Amtrust Europe Ltd v Trust Risk Group SpA

The claimant, AmTrust Europe Ltd, is a UK subsidiary of the American insurance group, AmTrust Financial Services Inc. The defendant, Trust Risk Group SpA, is an Italian insurance broker based in Milan, its President and CEO being Mr Antonio Somma.

The dispute arises from the breakdown of a business relationship between the parties which happened in mid to late 2014. The business is concerned primarily with the placement of medical malpractice insurance in the Italian market. The insured are largely Italian hospitals. For present purposes, the business goes back to 2010, and I am told by the defendant that to date AmTrust has received almost €1 billion in net premiums. The policies are, I am told, typically of 1-3 years duration.

In summary, the claimant has begun proceedings seeking a mandatory injunction requiring the defendant to pay the sum of €32,039,096.32 into a bank account maintained, the claimant says, according to a Terms of Business Agreement between the parties dated 20 July 2010. The claimant says that this is a trust account consisting of premiums received from insured persons to be paid over to the claimant. Its case is that in October 2014 it discovered that the defendant had misappropriated almost all the money in the account, and asks the court to make a mandatory order requiring the defendant to return it.

The defendant denies that the money has been misappropriated. Its case is that it was entitled to transfer the money out of the account in October 2014 because it had the right to receive advance brokerage commission upon placement of the policies. Calculated in that way, the defendant claims to be owed commission in the amount of €97m, of which it says that the disputed sum of €32m represents part payment. In other words, its claim more than exceeds the amount that was in the account.

The defendant contends that the court should not grant the injunction sought on four grounds, which constitute the main areas of dispute on the claimant’s application.

The proceedings were begun on 4 November 2014, and came before Eder J on 7 November 2014. He refused to grant relief, expressing a preliminary view against the claimant. He made clear his concern, however, that the matter had come on at extreme speed, and that after reflection a different conclusion might be reached. As he anticipated, both the evidence and the argument when the case came back for a full hearing have become significantly more complete.

I should add that the claimant also has a claim for an anti-arbitration injunction in respect of the arbitration in Milan, but that has not been pursued at this hearing.

As stated, the parties entered into a Terms of Business Agreement (“TOBA”) dated 20 July 2010. It is not in dispute that this is a standard London form governing relations between insurer and broker. At this time, the business was transacted by AmTrust in Italy pursuant to the EU “freedom of services” provisions. This agreement was subject to English law and jurisdiction. Two endorsements to the TOBA were subsequently agreed, which are primarily relevant to the claimant’s claim that premium monies were to be held in a trust account.

On 27 January 2011, the claimant, the defendant and AmTrust Financial Services Inc (i.e. the American parent) entered into a Framework Agreement. There is a dispute as to precisely what the agreement covered, the defendant saying that it applies overall to the relationship between the parties, whilst the claimant says that it is concerned with exclusivity.

By the agreement, AmTrust (that term including both the companies which were parties and others in the group) entered into an exclusive relationship with the defendant group in respect of medical malpractice insurance risks in Italy. Under this contract, the defendant was the paying party. It agreed to pay the claimant an amount equal to 6% of the gross premium before insurance premium tax. The Framework Agreement contained an Italian arbitration and choice of law clause. The TOBA was included as a Schedule, and its ongoing status is in dispute.

On 10 May 2013, the parties’ relationship moved still closer in the form of an Agency Agreement entered into between the newly established Italian branch of AmTrust (established under the EU “freedom of establishment” provisions) and a company owned and controlled by the defendant called Trust Risk Italia SrL. This agreement was subject to Italian law and arbitration, and (unlike the Framework Agreement) is in the Italian language. This agreement is not the subject of these proceedings.

Thereafter, all new business was placed through the claimant’s Italian branch, with Trust Risk Italia acting as agent in the placement of policies. The existing business continued through the claimant.

It is not in dispute that a current account held by the defendant at Banco di Napoli (to put it neutrally) was attributable to the business done between the claimant and the defendant (i.e. Trust Risk Group). The claimant calls it the “trust” or “designated” account established under the provisions of the TOBA, and maintains that net premium received had to be held in it. However, for the moment, I leave the legal nature of the account on one side.

It is not in dispute either that Trust Risk Italia held an account or accounts at the same bank in respect of premium generated by the business conducted under the Agency Agreement.

As stated above, by October 2014, the relationship between the parties had broken down. On 10 October 2014, the defendant wrote to the claimant to the effect that it was entitled to advance commission, the sum set out in an accompanying table being €96,963,055.10. This was on the basis that it was entitled to receive all the brokerage commission upon placement of the policies. On that basis, the defendant said (in effect) that it would withhold premium payments received in September 2014.

By letter of 15 October 2014, the claimant objected, saying that this was a breach of the TOBA. The defendant responded on 17 October 2014 that the parties’ relationship was governed by the Framework Agreement and the Agency Agreement, rather than the TOBA, which remains its position.

By letter sent on 21 October 2014, the claimant gave notice of termination under the TOBA.

On 23 October 2014, the claimant served a “Deed of Appointment for an Arbitrator in an Arbitration Proceeding” on the claimant and AmTrust Financial Services Inc, thereby commencing an arbitration under the Framework Agreement.

There were audit rights under the contractual documentation, which the claimant proceeded to exercise on 26and 27 October 2014. According to the claimant, the audit revealed that the account for the business with the defendant contained only €26,474.38. It should (the claimant says) have contained at least €32,039,096.32 (comprising premiums received in September 2014 in the sum of €22,246,188.27 together with premiums received between 1 and 10 October 2014 in the sum of €9,792,908.05) and should also have contained any premiums received between 10 October 2014 and 26/27 October 2014.

It is not in dispute that the money had been transferred out of the account by the defendant, it says with justification, and for present purposes, these numbers (as opposed to the defendant’s right to make the transfers) are not in dispute.

The claimant says that the audit also revealed a deficit in the account in which premiums received by Trust Risk Italia under the Agency Agreement ought to have been held: this account should have contained at least €21,985,355.63 but in fact contained just €18,459.53. Again, for present purposes, these numbers are not in dispute. However, as noted, this aspect of the matter falls outside the claim in these proceedings, since there is no doubt that it is governed by the choice of Italian law and Milan arbitration.

The claimant issued the Claim Form in these proceedings on 31 October 2014, sending it to the defendant on 3 November 2014. It issued the present application on 4 November 2014.

On 12 November 2014, the claimant appointed an arbitrator in the Milan arbitration, and put in contentions disputing the arbitrators’ jurisdiction.

On 21 November 2014, the Public Prosecutor at the Torre Annunziata Court in Naples made an Order for Emergency Precautionary Sequestration in relation to the funds transferred by the defendant out of the various accounts. This is in the nature of a freezing order, and it was obtained on the complaint of AmTrust.

The steps that were then in progress to make this complaint to the authorities were not mentioned previously in these proceedings. I accept that this was because of concerns expressed by AmTrust’s Italian lawyers about “tipping off”, the Italian procedure being in the form of a criminal procedure against Mr Somma.

In any case, the defendant says that the order should not have been granted, and is seeking to set it aside.

The Prosecutor’s order erroneously records that the English court has made an order ordering the defendant to pay the disputed money into the account. In his evidence, Mr Somma said that this information was falsely given to the prosecutor by the claimant. However, on investigation it turned out that the misunderstanding likely came from information provided by the defendant itself which included the draft order sought by the claimant. This allegation has been withdrawn.

It can be seen from the terms of the order that the sums in question were transferred into accounts held by or on behalf of the defendant at different banks. The defendant says that the money is still in these accounts, and that is accepted by the claimant. The defendant has however made it clear that it regards itself as entitled to use the money for its business purposes, in other words, not to account for it to the claimant. That is the nub of the dispute between the parties, and is what has led to this application. The claimant seeks an order that the disputed sums in respect of the business between claimant and defendant should be returned to the account pending determination of its claim.

Jurisdiction

The claimant relies on clause 21 of the TOBA, which provides that “This Agreement shall be construed according to English law and any disputes arising under it shall, subject to the provisions of clause 20 above be determined in the English Courts”. If that applies to the claim, it is common ground that this court has jurisdiction.

The defendant’s case is that this court has no jurisdiction, because the dispute has to be determined by arbitration in Milan under the terms of the Framework Agreement. It relies on clause 6.1 of the Framework Agreement which provides that, “This Agreement shall be governed by, and construed and enforced in accordance with Italian law”, and clauses 6.3 to 6.6, which provide for arbitration of disputes according to Italian Law, the seat of the arbitration being Milan.

The parties are in agreement as to the applicable principles at this stage of the proceedings:

Applying these principles, the parties in the present case have rightly treated the question as a matter of the construction of the TOBA and the Framework Agreement.

The claimant argues that the TOBA and the Framework Agreement deal with different aspects of the relationship between the parties. It is the TOBA which deals with premiums, and the trust relationship relating to the account into which premiums were to be paid. The Framework Agreement, on the other hand, is dealing with exclusivity, in other words, the agreement by which in return for exclusivity, the claimant was to pay the defendant 6% of the gross premium before tax. The claimant argues that were the Framework Agreement to fall away for any reason, the parties would revert to the TOBA.

The defendant argues that upon the inception of the Framework Agreement, the parties intended their relationship to be subject to Italian law and jurisdiction. It refers to the evidence of Mr Somma to that effect, so far as admissible in relation to the construction of the agreements. It submits that following the Framework Agreement, there was only one contract between the parties, and that the TOBA as a free standing agreement had gone. This, the defendant submits, is shown by the terms of the agreement, and the fact that the TOBA is contained in a schedule. In the Framework Agreement, the terms of the TOBA were expressed to be modified to the extent necessary, and the jurisdiction clause in the TOBA no longer applied from that time.

In support of their contentions, the parties refer to a number of provisions of the Framework Agreement. In the agreement the claimant is called “ATEL”, and the defendant is called “TRG”.

Clause 1 of the Framework Agreement sets out the scope of the agreement. Clauses 1.1 and 1.2 set out the exclusivity obligations agreed by the parties under the agreement, and clause 1.3 details the remuneration payable by the defendant to the claimant in return for that exclusivity.

Clause 1.4 deals, as the claimant puts it, with the interplay between the Framework Agreement and the TOBA:

“The Parties acknowledge that:

(a)

Until the signing date of this Agreement, TRG has operated – and shall hence continue to operate – as a broker for the placement of (mainly but not only) Medical Malpractice insurance business in Italy (the TRG Business) to ATEL;

(b)

ATEL and TRG shall modify the Term of Business Agreement (TOBA) currently in force between them to the extent necessary to reflect the terms hereunder. In particular, should ATEL decide to pursue business in Italy by establishing a branch, the Parties hereby commit to enter into an additional distribution agreement for MedMal insurance risks in Italy.

(c)

The Parties shall ensure that all agreements and their respective procedures are and remain compliant with all applicable law and regulations.”

Clause 3 deals with the consequences of termination of the agreement. Clause 3(a) provides:

“Upon the termination of this Agreement for any reason whatsoever, without prejudice to the Parties rights:

(a)

The exclusivity provisions between the parties will terminate. The Agreements, including the TOBA shall be modified with effect as of the date of termination of this Agreement. TRG and the service company designated by ATEL in Section 1.3 each shall be entitled to the commissions due in accordance with clause 1.3 to each party in respect of each policy which falls under the Agreement until the natural expiry of each policy (including any contractual extension periods (“the run off period”).”

By clause 8, the TOBA was exhibited as a Schedule to the Framework Agreement. Clause 5.5 of the Framework Agreement provided:

“This Agreement, including its Schedule, constitutes the entire agreement between the Parties with respect to the transactions contemplated herein, and supersedes any prior understanding, whether written or oral, with respect to such transactions or any other matter peripheral or ancillary thereto.”

Clause 5.9 provides that:

“The recitals hereto and its Schedule are an integral part of this Agreement.”

Clause 6.1 provides that:

“This Agreement shall be governed by, and construed and enforced in accordance with Italian law.”

A central question of construction is what is meant by “This Agreement …” in this sub-clause.

The claimant’s case is that clause 1.4 makes it plain that the TOBA remains in force without amendment save, ‘to the extent necessary to reflect the terms hereunder’. This point is further reinforced by clause 3(a), which envisages that the effect of termination of the Framework Agreement will be the end of exclusivity, but that the TOBA will continue. Still further, the TOBA (including the English exclusive jurisdiction clause and the first endorsement) was expressly included as a Schedule to the Framework Agreement which was expressly stated in clause 5.5 to form part of the agreement between the parties.

The claimant submits that the reference to “This Agreement …” in clause 6.1 is a reference to the Framework Agreement alone. This provision may be compared with the “entire agreement” provision in clause 5.5 which refers to “This Agreement, including its Schedule …”. This would strongly suggest that the phrase “This Agreement” alone does not ‘include’ the Schedule (i.e. the TOBA).

This view is reinforced, the claimant argues, by a further textual analysis of the remaining provisions in the Framework Agreement showing that the phrase “This Agreement” refers to the Framework Agreement without the TOBA rather than the Framework Agreement including the TOBA. Reference is made to the heading of the Agreement, and the heading to clause 1 which sets out the scope of “THIS AGREEMENT”. Clause 1 goes on to set out the matters dealt with exclusively by the Framework Agreement itself (and not those matters governed by the TOBA). Clause 2.1 sets out the term of “This Agreement” as five years, but the TOBA had no fixed duration and was terminable on notice or otherwise in accordance with clause 10. Clause 3 addressed the consequences of termination of “this Agreement” providing for the continued operation of the TOBA, which cannot therefore have comprised part of the terminated, “this Agreement”. In clause 3(a) there is a reference to “The Agreements, including the TOBA”, which again suggests that the TOBA continued in operation as a freestanding agreement. Finally, the termination provisions of “this Agreement” in the Framework Agreement (set out in clause 2.2) were distinct from the termination provisions in the TOBA.

The claimant also argues that it should not be assumed that the jurisdiction clause in the TOBA in effect remained in by way of error. As it puts it, the TOBA is “awash” with references to English statutes and regulatory concepts. In that regard, English law is necessary to give the contract commercial efficacy. Further, the defendant’s construction implies that disputes arising prior to the Framework Agreement should nevertheless be decided by arbitration in Milan. In short, it submits that it has made out a good arguable case that there were and remain two separate regimes, and the Framework Agreement did not change that.

The defendant’s case is that the parties started afresh with the Framework Agreement, which included AmTrust’s parent company. It places reliance on the “entire agreement” provision in clause 5.5. This expressly provides that the Framework Agreement is to supersede any prior understanding between the parties.

Further, clause 8 identified that the Schedule to the Framework Agreement was the TOBA. The defendant says that this is to be read with clause 5.9 stating that, “The recitals hereto and its Schedule are an integral part of this Agreement”. This does not, as the claimant says, merely record the fact that the TOBA is to have equal force and was to operate alongside the Framework Agreement, but makes it clear that the TOBA was incorporated into the Framework Agreement, and that there was thereafter one contract. None of the claimant’s textual submissions, the defendant says, are sufficient to displace the fact that clause 6.1 provides that “this Agreement” is to be governed by Italian law, which plainly includes the Agreement including the scheduled TOBA.

The defendant’s primary case is that the TOBA ceased as a freestanding agreement, and that thereafter business between claimant and defendant was transacted under the Framework Agreement. It relies on the fact that in endorsement 1 to the Framework Agreement (dated 18 January 2012) and endorsement 2 (dated 2 June 2014) there is no reference to the TOBA, though one would expect (if the claimant is correct) to see a reference, particularly as regards the maximum commission and extension provisions.

Alternatively, it submits that if the TOBA survives as a separate agreement, it was amended by clause 1.4(b) of the Framework Agreement “to the extent necessary to reflect the terms hereunder”, which includes replacing the existing jurisdiction and dispute resolution provisions in TOBA with the Italian law and arbitration clause in the Framework Agreement.

In my view, this is a difficult issue, with arguments going both ways. Among the relevant considerations are the following:

At this point in time the question is whether the claimant can show a good arguable case that the English court has jurisdiction. The court is not concerned at this stage of the proceedings to determine that issue conclusively. For the above reasons, I consider that the claimant has done so. It has shown to the good arguable case standard that the TOBA continued as an agreement after the Framework Agreement. On the defendant’s alternative argument, there was in my view no cause to modify the TOBA so as to substitute Italian law and jurisdiction for that of England.

The “trust account” issue

The next dispute relates to the status of the account into which the defendant paid the premiums in respect of its business with the claimant up until October 2014. The claimant says it was a “trust” account, and the defendant says that this is incorrect.

The claimant must establish its case to the requisite standard, and at this stage in the proceedings, I believe that it is common ground that this requires the claimant to establish that there is a “serious question to be tried” that the account was a trust account.

The relevant provisions are set out in the TOBA. It is correct to say as the defendant does that elements of the claimant’s argument as to the contractual basis have been put erroneously during the course of the application. The claimant’s apparent reliance in its evidence on clause 6.1 was misplaced because this clause provides for the defendant to hold monies as agent for the client. Its reliance on clause 6.2 was misplaced because the defendant was not a coverholder, which further rules out clause 6.6 of the TOBA.

At the hearing before me, the claimant relied on sub-clause 11 at the end of the first endorsement to the TOBA. Importantly, this was the provision that the claimant identified at the beginning of the dispute, setting it out in its letter of 15 October 2014 to the defendant referred to above.

There is a dispute as to whether this endorsement was entered into in July or December 2010, but this makes no practical difference. It is correct as the defendant says that the obligation relied on is not stated in the body of the TOBA, but that does not appear to make any difference either.

There is also a mistake as to the numbering in the endorsement, because clause “A)” appears twice. Picking up on this mistake, the defendant submits that the second clause A) should read should in fact be “5)” and part of the previous section dealing with sub-agents. It argues that on its true construction, sub-clause 11 is restricted to sub-agents. However, as a matter of construction it is well arguable in my view that whereas the first clause A) applies to sub-agents, the second clause A) is in general terms. There is no need, in my view, to read it as a supposed “5)”.

Sub-clause 11 of the second clause A) on which the claimant relies provides that:

“The BROKER to the extent it collects premium shall hold premium in a trust account for and on behalf of the INSURER and as a fiduciary. Premium shall be kept separate from other bank accounts and/or the general funds of the BROKER”

The “broker” is the defendant, and the “insurer” is the claimant in this provision.

Sub-clause 11 in terms requires the defendant to hold premium in a trust account without intermingling with the defendant’s general funds. This was what the parties agreed, and the claimant has in my view shown a serious issue to be tried that this was the defendant’s obligation.

In written submissions, the defendant submitted that as the claimant is seeking a mandatory injunction, the principles have to be amended somewhat (Zockoll Group Ltd v Mercury Communications Ltd [1998] FSR 354), and that where a mandatory injunction is sought, the court should consider whether it feels a high degree of assurance that the claimant will be able to establish its right at trial. If that is the principle, then I consider that the claimant has made good its case to this enhanced standard. At this stage of the proceedings, the court should in my view proceed on the basis that when the defendant received premium payments from the parties that the claimant insured, it was obliged to hold those payments on trust for the claimant in a separate trust account. The premium money should then have been paid to the claimant as insurer, as indeed (according to the evidence) was happening up until October 2014, and should not have been dealt with in any other way.

The defendant’s asserted right to transfer the money as a matter of Italian law

In written submissions the defendant submitted that as a matter of Italian law, a broker earns his commission upon placement of the policy. It submitted that the defendant was entitled to treat the payments made by its customers as sums on account of the claimant’s liability for advance commission and transfer it out of the trust account. This, it was submitted, is consistent with Italian and English law.

That remains the defendant’s case, but in oral submissions it was accepted on behalf of the defendant that for the purposes of this application only, the claimant had established its case in this regard to the requisite standard (“serious issue to be tried”).

This was in my view an inevitable concession. It is not in dispute that until about 10 October 2014, the defendant was not paid and did not claim “advance” commission. The evidence is that this was asserted for the first time in the defendant’s letter of 10 October 2014. Until then, the evidence is that everything in the trust account was paid to the claimant on the 10^th day of each month, being net premium, that is, less commission and tax.

In its response of 15 October 2014, the claimant objected that the defendant was not entitled to deduct anything other than agreed commission on the premium actually collected, and was not entitled to deduct commission on premium which had not yet been collected. As the claimant says, the evidence before the court on the present application shows that there was a “complete departure” from what had previously happened in this respect.

In his witness statement in opposition to the claimant’s application, Mr Somma gives three reasons for the action the defendant took.

At this preliminary stage, the court is not able (or entitled) to make findings. Subject to that proviso, I am satisfied that the claimant has made good to the requisite standard (“serious issue to be tried”) its case that what happened is that the parties fell out, and that the defendant then appropriated the premium money in the trust account which should have gone to the claimant, and purported to apply it towards “advance commission” to which the defendant had no entitlement.

Whether damages are an adequate remedy

The defendant submits that an injunction should not be granted because damages would be an adequate remedy. It says that it is in a position to repay the money, which will in any event be repaid over time since premiums are now being paid gross direct to the claimant. The defendant says that the claim is really about interest, because it is clear that the defendant will be entitled to the brokerage commission amounting to €32m in the future, probably within the next year.

However, the claimant says that according to the defendant’s accounts, its net assets are only €26m, which is substantially less than the amount taken from the account. Further, the claimant says that it will take until 2016 for the money to be recouped, assuming that all premiums are in fact paid direct to it by the policy holders.

I cannot resolve these factual issues, but I am satisfied that this is not a case in which damages are an adequate remedy.

In this regard, I accept the claimant’s submission that, on the basis that the account was a trust account, as to which see above, the claimant is entitled to an interim injunction because it has a proprietary interest in the funds: Madoff Securities International Ltd v Raven [2012] 2 All ER (Comm) 634 at [140], Flaux J.

On the basis that the account was a trust account, I understood this rightly to be common ground. Clearly, if the account was a trust account for the reception of premiums, there is no question of damages being an adequate remedy. The insurer is beneficially entitled to the funds, and is entitled to have the account made good.

Balance of convenience

For all the above reasons, balance of convenience aside, I consider that the claimant has made out its case for a mandatory injunction that the money be paid back into the trust account.

The defendant submits that the balance of convenience is against granting a mandatory injunction because the Italian business is principally insuring Italian public hospitals which will continue to pay their premiums. The claimant is now collecting the gross premiums from the Italian hospitals, and will receive as part of the gross premiums brokerage commission which should be paid to the defendant. It has not made any proposals in respect of this brokerage commission element of the gross premiums. A mandatory injunction, the defendant says, should not be made without the claimant making reciprocal proposals.

I agree with the defendant that it may be necessary to frame the order to take account of its future right to commission. This should be capable of agreement between the parties.

The defendant further submitted that the balance of convenience is against this court granting a mandatory injunction because its funds are presently subject to the Italian freezing order. Clearly no order can be made which requires action which is prohibited by the Italian order. The terms of the order must accommodate the Italian order, and again this should be capable of agreement between the parties.

Subject to the above, I consider that the claimant is entitled to an order requiring the defendant to replace the money that has been transferred out of the trust account. If necessary, I will hear the parties as to consequential matters.