The exception is the slip agreed for the “ICOA” in early May 1996. It will be recalled that a handwritten insertion on the slip stated “Premium to u/w’s within 45 days”. Below this was the following (also in handwriting) “S.D.D. 15.6.96.” There was some debate as to what S.D.D. meant but it later became clear that it was the settlement due date, ie the date when premium was to be paid. allowing for 45 days credit. So the cause of action for this debt accrued on that date.

It follows that, unless Mr Onions is right that the Defendants have acknowledged their liabilities, all Heath Lambert’s claims are time barred apart from the claim for $261,632.01 on the final “ICOA” extension - the 90 days credit point only avails it in relation to that extension.

Under section 29(5) of the Limitation Act 1980, a cause of action in debt will accrue afresh where “the person liable or accountable for the claim acknowledges the claim.” Acknowledgment of the exact amount due is not necessary. In Surrendra Overseas Ltd v. Government of Sri Lanka [1977] 1 WLR 565 Kerr J. analysed the authorities in considering what was needed to constitute an acknowledgment under the 1939 Act (there is no relevant distinction in this respect between the 1939 and the 1980 Act). He concluded (at p.575 E-H):

“What I draw from these authorities and from the ordinary meaning of indebtedness and legal liability to pay the claim in question. There is now no need to go further to seek for any implied promise to pay it. That artificiality has been swept away. But, taking the debtors statement as a whole, as it must be, he can only be held to have acknowledged the claim if he has in effect admitted his legal liability to pay that which the plaintiff seeks to recover. If he has denied liability, whether on the ground of what in pleader’s language is called ‘avoidance’, or on the ground of an alleged set-off or cross-claim, then his statement does not amount to an acknowledgment of the creditor’s claim. Alternatively, if he contends that some existing set-off or cross-claim reduces the creditor’s claim in part, then the statement, taken as a whole, can only amount to an acknowledgment of indebtedness for the balance. In effect, ‘acknowledges the claim’ means that the statement in question must be an admission of that indebtedness which the plaintiff seeks to recover notwithstanding the expiry of the period of limitation.”

I have to decide whether either Defendant has acknowledged its indebtedness and legal liability to pay Heath Lambert. Mr Geary argued that the touchstone is, as Russell LJ put it in Dungate v. Dungate [1965] I WLR 1477, 1488: “I owe you money”. I accept that this is the flavour of what is required, but it is not the test. In that case the Court accepted a document constituted an acknowledgement although it did not state this in terms.

As against Scort, Mr Onions relied on three letters dated 6 December 1996, 27 May 1998 and 20 February 2001.

As against Banesco, he relied on two letters dated 18 June 1997 and 20 October 1998:

All these letters acknowledged that premium was outstanding; but in none did the sender acknowledge that it owed the money. On the contrary, the consistent point was that INC owed the premiums and that Scort and Banesco were doing their best to get INC to pay. The implication was that Scort/Banesco would only be liable to pay once the premiums had been collected from INC. That is not a good answer in law to Heath Lambert’s right to be indemnified but an acknowledgment cannot be conjured up out of a bad point taken on liability. I would add that none of these letters was written in response to an assertion by heath Lambert that either Scort or Banesco was liable for payment of the premiums. If they had been, it might have been easier, in the context, to conclude that an acknowledgement was being made.

I will set aside the service of the claim form in relation to all claims apart from the claim for $261,632.01 premium in respect of the final extension of cover for the “ICOA”. In my judgment, there is no time bar defence available for that claim. In reply Mr Millett argued that only $156,837.58 was recoverable, because that was all that had been paid to the underwriters. That argument is unsustainable in the light of Power v. Butcher and Universo Insurance Co. of Milan v. MMI Co Ltd (supra). It is also inconsistent with his argument as to when the cause of action accrued. As I see it, the only real issue is as to whether Scort or Banesco (or possibly both) is liable for that premium. I will hear counsel as to any further declaratory relief I should grant at this stage, and as to what orders I should make as to costs.