Henderson v Merrett Syndicates [1994] UKHL 5

House of Lords

Between

HendersonAppellant

Merrett SyndicatesRespondent

Before

Lord Keith of Kinkel

Date 25 July 1994

My Lords.

For the reasons set out in the speech of my noble and learned friend Lord Goff of Chieveley. which I have read in draft and with which I agree, 1 would dismiss these appeals.

LORD GOFF OF CHIEVELEY

My Lords. Introduction

The appeals now before your Lordships' House arise out of a number of actions brought by underwriting members (known as Names) of Lloyd's against their underwriting agents, in an attempt to recoup at least part of the great losses which they have suffered following upon recent catastrophic

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events, mainly in the United States of America, which have led to unprecedented claims being made upon Lloyd's underwriters.

The actions in question form part of a large number of actions of this kind, which are now approaching trial in the Commercial Court. At the root of many of these actions lie questions of law, upon the resolution of which depends the nature of the legal responsibility which rested upon underwriting agents towards the Names for whom they acted. Accordingly, with the co- operation of the parties to the actions out of which the present appeals arise. Saville J. ordered that certain issues of principle should be decided as preliminary issues. Having heard argument upon these issues, he gave judgment on 12 October 1993, his rulings being favourable to the contentions advanced on behalf of the Names. On 13 December 1993, the Court of Appeal unanimously affirmed the decision of Saville J., for the reasons given by him. The matter now comes before your Lordships' House, with the leave of the House; and the hearing of the appeals has been expedited, in the hope that the fact that the appeals have come before the House will result in as little disturbance as possible to the programme now established for the hearing of the various Lloyd's actions in the Commercial Court.

It is necessary for me now to identify, and place in their context, the various issues which fall for consideration on these appeals. But before I do so, it is desirable that I should first set out certain basic facts about the structure of Lloyd's, with special reference to the relationship between Names and their underwriting agents.

Every person who wishes to become a Name at Lloyd's and who is not himself or herself an underwriting agent must appoint an underwriting agent to act on his or her behalf, pursuant to an underwriting agency agreement. Underwriting agents may act in one of three different capacities.

They may be members' agents, who (broadly speaking) advise Names on their choice of Syndicates, place Names on the Syndicates chosen by them, and give general advice to them.

They may be managing agents, who underwrite contracts of insurance at Lloyd's on behalf of the Names who are members of the Syndicates under their management, and who reinsure contracts of insurance

and pay claims.

(3) They may be combined agents, who perform both the role of members' agents, and the role of managing agents in respect of the Syndicates under their management.

Until 1990, the practical position was as follows. Each Name entered into one or more underwriting agency agreements with an underwriting agent, which was either a members' agent or a combined agent. Each underwriting agency agreement governed the relationship between the Name and the

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members' agent, or between the Name and the combined agent in so far as it acted as a members' agent. If however the Name became a member of a Syndicate which was managed by the combined agent, the agreement also governed the relationship between the Name and the combined agent acting in its capacity of managing agent. In such a case the Name was known as a direct Name. If however the Name became a member of a Syndicate which was managed by some other managing agent, the Name's underwriting agent (whether or not it was a combined agent) entered into a sub-agency Agreement under which it appointed the managing agent its sub-agent to act as such in relation to the Name. In such a case the Name was known as an Indirect Name.

Before 1 January 1987, no forms of underwriting agency or sub-agency agreements were prescribed at Lloyd's; but standard clauses were in common use, and forms of agreement used by underwriting agents were similar, if not identical. For the purposes of the first group of actions now under appeal (the Merrett actions), which were concerned with that period, specimen agreements were placed before Saville J. for use by him in respect of those actions. These are to be found annexed to his judgment. However, pursuant to the Lloyd's Act 1982, Byelaw No. 4 of 1984 was made which prescribed forms of agency agreement and sub-agency agreement. These forms became compulsorily applicable as from 1 January 1987, and are the relevant forms in the other two groups of actions which are the subject of the present appeals, the Feltrim actions and the Gooda Walker actions. A subsequent Byelaw, No. 8 of 1988, prescribed new standard forms of agreement for use in 1990 and subsequent years of account. With these forms, which swept away the distinction between direct and indirect Names, your Lordships are not directly concerned in the present appeals.

I turn to the appeals now before your Lordships' House. These are(1) the Merrett Appeals, and

(2) the conjoined Feltrim and Gooda Walker Appeals.

(1) The Merrett Appeals.

The appellants in these appeals (referred to as "Merretts") are in fact Merrett Syndicates Ltd. ("MSL") and Merrett Underwriting Agency Management Ltd. ("MUAM"). Up to 1 January 1986, MSL was a combined agent. It was the Managing Agent of Syndicate 418/417, and was also a members' agent. From 1 January 1986, MUAM became the Managing Agent of Syndicate 418/417, and MSL operated solely as a members' agent. There are three groups of Merrett actions brought by Names who were members of Syndicate 418/417. In all three groups of actions, there are complaints of negligent closure of a year or years of account into subsequent years by reinsurance to close ("RITC"). In one of them, there is also a complaint as to the writing of certain contracts of insurance; and in this case there is also an issue of limitation.

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(2)(a) The Feltrim Appeals.

The appellants are(i) Feltrim Underwriting Agencies Ltd. ("Feltrim"), which acted as a managing agent only; and

(ii) about 40 members' agents- ("the Feltrim Members' Agents"), which are in fact unrelated to Feltrim. In the actions which are the subject of these appeals, Names who were members of Syndicates managed by Feltrim sue Feltrim as managing agents, and also sue the Feltrim members' agents as their members' agents. All the Names are indirect Names. The Names allege against Feltrim negligent underwriting during the years 1987-1989 arising out of their Syndicates' participation in the London Market Excess of Loss ("LMX") business, it being alleged that the underwriters assumed greatly excessive aggregate liabilities, and took out far too little reinsurance. The Feltrim members' agents are sued on the basis that they are contractually liable for the defaults of Feltrim as managing agents to whom the underwriting was delegated. There is no limitation issue.

(2)(b) The Gooda Walker Appeals.

The appellants are 65 members' agents ("the Gooda Walker Members' Agents"), against which it is alleged by Names that they are contractually liable to the Names for failure by the managing agents of the Syndicates of which the Names were members, to which the Gooda Walker Members' Agents had delegated the function of underwriting, to exercise reasonable care and skill in relation to such underwriting.

It might have been expected that, in all three groups of appeals, there would be appeals by both the members' agents and the managing agents: and that in each case issues would arise whether there was liability on their part in contract, or in tort, or for breach of fiduciary duty. But that is not in fact the case. In the case of the Merrett Appeals, there is no issue before your Lordships between the Names and their members' agents acting as such. Except for one entirely distinct issue concerned with RITC, the appeals are concerned only with the issue of liability, either in tort or for breach of fiduciary duty, of Merretts as managing agents, whether to direct Names (where Merretts were combined agents) or to indirect Names. By way of contrast, in the Gooda Walker Appeals the Gooda Walker Managing Agents are not appealing to this House against the decision of the Court of Appeal, with the result that the ruling of the Court of Appeal that they owed a contractual duty to direct Names, and a duty of care in tort to indirect Names, will remain binding as between them and the Names in question. The only issue now before your Lordships on the Gooda Walker appeals arises in relation to the agency agreements entered into between Names and the Gooda Walker Members' Agents. So far as the Feltrim appeals are concerned, however, issues arise both as to Feltrim's liability as managing agents, viz. whether Feltrim owed a duty of care in tort, or as fiduciary, to the indirect Names who were members of the Feltrim Syndicates in the years 1987-1989, and as to the Feltrim Members' Agents' liability as such in relation to the

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agency agreements entered into between them and Names, as in the Gooda Walker appeals.

In the result, the following issues have been identified as arising for the decision of your Lordships' House on these appeals:

Issue 1.

(A). Merrett Appeals. Liability of managing agents to Names under the forms of agreement in force before 1987.

(1) Duty of care - indirect Names. Did managing agents (who were not also members agents) owe indirect Names a duty under the pre-1985 Byelaw form of underwriting agency agreement to carry out their underwriting functions with reasonable care and skill for the 1979 to 1985 years of account

inclusive?

(a) Does the law of tort impose any duty upon managing agents not to cause purely economic loss to Names?

(b) Does the "absolute discretion" conferred upon managing agents under the pre-1985 Byelaw form of underwriting agency agreement preclude the implication of any duty other than duties to act honestly, rationally and

loyally?

(2) Duty of care - direct Names. Did Merretts as managing agents who were also members' agents owe direct Names a non-contractual duty under the pre-1985 Byelaw forms of underwriting agency agreement to carry put their underwriting functions with reasonable care and skill for the 1979 to 1985 years of account inclusive?

(3) Fiduciary duty. Did Merretts as managing agents (whether they were also members' agents or not) owe Names as fiduciary a duty to conduct the underwriting for the account of the Names with reasonable care and skill for the 1979 to 1985 years of account (inclusive) equivalent to the alleged duty of care in tort?

(B). Feltrim Appeals. Liability of managing agents to names under the forms of agreement in force between 1987 and 1989.

Duty of care - indirect Names. In tort Did Feltrim, a managing agent only, owe a duty of care in tort to the (indirect) Names on the Feltrim Syndicates to carry out the conduct and management of the underwriting business of the Feltrim Syndicates with reasonable care and skill at any material time between 1987 and 1989?

Fiduciary duty. As fiduciary Did Feltrim owe Names a fiduciary duty equivalent to a duty of care in tort as described above?

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Issue 2.

Feltrim and Gooda Walker Appeals. Liability of members' agents to Names under the forms of agreement in force during the period 1987 to 1989;-

Whether, in relation to, and on the true construction of, agency

agreements entered into between Names and members' agents in the standard form provided for by Lloyd's Byelaw No. 1 of 1985:

(1) It was a term of the said agency agreements that the actual underwriting would be carried on with reasonable care and skill, so that the members agents remained directly responsible to their Names for any failure to exercise reasonable care and skill by the managing agents of any particular Syndicate to whom such underwriting had been delegated.

(2) There was a term of the said agreements that the members' agent was only required to exercise reasonable care and skill in relation to such activities and functions as members' agents by custom and practice actually perform for their Names personally.

(3) There was a direct contractual relationship of principal and agent between Names and the managing agents of Syndicates in which the Names participated.

Issue 3.

Merrett Appeals. Reinsurance to close.

Whether for Names who executed the new prescribed 1985 Byelaw form or underwriting agency agreement the contractual relationship between such Names for the 1985 underwriting year of account and their members' agents and between their members' agents and the managing agent in relation to the acceptance in about June 1987 by the Syndicate for the 1985 underwriting year of account of the reinsurance to close the 1984 underwriting year of account was governed by the 1985 Byelaw form of agreement or by the pre-1985 Byelaw form of agreement.

For the purpose of considering these various issues, I shall for convenience organise them a little differently, as will appear hereafter.

I Merrett and Feltrim Appeals.

A Duty of care - Liability of managing agents to Names (both direct and indirect Names) in tort.

(1) Introduction

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I turn now to the tortious issues which arise in the Merrett and Feltrim appeals. The first issue, in the order in which they are stated, is concerned with the question whether managing agents, which were not also members' agents, owed to indirect Names a duty of care in tort to 'carry out their underwriting functions with .reasonable care and skill. The second issue is concerned with the question whether managing agents, which were also members' agents, owed such a duty to direct Names.

The first of these issues, relating to indirect Names, arises in both the Merrett appeals and the Feltrim appeals. However the issue in the Merrett appeals arises in the context of the pre-1985 Byelaw forms of agency and sub- agency agreements, whereas that in the Feltrim appeals does so in the context of the forms of agreement prescribed under the 1985 byelaw. The second of these issues, relating to direct Names, arises only in the Merrett appeals, in the context of the pre-1985 Byelaw forms.

It is desirable that I should at once identify the reasons why Names in the Merrett and Feltrim actions are seeking to establish that there is a duty of care owed to them by managing agents in tort. First, the direct Names in the Merrett actions seek to hold the managing agents concurrently liable in contract and in tort. Where, as in the case of direct Names, the agents are combined agents, there can be no doubt that there is a contract between the Names and the agents, acting as managing agents, in respect of the underwriting carried out by the managing agents on behalf of the Names as members of the Syndicate or Syndicates under their management, the only question being as to the scope of the managing agents' contractual responsibility in this respect. Even so. in the Merrett actions. Names are concerned to establish the existence of a concurrent duty of care in tort, if only because there is a limitation issue in one of the actions, in which Names wish therefore to be able to take advantage of the more favourable date for the accrual of the cause of action in tort, as opposed to that in contract. Second, the indirect Names in both the Merrett and the Feltrim actions are seeking to establish the existence of a duty of care on the part of the managing agents in tort, no doubt primarily to establish a direct liability to them by the managing agents, but also, in the case of the Merrett actions, to take advantage of the more advantageous position on limitation. Your Lordships were informed that there is no limitation issue in the Feltrim actions.

I turn next to the forms of agreement which provide the contractual context for these issues. I have already recorded that, so far as the pre-1985 Byelaw forms are concerned, no form was prescribed, but those in use were substantially similar if not identical, and that specimen forms of agency and sub-agency agreement were agreed for the purposes of these preliminary issues and are scheduled to the judgment of Saville J. The most relevant provisions of the specimen forms are the following.

(1) Agency Agreement

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" 1. The Agent shall act as the underwriting agent for the Name for the purposes of underwriting at Lloyd's for the account of the Name policies and contracts of insurance reinsurance and guarantee relating to all classes of insurance business which with the sanction of the Committee of Lloyd's may be transacted at Lloyd's by the Syndicate.

. . .

4. The Agent shall have full power and authority to appoint and employ the Sub-Agent to carry on or manage the underwriting and to delegate to or confer upon the Sub-Agent all or any of the powers authorities discretions and rights given to the Agent by this agreement.

. . .

6. (a) The Agent shall have the sole control and management of the underwriting and absolute discretion as to the acceptance of risks and settlement of claims whether such claims shall in the opinion of the Agent be legally enforceable or not.

. . .

(d) The Name shall not in any way interfere with the exercise of the aforesaid control or management or discretion.

7. The following provisions shall apply concerning the accounts of the underwriting:-

. . .

(e) The Syndicate account of any calendar year shall not be closed before the expiration of the two calendar years next following the calendar year in question and in order to close the Syndicate account of any year the Agent may:- (i) re-insure all or any outstanding liabilities in such manner and by debiting such account with such sum as the Agent shall in the absolute discretion of the Agent think fit as a premium for reinsurance and crediting the reinsurance premium to the Syndicate account of the next succeeding year or

(ii) re-insure all or any outstanding liabilities of such account into the account of any other year then remaining open or in any other manner which the Agent thinks fit or

(iii) allow the whole or part of a Syndicate account of any year to remain open until its outstanding liabilities shall have run off

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. . .

12.(a) The Agent may from time to time retain out of the profits of the underwriting which would otherwise be payable to the Name any moneys which the Agent may in the absolute discretion of the Agent (subject to any requirements prescribed by Lloyd's) think desirable to carry to reserve and such moneys may be placed on deposit at any bank or discount house of public or local authorities or building society or may be invested in such stocks funds shares or securities (including bearer securities) in any part of the world as the Agent may determine and the Agent shall not be responsible for any loss of principal or interest on such deposits or investments. Interest or dividends earned on any such deposits or investments shall be credited to the Name in respect to the Name's due proportion thereof."

(2) Sub-Agency Agreement

"2. The Sub-Agent agrees and is retained and authorised to act as Underwriting Sub-Agent for the Agent for the purpose of underwriting at Lloyd's in the Names and for the account of each of the Names policies and contracts of insurance reinsurance and guarantee relating to all classes of insurance business which with the sanction of the Committee of Lloyd's may be transacted as insurance business and of carrying on for each of the Names the business of Marine Underwriter at Lloyd's and the appointment of the Sub-Agent shall take effect in respect of each of the Names on and from the date specified in the second column of the Schedule hereto opposite the name of each of the Names.

. . .

5. The Agent delegates to the Sub-Agent the exercise of all such powers authorities discretions and rights conferred upon the Agent by the Underwriting Agency agreement as it may be in any way necessary for the Sub-Agent to have to enable the Sub-Agent or any underwriter or agent appointed by the Sub- Agent to carry on the underwriting for the Names and to close the accounts of the Names.

6. Subject to the provisions of clause 7 hereof the underwriting shall be conducted and the accounts thereof shall be kept and made up and the profits ascertained in such manner as the Sub-Agent may for the time being think fit and the Sub- Agent shall have the sole control and management of the

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underwriting and sole discretion as to the acceptance of risks and the compromise or settlement of claims.

. . .

8. All questions relating to the investment of premiums and other monies not required for the current service of the underwriting and to the time and manner of paying over profits and the placing of sums to a reserve shall be decided by the Sub-Agent and subject as aforesaid the Sub-Agent shall pay over the profits of the underwriting to the Agent for distribution to the Names."

Turning to the forms of agency and sub-agency agreements prescribed by the 1985 Byelaw, I will set out the material provisions below when considering Issue 2, concerned with the liability of members' agents. These provisions will therefore be available for reference, and I do not propose to repeat them here.

In the result, in neither the specimen agreements nor the agreements prescribed by the 1985 Byelaw is there any express provision imposing on the agent a duty to exercise care and skill in the exercise of the relevant functions under the agreement: but I understand it not to be in dispute that a term to that effect must be implied into the agreements. It is against that background that the question falls to be considered whether a like obligation rested upon the managing agents in tort, so that the managing agents which were also members' agents owed such a duty of care in tort to direct Names, with the effect that the direct Names had alternative remedies, in contract and tort. against the managing agents; and whether managing agents which were not also members' agents owed such a duty of care in tort to indirect Names, so that the indirect Names had a remedy in tort against the managing agents, notwithstanding the existence of a contractual structure embracing indirect Names, members' agents and managing agents, under which such a duty was owed in contract by the managing agents to the members' agents, and by the members' agents to the indirect Names. Furthermore, the question also arises whether, under the pre-1985 forms of agreement, the absolute discretion as to the acceptance of risks (and settlement of claims) vested in agents under clause 6(a) of the agency agreement, and delegated by them to sub-agents (the managing agents) under clauses 5 and 6 of the sub-agency agreement, was effective to exclude any duty of care which might otherwise have been imposed upon the managing agents, either in contract or in tort.

Saville J. resolved all these issues in favour of the Names. He held that a duty of care was owed by managing agents in tort both to direct Names and to indirect Names, and that the existence of such a duty of care was not excluded by reason of the relevant contractual regime, whether under the pre- 1985 specimen agreements, or under the forms of agreement prescribed by the 1985 Byelaw. In particular, he held that the absolute discretion conferred on

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the agent under clause 6(a) of the pre-1985 Byelaw specimen agency agreement, and delegated to the managing agent under clauses 5 and 6 of the related sub-agency agreement, did not exclude any such duty of care. On all these points Saville J,'s decision was, as I have recorded, affirmed by the Court of Appeal.

(2) The argument of the Managing Agents

The main argument advanced by the managing agents against the existence of a duty of care in tort was that the imposition of such a duty upon them was inconsistent with the contractual relationship between the parties. In the case of direct Names, where there was a direct contract between the Names and the managing agents, the argument was that the contract legislated exclusively for the relationship between the parties, and that a parallel duty of care in tort was therefore excluded by the contract. In the case of indirect Names, reliance was placed on the fact that there had been brought into existence a contractual chain, between Name and members' agent, and between members' agent and managing agent; and it was said that, by structuring their contractual relationship in this way, the indirect Names and the managing agents had deliberately excluded any direct responsibility, including any tortious duty of care, to the indirect Names by the managing agents. In particular, the argument ran. it was as a result not permissible for the Names to pray in aid, for limitation purposes, the more favourable time for accrual of a cause of action in tort. To do so, submitted the managing agents, would deprive them of their contractual expectations, and would avoid the policy of Parliament that there are different limitation regimes for contract and tort.

Such was the main argument advanced on behalf of the managing agents. Moreover, as appears from my summary of it, the argument was not precisely the same in the case of direct Names and indirect Names respectively. However, in any event, I think it desirable first to consider the principle upon which a duty of care in tort may in the present context be imposed upon the managing agents, assuming that to impose such a duty would not be inconsistent with the relevant contractual relationship. In considering this principle, I bear in mind in particular the separate submission of the managing agents that no such duty should be imposed, because the loss claimed by the Names is purely economic loss. However the identification of the principle is, in my opinion, relevant to the broader question of the impact of the relevant contract or contracts.

(3) The governing principle

Even so, I can take this fairly shortly. I turn immediately to the decision of this House in Hedley Byrne & Co. Ltd. v . Heller & Partners Ltd.

[1964] AC 465

. There, as is of course well known, the question arose whether bankers could be held liable in tort in respect of the gratuitous provision of a negligently favourable reference for one of their customers,

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when they knew or ought to have known that the plaintiff would rely on their skill and judgment in furnishing the reference, and the plaintiff in fact relied upon it and in consequence suffered financial loss. Your Lordships' House held that, in principle, an action would lie in such circumstances in tort; but- that, in the particular case, a duty of care was negatived by a disclaimer of responsibility under cover of which the reference was supplied.

The case has always been regarded as important in that it established that, in certain circumstances, a duty of care may exist in respect of words as well as deeds, and further that liability may arise in negligence in respect of pure economic loss which is not parasitic upon physical damage. But, perhaps more important for the future development of the law, and certainly more relevant for the purposes of the present case, is the principle upon which the decision was founded. The governing principles are perhaps now perceived to be most clearly stated in the speeches of Lord Morris of Borth-y-Gest (with whom Lord Hodson agreed) and of Lord Devlin. Lord Morris said, at pp. 502-503):

"My Lords, I consider that it follows and that it should now be regarded as settled that if someone possessed of a special skill undertakes, quite irrespective of contract, to apply that skill for the assistance of another person who relies upon such skill, a duty of care will arise. The fact that the service is to be given by means of or by the instrumentality of words can make no difference. Furthermore, if in a sphere in which a person is so placed that others could reasonably rely upon his judgment or his skill or upon his ability to make careful inquiry, a person takes it upon himself to give information or advice to, or allows his information or advice to be passed on to. another person who, as he knows or should know, will place reliance upon it. then a duty of care will arise.

Lord Devlin said, at p. 526:

"The respondents in this case cannot deny that they were performing a service. Their sheet anchor is that they were performing it gratuitously and therefore no liability for its performance can arise. My Lords, in my opinion this is not the law. A promise given without consideration to perform a service cannot be enforced as a contract by the promisee; but if the service is in fact performed and done negligently, the promisee can recover in an action in tort."

He then cited a number of authorities, and continued, at pp. 528-529:

"I think, therefore, that there is ample authority to justify your Lordships in saying now that the categories of special relationships which may give rise to a duty to take care in word as well as in deed are not limited to contractual relationships or to relationships of fiduciary duty, but include also relationships which in the words of

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Lord Shaw in Norton v . Lord Ashburton

[1914] AC 932

, 972 are 'equivalent to contract,' that is, where there is an assumption of responsibility in circumstances in which, but for the absence of consideration, there would be a contract. Where there is an express undertaking, an express warranty as distinct from mere representation, there can be little difficulty. The difficulty arises in discerning those cases in which the undertaking is to be implied. In this respect the absence of consideration is not irrelevant. Payment for information or advice is very good evidence that it is being relied upon and that the informer or adviser knows that it is. Where there is no consideration, it will be necessary to exercise greater care in distinguishing between social and professional relationships and between those which are of a contractual character and those which are not. It may often be material to consider whether the adviser is acting purely out of good nature or whether he is getting his reward in some indirect form. The service that a bank performs in giving a reference is not done simply out of a desire to assist commerce. It would discourage the customers of the bank if their deals fell through because the bank had refused to testify to their credit when it was good.

"I have had the advantage of reading all the opinions prepared by your Lordships and of studying the terms which your Lordships have framed by way of definition of the sort of relationship which gives rise to a responsibility towards those who act upon information or advice and so creates a duty "of care towards them. I do not understand any of your Lordships to hold that it is a responsibility imposed by law upon certain types of persons or in certain sons of situations. It is a responsibility that is voluntarily accepted or undertaken, either generally where a general relationship, such as that of solicitor and client or banker and customer, is created, or specifically in relation to a particular transaction."

He said, at pp. 531-532:

"Since the essence of the matter in the present case and in others of the same type is the acceptance of responsibility, I should like to guard against the imposition of restrictive terms notwithstanding that the essential condition is fulfilled. If a defendant says to a plaintiff:

'Let me do this for you: do not waste your money in employing a professional, I will do it for nothing and you can rely on me.'

I do not think he could escape liability simply because he belonged to no profession or calling, had no qualifications or special skill and did not hold himself out as having any. The relevance of these factors is to show the unlikelihood of a defendant in such circumstances assuming a legal responsibility, and as such they may often be decisive. But they are not theoretically conclusive and so cannot be the subject of definition. It would be unfortunate if they were. For it would mean that plaintiffs would seek to avoid the rigidity of the definition by

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bringing the action in contract as in De La Bere v. Pearson Ltd. [1908] 1 K.B. 280 and setting up something that would do for consideration. That, to my mind, would be an undesirable development in the law; and the best way of avoiding it is to settle the law so that the presence'- or absence of consideration makes no difference."

From these statements, and from their application in Hedley Byrne, we can derive some understanding of the breadth of the principle underlying the case. We can see that it rests upon a relationship between the parties, which may be general or specific to the particular transaction, and which may or may not be contractual in nature. All of their Lordships spoke in terms of one party having assumed or undertaken a responsibility towards the other. On this point. Lord Devlin spoke in particularly clear terms in both passages from his speech which I have quoted above. Further, Lord Morris spoke of that party being possessed of a "special skill" which he undertakes to "apply for the assistance of another who relies upon such skill". But the facts of H edley Byrne itself, which was concerned with the liability of a banker to the recipient for negligence in the provision of a reference gratuitously supplied. show that the concept of a "special skill" must be understood broadly, certainly broadly enough to include special knowledge. Again, though Hedley Byrne was concerned with the provision of information and advice, the example given by Lord Devlin of the relationship between solicitor and client, and his and Lord Morris' statements of principle, show that the principle extends beyond the provision of information and advice to include the performance of other services. It follows, of course, that although, in the case of the provision of information and advice, reliance upon it by the other party will be necessary to establish a cause of action (because otherwise the negligence will have no causative effect), nevertheless there may be other circumstances in which there will be the necessary reliance to give rise to the application of the principle. In particular, as cases concerned with solicitor and client demonstrate, where the plaintiff entrusts the defendant with the conduct of his affairs, in general or in particular, he may be held to have relied on the defendant to exercise due skill and care in such conduct.

In subsequent cases concerned with liability under the Hedley Byrne principle in respect of negligent misstatements, the question has frequently arisen whether the plaintiff falls within the category of persons to whom the maker of the statement owes a duty of care. In seeking to contain that category of persons within reasonable bounds, there has been some tendency on the part of the courts to criticise the concept of "assumption of responsibility" as being "unlikely to be a helpful or realistic test in most cases" (see Smith v. Eric S. Bush

[1990] 1 AC 831

, 864-865, per Lord Griffiths: and see also Caparo Industries Plc v . Dickman

[1990] 2 AC 605

, 628. per Lord Roskill). However, at least in cases such as the present, in which the same problem does not arise, there seems to be no reason why recourse should not be had to the concept, which appears after all to have been adopted, in one form or another, by all of their Lordships in Medley

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Byrne

[1964] AC 465

(see, e.g., Lord Reid at pp. 483, 486 and 487; Lord Morris (with whom Lord Hodson agreed) at p. 494; Lord Devlin at pp. 529 and 531; and Lord Pearce at p. 538). Furthermore, especially in a context concerned with a liability which may arise under a contract or in a situation "equivalent to contract", it must be expected that an objective test will be applied when asking the question whether, in a particular case, responsibility should be held to have been assumed by the defendant to the plaintiff: see Caparo Industries Plc v. Dickman

[1990] 2 AC 605

, 637, per Lord Oliver of Aylmerton. In addition, the concept provides its own explanation why there is no problem in cases of this kind about liability for pure economic loss; for if a person assumes responsibility to another in respect of certain services, there is no reason why he should not be liable in damages for that other in respect of economic loss which flows from the negligent performance of those services. It follows that, once the case is identified as falling within the Hedley Byrne principle, there should be no need to embark upon any further enquiry whether it is "fair, just and reasonable" to impose liability for economic loss - a point which is, I consider, of some importance in the present case. The concept indicates too that in some circumstances, for example where the undertaking to furnish the relevant service is given on an informal occasion, there may be no assumption of responsibility; and likewise that an assumption of responsibility may be negatived by an appropriate disclaimer. I wish to add in parenthesis that, as Oliver J. recognised in Midland Bank Trust Co. Ltd. v. Hett, Stubbs & Kemp

[1979] Ch. 384

, 416F- G. (a case concerned with concurrent liability of solicitors in tort and contract, to which I will have to refer in a moment) an assumption of responsibility by, for example, a professional man may give rise to liability in respect of negligent omissions as much as negligent acts of commission, as for example when a solicitor assumes responsibility for business on behalf of his client and omits to take a certain step, such as the service of a document, which falls within the responsibility so assumed by him.

(4) The application of the principle to managing agents at Lloyds

Since it has been submitted on behalf of the managing agents that no liability should attach to them in negligence in the present case because the only damage suffered by the Names consists of pure economic loss, the question arises whether the principle in Hedley Byrne is capable of applying in the case of underwriting agents at Lloyds who are managing agents. Like Saville J. and the Court of Appeal, I have no difficulty in concluding that the principle is indeed capable of such application. The principle has been expressly applied to a number of different categories of person who perform services of a professional or quasi-professional nature, such as bankers (in Hedley Byrne itself); solicitors (as foreshadowed by Lord Devlin in Hedley Byrne, and as held in the leading case of Midland Bank Trust Co. Ltd v. Hett, Stubbs & Kemp

[1979] Ch. 384

, and other cases in which that authority has been followed); surveyors and valuers (as in Smith v. Eric S. Bush [1990] 1 A.C. 831); and accountants (as in Caparo Industries Plc. v. Dickman [1990]

- 15 -

2 A.C. 605). Another category of persons to whom the principle has been applied, and on which particular reliance was placed by the Names in the courts below and in argument before your Lordships, is insurance brokers. As Phillips J. pointed out in Youell v . Bland Welch & Co. Ltd. (The- Superhulls Cover Case No. 2) [1990] 2 Lloyd's Rep. 431, 459, it has been accepted, since before 1964, that an insurance broker owes a duty of care in negligence towards his client, whether the broker is bound by contract or not. Furthermore, in Punjab National Bank v. DeBoinville [1992] 1 Lloyd's Rep. 7 it was held by the Court of Appeal, affirming the decision of Hobhouse J., that a duty of care was owed by an insurance broker not only to his client but also to a specific person whom he knew was to become an assignee of the policy. For my part I can see no reason why a duty of care should not likewise be owed by managing agents at Lloyds to a Name who is a member of a Syndicate under the management of the agents. Indeed, as Saville J. and the Court of Appeal both thought, the relationship between Name and managing agent appears to provide a classic example of the type of relationship to which the principle in Hedley Byrne applies. In so saying, I put on one side the question of the impact, if any, upon the relationship of the contractual context in which it is set. But, that apart, there is in my opinion plainly an assumption of responsibility in the relevant sense by the managing agents towards the Names in their Syndicates. The managing agents have accepted the Names as members of a Syndicate under their management. They obviously hold themselves out as possessing a special expertise to advise the Names on the suitability of risks to be underwritten; and on the circumstances in which, and the extent to which, reinsurance should be taken out and claims should be settled. The Names, as the managing agents well knew, placed implicit reliance on that expertise, in that they gave authority to the managing agents to bind them to contracts of insurance and reinsurance and to the settlement of claims. I can see no escape from the conclusion that. in these circumstances, prima facie a duty of care is owed in tort by the managing agents to such Names. To me, it does not matter if one proceeds by way of analogy from the categories of relationship already recognised as falling within the principle in Hedley Byrne or by a straight application of the principle stated in the Hedley Byrne case

[1964] AC 465

itself. On either basis the conclusion is, in my opinion, clear. Furthermore, since the duty rests on the principle in Hedley Byrne, no problem arises from the fact that the loss suffered by the Names is pure economic loss.

This conclusion is, however, subject to the impact, if any, of the contractual context. In argument before your Lordships this was regarded as constituting the main basis for the managing agents' challenge to the conclusion on this point of the courts below. To this point I must therefore turn: but before I do so I propose to consider briefly, if only to put it on one side, the question whether, under the pre-1985 forms of agreement, a duty of care on the part of the managing agents was excluded by the absolute discretion vested in them under their contract with the direct Names, or with the members' agents in cases involving indirect Names.

- 16 -

(5) Absolute Discretion

I can deal with this point briefly because, like the Court of Appeal, I agree with Saville J. that there is no substance in it. It was the submission of the managing agents in the Merrett appeals before your Lordships, as it had been before Saville J., that there was an unbroken line of authority supporting the proposition that the expression "absolute discretion" in the context of a private law agreement meant that the exercise of the power given by the agreement to the recipient of the power cannot be challenged by the donor or beneficiary of the power unless(a) the exercise of the power is in bad faith, or

(b) (arguably) the exercise of the power is totally unreasonable. It followed, so the argument ran, that a duty to exercise due skill or care, whether contractual or extra-contractual, was inconsistent with the bargain and so must be excluded. However, it appears to me, as it did to the judge, that in the present context the words used cannot have the effect of excluding a duty of care, contractual or otherwise. Clear words are required to exclude liability in negligence; and in the present case the words can, and in my opinion should, be directed towards the scope of the agents' authority. No doubt the result is that very wide authority has been vested in the agents; but the suggestion that the agent should as a result be under no duty to exercise due skill and care in the exercise of his function under the agreement is, in the present context, most surprising. I am content to adopt the following passage from the judgment of Saville J. as my own:

"As I have said in other cases, Lloyd's could not exist as an insurance and reinsurance market unless the business is conducted by professionals who must be given the widest possible powers to act on behalf of the Names. Thus the underwriting agency agreement makes absolutely clear that the Name must leave it exclusively to the underwriting agents actually to run the business. The standard of behaviour to be expected of the underwriting agents in carrying out this task is an entirely different matter. The underwriting agency agreement contains no express provisions in this regard, but I do not find this in the least surprising, since it seems to me literally to go without saying that the underwriting agents must act with reasonable care and skill in exercising their authority and carrying on the underwriting business on behalf of the Name. The very fact that the agents are given the widest possible authority to act on behalf of the Name, together with the fact that the Name's potential liability for the actions of the agents is unlimited and the further fact that the agents receive remuneration for exercising their professional skills on behalf of the Name, seem to me to point irresistibly to the conclusion that in such a relationship the law does (as a matter of common sense it should) impose a duty of reasonable care and skill upon the underwriting agents of the kind alleged by the Names, which could only be modified or excluded by clear agreement between the parties. I can find nothing in the underwriting agency agreement which indicates that this duty (the ordinary one owed by any professional

- 17 -

person) is in any way modified or excluded in the present cases, nor to my mind is there anything of relevance in this context in the sub- agency agreement."

For these reasons I am, like both courts below, unable to accept the managing agents' argument on this point. With this point out of the way I can turn to the main argument on this part of the case, relating to the impact of the contractual context.

(6) The impact of the contractual context.

All systems of law which recognise a law of contract and a law of tort (or delict) have to solve the problem of the possibility of concurrent claims arising from breach of duty under the two rubrics of the law. Although there are variants, broadly speaking two possible solutions present themselves: either to insist that the claimant should pursue his remedy in contract alone. or to allow him to choose which remedy he prefers. As my noble and learned friend Lord Mustill and I have good reason to know (see J. Bracconot et Cie v. Compagnie des Messageries Maritimes (The Sindh) [1975] 1 Lloyd's Rep. 372). France has adopted the former solution in its doctrine of non cumul. under which the concurrence of claims in contract and tort is outlawed (see Tony Weir in XI Int. Encycl. Comp. L., ch. 12. paras. 47-72, at para. 52). The reasons given for this conclusion are(1) respect for the will of the legislator, and

(2) respect for the will of the parties to the contract (see: para. 53). The former does not concern us; but the latter is of vital importance. It is however open to various interpretations. For such a policy does not necessarily require the total rejection of concurrence, but only so far" as a concurrent remedy in tort is inconsistent with the terms of the contract. It comes therefore as no surprise to learn that the French doctrine is not followed in all civil law jurisdictions, and that concurrent remedies in tort and contract are permitted in other civil law countries, notably Germany (see: para. 58). I only pause to observe that it appears to be accepted that no perceptible harm has come to the German system from admitting concurrent claims.

The situation in common law countries, including of course England. is exceptional, in that the common law grew up within a procedural framework uninfluenced by Roman law. The law was categorised by reference to the forms of action, and it was not until the abolition of the forms of action by the Common Law Procedure Act 1852 that it became necessary to reclassify the law in substantive terms. The result was that common lawyers did at last segregate our law of obligations into contract and tort, though in so doing they relegated quasi-contractual claims to the status of an appendix to the law of contract, thereby postponing by a century or so the development of a law of restitution. Even then, there was no systematic reconsideration of the problem of concurrent claims in contract and tort. We can see the courts rather grappling with unpromising material drawn from the old cases in which liability in negligence derived largely from categories based

- 18 -

upon the status of the defendant. In a sense, we must not be surprised: for no significant law faculties were established at our universities until the late 19th century, and so until then there was no academic opinion available to guide or stimulate the judges. Even so, it is a remarkable fact-mat there was little consideration of the problem of concurrent remedies in our academic literature until the second half of the 20th century, though in recent years the subject has attracted considerable attention.

In the result, the courts in this country have until recently grappled with the problem very largely without the assistance of systematic academic study. At first, as is shown in particular by cases concerned with liability for solicitors' negligence, the courts adopted something very like the French solution, holding that a claim against a solicitor for negligence must be pursued in contract, and not in tort (see, e.g., Bean v. Wade (1885) 2 T.L.R. 157): and in Groom v . Crocker [1939] 1 K.B. 194, this approach was firmly adopted. It has to be said, however, that decisions such as these, though based on prior authority, were supported by only a slender citation of cases, none of great weight; and the jurisprudential basis of the doctrine so adopted cannot be said to have been explored in any depth. Furthermore when, in Bagot v . Stevens Scanlan & Co. Ltd. [1966] 1 Q.B. 197. Diplock L.J. adopted a similar approach in the case of a claim against a firm of architects, he felt compelled to recognise (pp. 204-205) that a different conclusion might be reached in cases "... where the law in the old days recognised either something in the nature of a status like a public calling (such as common carrier, common innkeeper, or a bailor and bailee) or the status of master and servant". To this list must be added cases concerned with claims against doctors and dentists. I must confess to finding it startling that, in the second half of the 20th century, a problem of considerable practical importance should fall to be solved by reference to such an outmoded form of categorisation as this.

I think it is desirable to stress at this stage that the question of concurrent liability is by no means only of academic significance. Practical issues, which can be of great importance to the parties, are at stake. Foremost among these is perhaps the question of limitation of actions. If concurrent liability in tort is not recognised, a claimant may find his claim barred at a time when he is unaware of its existence. This must moreover be a real possibility in the case of claims against professional men. such as solicitors or architects, since the consequences of their negligence may well not come to light until long after the lapse of six years from the date when the relevant breach of contract occurred. Moreover the benefits of the Latent Damage Act 1986, under which the time of the accrual of the cause of action may be postponed until after the plaintiff has the relevant knowledge, are limited to actions in tortious negligence. This leads to the startling possibility that a client who has had the benefit of gratuitous advice from his solicitor may in this respect be better off than a client who has paid a fee. Other practical problems arise, for example, from the absence of a right to contribution between negligent contract-breakers; from the rules as to

- 19 -

remoteness of damage, which are less restricted in tort than they are in contract; and from the availability of the opportunity to obtain leave to serve proceedings out of the jurisdiction. It can of course be argued that the principle established in respect of concurrent liability in contract and tort should not be tailored to mitigate the adventitious effects of rules of law such

as these, and that one way of solving such problems would no doubt be 'to rephrase such incidental rules as have to remain in terms of the nature of the harm suffered rather than the nature of the liability asserted' (see Tony Weir, XI Int. Encycl. Comp. L. ch.12., para. 72). But this is perhaps crying for the moon; and with the law in its present form, practical considerations of this kind cannot sensibly be ignored.

Moreover I myself perceive at work in these decisions not only the influence of the dead hand of history, but also what I have elsewhere called the temptation of elegance. Mr. Tony Weir (XI Int. Encycl. Comp. L. ch. 12., para. 55) has extolled the French solution for its elegance; and we can discern the same impulse behind the much-quoted observation of Lord Scarman when delivering the judgment of the Judicial Committee of the Privy Council in Tai Hing Cotton Mill Ltd. v . Liu Chong Hing Bank Ltd. [1986] A. C. 90. 107 B-D:

Their Lordships do not believe that there is anything to the advantage of the law's development in searching for a liability in tort where the parties are in a contractual relationship. This is particularly so in a commercial relationship. Though it is possible as a matter of legal semantics to conduct an analysis of the rights and duties inherent in some contractual relationships including that of banker and customer either as a matter of contract law when the question will be what, if any, terms are to be implied or as a matter of tort law when the task will be to identity a duty arising from the proximity and character of the relationship between the parties, their Lordships believe it to be correct in principle and necessary for the avoidance of confusion in the law to adhere to the contractual analysis: on principle because it is a relationship in which the parties have, subject to a few exceptions, the right to determine their obligations to each other, and for the avoidance of confusion because different consequences do follow according to whether liability arises from contract or tort, e.g. in the limitation of action."

It is however right to stress, as did Sir Thomas Bingham M.R. in the present case, that the issue in Tai Hing was whether a tortious duty of care could be established which was more extensive than that which was provided for under the relevant contract.

At all events, even before Tai Hing we can see the beginning of the redirection of the common law away from the contractual solution adopted in Groom v . Crocker [1939] 1 K.B. 194, towards the recognition of concurrent remedies in contract and tort. First, and most important, in 1963 came the

- 20 -

decision of your Lordships' House in Hedley Byrne & Co. Ltd. v . Heller & Partners Ltd., reported in [19641 A.C. 465. I have already expressed the opinion that the fundamental importance of this case rests in the establishment of the principle upon which liability may arise in tortious negligence in respect of services (including advice) which are rendered for another, gratuitously or otherwise, but are negligently performed - viz., an assumption of responsibility coupled with reliance by the plaintiff which, in all the circumstances, makes it appropriate that a remedy in law should be available for such negligence. For immediate purposes, the relevance of the principle lies in the fact that, as a matter of logic, it is capable of application not only where the services are rendered gratuitously, but also where they are rendered under a contract. Furthermore we can see in the principle an acceptable basis for liability in negligence in cases which in the past have been seen to rest upon the now outmoded concept of status. In this context, it is of particular relevance to refer to the opinion expressed both implicitly by Lord Morris of Borth-y-Gest (with whom Lord Hodson agreed) and expressly by Lord Devlin that the principle applies to the relationship of solicitor and client, which is nearly always contractual: see

[1964] AC 465

, 497-499 (where Lord Morris approved the reasoning of Chitty J. in Cann v. Willson (1888) 39 Ch.D. 39), and p. 529 (per Lord Devlin).

The decision in Hedley Byrne, and the statement of general principle in that case, provided the opportunity to reconsider the question of concurrent liability in contract and tort afresh, untrammelled by the ancient learning based upon a classification of defendants in terms of status which drew distinctions difficult to accept in modern conditions. At first that opportunity was not taken. Groom v. Crocker [1939] 1 K.B. 194 "was followed by the Court of Appeal in Cook v. Swinfen [1967] 1 W.L.R. 457. and again in Heywood v. Wellers

[1976] QB 446

: though in the latter case Lord Denning M.R. (at p. 459) was beginning to show signs of dissatisfaction with the contractual test accepted in Groom v. Crocker a dissatisfaction which crystallised into a change of heart in Esso Petroleum Co. Ltd. v . Mardon

[1976] QB 801

. That case was concerned with statements made by employees of Esso in the course of pre-contractual negotiations with Mr. Mardon, the prospective tenant of a petrol station. The statements related to the potential throughput of the station. Mr. Mardon was persuaded by the statements to enter into the tenancy; but he suffered serious loss when the actual throughput proved to be much lower than had been predicted. The Court of Appeal held that Mr. Mardon was entitled to recover damages from Esso, on the basis of either breach of warranty or (on this point affirming the decision of the judge below) negligent misrepresentation. In rejecting an argument that Esso's liability could only be contractual. Lord Denning M.R. dismissed Groom v . Crocker [ [1939] 1 K.B. 194 and Bagot v. Stevens Scanlan Co. Ltd. [1966] 1 Q.B. 197 as inconsistent with other decisions of high authority, viz. Boorman v . Brown (1842) 3 Q.B. 511. 525-526 per Tindal C.J., and (1844) 11 Cl. & Fin. 1, 44 per Lord Campbell: Lister v. Romford Ice and Cold Storage Co. Ltd.

[1957] AC 555

, 587 per Lord Radcliffe;

- 21 -

Matthews v. Kuwait Bechtel Corporation [1959] 2 Q.B. 57; and Nocton v. Lord Ashbunon

[1914] AC 932

, 956, per Viscount Haldane L.C. He then held that, in addition to its liability in contract, Esso was also liable in negligence. The other members of the Court of Appeal. Ormrod and Shaw L.JJ., agreed that Mr. Mardon was entitled to recover damages either for breach of warranty or for negligent misrepresentation, though neither expressed any view about the status of Groom v. Crocker [1939] 1 K.B. 194. It was however implicit in their decision that, as Lord Denning held, concurrent remedies were available to Mr. Mardon in contract and tort. For present purposes, I do not find it necessary to comment on the authorities relied upon by Lord Denning as relieving him from the obligation to follow Groom v. Crocker, though I feel driven to comment that the judgments in Esso Petroleum Co. Ltd. v. Mardon

[1976] QB 801

reveal no analysis in depth of the basis upon which concurrent liability rests. That case was however followed by the Court of Appeal in Batty v . Metropolitan Property Realisations Ltd. [1978] Q.B. 554, in which concurrent remedies in contract and tort were again allowed.

The requisite analysis is however to be found in the judgment of Oliver J. in Midland Bank Trust Co. Ltd. v. Hett, Stubbs & Kemp

[1979] Ch. 384

. in which he held that a solicitor could be liable to his client for negligence either in contract or in tort, with the effect that in the case before him it was open to the client to take advantage of the more favourable date of accrual of the cause of action for the purposes of limitation. In that case, Oliver J. was much concerned with the question whether it was open to him, as a judge of first instance, to depart from the decision of the Court of Appeal in Groom v. Crocker [1939] 1 K.B. 194. For that purpose, he carried out a most careful examination of the relevant authorities, both before and after Groom r. Crocker, and concluded that he was free to depart from the decision in that case, which he elected to do.

It is impossible for me to do justice to the reasoning of Oliver J.. for which I wish to express my respectful admiration, without unduly prolonging what is inevitably a very long opinion. I shall therefore confine myself to extracting certain salient features. First, from his study of the cases before Groom v. Crocker, he found no unanimity of view that the solicitor's liability was regarded as exclusively contractual. Some cases (such as Howell v . Young (1826) 5 B.& C. 259) he regarded as equivocal. In others, he understood the judges to regard contract and tort as providing alternative causes of action (see In re Manby and Hawksford (1856) 26 L.J.Ch. 313, 317, and Sawyer v. Goodwin (1867) 36 L.J.Ch. 578, 582, in both cases per Stuart V.-C., and most notably Nocton v. Lord Ashburton

[1914] AC 932

, 956. per Viscount Haldane L.C.). However Bean v. Wade (1885) 2 T.L.R. 157, briefly reported in the Times Law Reports and by no means extensively referred to, provided Court of Appeal authority that the remedy was exclusively contractual; and it was that case which was principally relied upon by the Court of Appeal in Groom v. Crocker [1939] 1 K.B. 194 when

- 22 -

reaching the same conclusion. Oliver J. put on one side those cases, decided for the purpose of section 11 of the County Courts Act 1915. under which a different statutory test had to be complied with, viz. whether the action was one "founded on a contract" or "founded on a tort".

It is evident that the early authorities did not play a very significant part in Oliver J.'s decision (see

[1979] Ch. 384

, 411 C-D). He loyally regarded Groom v . Crocker as prima facie binding upon him. His main concern was with the impact of the decision of this House in Hedley Byrne

[1964] AC 465

, and of subsequent cases in the Court of Appeal in which Hedley Byrne had been applied. As he read the speeches in Hedley Byrne, the principle there stated was not limited to circumstances in which the responsibility of the defendant had been gratuitously assumed. He referred in particular to the statement of principle by Lord Morris of Borth-y-Gest at pp. 502-503. which I have already quoted, and said, at p. 411 E-F:

"The principle was stated by Lord Morris of Borth-y-Gest as a perfectly general one and it is difficult to see why it should be excluded by the fact that the relationship of dependence and reliance between the parties is a contractual one rather than one gratuitously assumed, in the absence, of course, of contractual terms excluding or restricting the general duties which the law implies."

Oliver J. went on (p. 412) to quote from the dissenting judgment of Denning L.J. in Candler v. Crane Christmas & Co. [1951] 1 K.B. 164. 179-180 (a passage approved by Lord Pearce in Hedley Byrne

[1964] AC 465

. 538) and said, at p. 413 B-D:

"Now, in that passage, I think that it is abundantly clear that Denning L.J. was seeking to enunciate a general principle of liability arising from the relationship created by the assumption of a particular work or responsibility, quite regardless of how the relationship arose

. . .

"The inquiry upon which the court is to embark is 'what is the relationship between the plaintiff and defendant?' not 'how did the relationship, if any, arise' That this is so appears. I think, with complete clarity from subsequent cases."

Later he said, at p. 415:

"The matter becomes, in my judgment, even clearer when one looks at the speech of Lord Devlin in the Hedley Byrne case [1964] A.C. 465, for he treats the existence of a contractual relationship as very good evidence of the general tortious duty which he is there discussing. He said, at pp. 528-529:

- 23 -

'I think, therefore, that there is ample authority to justify your Lordships in saying now that the categories of special relationships which may give rise to a duty to take care in word as well as in deed are not limited to contractual relationships or to relationships of fiduciary duty, but include also relationships which in the words of Lord Shaw in Nocton v. Lord Ashburton [1914] AC 932 , 972, are 'equivalent to contract', that is, where there is an assumption of responsibility in circumstances in which, but for the absence of consideration, there would be a contract . . .'

He expressed his conclusion concerning the impact of Hedley Byrne on the case before him in the following words, at p. 417 A-C:

The case of a layman consulting a solicitor for advice seems to me to be as typical a case as one could find of the sort of relationship in which the duty of care described in the Hedley Byrne case [1964] A.C. 465 exists: and if I am free to do so in the instant case. I would, therefore, hold that the relationship of solicitor and client gave rise to a duty in the defendants under the general law to exercise that care and skill upon which they must have known perfectly well that their client relied. To put it another way, their common law duty was not to injure their client by tailing to do that which they had undertaken to do and which, at their invitation, he relied upon them to do. That duty was broken, but no cause of action in tort arose until the damage occurred; and none did occur until August 17. 1967. I would regard it as wholly immaterial that their duty arose because they accepted a retainer which entitled them, if they chose to do so. to send a bill to their client."

I wish to express my respectful agreement with these passages in Oliver J.'s judgment.

Thereafter, Oliver J. proceeded to consider the authorities since Hedley Byrne. in which he found, notably in statements of the law by members of the Appellate Committee in Arenson v . Arenson [1977] A.C. 405 and in the decision of the Court of Appeal in Esso Petroleum Co. Ltd. v. Mardon [1976] Q. B. 801, the authority which relieved him of his duty to follow Groom v . Crocker [1939] 1 K.B. 194. But I wish to add that, in the course of considering the later authorities, he rejected the idea that there is some general principle of law that a plaintiff who has claims against a defendant for breach of duty both in contract and in tort is bound to rely upon his contractual rights alone. He said, at p. 420 A-B:

"There is not and never has been any rule of law that a person having alternative claims must frame his action in one or the other. If I have a contract with my dentist to extract a tooth, I am not thereby

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precluded from suing him in tort if he negligently shatters my jaw: Edwards v. Mallan

[1908] 1 KB 1002

The origin of concurrent remedies in this type of case may lie in history; but in a modern context the point is a telling one. Indeed it is consistent with the decision in Donoghue v. Stevenson

[1932] AC 562

itself, and the rejection in that case of the view, powerfully expressed in the speech of Lord Buckmaster (see, in particular, pp. 577-578), that the manufacturer or repairer of an article owes no duty of care apart from that implied from contract or imposed by statute. That there might be co-existent remedies for negligence in contract and in tort was expressly recognised by Lord Macmillan in Donoghue v. Stevenson, at p. 610, and by Lord Wright in Grant v. Australian Knitting Mills Ltd.,

[1936] AC 85

, 102-104. Attempts have been made to explain how doctors and dentists may be concurrently liable in tort while other professional men may not be so liable, on the basis that the former cause physical damage whereas the latter cause pure economic loss (see the discussion by Christine French in (1983) 5 Otago L.R. 236, 280-1). But this explanation is not acceptable, if only because some professional men. such as architects, may also be responsible for physical damage. As a matter of principle, it is difficult to see why concurrent remedies in tort and contract, if available against the medical profession, should not also be available against members of other professions, whatever form the relevant damage may take.

The judgment of Oliver J. in the Midland Bank Trust Co. case

[1979] Ch. 384

provided the first analysis in depth of the question of concurrent liability in tort and contract. Following upon Esso Petroleum Co. Ltd. v . Mardon

[1976] QB 801

, it also broke the mould, fn the sense that it undermined the view which was becoming settled that, where there is an alternative liability in tort, the claimant must pursue his remedy in contract alone. The development of the case law in other common law countries is very striking. In the same year as the Midland Bank Trust Co. case, the Irish Supreme Court held that solicitors owed to their clients concurrent duties in contract and tort: see Finlay v. Murtagh [1979] I.R. 249. Next, in Central Trust Co. v . Rafuse (1986) 31 D.L.R. 4th 481, Le Dain J., delivering the judgment of the Supreme Court of Canada, conducted a comprehensive and most impressive survey of the relevant English and Canadian authorities on the liability of solicitors to their clients for negligence, in contract and in tort, in the course of which he paid a generous tribute to the analysis of Oliver J. in the Midland Bank Trust Co. case. His conclusions are set out in a series of propositions at pp. 521-2 of the report: but his general conclusion was to the same effect as that reached by Oliver J. He said, at p. 522:

". . .A concurrent or alternative liability in tort will not be admitted if its effect would be to permit the plaintiff to circumvent or escape a contractual exclusion or limitation of liability for the act or omission that would constitute the tort. Subject to this qualification, where concurrent liability in tort

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and contract exists the plaintiff has the right to assert the cause of action that appears to be the most advantageous to him in respect of any particular legal consequence."

I respectfully agree.

Meanwhile in New Zealand the Court of Appeal had appeared at first, in McLaren Maycroft & Co. v . Fletcher Development Co. Ltd. [1973] 2 N.Z.L.R. 100. to require that, in cases where there are concurrent duties in contract and tort, the claimant must pursue his remedy in contract alone. There followed a period of some uncertainty, in which differing approaches were adopted by courts of first instance. In 1983 Miss Christine French published her Article on the Contract/Tort Dilemma in (1981-84) 5 Otago L.R. 236. in which she examined the whole problem in great depth, with special reference to the situation in New Zealand, having regard to the "Rule" in McLaren Maycroft. Her Article, to which I wish to pay tribute, was of course published before the decision of the Supreme Court of Canada in the Central Trust case. Even so. she reached a conclusion which, on balance. favoured a freedom for the claimant to choose between concurrent remedies in contract and tort. Thereafter in Rowlands v . Collow [1992] 1 N.Z.L.R. 178 Thomas J., founding himself principally on the Central Trust case and on Miss French's Article, concluded that he was free to depart from the decision of the New Zealand Court of Appeal in McLaren Maycroft and to hold that a person performing professional services (in the case before him an engineer) may be sued for negligence by his client either in contract or in tort. He said. at p. 190:

" The issue is now virtually incontestable; a person who has performed professional services may be held liable concurrently in contract and in negligence, unless the terms of the contract preclude the tortious liability."

In Australia, too, judicial opinion appears to be moving in the same direction. though not without dissent: see, in particular. Aluminum Products (Qld.) Pty. Ltd. v. Hill [1981] Qd.R. 33 (a decision of the Full Court of the Supreme Court of Queensland) and Macpherson & Kelley v. Kevin J. Prunty & Associates [1983] 1 V.R. 573 (a decision of the Full Court of the Supreme Court of Victoria). A different view has however been expressed by Deane J in Hawkins v. Clayton (1987-88) 164 C.L.P. 539. 585. to which I will return later. In principle, concurrent remedies appear to have been accepted for some time in the United States (see Prosser's Handbook on the Law of Torts. 5th ed. (1984) p. 666), though with some variation as to the application of the principle in particular cases. In these circumstances it comes as no surprise that Professor Fleming, writing in 1992, should state that "the last ten years have seen a decisive return to the 'concurrent' approach" (see his Law of Torts, 8th ed., p. 187).

- 26 -

I have dealt with the matter at some length because, before your Lordships, Mr. Temple Q.C., for the managing agents, boldly challenged the decision of Oliver J. in the Midland Bank Trust Co. case

[1979] Ch. 384

, seeking to persuade your Lordships that this House should now- hold that case to have been wrongly decided- This argument was apparently not advanced below, presumably because Oliver J.'s analysis had received a measure of approval in the Court of Appeal: see, e.g., Forster v. Outred & Co. [1982] 1 W.L.R. 86, 99, per Dunn L.J. Certainly there has been no sign of disapproval, even where the Midland Bank Trust Co. case has been distinguished: see Bell v . Peter Browne & Co. [1990] 2 Q.B. 495.

Mr. Temple adopted as part of his argument the reasoning of Mr. J.M. Kaye in an article The Liability of Solicitors in Tort (1984) 100 L.Q.R. 680. In his article, Mr. Kaye strongly criticised the reasoning of Oliver J. both on historical grounds and with regard to his interpretation of the speeches in Hedley Byrne. However, powerful though Mr. Kaye's article is, I am not persuaded by it to treat the Midland Bank Trust Co. case as wrongly decided. First, so far as the historical approach is concerned, this is no longer of direct relevance in a case such as the present, having regard to the development of the general principle in Hedley Byrne. No doubt it is correct that, in the 19th century, liability in tort depended upon the category of persons into which the defendant fell, with the result that in those days it did not necessarily follow that, because (for example) a surgeon owed an independent duty of care to his patient in tort irrespective of contract, other professional men were under a similar duty. Even so, as Mr. Boswood Q.C. for the Names stressed, if the existence of a contract between a surgeon and his patient did not preclude the existence of a tortious duty to the patient in negligence 'there is no reason in principle why a tortious duty should not co-exist with a contractual duty in the case of the broad duty of care now recognised following the generalisation of the tort of negligence in the 20th century.

So far as Hedley Byrne itself is concerned. Mr. Kaye reads the speeches as restricting the principle of assumption of responsibility there established to cases where there is no contract; indeed, on this he tolerates no dissent, stating (at p. 706) that "unless one reads [Hedley Byrne\ with deliberate intent to find obscure or ambiguous passages" it will not bear the interpretation favoured by Oliver J. I must confess however that, having studied yet again the speeches in Hedley Byrne

[1964] AC 465

in the light of Mr. Kaye's critique, I remain of the opinion that Oliver J.'s reading of them is justified. It is, I suspect, a matter of the angle of vision with which they are read. For here, I consider, Oliver J. was influenced not only by what he read in the speeches themselves, notably the passage from Lord Devlin's speech at pp. 528-529 (quoted above), but also by the internal logic reflected in that passage, which led inexorably to the conclusion which he drew Mr. Kaye's approach involves regarding the law of tort as supplementary to the law of contract, i.e. as providing for a tortious liability in cases where there is no contract. Yet the law of tort is the general law, out

- 27 -

of which the parties can, if they wish, contract: and, as Oliver J. demonstrated, the same assumption of responsibility may, and frequently does, occur in a contractual context. Approached as a matter of principle, therefore, it is right to attribute to that assumption of responsibility, together with its concomitant reliance, a tortious liability, and then to enquire whether or not that liability is excluded by the contract because the latter is inconsistent with it. This is the reasoning which Oliver J., as I understand it, found implicit, where not explicit, in the speeches in Hedley Byrne. With his conclusion I respectfully agree. But even if I am wrong in this, I am of the opinion that this House should now, if necessary, develop the principle of assumption of responsibility as stated in Hedley Byrne to its logical conclusion so as to make it clear that a tortious duty of care may arise not only in cases where the relevant services are rendered gratuitously, but also where they are rendered under a contract. This indeed is the view expressed by my noble and learned friend Lord Keith of Kinkel in Murphy v . Brentwood District Council

[1991] 1 AC 398

, 466, in a speech with which all the other members or the Appellate Committee agreed.

An alternative approach, which also avoids the concurrence of tortious

and contractual remedies, is to be found in the judgment of Deane J. in Hawkins v. Clayton (1987-88) 164 C.L.R. 539. 582-586. in which he

included, at p. 585:

On balance, however, it seems to me to be preferable to accept that there is neither justification nor need for the implication of a contractual term which, in the absence of actual intention of the parties, imposes upon a solicitor a contractual duty (with consequential liability in damages for its breach) which is co-extensive in content and concurrent in operation with a duty (with consequential liability in damages for us breach) which already exists under the common law of negligence."

It is however my understanding that by the law in this country contracts for services do contain an implied promise to exercise reasonable care (and skill) in the performance of the relevant services; indeed, as Mr. Tony Weir has pointed out (XI Int. Encycl. Comp. L., ch. 12, para. 67), in the 19th century the field of concurrent liabilities was expanded "since it was impossible for the judges to deny that contracts contained an implied promise to take reasonable care, at the least, not to injure the other party". My own belief is that, in the present context, the common law is not antipathetic to concurrent liability, and that there is no sound basis for a rule which automatically restricts the claimant to either a tortious or a contractual remedy. The result may be untidy: but, given that the tortious duty is imposed by the general law, and the contractual duty is attributable to the will of the parties, I do not find it objectionable that the claimant may be entitled to take advantage of the remedy which is most advantageous to him, subject only to ascertaining whether the tortious duty is so inconsistent with the applicable contract that,

- 28 -

in accordance with ordinary principle, the parties must be taken to have agreed that the tortious remedy is to be limited or excluded.

In the circumstances of the present case, I have nor regarded it as necessary or appropriate to embark upon yet another detailed analysis of the case law, choosing rather to concentrate on those authorities which appear to me to be here most important. I have been most anxious not to overburden an inevitably lengthy opinion with a discussion of an issue which is only one (though an important one) of those which fall for decision; and, in the context of the relationship of solicitor and client, the task of surveying the authorities has already been admirably performed by both Oliver J. and Le Dain J. But, for the present purposes more important, in the present case liability can, and in my opinion should, be founded squarely on the principle established in Hedley Byrne itself, from which it follows that an assumption of responsibility coupled with the concomitant reliance may give rise to a tortious duty of care irrespective of whether there is a contractual relationship between the parties, and in consequence, unless his contract precludes him from doing so, the plaintiff, who has available to him concurrent remedies in contract and tort, may choose that remedy which appears to him to be the most advantageous.

(7) Application of the above principles in the present case

I have already concluded that prima facie a duty of care was owed in tort on the Hedley Byrne principle by managing agents both to direct Names and indirect Names. So far as the direct Names are concerned, there is plainly a contract between them and the managing agents, in the terms of the pre-1985 Byelaw form of agency agreement, in which a term falls to be implied that the agents will exercise due care and skill in the exercise of their functions as managing agents under the agreement. That duty of care is no different from the duty of care owed by them to the relevant Names in tort: and, having regard to the principles already stated, the contract does not operate to exclude the tortious duty, leaving it open to the Names to pursue either remedy against the agents.

I turn to the indirect Names. Here there is, as I see it, no material distinction between the claims of the Names in the Merrett actions, and those of the Names in the Feltrim actions. True, the former arise in the context of the pre-1985 Byelaw forms of agency and sub-agency agreements, whereas the latter arise in the context of the forms of agreement prescribed by the 1985 Byelaw. However in both cases there must be implied into the sub-agency agreements a duty upon the managing agents to exercise due skill and care. A similar responsibility must rest upon the members' agents under the 1985 Byelaw form of agency agreement, and I will assume that the same applies under the pre-1985 Byelaw form (though the point does not arise for decision by your Lordships). In neither case, however, is there any material difference between the relevant contractual duty and any duty which is owed by the managing agents to the relevant Names in tort. It is however submitted on behalf of the managing agents that the indirect Names and the managing

- 29 -

agents, as parties to the chain of contracts contained in the relevant agency and sub-agency agreements, must be taken to have thereby structured their relationship so as to exclude any duty of care owed directly by the managing agents to the indirect Names in tort.

In essence the argument must be that, because the managing agents have, with the consent of the indirect Names, assumed responsibility in respect of the relevant activities to another party, i.e. the members' agents, under a sub-agency agreement, it would be inconsistent to hold that they have also assumed responsibility in respect of the same activities to the indirect Names. I for my part cannot see why in principle a party should not assume responsibility to more than one person in respect of the same activity. Let it be assumed (unlikely though it may be) that, in the present case, the managing agents were in a contractual relationship not only with the members' agents under a sub-agency agreement but also directly with the relevant Names, under both of which they assumed responsibility for the same activities. I can see no reason in principle why the two duties of care so arising should not be capable of co-existing.

Of course I recognise that the present case presents the unusual feature that claims against the managing agents, whether by the members' agents under the sub-agency agreement or by the indirect Names in tort, will in both cases have the purpose, immediate or ultimate, of obtaining compensation for the indirect Names. In these circumstances, concurrent duties of care could, in theory at least, give rise to problems, for example in the event of the insolvency of the managing agents or the members' agents. Furthermore, as Mr. Temple Q.C. suggested in the course of his submissions on behalf of the managing agents, questions of contribution might, at least in theory, arise. But your Lordships' task, like that of the courts below, is to answer the questions of principle raised by the issues presented for decision: and in these circumstances it would be quite wrong to embark upon the examination of questions which do not arise on those issues, and indeed may never arise in practice. For myself, I am all the more reluctant to do so since, because the liability (if any) of the managing agents will in each case flow from claims by the indirect Names, it may well be that practical problems such as these will, it they arise, find a practical solution.

I wish however to add that I strongly suspect that the situation which arises in the present case is most unusual; and that in many cases in which a contractual chain comparable to that in the present case is constructed it may well prove to be inconsistent with an assumption of responsibility which has the effect of. so to speak, short circuiting the contractual structure so put in place by the parties. It cannot therefore be inferred from the present case that other sub-agents will be held directly liable to the agent's principal in tort. Let me take the analogy of the common case of an ordinary building contract, under which main contractors contract with the building owner for the construction of the relevant building, and the main contractor sub-contracts with sub-contractors or suppliers (often nominated by the building owner) for

- 30 -

the performance of work or the supply of materials in accordance with standards and subject to terms established in the sub-contract. I put on one side cases in which the sub-contractor causes physical damage to property of the building owner, where the claim does not depend on an -assumption of responsibility by the sub-contractor to the building owner; though the sub- contractor may be protected from liability by a contractual exemption clause authorised by the building owner. But if the sub-contracted work or materials do not in the result conform to the required standard, it will not ordinarily be open to the building owner to sue the sub-contractor or supplier direct under the Medley Byrne principle, claiming damages from him on the basis that he has been negligent in relation to the performance of his functions. For there is generally no assumption of responsibility by the sub-contractor or supplier direct to the building owner, the parties having so structured their relationship that it is inconsistent with any such assumption of responsibility. This was the conclusion of the Court of Appeal in Simaan General Contracting Co. v. Pilkington Glass Ltd. (No. 2)

[1988] QB 758

. As Bingham L.J. put it, at p. 781:

"I do not, however, see any basis on which the defendants [the nominated suppliers] could be said to have assumed a direct responsibility for the quality of the goods to the plaintiffs [the building owners); such a responsibility is, I think, inconsistent with the structure of the contract the parties have chosen to make."

It is true that, in this connection, some difficulty has been created by the decision of your Lordships' House in Junior Books Ltd. v. Veitchi Co. Ltd.

[1983] 1 AC 520

. In my opinion, however, it is unnecessary for your Lordships to reconsider that decision for the purposes of the present appeal. Here however I can see no inconsistency between the assumption of responsibility by the managing agents to the indirect Names, and that which arises under the sub-agency agreement between the managing agents and the members' agents, whether viewed in isolation or as part of the contractual chain stretching back to and so including the indirect Names. For these reasons, I can see no reason why the indirect Names should not be free to pursue their remedy against the managing agents in tort under the Medley Byrne principle.

I Merrett and Feltrim Appeals

B. Fiduciary Duty

The question arising under this issue is whether Merretts acting as managing agents (whether or not they are also members' agents) owed the Names a fiduciary duty to conduct the underwriting for the account of the Names with reasonable skill for the 1979 to 1985 underwriting years of account (inclusive) equivalent to the alleged duty of care in tort.

- 31 -

Both Saville J. and the Court of Appeal declined to address this question since having regard to the manner in which they decided the issue on the tortious duty of care, the question did not arise. Having regard to the conclusion which I have reached on the tortious duty, I likewise do not think it necessary for your Lordships' House to address the question of fiduciary duty.

II. Feltrim and Gooda Walker Appeals

Liability of members' agents to Names during the period 1987-1989

Saville J. held that this issue should be decided against the members' agents, and his decision was affirmed by the Court of Appeal, for the same reasons. As a result it was held that, under agency agreements in the form prescribed by Lloyd's Byelaw No. 1 of 1985, members' agents are responsible to the Names for any failure to exercise reasonable skill and care on the part of managing agents to whom underwriting has been delegated by the members agents; and that the members agents are not required to exercise skill and care only in relation to those activities and functions which members' agents by custom and practice actually perform for the Names personally.

This issue raises a question of construction of the prescribed form of agency agreement. Since however the prescribed forms of agency and sub- agency agreements together constitute the contractual regime established by the Byelaw, it follows that the agency agreement should not be considered in isolation, but as forming, together with the sub-agency agreement, a coherent whole which, in a case concerned with indirect Names, regulates the contractual relationship between Name, members' agent and managing agent. Furthermore it is not to be forgotten that, in a case concerned with a combined agent, the agency agreement may fulfil the dual function of regulating the functions of the combined agent both in its role as members agent, and in its role as managing agent in respect of any Syndicate under its management of which the Name is a member.

In order to consider this question of construction I think it desirable that I should, like Sir Thomas Bingham M.R., first set out the terms of the most relevant provisions of the prescribed forms of agency and sub-agency agreements. These are as follows.

AGENCY AGREEMENT

1. DEFINITIONS:

In this agreement the under mentioned expressions shall where the context so requires or admits have the following meanings:-

- 32 -

(a) The expression 'the Syndicate' shall mean the syndicate or, if more than one, each of the respective syndicates of which the Name is for the time being a member under the provisions of this agreement, being the syndicate or syndicates specified in the Schedule(s) attached hereto ....

2. APPOINTMENT OF THE NAME'S AGENT AT LLOYD'S:

The agent shall act as the underwriting agent for the Name for the purpose of underwriting at Lloyd's for the account of the Name such classes and descriptions of insurance business, other than those prohibited by the Council, as may be transacted by the Syndicate (hereinafter referred to as 'the underwriting business').

In acting as underwriting agent for the Name the Agent shall at all times comply with the byelaws, regulations and requirements for the time being of the Council affecting the Name as an underwriting member of Lloyd's. Provided that if and to the extent that any provision of this Agreement shall be inconsistent with any such byelaw, regulation or requirement such inconsistent provision shall be deemed to be modified or cancelled so far as may be necessary or appropriate to the intent that the byelaw, regulation or requirement in question shall prevail and have full effect.

. . .

4 POWERS OF THE AGENT

(a) The agent is authorised ....

(g) hereof;

. . . .

(b) Without prejudice to the generality of the

provisions of sub-clause (a) of this clause, the agent shall have the

following customary and/or special powers in connection with the conduct and winding-up of the underwriting business:

. . . .

(G) Delegation of agent's powers: - 33 -

Power, subject to any requirements of the Council, to appoint or employ any person, firm or body corporate to carry on or manage the underwriting business or any part thereof, and to delegate to or confer upon any person, firm or body corporate all or any of the powers, authorities and discretions given to the agent by this agreement including this power of delegation and the other powers contained in this paragraph.

5. CONTROL OF UNDERWRITING BUSINESS:

(a) The agent shall have the sole control and management of the underwriting business and the Name shall not in any way interfere with the exercise of such control or management.

. . . .

(g) In order to close the underwriting account of any year the agent may: (i) reinsure all or any outstanding liabilities in such manner as the agent shall think fit, including the debiting of such account and the crediting of the underwriting account of the next succeeding year with such reinsurance premium as the Agent in its absolute discretion (subject to any requirements of the Council) thinks fair or

(ii) reinsure all or any outstanding liabilities into the underwriting account of any other year then remaining open or in any other manner which the agent (subject as aforesaid) thinks fair.

. . . .

8. REMUNERATION:

(a) The Name shall pay to the agent as remuneration for the services of the agent a fee at the rate per annum specified in the Syndicate Schedule.

. . . .

9. UNDERTAKING BY THE NAME TO PAY ALL

LIABILITIES AND OUTGOINGS:

(a) The Name shall keep the agent at all times in funds available for the payment of the liabilities, expenses and outgoings of the underwriting business . . . ."

- 34 -

"SUB-AGENCY AGREEMENT

WHEREAS the agent is the underwriting agent at Lloyd's for certain underwriting members of Lloyd's and it has been arranged between the agent and the sub-agent that the sub-agent shall act as the sub-underwriting agent for one or more of such underwriting members upon the terms hereinafter mentioned.

NOW IT IS HEREBY AGREED AND DECLARED between the parties hereto as follows :-

. . . . .

The sub-agent shall act as sub-agent for the agent for the purpose of conducting in the names and for the account of each of the agent's Names that part of the underwriting business as defined in clause 2(a) of the agency agreement which is to be transacted by such Name as a member of the Syndicate (hereinafter called 'the Syndicate underwriting business'); ....(a) The sub-agent shall underwrite for the agent's Names as part of the Syndicate ....

(b) The individual premium income limit to be allocated to the Syndicate in respect of each of the agent's Names shall be agreed from time to time between the sub-agent and the agent . .

. .

5. (a) The agent delegates to the sub-agent the performance of all such duties and the exercise of all such powers, authorities and discretions imposed or conferred upon the agent by the agency agreement (including without prejudice to the generality of the foregoing the power of delegation contained in that agreement) as it may be appropriate or necessary for the sub-agent to perform or exercise for the purpose of carrying on the Syndicate underwriting business.

. . . .

7. (a) The sub-agent shall conduct the Syndicate underwriting business in such manner as to comply with the provisions of the agency agreement and Lloyd's byelaws and regulations and is to have regard for Lloyd's Codes of Conduct or similar forms of guidance for the Lloyd's market.

. . . .

- 35 -

12. (a) The agent undertakes to put and keep the sub-agent in funds to such extent as the sub-agent shall in its sole discretion determine for payment of all liabilities, expenses and outgoings from time to time payable in connection with the Syndicate underwriting business but (subject to any supplementary provision) only to the extent that the agent shall be able to enforce against a Name the provisions of the agency agreement.

. . . . "

The rival contentions of the parties centred upon the construction to be placed upon clause 2(a) of the agency agreement. For the Names in the Feltrim actions, it was submitted by Mr. Boswood Q.C. that clause 2(a) contains an express undertaking by the underwriting agent to act as the underwriting agent of the Name, with the effect that (except to the extent that, where the agent is a combined agent, it acts as managing agent of a Syndicate of which the Name is a member) members' agents are as such bound to underwrite insurance business for the Name. It was conceded that, if that submission was correct, there was an implied term that such underwriting should be carried out with reasonable care and skill. Mr. Boswood's argument on this point was supported by Mr. Vos Q.C. for the Names in the Gooda Walker actions.

This argument was accepted by the courts below. But before the Appellate Committee it was subjected to a powerful attack by Mr. Eder Q C for the Gooda Walker members' agents, supported by Mr. Rowland for the Feltrim members agents. The argument ran as follows:

(1) Mr. Eder began with clause 2(a) of the agency agreement, under which it is provided that the agent shall act as 'underwriting agent' for the Name. He then drew upon the definitions of 'underwriting agent' in Byelaw No. 4 of 1984, and in paragraph l(c) of the Interpretation Byelaw No. 1 of 1983 (as amended), as showing that an underwriting agent may be either a member's agent or a managing agent, and submitted that appointment under clause 2(a) as underwriting agent' did not of itself indicate in which capacity the agent was agreeing to act.

(2) Next he turned to clause 2(b). Here again he invoked Byelaw No. 4 of 1984, and the definitions in Part A of both 'managing agent' and members agent' which show(1) that a managing agent performs for an underwriting member the function of (inter alia) underwriting contracts of insurance at Lloyd's and

(2) that a members' agent does not perform any of the functions of a managing agent. Further, under paragraph 4(a) of Part B of the Byelaw, there is a prohibition against any person acting as a managing agent who is not registered as such under the Byelaw. Building on this prohibition, Mr.

(a) , members' agents could not as such have agreed

- 36 -

to do underwriting on behalf of the Names, when that was a prohibited activity under the relevant Lloyd's legislation.

(3) Turning to clause 4 of the agency agreement, he stressed that the clause is concerned not with duties but with powers conferred upon the agent, specifying powers the exercise of which the agent may consider to be 'necessary or desirable'. It followed from the fact that a member's agent is prohibited from acting as a managing agent that the exercise, in particular, of the power to accept risks and effect reinsurances could not properly be regarded as necessary or desirable for a members' agent. Furthermore, clause 4(b)(G) falls into two parts, the former being concerned with a power to appoint another person to carry on or manage the underwriting business, and the latter with a power to delegate or confer upon another the powers, etc., given to the agent. It was the submission of Mr. Eder that the effect of this sub-clause was, first, that the members' agent can appoint a managing agent to carry on the actual underwriting for the Name, even though the members' agent has itself no power to do so; and that the delegation of the broad authority conferred by clause 4(a) on the members' agent would have the effect of authorising the managing agent to underwrite on the Name's behalf. In his submission, clause 4(b)(G) envisaged that the person so appointed would be acting directly on behalf of the Name.

(4) There was nothing in the agency agreement, and in particular nothing in clause 5, to indicate that the members' agents contracted to underwrite or to be responsible for the underwriting in the sense advanced by the Names.

Impressed though I was by Mr. Eder's argument, in the end I feel

unable to accept it.

I start, like him, with clause 2(a). This is the central provision, which makes available to Names the opportunity of participating in underwriting at Lloyd's. Consistently with that evident object, it does not merely appoint the agent as "the underwriting agent" for the Name, but does so "for the purpose of underwriting at Lloyd's for the account of the Name such classes and descriptions of insurance business .... as may be transacted by the Syndicate (hereinafter referred to as 'the underwriting business')." Next. I have in the forefront of my mind the fact that, as I have already pointed out, the agency agreement is designed to enable it to perform a dual purpose so that it may apply not only to the functions of a members' agent as such, but also to the functions performed by a combined agent when it acts as managing agent in respect of a Syndicate of which the Name is a member. I have a feeling that this duality of function may lie at the root of the somewhat elliptical language in which clause 2(a) is expressed. However it follows in my opinion that appointment of the agent as underwriting agent under clause 2(a) must, in the case of a combined agent, impose upon it the duty of carrying out underwriting on behalf of the Name if entered as a member of a syndicate of which the agent is the managing agent.

(a) can impose any different obligation

- 37 -

on the members' agent when the relevant Syndicate is not managed by it, either because it is a pure members' agent, or because the Syndicate in question is managed by some other managing agent. Here, I draw attention to the definition of 'the Syndicate' in clause l(a) of the agency agreement, under which no distinction is drawn in this context between Syndicates managed by a combined agent in its capacity as managing agent, and Syndicates managed by some other managing agent, in which the Name is entered as member pursuant to a sub-agency agreement with the members' agent.

That the same obligation is in such circumstances imposed on the members' agent is, in my opinion, made clear beyond doubt when we read the agency agreement together with the sub-agency agreement, and discover from clause 2 of the latter that the managing agent acts as sub-agent for the members' agent in conducting the relevant part of the underwriting business as defined in clause 2(a) of the agency agreement. The position under clause 2(a) is therefore that the obligation imposed on the members' agent under the clause with regard to underwriting is the same, whether it is acting as members agent or is a combined agent acting as managing agent in respect of a Syndicate of which the Name is a member. The only difference is that in the former case it carries out the underwriting through the agency of a managing agent, under the terms of the prescribed form of sub-agency agreement, whereas in the latter case it carries it out itself.

Furthermore, like Saville J., I cannot see that such performance of its obligations by a members' agent can constitute any breach of the prohibition in paragraph 4 of Part B of the underwriting agents Byelaw, since in each case the function of managing agent will always be performed by a managing agent: indeed, on my understanding of the position, this is precisely what was intended by the draftsman of the agency and sub-agency agreements, who plainly intended that there should be no breach of the Byelaw.

There is another consideration which strongly supports the conclusion that clause 2(a) of the agency agreement must be read as imposing responsibility on the members' agent in respect of underwriting for the Name. It is plain from the two prescribed forms of agreement that, in a case involving an indirect Name, they create no contractual relationship between the Name and the managing agent. On the contrary, as I have already indicated, there is a clear structure by virtue of which, under clause 2(a) of the agency agreement, the members' agent is appointed the Name's underwriting agent for the purpose set out in the sub-clause; and, under clause 2 of the sub-agency agreement, it is provided (here mirroring the recital to that agreement) that the sub-agent (the managing agent) shall act as sub-agent for the agent (the members' agent). Consistently with these provisions, under clause 4 of the agency agreement all the necessary powers are vested in the underwriting agent (the members' agent), including the power to delegate contained in clause 4(b)(G); and clause 5(a) of the sub-agency agreement provides for the delegation by the agent (the members' agent) to the sub-agent

- 38 -

(the managing agent) of the performance of all duties and the exercise of all powers, authorities and discretions imposed or conferred upon the agent by the agency agreement as may be appropriate or necessary.

It was submitted by Mr. Eder on behalf of the members' agents before Saville J. and the Court of Appeal, and again before the Appellate Committee, that in cases involving indirect Names there was indeed a contractual relationship between the Names and the managing agents, under which the managing agents were contractually responsible for the proper performance of the underwriting for the Names. In this connection, Mr. Eder relied in particular upon the fact that the recital to the sub-agency agreement recites that it has been arranged between the agent and the sub-agent that the sub- agent shall act as the sub-underwriting agent for the Names.

However, the substantive provisions of the sub-agency agreement (in particular, clauses 2, 3, and 5) make it perfectly clear that, although the sub- agent has power to underwrite for the agent's names, i.e. to bind the Names to contracts of insurance, nevertheless there is no contractual relationship between the sub-agent and the Names, the only relevant contractual relationship of the sub-agent being with the agent. In this connection the true position in law is, in my opinion, accurately stated by Professor F.M.B. Reynolds in Article 36(3) of the 15th edition (1985) of Bowstead on Agency, p. 131, as follows:

"But there is no privity of contract between a principal and a sub-agent as such, merely because the delegation was effected with the authority of the principal; and in the absence of such privity the rights and duties arising out of any contracts between the principal and the agent, and between the agent and the sub-agent, respectively, are only enforceable by and against the immediate parties to those contracts. However, the sub-agent may be liable to the principal as a fiduciary, and possibly in other respects."

Of the three authorities cited by Mr. Eder in support of his submission on this point De Bussche v. Alt (1877) 8 Ch.D. 286, Powell & Thomas v . Evan Jones & Co.

[1905] 1 KB 11

and Tarn v . Scanlan [1928] A.C. 34, the first two were concerned with the accountability of a sub-agent for secret profits, and the third with liability for income tax. Each was a decision on its own specific facts, and none provides Mr. Eder with assistance in the form of general guidance on the circumstances in which a contractual relationship may come into existence between a principal and a sub-agent. I am satisfied that no such relationship came into existence between the Names and their sub-agents in the present case.

In these circumstances, Mr. Eder's argument leads to the extraordinary conclusion that, under the prescribed forms of agency and sub-agency agreements, neither members' agents nor managing agents assumed any contractual responsibility to the Names for the underwriting which was the

- 39 -

principal purpose of these agreements. Such a conclusion is, in my opinion. so improbable that it adds considerable support for the view that Mr. Eder's argument cannot be right, and that the true position must be that, on a true construction of clause 2(a) of the agency agreement, members' agents did indeed undertake to carry out underwriting for the Names, as was held by both courts below.

I recognise, of course, that it might have been thought right to structure the agreements differently, so that the managing agents were put into a direct contractual relationship with indirect Names who are members of Syndicates under their management. This was what was in fact done under the new forms of agreement brought into force as from 1 January 1990. But it is plain that this was not the intention under the forms of agreement now under consideration under which, in cases involving indirect Names, the managing agent acts as sub-agent of the members' agent, and all the necessary powers, etc. are vested in the members' agent which then delegates the performance of them to the managing agent.

In truth, once it is appreciated that the obligation to underwrite under clause 2(a) of the agency agreement may be performed by the underwriting agent either by itself in a case involving direct Names, or otherwise through a managing agent under the terms of the sub-agency agreement, everything falls into place. This is particularly true of clause 4 of the agency agreement, when read in conjunction with clauses 2 and 5 of the sub-agency agreement. As far as clause 4(b)(G) of the agency agreement is concerned, on which Mr. Eder placed such reliance, this can be seen to reflect precisely the position under clauses 2(a) and 4(a); the effect of the sub-clause is, as obviously contemplated by the draftsman of the two agreements, that under the first part the members agent will appoint the managing agent to act as its sub-agent for the purpose of conducting the relevant part of the underwriting business, under clause 2 of the sub-agency agreement, and under the second part delegate to it under clause 5(a) the performance of the relevant powers, etc., which, significantly, are vested in the members' agent under clause 4(a) of the agency agreement. The vesting of these powers in the members' agent is, in my opinion, a strong pointer against the construction of the agreements for which Mr. Eder contends. Had that construction represented the draftsman's intention, he would surely, in this respect at least, have drafted the agreements differently.

For these reasons, which I understand to be the same as those given by Saville J., which were accepted by the Court of Appeal, I would on this issue accept the argument advanced on behalf of the Names, and reject that advanced on behalf of the members' agents.

III Merrett Appeals

Reinsurance to Close.

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On this Issue, I can see no answer to the conclusion reached by Saville J. and the Court of Appeal. I agree with the submission advanced by Mr. Borwood Q.C. on behalf of the Names in the Merrett Appeals that when Names on the 1985 underwriting year reinsured Names on the 1984 year, although the 1984 Names were running off their business, the 1985 Names were writing new insurance business which could only be done pursuant to the 1985 Byelaw form of agreement in force as from 1 January 1987, as held by the courts below.

Conclusion

For these reasons, I would answer all the questions in the same manner as Saville J. and the Court of Appeal, and I would dismiss the appeals of the members' agents and the managing agents with costs.

LORD BROWNE-WILKINSON

My Lords,

I have read the speech of my noble and learned friend Lord Goff of Chieveley, with which I am in complete agreement. I add a few words of my own on the relationship between the claim based on liability for negligence and the alternative claim advanced by the Names founded on breach of fiduciary duty.

The decision of this House in Hedley Byrne & Co. Ltd. v . Heller and Partners Ltd.

[1964] AC 465

, was, to a substantial extent, founded on the earlier decision of this House in Nocton v. Lord Ashburton

[1914] AC 932

. In that case, Lord Ashburton sought to be relieved from the consequences of having loaned money to, amongst others, his solicitor Nocton. Lord Ashburton's pleadings were based primarily on an allegation of fraud; in particular, there was no allegation on the pleadings either of breach of contract by Nocton or of negligence. The lower courts treated the case as being wholly dependent on proof of fraud. But in this House Nocton was held liable for breach of a fiduciary obligation owed by him as solicitor to his client. However, although the decision was based on breach of fiduciary duty, both Viscount Haldane L.C. and Lord Shaw expressed such fiduciary duty as being but one example of a wider general principle, viz., that a man who has voluntarily assumed to act on behalf of, or to advise, another in law assumes a duty to that other to act or to advise with care. Viscount Haldane said, at p. 948:

"Although liability for negligence in word has in material respects been developed in our law differently from liability for negligence in act, it is nonetheless true that the man may come under a special duty to exercise care in giving information or advice. I should accordingly be sorry to be thought to lend countenance to the idea that recent

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decisions have been intended to stereotype the cases in which people can be held to have assumed such a special duty. Whether such a duty has been assumed must depend on the relationship of the parties, and it is at least certain that there are a good many cases in which that relationship may be properly treated as giving rise to a special duty of care in statement."

Viscount Haldane gave a further explanation of the decision in Nocton v. Lord Ashburton in Robinson v. The National Bank of Scotland Ltd. [1916] S.C. (H.L.) 154. 157:

". . .I wish emphatically to repeat what I said in advising this House in the case of Nocton v. Lord Ashburton, that it is a great mistake to suppose that, because the principle in Derry v . Peek clearly covers all cases of the class to which I have referred, therefore the freedom of action of the courts in recognising special duties arising out of other kinds of relationship which they find established by the evidence is in any way affected. I think, as I said in Nocton's case, that an exaggerated view was taken by a good many people of the scope of the decision in Derry v . Peek. The whole of the doctrine as to fiduciary relationships, as to the duty of care arising from implied as well as expressed contract, as to the duty of care arising from other special relationships which the courts may find to exist in particular cases, still remains, and I shall be very sorry if any word fell from me which suggests that the courts are in any way hampered in recognising that the duty of care may be established when such cases really occur."

It was these passages from the speeches of Viscount Haldane, and others. which this House in Hedley Byrne took up and developed into the general principle there enunciated as explained by my noble and learned friend, Lord Goff of Chieveley.

This derivation from fiduciary duties of care of the principle of liability in negligence where a defendant has by his action assumed responsibility is illuminating in a number of ways. First, it demonstrates that the alternative claim put forward by the Names based on breach of fiduciary duty, although understandable, was misconceived. The liability of a fiduciary for the negligent transaction of his duties is not a separate head of liability but the paradigm of the general duty to act with care imposed by law on those who take it upon themselves to act for or advise others. Although the historical development of the rules of law and equity have, in the past, caused different labels to be stuck on different manifestations of the duty, in truth the duty of care imposed on bailees, carriers, trustees, directors, agents and others is the same duty: it arises from the circumstances in which the defendants were acting, not from their status or description. It is the fact that they have all assumed responsibility for the property or affairs of others which renders them liable for the careless performance of what they have undertaken to do, not the description of the trade or position which they hold. In my judgment, the

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duties which the managing agents have assumed to undertake in managing the insurance business of the Names brings them clearly into the category of those who are liable, whether fiduciaries or not, for any lack of care in the conduct of that management.

Secondly, in my judgment, the derivation of the general principle from fiduciary duties may be instructive as to the impact of any contractual relationship between the parties on the general duty of care which would otherwise apply. The phrase "fiduciary duties" is a dangerous one, giving rise to a mistaken assumption that all fiduciaries owe the same duties in all circumstances. That is not the case. Although, so far as I am aware, every fiduciary is under a duty not to make a profit from his position (unless such profit is authorised), the fiduciary duties owed, for example, by an express trustee are not the same as those owed by an agent. Moreover, and more relevantly, the extent and nature of the fiduciary duties owed in any particular case fall to be determined by reference to any underlying contractual relationship between the parties. Thus, in the case of an agent employed under a contract, the scope of his fiduciary duties is determined by the terms of the underlying contract. Although an agent is, in the absence of contractual provision, in breach of his fiduciary duties if he acts for another who is in competition with his principal, if the contract under which he is acting authorise him so to do, the normal fiduciary duties are modified accordingly: see Kelly v . Cooper [1993] A.C. 205, and the cases there cited. The existence of a contract does not exclude the co-existence of concurrent fiduciary duties (indeed, the contract may well be their source); but the contract can and does modify the extent and nature of the general duty that would otherwise arise.

In my judgment, this traditional approach of equity to fiduciary duties is instructive when considering the relationship between a contract and any duty of care arising under the Hedley Byrne principle (of which fiduciary duties of care are merely an example). The existence of an underlying contract (e.g. as between solicitor and client) does not automatically exclude the general duty of care which the law imposes on those who voluntarily assume to act for others. But the nature and terms of the contractual relationship between the parties will be determinative of the scope of the responsibility assumed and can, in some cases, exclude any assumption of legal responsibility to the plaintiff for whom the defendant has assumed to act. If the common law is not to become again manacled by "clanking chains" (this time represented by causes, rather than forms, of action), it is in my judgment important not to exclude concepts of concurrent liability which the courts of equity have over the years handled without difficulty. I can see no good reason for holding that the existence of a contractual right is in all circumstances inconsistent with the co-existence of another tortious right, provided that it is understood that the agreement of the parties evidenced by the contract can modify and shape the tortious duties which, in the absence of contract, would be applicable.

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For these reasons, in addition to the much wider considerations addressed by Lord Goff of Chieveley, I would dismiss the appeals.

LORD MUSTILL

My Lords.

I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Goff of Chieveley, and for the reasons which he gives, I too would dismiss the appeals of the Members' Agents and the Managing Agents with costs.

LORD NOLAN

My Lords.

I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Goff of Chieveley, and for the reasons which he gives, I too would dismiss these appeals with costs.

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Cited in 203 later judgments

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Showing the 50 most senior of 203.